Greetings. And welcome to Surgery Partners Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Dave Doherty, Chief Financial Officer. Please go ahead.

Good afternoon. And welcome to Surgery Partners fourth quarter and year end 2021 earnings call. This is Dave Doherty, Chief Financial Officer. Joining me today are Wayne DeVeydt, Surgery Partners’ Executive Chairman; and Eric Evans, Surgery Partners’ Chief Executive Officer. As a reminder, during this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this afternoon’s press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today’s call, the company will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent annual report when filed. With that, I will turn the call over to Wayne. Wayne?

Thank you, Dave. Good afternoon and thank you all for joining us today. Before we begin, I would like to take a moment to thank all of our employees and frontline workers supporting the U.S. healthcare system, during these unique times. They truly embody the American spirit of caring and providing for others. And we appreciate the opportunity to support these efforts and to have the privilege of serving our communities. Turning to our financial results, I am pleased to report full year adjusted EBITDA of $339.6 million, a 32% increase as compared to the prior year. For the full year, we performed just shy of $550,000 surgical cases, nearly 20% more than 2020 and almost 5% greater than the pre-pandemic period in 2019, resulting in annual revenue of $2.2 billion, a new record high for surgery partners. We are especially proud of these results, as our company was not isolated from the continued impact of the pandemic. With rising cases and successive waves of the Delta and omicron variant associated labor pressures and a rapidly changing regulatory landscape. As we have discussed before, our operating model has proven resilient in this dynamic environment and the Board of Directors continues to be proud of how this management team and our 10,000 plus associates has navigated these challenges while providing the highest quality care to our patients. As we look closer at our fourth quarter, results were impacted by regional COVID 19 cases, some labor pressures in select markets and the continued recovery from Hurricane Ida in our Louisiana facilities. Despite these headwinds, our results continue to affirm the power of our business model and the value proposition we provide. So notable highlights of the fourth quarter include the following. Net revenues increased to $610 million, approximately 11.3% growth over the…

Thank you, Wayne, and good afternoon. Today, I will focus my comments on three areas that will explain my optimism for the company as we enter 2022 and our updated guidance for the year. First, I will provide a few additional highlights of our fourth quarter results. Second, I will spend a moment talking about our most recent experience with COVID, the Omicron variant and the labor pressures we have seen in our industry-related to clinical care. And finally, I will discuss our organic growth initiatives, as well as dive a little deeper on our recent acquisitions and the increasing focus we are placing on de novo development and health system and health plan partnership opportunities as our industry continues to migrate care to the highest value setting. As Wayne indicated, we are pleased with our fourth quarter results, which demonstrated strong topline growth and higher adjusted EBITDA margins. The growth in total reported revenue was greater than 11% and 9.6% on a same-facility basis. As we have mentioned throughout this pandemic, our business model has been affected by illnesses that have temporarily affected some of our physicians, clinicians and patients. But these events tend to be temporary and site specific. Surgical cases, which grew by over 10,500 in the quarter compared to the prior year quarter, are often rescheduled within weeks if necessary due to the nature of these cases and the fact that our facilities are increasingly sought after by all constituents in the healthcare system. The mix of surgical case specialties has also largely stabilized in line with our expectations, as GI cases have rebounded to above pre-pandemic levels and our investments in recruiting positions that focused on higher acuity orthopedic cases continues to be successful. Our ability to manage through the significant impact of COVID in…

Thanks Eric. First, I will spend a few minutes on our fourth quarter financial performance before moving on to liquidity and some considerations we have as we move into 2022. Starting with the topline, surgical cases improved by 7.8% in the fourth quarter to approximately 145,000, with GI cases returning to normalized levels and the contributions from our new acquisitions that were partly offset by lower case volumes in our pain management business. Revenues for the quarter were $610 million, 11.3% higher than the prior year period. On a same facility basis, total revenue increased 9.6% in the fourth quarter. Looking at the components of this increase, our net revenue per case increased approximately 5% and case volume was approximately 4% higher than the prior year period, driven by acuity mix and pricing, continued recovery of case volume from the pandemic and favorable recruiting efforts. Turning to operating earnings, our fourth quarter 2021 adjusted EBITDA was $114.4 million, a 26% increase from the comparable period in 2020. These results include an $11.6 million impact from CARES Act grants that were recognized in the fourth quarter of 2021, compared to $9.2 million in 2020. Year-to-date, we have recognized $37.9 million of CARES Act grants as grant income, translating to $25.3 million and -- of adjusted EBITDA impact. As of December 31, 2021, we have approximately $4 million of grants deferred as the liability on our balance sheet. During the quarter, we recorded $15.1 million of transaction, integration and acquisition costs with a meaningful amount of this overall expense related to our acquisition and divestiture activity in the fourth quarter. As we disclosed in the third quarter of 2021, transaction, integration and acquisition cost did not include any losses associated with our community hospital in Idaho Falls, as the facility began producing…

Thank you very much, sir. [Operator Instructions] We have a first question from the line of Brian Tanquilut with Jefferies. Please go ahead.

