Good morning. And welcome to the Surgery Partners' Inc. Third Quarter 2017 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Teresa Sparks. Please go ahead.

Thank you, Operator. Good morning. And thank you for joining us today for Surgery Partners' third quarter 2017 earnings conference call. Before we begin, let me remind everyone that, during this call, Surgery Partners' management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and provided in our annual report on Form 10-K and our quarterly report on Form 10-Q each is filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of adjusted EBITDA and adjusted net income to net earnings calculated under GAAP can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent quarterly report on Form 10-Q. With that, I'll turn the call back over to Clifford Adlerz, our Interim Chief Executive Officer of Surgery Partners. .

Good morning. And thank you for joining the call. It has been a dynamic first few months in my role as Interim CEO. Our first challenge was the natural disasters impacting several of our markets and our main priority was ensuring the safety and wellbeing of our colleagues in these areas. We are pleased to report that all of our employees are okay. Our facilities suffered only minor damages and we appreciate the swift response by our entire team in addressing immediate needs. As this is my earnings call I'd like to frame up this morning's discussion around three primary topics. First, Teresa will provide a brief update on our third quarter and year-to-date results which are in line with our pre release on October 31st. I'll then provide an update on the status of our integration efforts related to NSH and how we are leveraging these efforts and creating focus and discipline around our core operations. And finally I'll outline some of the 2018 headwinds and tailwinds and the efforts we are undertaking to achieve growth and improve underlying financial performance. At the onset before stepping through each of these three topics I want to clearly state I am very excited about the opportunities ahead of Surgery Partners given the business is well aligned to take advantage of the long-term trend for an increasing number of surgical procedures moving to high quality, more cost efficient outpatient facilities. Moving forward, the organization is focused on several key initiatives including setting appropriate growth objectives and providing this corresponding guidance to our investors. Integrating NSH to achieve the scale benefits of a larger, more diversified organization. Focusing our efforts on core outpatient surgical facilities by driving performance improvements to achieve increased same facility growth and enhance margins, and evaluating and completing accretive acquisitions of short stay surgical facilities. I'll elaborate further on these items but in short these are the main areas of organizational focus and action. With that backdrop, let me hand the call over to Teresa for an update on our financial results and near term outlook.

Thanks Cliff. As you saw last week we pre announced select financial results in the quarter and updated guidance for 2017 in order to provide greater transparency regarding the state of business, the any challenges we face during the quarter and their impact on our financial results. For the quarter, total revenues increased 8.4% to $306.3 million from $282.7 million for the third quarter of 2016. Total revenues reflect the contribution of one month of revenues from the NSH business, partially offset by the impact of certain industry headwinds and hurricanes. On a normalized basis total revenues increased 16.7% to $330 million. As a reminder, normalized revenue is adjusted for the impact from hurricanes as well as the one time adjustment disclosed in our earnings prerelease. Our same facility revenues in the quarter on both normalized and pro forma basis reflecting the NSH acquisition increased 2.9%, which is a result of a 3.3% increase in net revenue per case offset by a slight decrease in case volumes. On a sequential basis, we have seen stabilization in the payor mix between commercial and government payor. Our adjusted EBITDA margin on a normalized basis declined to 13.1% from 15.8% of revenue as compared to the third quarter of last year. This decline margin was primarily driven by an increase in our medical supply and implant cost driven by higher duty cases and an adverse payor mix shift within commercial. We have launched specific initiatives to address margin with a focus on procurement and medical supplies. Cliff will elaborate on this in a moment. Normalized adjusted EBITDA for the third quarter of 2017 which excludes the impact of hurricanes and the charges identified in our earnings prerelease was $43.1 million compared to $44.7 million, third quarter 2016. On year-to-date revenues increased 4.9% to…

Thanks Teresa. Although the quarter and the near term outlook for our business were impacted by certain industry headwinds and the hurricanes, we feel more confident than ever about our ability to create long-term profitable growth. Our current focus is on the seamless integration of NSH and the opportunity to leverage our core operating assets. We believe that the combined company operating on a larger scale will be effective in delivering a more diversified set of services, focused on high quality, cost effective surgical procedures to a growing number of patients, payors and providers. The integration is proceeding as expected. We are beginning to operate with a scale and efficiencies of a larger organization. As a reminder, the combined company now has a portfolio of 124 surgical facilities, 60 physician practices and complementary ancillary services and operates in 32 states with more than 5,000 affiliated physicians. We continue to expect approximately $20 million in run rate synergies with the majority captured in 2018. Despite the unique challenges in the quarter, our underlying core assets continue to deliver growth. As was previously stated, we exhibited strong same facility revenue growth of 2.9% as compared to the third quarter of 2016 and 5.7% growth on a year-to-date basis. We believe the continued same facility growth rates in the quarter and year-to-date demonstrates the underlying market demand for outpatient surgical procedures than our facilities. We are even more convicted in our belief that the trend in surgical procedures towards high quality, more cost effective settings is a long-term growth driver for our business that was further strengthened as CMS is finalizing its proposal to add three procedures to the ASC covered procedures list. These new proposed rules coupled with our initiatives to expand recruitment and marketing are expected to pay dividends to the…

[Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Cliff, welcome back I guess to the Surgery Partners. First question for you. Obviously you know a lot of these assets that are in the portfolio. So coming in from the outside I know you said national so you watch these assets over the last few years. Where do you think things kind of fell through the crack? So what were the issues? And as I think about it is this in your mind a basic block and tackling story at this point where you have things that you need to fix or is this more of a we need to pivot the strategy to a certain point to get the growth back in the business?

