Greetings, and welcome to the Surgery Partners First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, Chief Financial Officer. Thank you, Dave. You may begin.

Good afternoon. My name is Dave Doherty, CFO of Surgery Partners and I am here with our CEO, Eric Evans and our executive Chairman, Wayne DeVeydt. We appreciate you joining us to discuss our financial results for the first quarter of 2023. Today, we'll make forward-looking statements. There are risk factors that may impact those statements and could cause actual future results to be materially different from them. These risk factors are described in this afternoon's press release and the reports we file with the SEC, which are available on our website at surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or is a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this afternoon's press release. With that, I'll turn the call over to Wayne. Wayne?

Thank you, Dave. Good afternoon and thank you all for joining us today. I'm pleased to report Surgery Partners first quarter adjusted EBITDA of $90.1 million, 17% higher than last year's first quarter, which generated an adjusted EBITDA margin that grew 60 basis points to 13.5%. Including our non-consolidated facilities, we performed approximately 176,000 surgical cases in the first quarter, 12% more than 2022, with contributions from all our core specialties, consistent with our expectations. This strong case growth combined with increased acuity and contributions from recent acquisitions generated net revenue of $666 million. Consistent with our prior quarters, our first quarter results demonstrate top line growth, organic margin expansion, and contributions from recent acquisitions, which are the cornerstone of our long-term growth algorithm. Dave will share more details regarding our financial results, but let me highlight a few. Net revenue of $666 million represents nearly 12% growth from the prior year with same facility revenue growth of 10.3%. This organic growth rate was a combination of case growth of 5.3% and net revenue growth of 4.8 per case. As we pointed out in prior quarters, the case mix of our business has been stable since early 2022, with all specialties growing at rates consistent with our expectation, Physician recruiting efforts yielded nearly 150 new surgeons in the first quarter, representing all of our core high growth specialties. As we start the year, we continue to be encouraged by the quality of physicians that choose our high quality surgical facilities. We anticipate recruiting approximately 500 new physicians to 600 new physicians annually. Our prior year recruiting cohorts continue to demonstrate strong year-over-year growth, with first quarter recruits from our 2022 cohort, generating 78% more revenue in the current year quarter as compared to the same period last year. Finally, joint…

Thanks, Wayne, and good afternoon, everyone. The start of 2023 for Surgery Partners has been productive as the company again delivered on its commitment for double-digit growth and continued to position the company for long-term growth by completing five acquisitions and four divestitures and by signing two strategic partnerships with Marquee Health Systems. Combined, these actions position us well to not only deliver on our updated outlook for 2023, but also on our long-term double-digit adjusted EBITDA growth trajectory. Dave will discuss the details of our financial results and the drivers of our increased guidance, and I will dive deeper into our operations and the portfolio changes we are making this year. From an operational perspective, our specialty case mix is right where we want it to be, and volume was in line with our expectations with over 151,000 consolidated surgical cases in the quarter, 6.1% more than last year. Let me reiterate what we shared throughout 2022. The effect of the pandemic on our results is completely in the rear view mirror. Since 2019, each of our specialties and subspecialties have experienced growth consistent with or exceeding our long-term growth. To put a finer point on this, since early 2022, all our specialties recovered from the pandemic with strong growth rates throughout the year. In aggregate, our quarter one case volume inclusive of 2023 has a four year CAGR of 4.9%. In the quarter, our same facility growth exceeded 5% when compared to the first quarter of 2022, continuing our consistently strong growth trajectory. As Wayne mentioned, this case growth included contributions from higher acuity cases, which helped our same facility net revenue per case increase almost 5% and combined to provide a double-digit same facility revenue increase in the quarter. We expect to continue to see both volumes…

Thanks, Eric. My initial remarks will focus on our first quarter financial results before providing additional perspective on our outlook for the remainder of the year. Starting with the top line, we performed 151,000 surgical cases in the first quarter, which is 6.1% more than the prior year, first quarter. These are only cases that are included in our consolidated revenue. If I include cases performed at non-consolidated facilities, we performed 176,000 cases. These cases spanned across all our specialties, with an increasing focus on higher acuity procedures, which is reflected in our double-digit same facility revenue growth this quarter. The combined case growth in higher acuity specialties, specific managed care actions and the continued impact of acquisitions supported revenue growth of 11.7% over last year to $666 million. I will reiterate that an increasing share of recent acquisitions include minority interest investments. For these acquisitions, revenue is not included in our consolidated financials. We will continue to be agnostic to the accounting treatment of the assets we acquire. Our focus remains to acquire high growth, high quality assets aligned with our targeted specialties at the most favorable multiple possible. This may affect how some of our stakeholders model revenue expectations. So it is worth reiterating this point for you. From a financial planning perspective, we focus primarily on growing our adjusted EBITDA and managing the core operations to grow market share. On a same facility basis, total revenue increased 10.3% in the first quarter, with case growth at 5.3%. Net revenue per case was 4.8% higher than last year, primarily driven by higher acuity procedures. As we reported throughout 2022, our prior year results were largely unaffected by the pandemic and the inflationary pressures that affected prior years. Hence, the first quarter of 2022 is a stable comparable period…

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question is from Jason Cassorla with Citi. Please press proceed with your question.