Hey. Good afternoon, guys. Congrats on a great quarter and great year. Well, I guess my first question for either Wayne or Eric, you talked about Q4 strength, but I think it’s pretty clear that Omicron had a little bit of an impact on volumes in December and January for most healthcare providers. So just want to hear, any color you can share with us in terms of what you saw during those periods, in terms of the drag from that and then the bounce back, if any, that you have seen say in February or a quarter today or so far in March and how you are thinking about volume performance around surges that you see with the virus?

Hey. Brian, thank you for the question. I think it’s fair to say we all know someone who was impacted by this variant, whether it would be in December or January time frame. As we think about, responding to that question, we looked at it really from two lenses. One is, how did the actual variant impact our patients, our surgeons, our nurses? And then separate from that was, was there any late pressure as a result of that within, within the labor market. So I am going to let Eric respond to both of those. And then maybe Eric, give a little commentary of what we have seen in terms of the rebound, both at year end as well as going into the February timeframe.

Yeah. Brian. Thanks for the comments too. We are certainly pleased with the way we finished the year. When you think about the kind of our impact from Omicron, we certainly saw it. We saw it in certain regions more than others. As we have talked about before though and then particularly with Omicron, it’s been a situation where even whether it’s a physician or a patient, we never cancel those cases. They are rescheduled within a relatively short period of time. And so we have seen pressure points. They come up and then they quickly abate. Patients are rescheduled relatively quickly, usually within the month, definitely within a quarter, if you think about kind of just the timeline of getting that done. And what’s been particularly encouraging towards the end of the year and coming into the first part of 2022 is the areas where we had seen not full recovery. So if you think about ENT pain management, some of those procedures that we explore are coming back in the past. They really are coming back quite strongly. And so we actually -- we are really encouraged by the start of the year. January was somewhat affected, but clearly we have seen that bounce back in February and actually expect our quarter to be where we expect it to be and what we have talked about. As far as labor pressure, I think Wayne pointed to how does that affect us? Clearly, when people are out sick from the short-term perspective, you have to cover them often with premium labor. So that could be over time that could be contract labor, typically over time for us. But I’d just remind you on labor pressure, we have a preferred job. So if you think about our positions are typically…

That’s awesome. And then I guess my follow-up you, in your prepared remarks, you talked about the de novo strategy as well as Privia joint venture. So just curious if you could share with us some comments on how you are addressing or how are you, how you are doing de novo, what you are looking at there, and then maybe just any other color you can share on how you thought about Privia and your entry into some sort of value based arrangements with primary care practices such as those?

So I will start and I am going to ask Eric to maybe comment a little bit more on how we are expanding `our de novo strategy and the Privia relationship specifically, but as a reminder, we made substantial investments on a de novo basis over the previous four years and obviously Idaho Falls Community Hospital being the largest of all those de novo. But we have spent a lot more time once we got those started and up and running over the last two years, focusing on them being successful during the COVID-19, in all the various variants that came out. So we took the foot off the pedal slightly over the last couple of years to make sure that our existing de novos would be highly successful and that our position recruitment efforts of years to make sure that our existing de novos would be highly successful and that our physician recruitment efforts would be implemented. That being said, Eric and the team over the last, I would say 8 to 12 months have really started putting the pressure back on that next wave of de novos and where those are at, and so I am going to let Eric comment on kind of what we are seeing, and I think you will hear more exciting things as this year goes by and then around the Privia relationship.

Yeah. Thanks for that question. I think on the de novo side, I would say a couple of things. Let me first separate this thing. It’s not a new growth problem. We typically have several de novos a year that we do. However, it’s an increasingly big part of how the industry is growing. If you look at the data that’s out there, we think de novo capacity represents or de novo count of centers represents about a 4% increase on an annual basis in the last couple of years. So it’s become a, certainly a big part of the growth of our space. And it’s a place we are leaning in. I would just remind you, though, that we have been doing this for quite some time. On the de novo side too what I would tell you is we have been really focused on the strategy. We have a number of exciting opportunities to increase our pace there. We think de novos can be a, a double-digit part of our center growth over the next several years. And we are leaning in to make sure that we are positioning ourselves to do that, particularly as cardiology in orthopedics come out of hospitals. Sometimes it’s easier than in a single specialty hospital to start with a very specific, purpose-built facility and so that is something that we are quite excited about. I think, Brian, to follow back up on your question around Privia in value-based care. I always start my value-based care discussion with reminding everyone we are value-based care within the fee-for-service world, right? So the simplest way to think about us is in the current world, move patients to our site. We will save you a 20% to 50%, I think that’s a story that continues to…

And maybe last thing I would add is just this we have been working over the last 12 months on opportunities to accelerate the de novo window. As we have mentioned, it’s usually 12 months to 18 months before you see positive EBITDA. We think there’s opportunities with the right partnerships and the right individuals to actually accelerate that so that the EBITDA of value creation occurs much sooner than the typical digestive period that we have seen in the past. So, again, more to come, but we are excited about a number of things we have in the hopper right now, and hopefully, we will be able to share more in the next quarter or two.