Yes, no, thanks Brian. It is a good to be back and as you know I got a great familiarity with our senior management team and our operators who got great team here, great group of group presidents and even down to our VP level so. It's not like come in and really kind of hit the ground and running. I don't - I don't see it is a turnaround situation or a big pivot. I believe the issue is really just focus and over 90% of our assets are in the short stay surgical facility. So that really should be our focus going forward and it's a business that we know extremely well, all the trends are positive in that business, cost effective, low cost setting, the inpatient outpatient shift, high patient satisfaction, great patient outcome so we feel very good about that business long term. So I think it's really focusing in on our core business and our core assets and starting optimize those assets.

Got it. And then Teresa as I think about the payor mix seems to be stabilizing and actually your revenue performance in the quarter as hurricanes look pretty good right. So how should we think about -- I know you talk about procurement and all those things but is this margin reset given the types of patients that you are taking in right now or types of cases or is there ample room to push margins higher even as we see these higher acuity ortho cases coming in.

Yes, good question. So as we look at the business from a margin perspective our trends towards acuity cases has obviously had an impact on the business although very well aligned with the trends as Cliff just mentioned that we are seeing in the broader industry in terms of shift to from inpatient to outpatient supported by CMS and commercial payor. So as we think about these cases being having a lower margin profile that really does focus the business as that trend emerges and continues to accelerate focuses our attention clearly upon our supplies and particularly our implant cost. And so with the opportunity bringing in NSH together and focusing on procurement and med supplies, you look at those opportunities near term to long term and really from a near term perspective combining GPO, leveraging pricing tiers , restructuring rebate, those are things that you focus on near term to address the cost trends related to these higher acuity cases and you really move to that continuum of initiative from a supply standpoint based on near term GPO, long term physician preference item. So that's really the way we think about it, think about tackling the business and improving margin.

We've also got focus on analytics, we for sometime building a data warehouses that we think is going to be very helpful in getting real time information and with some outside resources and partners we are focusing on finishing up that effort which will give us improved real time information, will give us case costing, improve managed care contracting data and real time trending data. So if we start missing in higher acuity cases and we've got opportunity to evaluate those cases very quickly and determine what we need to do about our cost structure and/or make sure that we've got our revenue structure in line for those types of cases. So I think those efforts in addition to expanding our dedicated sales team, we've got a very strong sales group in the company and they have a very good infrastructure. They are using analytics to target physician recruitment. So it's really just a matter of expanding that group right now in cohort with our group presidents to make sure that we are developing market and supporting our surgery centers. And then other effort is really tuck-in acquisitions in our same store market. So we've got the ability to kind of thing rebuild that pipeline little bit and letting our group presidents know that we have capital and we are ready to develop our market. So if you are looking at one off physician acquisitions or if you are looking at holding in another ASC into our portfolio in a market so that we combine to ASCs or combine smaller ASCs into one of our markets then we have the ability to do that. We have the development team to do that. And we have the capital to do that. And that's often very effective growth for us because we know our market so well. So we think we've got some initiatives in place already started that will help us tremendously.

Our next question comes from Kevin Fischbeck with BOAML. Please go ahead.

Great, thanks. So I guess throughout the year companies you guys included saw weak first half volumes and I thought was volumes going to be pushed to back half of the year because of high deductible high growth pace, what is the Q4 assumption in your guidance around the rebound of volumes seasonality? Is it a normal seasonality or you are still forecasting an accelerated seasonality in Q4?

Yes. Thanks Kevin. So as you mentioned I mean we really identify these trends really emerging in the second quarter and then continuing in the third and our projections layout that those trends would persist in the fourth quarter with some muted seasonality expected in the fourth quarter. So that from Q4 perspective is how we laid out our thoughts and projections related to the fourth quarter.

All right. So I guess I mean given that it sounds like that you are taking this from holistic year perspective, a more muted thought in backdrop for the year this year. When you talked about headwinds and tailwinds you indicated that there really weren’t in your view any unmanageable headwinds for next year. I guess when you think about the core growth of the business for next year, the industry like just the industry backdrop, I am not even talking about specifically, is there a reason to think that the industry growth after the hurricanes will be better next year than it is this year or is the assumption that the pressure that you've seen this year are likely to persist in the next year.