Great. Thanks for taking my questions. Just on the volume front, certainly a solid number in the corner of 5.3, but I was hoping you could give us a flavor of how payer mix trended and then just given a macro backdrop, if any portion of that volume was perhaps pulled forward ahead of potential coverage changes later this year, or if you think, underlying the demand was just more broad based in that sense.

Hey, Jason, thanks for the question and good afternoon. I would say from our perspective, we don't believe anything was pulled forward. That's not -- this is the core run rate that we had anticipated. I think we're feeling fairly optimistic for the full year, continue to believe that we'll see similar patterns as this year progresses, and I think as we said in our prepared remarks, we are fully expecting to exceed our typical algorithm in terms of growth.

Yeah, and I guess I'd say today is across all specialties, certainly you saw the acuity growth was strong. We talked a little bit about our joint growth being 84% year-over-year. Continue to see that acuity come through. From a mixed perspective, very consistent with what we expected. So, I would just say like fully meeting expectations as far as the overall growth and we liked how evenly spread it was across all of our service lines with specifically strong growth, the higher acuity procedures, which clearly showed up in our same store, net revenue per case.

Got it. Okay, thanks. Helpful. And then just maybe the follow up, I wanted to ask about labor costs in the quarter. You talked about inflationary impact was generally moderated in 1Q, but if we isolate as WV to per case basis, it looks like it was up about 6.5% year-over-year. That's been growing in that mid to high single digit range for the past few quarters. Maybe just helped bifurcate the impact between, underlying wage growth trend for '23 and the impact that the shift towards higher acuity procedures has on the intensity of labor per case. That would prop that set up too. Thanks.

Yeah, I'll dive in there. So Jason, that's a great question. We continue to see very moderate impact of premium labor. As we've talked about kind of throughout the pandemic, it's been a low percentage of our total labor. Certainly at points in the pandemic, we saw some excessive rates in that in some markets, but in general, didn't have a huge impact in prior years. We continue, we think to manage that cost quite well. From a per case perspective, I think you do point out something which is good to point out in higher revenue cases, obviously more higher acuity cases. There certainly is some length of stay difference in cases and it can be a different labor mix, but in total, we feel good about where labor came in. It still remains well controlled and we think it's actually, if anything, it's moderating and continuing to look better as the year moves forward.

Thank you. Our next question is from Kevin Fischbeck with Bank of America. Please proceed with your question.

This is Nabil Gutierrez on for Kevin. Thanks for taking the question. Can you talk about how volumes trended throughout the quarter? Was the growth consistent each month?

I would say relative to our expectations, yes, we obviously build our January, February and March, different each year. We look at a number of days. But if you look at a year-over-year basis, the number of days for us was consistent for 2022 versus Q1 of 2023. So no surprises from that. We saw a pretty consistent volume each month. So we have nothing weird to report.

And then my follow-up is, what type of procedures grew the fastest?

So as we called out, we called out total joints this quarter, growing up 84% in our ASCs. We clearly see orthopedics being a strong grower. But to be honest with you, all specialties were up and so consistent with our expectations, we're seeing our core service lines show strength and continued market share gains. So I think across the board, it was quite good, but I would definitely note, and you can see it in our -- obviously, our same per case, our per case revenue increases, same facility that we had pretty strong acuity growth, particularly at MSK.

Our next question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Good afternoon, guys and congrats. I guess, Wayne, obviously, congrats on the Intermountain deal. As I think about the surgery part of your strategy, historically, this was a two-way approach to running surgery centers, right? And now obviously, you have a big partnership with the marquee hospital name. So maybe a couple of things. Just thinking about the strategy, I don't want to say shift but expansion there, like how you're thinking about that? And maybe if you can remind us what the advantage is of partnering with the hospital as well versus your legacy two-way model?

So let me just start off by saying that one of the things that Eric brought when he came in and then took over as CEO was this idea that we really thought we could make the algorithm even more additive if we would be open to some of these three-way JV partnerships. And the core to that was, will they be like-minded similar to what the way we see the world and who we want to align with and how we want to align. So first and foremost, super excited because this is now another growth lever for us. I'm going to ask Eric to comment though, since this was a big part of his brainchild as we were thinking about the strategy of where we wanted to take this over time. And more importantly, maybe use Intermountain as an example of how this like-mindedness works.