Awesome. Thank you, guys.

Thank you. We have next question from the line of Jason Cassorla with Citi. Please go ahead.

Great. Thanks, guys. Good evening. Just wanted to turn to your 2022 revenue guidance and call it over 12% growth. Can you help frame the attribution of that growth between organic, just considering the rollover of COVID and maybe the pent-up demand argument? And then maybe the contribution you are expecting from fields that you completed for 2021, just so we understand. Thanks.

So maybe Dave can feel free to chime in with any of the specifics here, but I would generally say we are targeting high single digit, low double digit for the organic portion of revenue growth. And then if you think about capital deployment again, if we average around $200 million use of mid-year conventional for the average deployment timeline, you can kind of back into the delta there. I’d remind you that, our revenue growth is on an absolute basis. So we didn’t bifurcate when we gave the at least 12%, we didn’t bifurcate out the government money that we are covering. We didn’t bifurcate out the sequestration headwind that we are dealing with. So from our perspective, the underlying growth rate is actually greater than 12% when you consider that we are actually overcoming those headwinds. And then, of course, growing on top of that, but ultimately, think about it as more, high single digit, low double digit organic and then the delta through, through M&A.

Yeah. I would agree with you Wayne, as you look at what we have experienced over this past couple of years with same-store growth, especially what we just reported this year, that we have a good mix of both case and rate growth, that trend we expect to continue. But clearly a good contribution coming from our acquisition activity. So it’s a fairly balanced way that we are looking at the growth plan for next year.

Got it. Okay. Thanks. Maybe just as my follow-up, I just wanted to go to the physician recruitment engine you have at Surgery. Is this in your prepared remarks? You discussed 13% growth year-over-year in physician adds for 2021. Is that how we should think about targeted growth moving forward, just given the focus there? And maybe just help out in terms of what kind of growth you need to help offset the natural attrition of physicians that you noted in your prepared remarks? Thanks.

So probably the best way to think about it is that we average around 95% retention in our physician base. Now, that varies between those that are owners with us versus those that maybe somewhat transient, either returning or relocating, et cetera. But as you generally think, average of averages, we retain somewhere around that 95 percentile. So all things being equal, you have got to be able to recruit at least 5% new physician base to recover those that retire, relocate or just choose to change professions or -- and so what we generally try to target is basically replenishing that whole each year. And then, of course, we would like to see a level of growth on top of that. So I don’t know that I would say we are always going to be 13% a year, because who knows where this will end up. But I would tell you that we have been very heavily focused on high acuity procedures, and I have been very pleased with the level that the team’s done there and there’s multiple specialties that we are actively pursuing still, whether it be ophthalmology, GI, et cetera. So I still think we will be double-digit growth. I would say we have aligned the team and their incentives around recruiting physicians and the right doctors. So that will be aligned around that double-digit growth. But Eric, anything you want to add?

No. I think you have hit the key points. I think that we have a very experienced team that has usually data-driven approach to drive this growth. And it’s -- every year, we are making gains. We are making gains not only on procedures, but the type of procedures attracting the right docs in every market. And we do -- I guess what I will say is we actually continue to see our pipeline strengthened. This is not something that’s slowing down. Our pipeline is as strong entering this year as it’s ever been. Our pipeline is as strong entering this year as it’s ever been, actually, I’d say stronger than it’s ever been. And so we look at the opportunities that remain on that as a, obviously, a big part of our organic growth when we go out and acquire a new facility, it’s one of the big value propositions we bring is being really thoughtful around how do we, how do we market to and gain traction with the most important positions in that community that can drive value in our facilities, and we have executed upon that really well, and I don’t expect that to change?

Great. Thanks for the color.

Of course.

Thank you. We have next question from the line of Kevin Fischbeck with Bank of America. Please go ahead.

All right. Great. Thanks. I guess first question, I think we said that your guidance includes headwinds from labor and supply cost pressure from the pandemic. Is there any way to spike those out and when we think about the impact that maybe those had in 2021, is the CARES recognition a good proxy for that, or is there some other way to think about that?

I mean, ultimately we have had this debate internally that we have been trying to wrap our hands around like how big is it, how do you measure it, but ultimately cares grants were there to subsidize for where you had shortfalls and shortcomings, whether it be from labor pressure or timing on volume. So I don’t know if that full $25 million is completely the right proxy. I’d probably say it’s a little bit south of that, but I would say that, it’s a reasonable proxy to say that, that we have had to overcome that entire headwind in our revised guidance and we have in our updated guidance, we have had to overcome the sequestration as well. So I would view it like that And if you look at just overall cost, we are up about 100 basis points, if you compare to last year at this time on kind of the labor headwind, now we are closer to the 2019 levels, but we are kind of investing through this. So, but I would use, I would, at this point, I’d probably use a little bit south of the grants as a proxy because some of that grant related to the prior year, meaning 2020 that rolled into twenty 2021 as we were figuring out the rules that CMS was publishing But, but south of that number, but, but obviously a reasonable proxy.