Yes, there are obviously tailwinds as we look into next year and just the continued acceptance and push towards inpatient cases into the outpatient setting. Depending on the timing of the final rule for the ASC from a CMS perspective is -- we know that that's out there, the timing is uncertain at this point but definitely near term. But as we think about going into next year we feel like we've established a base business that has the opportunities to be enhanced going forward certainly with the larger platform that has emerged from NSH for us specifically. So I think all those things and some of things that Cliff mentioned as far as specific initiatives definitely point to a return to more normalized growth rate and normalized approach to 2018.

Okay. and then I guess appreciate the fact that you are guys really focusing on the core business I think that make some sense I guess can you help us think about what then right growth rate organically I guess plus acquisition that you would think in the past you talked about 3 to 6 some surgery centers and 1 or 2 tuck-in deals maybe 3 to 4 some ancillary and then 3 or 4 some deals. What does this new company that re focus mostly on the surgery center business? How do we think about the longer not 2018 specifically how do you think about the long term growth rate and building blocks to get that?

Well I think in the absence of pointing to specific data point for next year, I can give you some color around specifically you mentioned M&A spend. And as we refocused the company on our core surgical assets which Cliff mentioned is over 90% of our revenue actually in the third quarter we were at 96%. So that just gives you an indicator of the new kind of combined platform with NSH and the core and how that material is to the business. So as we look at M&A spend going into next year and the year following I think you can expect a normalized approach to M&A we had circled up as we talked about the transaction $100 million in spend roughly each year, I think that's a good target for us largely focused primarily focused on our surgical facilities. We'll continue to think about one off physician practice transaction on a very muted lower level in terms of our overall capital spend. So and just one another data point as you think about how we thought about the business and throughout the year we did have a couple of data points as we move throughout the year. If you just kind of peg from 3% same facility growth to 7% which is kind of the range as we move through the year and saw the trends emerging. We did land in that 3% for the quarter and on the high end of that 6% for the year. So as we think about the revenue and top line revenue being at those levels then it's a matter of focus and initiative related to converting which is primarily focused on our med supplies, secure med specifically related to our implant cost. And those initiatives are well underway. So I think that's really how we would talk about 2018 and beyond in the absence of specific metric that we are just not ready to outline today.

Okay. And then you mentioned that payor mix was stable from Medicare commercial perspective but there was negative mix shift within commercial, can you explain what happened there?

Yes. So I think couple of points in the payor mix that we just wanted to highlight is one we did see the payor mix stabilize from sequentially as well as quarter-over-quarter in terms of just this mix between government and commercial. However, within that commercial bucket we are still seeing pressure we are seeing a mix. Number one, we are continuing to get our standard rate increases from commercial payor that's been consistent, where the rate variability has emerged and some of the things we've been talking about again tax affect to the shift to higher acuity cases. I mean these are new -- this is a new trend that moving rapidly and so commercial payors are responding to those trends just like we are with our vendors on the cost side. And so just that rate variability that is existed on the commercial side and for example we had some pockets where workers comp has have some pressure not prevailing throughout through the network but we've had pockets within that commercial mix that where we had some variability and some continued pressure within the commercial mix of business.

Okay and then I guess lastly you mentioned in the press release account receivables, if you could talk about what happened there?

Yes. During the quarter we had certain known events that occurred and I can give some four examples but as a results of these known event we had new information that as a result of that new information we really had to take a look at some older accounts and we mentioned that data back to really first quarter 2016 and prior where it primarily related to the ancillary services segments where they has been a very volatile rate environment as we all know we kind of live that together but really dating back to that first quarter 2016 and prior and those certain known events that gave us new information we have to evaluate probability of collection of those accounts during the quarter and determine that there is low probability of collection and decided that we have to record this in the quarter because of those known events. I can give you some --

Yes. Examples would be great.

Yes. For example we entered into a contract in the third quarter again this is primarily in the ancillary services side to go in network. So we were out at network with particular payor and again this is just one example. And so as we enter into that contract with that payor, contract has to stand on its own merit and it has to be the right business decision at this point in time and going forward but typically what you'll see as part of those discussion is hey if there is anything out there that we've been disputing, that's been under negotiations, let's settle this old account, let's wipe the slate clean and move forward. And again it's sort of independent of those contracts -- that new contract but also related because you want to make sure that when you are entering into this contract which stands on its own, has to have its own merit from a business standpoint going forward that you do take the opportunity to settle everything that's outstanding that's been taking up, management time and resources and wipe the slate clean in terms of going forward. So that payor settlement occurred as a result of entering into those in network contract.

And the reason why it's old AR issue not like ongoing run rate EBITDA issue, is that at some point of last year so your views about ultimate collection and run rate business changing the booking revenue at a more conservative rate over the last year because you still have old AR effect out of the network?

Yes, that's exactly right. So that pivot was made really first quarter of 2016 and but it did leave those accounts in dispute that were older at that point in time and then exactly booking those-- basically those agreed upon contract rates going forward.

Our next question comes from Tejus Ujjani with Goldman Sachs. Please go ahead.

Hi, its Tejus here thanks. Just staying on the lab topic there, are you expecting any impact from recent updates clinical lab fee schedule?

Hey, Tejus. Yes, thanks for the question. As you know the FFEMA rules were finalized in November and we will have an impact going forward. When you look at the overall scope of the business, any dollar of rate reduction is important to us and significant from the standpoint of -- we want to retain all reimbursement but really immaterial in terms the overall revenue of the company which is expected that it will be less than $1 million of impact next year.

Great, thanks very much. Just going to back another question I know you are not providing 2018 guidance but as we exit 2017 what's your expected run rate of EBITDA normalized for any acquisitions that they are closed as of year end. I am just trying to get a sense of earnings base that we should think about.

Yes. So really as we talked about beginning in the year NSH emerged we focused on that, we diverted our attention on the one off M&A transaction as a result of the bigger NSH transaction. And so really that's the only thing that you would need to pro forma into the base for this year, is really just the NSH transaction.

No but I guess exiting the year accounting for weather or seasonality on these items like assuming everything was normalized end of Q4 like what is the run rate EBITDA power of the business. Forget about future growth rate just curious on what do you expect the run rate business to be?

Well on a pro forma basis we would be in the range of call it 240, it's I think it's difficult to take even the fourth quarter as sort of the low end of the range. You can take that and annualize that for the business but it's always tricky even annualizing the fourth quarter which while we are projecting to have the trends continue it's always sort of difficult to annualize the fourth quarter. So I would think about the two things. One, the pro forma of the business as it stands today and the expected synergies for next year.

Okay. So kind of like 240 plus 20 is that -

Well, I think the 20 would be over a two year timeframe so you could say that 240 plus 10 is the --in very general term how we would think about synergy captured into 2018.

Got it, that's helpful, thank you. And just to follow on the topic of EBITDA growth and how much you can expect from M&A. You've done the sizeable NSH deal. I think it makes a lot of sense that you are focused M&A kind of strategy going forward is more on the facility side as opposed to physicians practices. But within now pro forma for the organization you still have a big chunk of your EBITDA about 50% is from the surgical hospitals I understand that's mostly outpatient. But I guess if you got a larger base of EBITDA from this hospital facilities but you are rolling up the smaller ASCs, I am just trying to understand is there any concern about how much actual M&A contribution you have from ASC side because you got this larger base of hospital assets now?

No. I don't think so. I mean we consider ourselves generally in the short stay surgery market. So whether the M&A comes from ASCs or surgical hospitals it's all opportunity to develop our short stay surgery facility. So we look at approximately $100 million spend and that will get us EBITDA from short stay surgery whether that's surgery centers or surgical hospital. So we are indifferent as to which type of facility but we think there is a great opportunity in both arenas to expand our footprint, as well as the M&A tuck-in acquisitions that we are focused on. So I think there is a great ability to expand and again we are the only kind of independent multi specialty short stay surgery company out there. So we think we have a great opportunity to develop the business.

Yes. And just to clarify I think that makes a lot of sense. I guess most people are familiar with the free standing ASC space roughly 5,500 centers around the US, highly fragmented so a lot of opportunity there. But the surgical hospitals specially the physicians known I think people are less familiar on what that landscape is and I don't think I think based on current law you can't build more of them et cetera so I mean how many of these - if you can just give us a rough sense of what is that runway there, how many centers are kind of independent or still out there in the US that could be potentially M&A target.

Yes. I think there is over 200 plus physicians and surgical hospital still out there. And so that's a great opportunity for us. There is obviously the cap is on physician ownership of those facilities but within that ownership you could still acquire and move shares within that ownership. So you have an ability to go into an underperforming asset and retool it and develop it. So there still a lot of opportunity in the surgical hospital area as well as the ASC area. So we like both opportunities to continue to develop our company and I think there is a plenty of opportunity there for a quite long time.

Tejus on the surgical hospital side, one thing that we've done very well and executed across the platform particularly in a couple of markets in particular is to continue to expand ancillary services in those market. So whether that acquiring urgent care facility, wound care, medical oncology, physician practices, within each of those hospitals without the benefit of expansion from a bed and/or our standpoint there is an enormous amount of opportunity and we've executed on that across the network, some market very effectively and have had a lot of success in rolling out those ancillary within an existing platform and within existing market.

Great, thanks. Last question I promise. How many on average operating room are surgical hospitals having versus your ASC?

Well, they can -- they varies I mean -- and especially from a bed standpoint we can have 12 beds up to 70 beds. So it's a wide range.

Yes, it could be 4 to 6 to 8 or/are just depending on the facility. So I'd say a range of 4 to 6 is reasonable.

For the hospital you are saying.