Yeah. And I would just say maybe if you are thinking about kind of how we thought about that rolling into next year, clearly in the second part of the year, we have, Wayne talked about this point, but our current performance is basically the same as a percentage of revenue as it was in 2019. It’s up over 2020. It’s even to kind of over the prior month if you look at our over the prior quarter. But we know part of the reason we have been able to do that is through some of the efficiencies we have gained through COVID. So we have outrun some of that just simply by being more efficient. We have kept that kind of higher rate in there for a period this year because we still think we are going to have noise. So when we say it includes that, we certainly have, based on our best knowledge and understanding how we have to manage through this on a transitional basis. There is some of that in there, but our expectation again is that, this is a, this is an area we can really manage through number one because we have a great job that we tend to retain people in. Number two, the pressure is coming off kind of that floating nursing capacity. And then number three, much like the industry has done over the years, we will continue to look for ways where we have pressured physicians to make sure we are working top of license and adjusting our mix to, to meet that need.

Okay. That’s helpful. And then I guess as far as the managed care negotiations go, you seem to me to be benefiting from these strategic rate negotiations. Where are we in that process? How much longer do we have to go? Should we be thinking that we will be talking about this in still in two or three years or is this going to wrap up sooner than that?

Yeah. So I think we still have a fair amount of ways to go there. We are still a value player within our space. We have certainly, I think, made a lot of progress in the last couple of years and making sure we are getting paid fairly in our core markets. Now the real opportunity comes for some of these more what I would say, more interesting strategic discussions on how do we make sure that we are partnering with physicians to make sure our physicians are giving the professional fee incentive they should to ensure they go to the high value place, making sure that we are contracted ahead of our facility expansions when it comes to service lines and making sure where we can, we are sharing in some of the savings we created. So I think that’s going to be the real opportunity for us over the next several years, but we are certainly not in any way shape or form of a price leader in our markets. We still have plenty of opportunity to partner. We have a very strong value proposition as an independent player in this space and that continues to resonate.

And Kevin, I remind you, when we started this journey four years ago, we were just building out the team around managed care and contracting and how we wanted to approach it. And as you know, most contractual arrangements are generally three years in length. And so even if we were able to hit the ground running, as of 119, best case, we got to -- we had an initial bite into all of the contracts and where they needed to move to. But as you know, these contracts have about a third of them renew each year over the three-year period. So I would say knowing the trajectory that we are on, I don’t think we have hit the top of the mountain yet. I think we still got another three years to five years of climbing to get to the top of the mountain. And at that point, we think we will have even further scale that should drive even more value for the system that we would have another round. So I would say maybe we are in the fourth inning, at this point. We are not in the first inning anymore, but we are a long way away so from the value creators from contract negotiation.

Yeah. And Kevin, just as a reminder, as we move into higher acuity services, I think the inning roll is back. I mean, I would just point to you that, you started thinking about the procedures we are doing more of today hips, knees, spine, cardiology, these are the types of procedures that prepares our six-figure savings per procedure that actually really changes are our value prop in a way that allows us to rethink and renegotiate our partnerships, because we are going to drive so much value together. And so like, I don’t think it’s -- if I gave you an inning from where I thought we were going to be initially, I would probably say fourth or fifth, but ultimately, as higher acuity procedures are proven out to be safe in our space as CMS is leaned I think that opportunity has gotten larger for partnership and larger for ways to make sure that we are aligning on creating value for the system in a very accretive way for Surgery Partners.

All right. Great. Thank you.

Thank you. We have next question from the line of Sarah James with Barclays. Please go ahead.

Hi. Yeah. This is Steven Braun on for Sarah.

Hey, Steve.

Hey. How’s it going?

Good.

So a question on, I guess, like the acquisitions and the multiple that you guys stated at 8 times. So is there -- was that like the reason for the 8 times multiple? I guess like the last number we had seen was 7.5 times as the average multiple you had paid since 2018. Was there any reason that the multiple may have stepped up a bit? Was that like pertaining to that, maybe the three deals that that were closed in December?

Yeah. It’s a great question. If you think about multiples, they vary on a range that can be literally as low as 5 times to as high as 9 times, sometimes even as closer to 10 times. It’s a function of the quality of the asset, as well as the specialty in which they are in. So if you think about historically, if you go all the way back to 2018, that was when we were pruning the asset, repositioning that book into the high growth specialties. And so certain assets we were getting a lower multiples on others will be higher. If you look at our more recent acquisitions, they are very heavy in the MSK and cardio, lines of service. And when you think about those, those generally have a slightly higher multiple than other specialties that have already moved a significant portion into an outpatient setting. But all-in, around 8 times multiple on a trailing 12-month pre-synergies. So if you think about, as Eric said in the opening comments, we usually take about a turn off on these things after we get on a synergies basis. So but I think you will see multiples continue to hover in the seven to nine times average range and specialty is really the big driver.