Right but to your point they are 90% outpatient in nature. So I think this is to focus on.

Our next question comes from Bill Sutherland with Benchmark Company. Please go ahead.

Thanks, good morning. I am curious on the procurement efforts you are going to be making. Are you all thinking of the quite of a bit of impact early in 2018 or is that something is going to take its course through the year? And anyway to give us any sense of how much that could move you?

Yes. It's hard to give an estimate right now because that effort has just started. We are going right now to renegotiate certain contracts but so it will be difficult to estimate that right now until we get some data back but certainly if you think about the spend of the combined companies and if you think about the opportunity with two different GPOs, compare our pricing, determine net pricing after rebate we just take best price for the -- for what we are purchasing now that will be the first phase and we should get sneaking opportunity from that. But given that the effort has just started it's very difficult to predict that. It will flow throughout the year because after we get down with the first phase and phase two would be starting to look at physicians preference items and other items where we maybe able to work with our physicians partners and maybe change for example the implant that we are using to a lower cost implant. So it will definitely rollout through the year and but first phase getting pricing on items that we are currently purchasing will have a great benefit, it's just too early to tell since we don't have any early returns on that. But we do have that effort underway right now.

Make sense and then you all look at the quarter to date and this issue that's been -- that you and everyone else have been seeing with utilization related to out of pocket cost. To what degree are you seeing the normal kind of seasonal uptick occur and aside from obviously areas where there has been some disruption still in October. Is it still widespread? Yes, sorry, go ahead Teresa.

No, that's a good point. It's just what visibility we have into the fourth quarter today. And I think that visibility has been somewhat clouded primarily due to the residual impact of the hurricanes rolling into the first part of the fourth quarter. Some of our facilities were closed for three days but then we had a number of facilities that were closed to three weeks. And so that gives you an indication of really the impact on the community where we had that extended close period and the community struggling to ramp up back to sort of status quo and normal way of life. So I think as we thought about the fourth quarter and looking for the trends to emerge and that seasonality to return it was somewhat clouded that visibility by the residual impact of the hurricane.

So if you look just to your un-impacted parts of the country which thankfully is most of the country, do you feel like to what degree is there normalcy kind of in the seasonality compared to what we've seen through the first three quarters?

Yes, there are as you would expect with a vast -- it operates in 32 states and mostly multi site there are pockets where the demand has returned in the fourth quarter but there are other pockets of the country where we are not seeing that return. So I think at this point our projections are prudent and the fact that they are consistent with the broader industry trends and what we are hearing across the board but obviously we remained encouraged that those trends would -- that seasonality would return but I think we've been prudent and expecting the broader trends that we experienced in second and third quarter to process into the fourth.

Okay. So it's a mix. And then your same store that's implied in your full year 2017 guide is kind of what range?

Yes. So I think I have kind of point into the 3% in the third quarter and 6.7% -- I am sorry 5.7% in the year-to-date. I think what we had projected our trends in the fourth; volume is expected to still basically be flat. Again with the things we just kind of pick through but that's the expectation reflected in the guidance.

Okay. With some pricing, okay. That's it. Thank you very much.

Our next question comes from John Ransom with Raymond James. Please go ahead.

Good morning, everybody. Cliff, welcome back. Just kind of drill down, a lot of good questions have been asked. When you talk about implant costs pressure is that orthopedic and pain or is it one specialty more than the other?

It's about orthopedic and pain, while we've done a good job of going out and recruiting and developing those cases but we need to now focus on making sure that we manage the cost down on those cases and that we understand our revenue side. But it's both pain and total joint procedures.

Okay. Now when the company became public I know three years ago there was a lot made of being able to provide these little doctor practices for two times EBITDA which seemed to us to be an incredible use of capital. Is that just no longer the case?

No. John I think we are still obviously very interested in tuck-ins and acquiring practices but what we are saying it will be to support our surgery centers and our markets. So if you look at our operators and the toolkit they have. In their toolkit they have employment, they will have one off physician acquisition and tuck-ins as far as the toolkit as well as in market merger so what we are saying is we are not going to go out and acquire independent physician group outside of our market size. That's not what we are going to focus on. What we are going to definitely focus on within our markets supporting our core surgery assets developing those one off acquisitions, employment just physician recruitment of independent physicians to our market. Those are all a toolkit for our operators to use. So we will continue to do those and we are going to support our core surgery center asset.

Okay. So if you look at the company now with your acquisition, what is the top three procedure mix by revenue and where would you like to take that with your M&A strategy and development strategy.

Right. We are still as far as from the revenue standpoint it is orthopedic. I mean that continues to be even when think about the total joint stand the higher implant cases that has inherent margin compression in those type cases as a result of the squad required. We still have a very diverse, multi specialty platform that leverages kind of the bread and butter cases if you will of pain and GI and ophthalmology that really as you are covering your base or covering your fixed cost, you bring these incremental higher acuity cases into the mix which is the trend and that enhances the overall, if you just think about it on an individual facility basis. And so as we go out and look for M&A opportunity that's always the orthopedic side of the business is always what interests us the most. But we are not taking our eye off of the bread and butter GI pain and ophthalmology which has proven to be good steady state business lines for us and we have the multi specialty environment to accommodate that.

And last question I mean so Cliff you -- I don't know that you had much experience in the pain business. It was something new for me as well. What are you -- when you took a look at that coming onboard what are you kind of thinking of that business as a sacks some of your other -- I mean from what I have been -- what I've learned I guess mix shift in that business is deadly I mean a Medicare patient with an expensive implant maybe money loser and a commercial patient may not be. But is that a business that you like and is there way to better manage the volatility of that margin. Thanks.

No. I think there is still a good business there. I think it's just like our other lines of business. We got to understand it. We got to make sure we manage it correctly and we've got an employed physician base that is developing our pain business particularly down in Florida. And we think there is a lot of opportunity there to recruit physicians and develop that business. But just like managing our implants on the orthopedic side we got to make sure that we focus and develop the business but I think we can do quite well with the business if we focus on it. And I think that is definitely an opportunity for us along with as Teresa said our other multi specialty opportunity. So we are good with the business. It's again just matter just kind of the fundamentals stay in focus, understanding it but I think there is an opportunity there for sure.

Our next question comes from Seth Canetto with Stifel. Please go ahead.

Hey, good morning. My question is just on your opening commentary. You guys mentioned that you completed a deep dive assessment and you said that the opportunities are better than initially anticipated for NSH. Can you just unpack that comment a little more? Is that opportunity kind of be reflected in the margin, really what did you find it, is that what led to the procurement optimization program?

Yes. I think just if you think about the combined size now of the company, the leverage to -- gives you the opportunity to go out and renegotiate, gives you leverage to go out and renegotiate but also kind of best practices so if you look it's something like our implant cases best practices from both companies starting to manage those implant cases better, getting best pricing and making sure you get the revenue side. I think that there is a great opportunity there and just looking at net pricing for the items that we are currently buying from both companies there is an immediate opportunity to go out and negotiate just across the system best pricing that one company or the other is already getting. So when you see that kind of opportunity then you feel like there is probably a good long term opportunity also because we haven't gotten in phase two, how do we start developing -- working with our physicians to get lower cost implant maybe change some of our purchasing behavior so that's a second and third phase that we can get to. So seeing immediate opportunity to get this best pricing and using an outside resource to get it makes you feel like there is a longer term opportunity there and I think that's kind of what we are referring to in terms of the procurement opportunity here.

All right, great. And then you mentioned the $20 million in synergies with the majority realized in 2018. Given that immediate pricing opportunity are there any synergies that you captured in 3Q, are you assumed in your 4Q guidance?

Yes. So as you think about just in general the $20 million in synergies and you break that down to roughly 50% operational procurement supplies, other operational initiatives and the remaining 50% corporate related and roughly half of that is related to duplicative headcounts and other corporate initiatives that you would expect with the executive level team having to duplicate headcount there. So to the extent that roughly 50% -- of the 50% is focused on corporate headcount and so forth that has been identified and executed. So there is some as we continue to operate the business and those synergies from a month in the third quarter and into the fourth quarter have been reflected to that pro rata effect.

Okay, great. And then just focusing on the $5 million impact from the hurricane. I know you mentioned some facilities were closed for three days, some up to three weeks. Just given that you are in 32 states it just seems like $5 million is high relative to EBITDA in the quarter I mean is some of that because you are expecting slower volumes in the 4Q as well and that impact kind of trickles into 4Q and how should we think about that?

Yes. We gave range of projected outcome so and we peg the midpoint even normalized look at the third quarter. But you have to keep in mind that we have roughly 27 ASCs and two hospitals that were impacted. NSH has a hospital Corpus Christi and one in Savanna, Georgia that were impacted. And so as well as that just been the surgical facility base, our ancillaries are primarily focused in Florida. So where you have a closure of a surgical facility, you lose anesthesia, you lose revenue from the physician practice and the lab as well. So there is ancillary effect of that in the quarter. These communities they were mandatory evacuation and so physicians leave, clinical staff leaves and just flow to ramp up back to normal.

Our next question comes from Frank Morgan with RBC. Please go ahead

Good morning. I hopped on late so questions already been asked. But we hear a lot of commentary around cost management and the procurement but I just want to focus really little bit on the organic base of asset that you have. Really on the top line growth opportunity. I am just curious any strategies that you have specifically within that base to really drive volume growth specifically by just taking market share. I know there is new service line opportunities but just curious if you any strategies there. And then also just some color on the final rules coming out related to outpatient surgery, laboratory surgery in terms of the rate and rate differential and the opportunity that you see from knee replacements going forward and just any color there would be great. Thanks.