Got it. Thanks for that, and then I guess like on the other one, so the how much of like I guess, the revenue guide for 2022, how much of the inorganic growth is taking into consideration the three deals versus like incremental deals that you may do in 2021?

We do not count transactions as organic until they have gotten through one full year of maturity. So none of those transactions will come forward organic growth model that we just completed in December, those counter M&A. So our organic growth is a very pure growth. We have got to own the asset for a year, and at that point we then look at what is the value creation that we create after the one year mark.

Got it. Yeah. No. I was sorry, I was saying when you were dissecting the pieces of the growth algorithm, I was saying how much was of that M&A was factored into like the inorganic piece that you hadn’t talked about, I think on maybe?

Yeah. So we just, I would that would just clarify a little bit. So, yeah, so we think about going into this year, we clearly have capital still to deploy. And we think there is additional upside for us as we put that to work. We don’t have, we don’t try to build way ahead on that. We have assumptions that we have on any given year will look like. But the reality of it is as we go through the course of this year and we deploy capital, we have no reason we shouldn’t. We have got a strong pipeline to continues to build that there are certainly opportunities for us to exceed the range we talked about today.

Yeah. I think for model in, think of it. As we said, we target at least $200 million, use a mid-year convention and use roughly an 8% as a rounding factor $200 million, use a mid-year convention and use roughly an eight-multiple as a rounding factor. And that’s what we would use to say. That’s how you back into what kind of value creation to the extent that we can accelerate the timeline relative to the mid-year convention that is additive to the outlook, to the extent that we do more than $200 million, it could be additive to the outlook. So a lot of moving parts here, but we would say the pipeline is as robust as it’s ever been.

Yeah. And one thing I didn’t clarify earlier, I want to make sure it doesn’t get lost on this call is we talked about the de novo opportunities for us going forward. That is a separate and apart from our normal $200 million plan, right? But we are going to put together -- we are going to do our traditional M&A, we feel good about our ability to do that. We have a great pipeline. Separate and apart from that, we see this additional growth opportunity in de novo that we think also can be quite accretive to our future.

Okay. Great. Thank you.

Thanks.

Thank you. And we have next question from the line of Tao Qiu with Stifel. Please go ahead.

Hey. Good evening. I am just trying to understand the revenue cadence for the year. You mentioned that you expect 1Q revenue to be 20% off the full year. At the same time, it sounds like there are delayed procedures you are -- that you are rescheduling pretty quickly. So the experience might be more similar to what we saw in 2021, where 1Q was actually higher. How should we think about the impact of pent-up demand improving -- improvement in staffing in terms of the impact on the first quarter?

Well, so, Tao, thanks for the question. So first off, we are not giving quarterly guidance on the revenue piece just yet, but you are absolutely right. We do look at the seasonality of our adjusted earnings to look somewhat consistent with what we have seen on a pre-pandemic level. But as we have looked at those cases that might be impacted by Omicron, but we are still looking at those things inside of the quarter. So anything that might have been delayed isn’t being delayed for a long period of time, which is why we feel comfortable with that overall earnings pattern still remaining somewhat consistent.

Yeah. We are actually are kind of, we are kind regressing to our norm this year a little bit. I mean, certainly we are going to have some recovery in some places, which is offset by some disruption. But the reality of it is we are getting back to what we see as our new normal, which is, back to this really fast growth pace. But when you think about the seasonality of our business, particularly as, as many of you know covered us as a long time, that fourth quarter is a big quarter and typically is 31%, 32% of our revenues. Q1, as we talked about earlier, tends to be 19%, 20%. And we just want to make sure that, we pointed that out.

Yeah. I think part of that mix, of course, is the impact of deductibles on patients that are commercial-based that will tend to bring those cases in a little bit later in the year and the reimbursement of those. So, so part of it is just natural as you do get back to again those pre-pandemic levels, which is probably a better comparable or comparison for you rather than the past couple of years clearly.

Got you. And then I think you talk about there’s a $ million deferred liability from the grant income, is that including the adjusted EBITDA guidance you guys gave?

No. It is not. And as you know, kind of relatively small, the grant income that gets recorded is all subject to the applicability of the facility itself. They received it in the nature of the grant that was received. And so a large part of that $4 million that’s still on the balance sheet was received in the fourth quarter grants. And so we just look carefully at that it, it will be dependent upon losses that were incurred at that particular facility and then how it may be used across the rest of the portfolio based on actual COVID-related losses. So more to come on that, but unclear how that might be pushed into the year, if at all.

We have no more assumptions around receiving grants. That’s in the guidance.

Yeah. We like to view that money on the balance sheet as a hedge, if we have a particular facility that is impacted and that it would apply against that facility, but very similar to what you saw in Q4. We manage our business without those grants. That’s our job. And so that’s why we have such a strong Q4 and that we were able to not only execute, but we were able to recognize many grants and markets that were impacted by Omicron and by the wage pressures. So no, we are not assuming any of it in our guidance and view it as either a hedge or potential upside.

Understood. Great. If I may squeeze in one more, I think, Dave, you mentioned that you are comfortable taking leverage to the high 5s and low 6s. Is it fair to say that there’s no need to kind of raise equity capital near-term, given the trying to make long capital deployment target?

I am sorry. Say that last part of your question again.

So given the capital deployment target of $200 million, just doing my math here, it seems like there is no need to raise equity capital in near term. Is that a fair characterization? Thank you.

It’s a very fair -- yeah, very fair characterization. We have more than ample capital. $390 million consolidated cash, $210 million undrawn revolver. And I do not see a need for us to raise more capital, and I would remind everybody that we are now going to be cash flow positive that our business north of $0.0315 in EBITDA moves us into cash flow positive territory around $0.65 of every dollar above $0.0315 converts to positive cash flow. And on top of that, as you know, we have some debt that we can call with a 10% interest rate and the ability to refinance. That will also give us even further flexibility of improving our cash flow position. So I would say we feel like we are in a very strong position cash flow position. So I would say we feel like we are in a very strong position without having to raise additional capital.

Thank you.

Thank you. We have next question from the line of Gary Taylor with Cowen. Please go ahead.

Hey. Good afternoon or good evening. I will have to go back to the transcript. I was going to ask a question about that free cash flow Dave was ripping through a lot of numbers pretty quickly, but wanted to ask what does maintenance CapEx recurring, look like in 2002 or kind of go forward now given your current portfolio?

Yeah. Sure. This is Dave, Gary. And I am happy to walk you through those numbers again if you need to. But you are right, it’s all kind of laid out pretty nicely in those talking points. CapEx for us last year was somewhat of a normalized level for us, and I think we reported just shy of $57 million or just around $57 million of CapEx procedures. And so as we look forward on a normal maintenance basis, as well as the growth that Eric was talking about with regard to de novo investments that are necessary, that’s a good number to use.

Got it. Then my second question, I just want to ask about supply costs trend look pretty good this quarter, I mean, for obvious reasons. Supply cost per procedure tracks pretty closely with your revenue growth per procedure as particularly as you have done more higher acuity procedures. But this quarter, we actually had supply costs per case, down about 0.5 point. You had pretty decent revenue per procedure growth, was a pretty wide gap versus what we are used to sort of seeing from you. So was there anything about the mix of, of cases this quarter or anything else driving that performance?

It’s a great question for Eric, I will start and maybe let Dave give more detail, but I would say high level, you did see some return of the lower acuity. We started to see pain come back a little bit in late in the quarter. And certainly those are high margin, lower supply cost procedures. In general, we have got a supply chain team has done a fantastic job of staying close to our large, large distributors, large suppliers and we have been very proactive on managing this, and we in some cases that means we have to work with our physicians to change preference. In other cases, it just is simply a matter of making sure that we carry enough stock to live through disruptions. But in general, we feel like our supply chain progress and what we are driving there is sustainable and hopefully we can build upon it. I don’t know what Dave you would add to that.

Yeah. I think, I think the other two points to consider, one, fourth quarter does have higher mix of commercial business in there. So you are going to see a different revenue mix than you see, which is going to impact that, that metric just a little bit. And also as you look at the fourth quarter compared to, say, for example, fourth quarter of 2019, that might be a better comparison than your sequential as you have returned to somewhat normal. And Eric’s absolutely right. As we talk about supply chain and as we have worked with our vendors and at least the key, the key suppliers in there, we are talking about future trends and a current view of kind of how long we think that’s going to persist for. And so, much like the labor trends that we do see them in pockets. And we also can deploy different strategies, as Eric was mentioning -- are either buying in advance of some of those things, taking advantage of stock, also finding alternatives that are reasonable for our physicians as a way for us to kind of manage them. So much like our labor pressure, we look very, very closely at ways we can manage that cost to help offset the inflation factor there.

Got it. Thank you.

Thank you. We have next question from the line of Whit Mayo with SVB Leerink. Please go ahead.

Hey. Thanks. Good afternoon. I just wanted to go back for a second to the 13% increase in the new physicians onboarded this year. I don’t think this is a hugely significant number yet, but can you comment on what percent of the same-store growth in 2021 may have come from that group of physicians? And I guess really the broader question is reflecting back on 2019 or 2020, when you look at the various cohorts and how those new physicians are performing and the level of productivity that they are having in your centers now?