I'll talk a little bit about the growth side. I think as we refer to earlier we've got a very solid and long term recruitment function here in the company. They have continue to develop and refine their infrastructure, great use of analytics now so our immediate effort is in process is to add to that sales team and I think that will help us start immediately developing our business in our markets. They have targeted specific areas and specific markets where they are going to add resource and start developing. I think the other area is just kind of the in market tuck-ins and acquisitions. We've always had a solid pipeline of those and just opening up that opportunity to our group presidents is we'll pay dividends for. So whether that acquiring a single specialty into multi specialty center, combining two multi specialty centers, one of our surgical hospitals acquiring an ASC, I think there is a tremendous opportunity there for us and we are getting focused on identifying those opportunities and then converting those opportunity. So we think that will pay dividends for us in the future and then obviously developing our new market opportunities. We are building a development team to go out and look at new market opportunity. So I think that's a -- will be a driver force going forward but particularly our core physician recruitment product line development going after the end market tuck-in acquisition, these all activities that will help our operators develop their markets.

I think the last part of the question from a CMS standpoint, we obviously view this as a very much as a positive their interest in shifting inpatient cases from a orthopedic total joint standpoint into the appropriate side of service and view it kind of as phased approach the rule announced in this month from inpatient only to outpatient really is a precursor to the final rule which we anticipate allowing ASCs to perform this type of procedures in that side of the service to which to your point I think just as far as the pricing just as a reminder, we are still at a 45% discount. So there is encouragement in the CMS rule and again we see this is a phased approach and precursor to finally getting to the appropriate side of service.

Got you. Maybe one final and then I'll hop. Just any color or any update on your practice acquisition down in South Georgia the one that kind of brought you some problems a couple quarters ago. Any update there, any progress on that front. Thanks.

Sure. Hopefully if you think about that line of business and with the new platform, larger platform the practice in Jacksonville is isolated now. We've anniversaried in terms of financial impact. We are continuing to execute on our plan. I think we really have had a few challenges there with physician leadership and executing that plan that are working through those challenges. I think the good news is such -- become such a smaller component of our overall business specially in light of the combined transaction or the combined company within NSH and so while we continue to focus on those operational plans, you will hear us talk about it less and you will see the impact financially -- from a financial perspective even less going forward again as we anniversaried is kind of that impact from the decline that we saw there in that practice.

Okay. Our next question comes from Kyle Smith with Jefferies. Please go ahead.

Yes, good morning. Cliff, welcome back aboard here. First question for me is with the changes in ownership and leadership here, have there been any follow-on changes to the company's thoughts about the balance sheet and target leverage?

Yes. As we think about the balance sheet as we both mentioned the balance sheet is appropriately flexible for the company. We have approximately $200 million of cash on the balance sheet. We have no financial covenant and from technical terms we do have a springing covenant at a 35% draw down on the revolver. So it's in current phase is 9.5x. So again we have no financial covenant. We have sufficient cash on the balance sheet. And we are excited about the opportunities to deploy capital and leverage neutral manner in terms of continue to grow the business and focusing on those M&A opportunities to expand and continue that growth.

And how about in terms of focusing on debt repayment. You've got relatively inexpensive longer-dated capital in there, but you've got a high coupon bond that's little bit shorter maturity. Is that something you're giving consideration to at this point? Or is that for further down the road?

Yes. I am saying we are newly settled into our capital structure since we disclosed August 31 and we are always considering strategic alternative in terms of the balance sheet but at this point we are newly settled in and we are enjoying having cash on the balance sheet and flexibility with our revolver and so I feel like at this point we will think about that to user term down the road.

Okay, great. And then a question, physician recruitment was I think the first initiative item that was listed. And over the past year there have been a couple of challenges in physician leadership in a couple of areas here. I was just wondering what's the magnitude of the opportunity that you could unlock, whether its retired docs, physician leadership challenges, underutilized facilities where recruiting in a solid physician can open up some value. How big is the magnitude there? And how quickly can you realize that?

I think its all part of the kind of same store metric that Teresa was talking about earlier. All these adds into same store growth and it's something that you are going to constantly pay attention to, constantly develop and so we had 3% revenue growth in the quarter same store with basically flat volume. And our goal is to get that volume up and so whether that turns into 3% to 6% range that Teresa talked about, that's our goal is to get same store so we think there is a significant opportunity and again this toolkit of physicians' acquisitions or recruitment, the tuck-in acquisitions all those relate to same store development. So we feel good that with those activities that we are going to -- and have positive impact on same store volume.

Okay, great. And then just last question for me is with the possibility of CMS allowing total knee replacement in ASCs, can you box in the magnitude of the opportunity there? And is that something where it's like flipping a light switch? Or would that be a slower transition from hospitals into your facilities?

I mean its transition obviously but something that we are ahead us in terms of our preparation and preparing this is a very detailed example but for preparing manual that our guide that we can give to our physician partners and they are very comprehensive on here is the patient education material that you can distribute. And just really working through that type of step to make sure that we are well ahead of this final at the shift.