Yeah. So this is Eric. I will take it -- that. Whit, thanks for the question. We have talked about this before. And we think about the cohorts and how they progress over time, and we have looked at this kind of year-over-year for quite some time, and it continues to hold true, which is typically the business in the second half of the year is up at least. I think it’s a 50% higher or it’s actually the double…

Yeah.

…often in year two. So typically we double that business in year two. It continues to have a growth in year three. And so this is one of those. Yet you do have to look cohort-by-cohort. If you think about the 13% in a given year, it’s actually not going to be driving as much as the cohort from the prior year as in year two, but it’s certainly a big part of that growth story. And as we have gotten more refined on that, it’s kind of a -- it builds upon itself, especially as we have increasingly been working on making sure we have really high retention, obviously, of our partners and we have good backfill plans, this all becomes additive. And so I mentioned earlier, our pipeline is as strong as it’s ever been with our positions that are in the queue going through our recruitment process. And ultimately, it is a -- it builds upon itself. It roughly doubles in year two and again with higher acuity specialties we have been recruiting. It makes a bigger difference. But I couldn’t tell you outside my head the percentage of our same-store growth is there. Clearly, new physicians, and it also mixes together a bit with new service line. So, as we add, as we add a joint program, as we had a cardiology program, those two are kind of connected. Same with robotics, so it would be hard to just pull that apart and say it’s just new physicians, part of its new equipment, part of its new service lines. But it’s certainly a big part of that organic growth piece.

Maybe to take Eric’s comment, though, and try to put a little bit of color around the idea that, if a typical year one physician again, remember, some physicians get recruited in January, some get recruited in December. So when we look at average of averages, so if you were to look back to kind of 2019, 2020, 2021 those are the first three years that this team had the ability to kind of look at how a vintage has evolved, right? So the typical vintage in year one is in the $30 million to $35 million in revenue, as Eric said it doubles by the second year and then it grows from there. So when a vintage gets fully out there, you are starting to get more to like that $100 million run rate over time. And what’s important to recognize with that is if you think about $2 billion of revenue and you think about just about half of our organic growth is coming from these recruitment efforts. Now of course, some of that then is offsetting the docs you lose to retirement to et cetera. So, it’s not as simple as does that group always give us 5% growth, but what would you have to look at it with that lens is that it’s generally, though, a pretty solid contributor to that mid-single digit growth that is there to both cover those docs that leave plus add to our growth. And as Eric said, we have so many other initiatives then, which is the mix of what we are bringing in, the robotics to expand even existing procedures with existing doctors. So when we talk about that that is literally just brand new doctors that have never used our facilities.

No. That makes sense. That I think the punch line is that it should increase our visibility into sustaining that level of growth. My last question is, is simply around Idaho Falls. I am not sure that there was an update around the performance of that facility and maybe just what the expectations are for its contribution this year. Anything you could share would be super helpful.

Yeah. Sure, Whit I can, I can take that. So first off, let me just remind you Idaho Falls was reflected below the line for, for all of its existence up through the second quarter of this year, when it turned profitable as when we moved it above the line and included it in our earnings and in the past we have talked about the revenue contribution from that facility as those numbers were kind of put above the line for a period of time. We are not disclosing that anymore because the overall business is now kind of in there, but you can assume that that growth trajectory that we have seen in the first part of the year has continued. It is part of the system that we have up in the Idaho Falls Community Market, which does, which does enjoy kind of the typical growth that we have seen across the rest of the portfolio. So it’s fair to assume that revenue trajectory is going to continue to grow. And the other point I would, I would make is we still feel confident in the long-term value associated with Idaho Falls Community Hospital. And for the time being, until we get there, you will see that being included as an addition to our credit agreement, adjusted EBITDA, which we still have in there at, at approximately $20 million.

Yeah. I just reaffirm what Dave said is that, I mean, this is a great market for us. We love our position in the marketplace. This hospital is a value player in that marketplace. It was certainly delayed by launching a new hospital during COVID, especially a hospital that is going to be a trauma center that’s going to have a fair amount of cardiology over time. And when you are doing that in the middle of ED impacted period, starting a hospital, obviously a kind of a little bit behind where we would have expected it to be. We were also delayed by just trying to get people out to license things and trying to get -- everyone was distracted. But we believe that this facility is going to be a fantastic facility. We still have a great confidence and it’s a market we like. We like our positioning. And ultimately, it’s just been delayed by COVID, but continue to be excited about Idaho Falls.

Can I just get clarification on that? Dave said that there’s $20 million of add backs to the credit agreement, and I mean normally that implies that there are losses. Is this the facility that you expect to be a positive EBITDA contributor this year? I just want to make sure that I am thinking about this, right?

Yeah. Yeah. Whit, this is Wayne. Let me clarify that. It is a positive contributor to EBITDA. It will be a positive contributor for 2022. We are expecting it to contribute an additional $20 million in the out years. That’s why we are including it in the credit agreement.

Okay.

So view it all as it’s all additive, meaning we are not off track. We started slower than we had expected, because we opened it up in the middle of COVID, but it has already turned to positive EBITDA mid-year this year, and that trajectory is not slowing down and we would expect going into the out years an additional $20 million of EBITDA growth on top of what we are projecting for this year.

Okay. Thank you so much.

Thank you. We take the last question from the line of Ben Hendrix with RBC. Please go ahead.

Hey. Thanks, guys, for squeezing me in here at the end. Just hoping you could provide a little bit more information or a little more detail around the cardio opportunity as the next wave of high acuity growth? Maybe some -- specifically some details around the timeline? Is it going to ramp up as fast as in this case has and any detail you can provide around that?

Sure. Ben, this is Eric. Thanks for the question. It’s certainly a service line that we are very excited about just because of the value creation opportunity, given how much expense it drives in the traditional acute care world from a patient care standpoint, I would say, I don’t know that I expected to move quite as fast as orthopedics, although I am being surprised that sometimes the pace that we are seeing, we expect to launch, I believe it’s seven to nine new programs this coming year in our ACS meaning cardiac rhythm management programs. And so when I talk about cardiology, I would just think about it. It’s kind of an evolution. If you think about our current facilities, 60% of them have the fluoroscopy capability needed to do basic cardiac rhythm management, which is think about that as pacemakers, lead extractions, some of the more basic procedures. But there’s a, there is definitely a growing interest among specialists to have cath lab procedures are available in outpatient world. Certainly, cardiologists have not had as much exposure as what orthopedic surgeons did ACS necessarily, but we are seeing tremendous interest and we think that’s again as part of that be part of the de novo story because a lot of these facilities can be efficiently built at de novo cardiac facilities. We are seeing more show up in our pipeline, and we are certainly seeing more on the recruitment side. When you think about our pipeline, it opens up a whole new group of physicians, whether that’s physician, EVP, EP vascular cardiology with procedures that can come into our space. And so what’s great about it is, when you think about our TAM, it’s part of that that next $60 billion that’s moving out of facilities tends to…

Thank you for that. It’s great color. And just finally, is there any risk to that growth from a regulatory perspective? I just ask because of the kind of vacillation we have seen among CMS kind of adding taking names on and taking names off of the outpatient or inpatient only list. Thanks.

Yeah. So appreciate the question. So I just this is a little bit of a baseline on cardiology. I have made this argument a lot, which is I don’t know. It’s 10 years or 15 years ago that hospitals began doing interventional cardiology procedures and stenting PCIs without open heart backup. And so just putting this in perspective, I think it took CMS 10 or 15 years to get comfortable with. The reality of it is these patients often go home within 24 hours. Today, they have for a long period of time. There’s been now a lot of, a lot of data backing up the efficacy of these procedures. And so I think CMS was very, very thoughtful on the procedures they took off the inpatient only list or they put back on, I should say, and as we have talked about before net-net that actually was a positive for us with our surgical hospital balance. So it wasn’t anything we did many procedures of, but they were also very deliberate on leaving or, hips the knees and leaving cardiology one because the data backs it up from a safety standpoint and two because the tremendous value creation and actually better patient experience. So we actually don’t, we don’t see risk there. They looked at that thoroughly. They have left the things on that know they feel really comfortable with. This is one of those. And I actually like I said, I think this could have, this could go off, in my opinion, years earlier. In fact, a lot of commercial patients in the cardiology side, there are a number of quite busy outpatient cardiac centers on the commercial side that have been out there for a number of years. That is very compelling as far as safety and efficacy. We will clearly want to make sure we are going through all of the appropriate checkmarks to make sure we provide as good or better care than anywhere else, and that’s what we do with all of our service lines. But no, I don’t. I don’t see this as one that’s going to go back the other way.

Thank you.

Thank you.

Hello.

Ladies and gentlemen -- yes, sir.

Yes. I’d say I appreciate everyone’s questions today, and I just want to make sure, as we conclude, I do want to take a chance to say thank you to our over 10,000 colleagues and our over 4,600 physicians for their many contributions. Surgery Partners collectively serves over 600,000 patients each year and thousands of patients each day in what are often their most vulnerable moments. We take the trust and faith of our communities, patients, physician partners and colleagues place in us incredibly seriously, and we are truly privileged to make a positive difference in so many people’s lives each day. I continue to be energized and humbled by the opportunity to lead this company as we work to deliver on our mission to enhance patient quality of life through partnership. Our company is clearly part of the solution to the many challenges facing our nation’s health system, and I am very proud of the significant value we are creating for all of our stakeholders. As a preferred partner for operating short space surgical facilities across the US it is the daily contributions of our colleagues, physicians, all of our partners that enable that success, and I couldn’t be more proud of the team and how they have managed through what’s been a very, very difficult period of time and couldn’t be more excited about where we are heading as a company. So thank you so much for your time and questions today. That concludes our comments.

Thank you very much, sir. Ladies and gentlemen, that concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.