Our next question comes from [Rishi Parikh] with Barclays. Please go ahead.

How are you doing? Just I apologize I jumped on late on the call. But I just want make sure on the acquisition side you said you are looking for -- I think in the past you had stated that the best way to looking in terms of the EBITDA contribution is roughly 7x in a 60% contribution rate. Are we still working with that same metrics?

Correct. The pricing ranges we are still seeing 6x to 8x and as we talked about how are you arriving at the 7 is usually that you get the turn, one turn benefit from the pricing multiple to effective so yes I'd say that 7x is you are right on it.

What are you allocating towards the acquisition for remainder of 2017 and what you have allocated for 2018?

Well as we've talked about returning to a normalized approach to M&A, 2018 I think we would be in that -- we will be circling $100 million in that range for kind of normalized approach to M&A. With NSH transaction in 2017 we entered into the year with a very active pipeline and just an enormous amount of opportunity and we continue to evaluate those opportunities but obviously put those on hold while we completed NSH transaction. Those opportunities are still out there and active and the timing on those is uncertain at this moment. Again we made the decision to place those on hold but I think you would see a normalized M&A spend around $100 million a year.

Okay. And then I believe you stated that you might still be looking to acquire more physicians' offices. I mean given the issue that happened with Jacksonville facility how you are I guess approaching some of these acquisitions and how would you change the incentive plans for these doctors?

I think what we are not going to do is acquire large independent groups outside of our market. What we would like to continue to do is one off physician acquisition as toolkit in our market for our operating group to use. We think that there is continued opportunity there to either employ, acquire physicians but we want that to be within our market supporting our core assets of short stay surgery facility. So we will continue that activity, what we don't want to do is acquire independent physician groups not in our core markets that are supporting our core asset for short stay surgery facilities.

Okay. And then just going on a pro forma basis based on a 240 of EBITDA that you mentioned. What is the mix of EBITDA coming from the surgical hospitals?

We haven't given that breakout and primarily because that's not how we operate the business. These are short stay surgical facilities, they are approximately 90% of their procedures are outpatient. And so when you look at our operating groups we have a mix of surgical hospitals and ambulatory surgery centers and that's how we focus on the business that short stay surgical facility.

Okay. Well then if could ask another way -- the procedure flowing through the surgical hospitals, the payor mix, is it mostly Medicare or is it a commercial? Because if you look at the -- [Multiple Speakers]

It's similar mix, we'll combine with NSH will be about 50% commercial and you have some facilities whether ASC or surgical hospitals that focus on ophthalmology GI and have a higher mix of government but in general for the company as a whole it's a 50% commercial business.

Okay. I guess that's what I getting to, if you look at other surgical centers their commercial mix is mostly call it 70%-80% commercial. I mean I just was trying to figure out why your is roughly 50% and not as a high as that your comps. Is it because of the ophthalmology GI?

Yes. We are having that multi specialty approach and having GI ophthalmology. You have a mix of government which is fairly consistent. If you look across the portfolio, it's pretty consistent, each facility kind of that mix corresponding GI ophthalmology government and commercial and so it appears pretty normalized to us with that multi specialty mix.

I think we would very consistent with other multi specialty companies. There maybe some single specialty companies that maybe have a higher commercial but if you are looking at the multi specialty business just through time historically and currently we are all pretty consistent.

Okay. And just last question and I apologize if you had already talked about it but in terms of Jacksonville any color or update or color as to maybe how that facility is turning around? Did you see any pressure on EBITDA during the quarter and if you could quantify what that impact was?

Yes. It's pretty well been stabilized, consistent with what we saw in the second quarter. And I mentioned earlier that we have operational plan for improvement. We have had a few challenges related to some leadership in that market but again my comment earlier is you will hear less about this as it becomes smaller component of our overall business. But that doesn’t mean we are not continuing to focus on that operational plan and the overall improvement that we had laid out earlier in the year.

This concludes our question-and-answer session. I'd like to turn the conference back over to Clifford Adlerz for any closing remarks.

Thank you. In closing, although we experienced some challenges during the quarter, we remain enthusiastic about the future of Surgery Partners as we move towards 2018. As the industry continues to shift towards more efficient care, we are focused on successfully integrating the NSH acquisition. We believe that the combined operating in a larger scale will be effected in delivering a more diversified set of services, focused on maximizing our short stay surgery assets. We are on the right side of the cost equation in a complex evolving healthcare environment. As evidenced from our continued same facility growth rate and underlying trends in our business. As a result, the company is well positioned to continue to deliver high quality, cost effective solutions. We are moving forward with a stronger more diversified platform to support our short stay surgical procedure growth objectives and continue to work to deliver significant volume to patient providers and payors. We really appreciate everybody's interest in the company. Thank you for your time this morning and participating in our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.