Yes, Brian, first of all, thanks for the kind words. We were excited about the quarter and excited about the start of the year, the Intermountain partnership and the OhioHealth partnership, both are quite exciting for us. Obviously, two really well thought of systems. You keen it on Intermountain. One thing that makes that partnership so aligned with the way we see the world is Intermountain also has a large payer arm. And when you have a payer arm like that, they see the world from a highest value, highest use case as well. And so we naturally align with their thinking on how they want to move in the world and really help this transition to higher-value cases. Clearly, they have choices when they choose a partner. We feel like we bring best-in-class operational capabilities, the ability to grow their facilities. And so we're excited initially starting with helping them manage their already kind of strong position in the State of Utah, but more importantly, investing together to grow across the Mountain West. So as Wayne mentioned, this is additive to our growth algorithm. We're going to continue to be a very strong two-way partnership company as we always have been. But these three-way partnerships, we do think expedite our ability to grow in certain markets where we have not been as quick to grow. And they also, we think, unlock a lot of potential to continue the acuity increases in those regions. So super excited about it, Intermountain, again, like-minded in the way that what they really believe is they want to deliver the best quality, lowest cost, high-value procedures and care in general to their patients, and we're a natural partner when that's their mission.

Appreciate that. And then, I guess, maybe for Dave, as I think about revenue per procedure, obviously pretty strong, and I know some of that is mix. Is this the right sound like level of growth in a route for procedure that we should be thinking about going forward, considering that you're obviously seeing a lot of growth in MSK or joint replacements?

Yes. Brian, it's a great question. And I think it goes back to the baseline that you've set for 2022 going into 2023. The premise there is that we were hitting on all cylinders last year and the growth that we're seeing inside this -- as we start the year is going to be consistent with that. So I think it's a fair assumption that we're going to be at the upper end of that long-term guidance range as we go throughout the year. There's nothing indicating that we're -- we had an odd year in any of the quarters last year and certainly, as we look forward into this year, we seem pretty solid.

Thank you. Our next question is from Bill Hendrix with RBC. Please proceed with your question.

Thank you very much. Just wanted to follow up on that last one again, with the 4.8% revenue per case on a same-store basis, clearly above the regular 2% to 3% algorithm, and you talked about acuity, but you'd also mentioned last quarter some upside from kind of holding some of your newer acquisitions into your managed care relationships in some of your markets. I wondered to know if maybe that had some influence too and how can we think about that, especially with some of the new acquisitions and partnerships you formed this quarter?

Hey, Bill, this is Wayne. First and foremost, we require all acquisitions to lap an entire year before we even evaluate them for same store. From our perspective, we think that gives you the purest view of how we're doing. And so we actually don't benefit from M&A until we show the value we can actually bring a year later. So the good news is this is a real pure view of same-store and we would expect these trends to continue. At least based on our forecast for the year and how we see things, I think we're going to consistently outperform both on the volume and on the rate side. So as you think about historically, the upper end would have been that 6% same-store kind of revenue, we think you're going to continue to see us outperform that throughout the year, and we're going to finish much higher than that for the full year.

Our next question is from Lisa Gill with JPMorgan. Please proceed with your question.

Good afternoon. I also just want to focus for a minute on the partnership. One of the things that stood out to me is that OhioHealth also has the relationship with Privia. You announced last year relationship with Privia. So my first question is, do you see incremental opportunities to partner alongside Privia as they continue to sign on these physician groups? And then secondly, I know you said not much contribution here in '23, but ramping into '24 and '25. Is there any way, Dave, to maybe give us an idea of how to think about how that ramps? And are there any implementation or start-up costs that will be in '23.

So, Lisa, I'll start with kind of your first question, and I'll turn it over to Dave to talk a little bit about kind of future -- I don't know how much guidance we'll give on that, but we can talk a little about directional stuff. When it comes to the relationship with Privia, look, we have said before that Privia and companies like them that are in the payvider space naturally align well with what we're doing. So I definitely think it's not surprising that a partner we would choose would also choose to partner with kind of those value-based primary care groups. That certainly aligns well for us to grow together. So we can see lots of markets where that's a real potential synergy, not just with Privia, but VillageMD, anyone who really has a primary care group that is either capitated or value-based. We look at that as a real benefit. And I think OhioHealth, having those kind of partnerships on the primary care side just reiterates that they're a like-minded partner really thinking about driving value, making sure patients get to the right place and growing the health care system in a very thoughtful way.

Yeah, Lisa, I think your question on kind of how you're going to see this coming through our results this year, it is a ramp that we're going into these facilities kind of on a very deliberate basis. So as we migrate into these relationships, we're being very thoughtful about that. So first and foremost, that's how the ramp-up kind of happens for us. We do expect this to be slightly positive to the company's earnings this year, inclusive of any of the start-up costs that are inside there. So there is a slight positive benefit that we baked into our updated outlook for the year.

Our next question is from Whit Mayo with SVB Securities. Please proceed with your question.

Good afternoon. Just want to make sure I get this right on the hospital partnerships. I think this is correct. But OhioHealth is not contributing any of their existing ASCs into a joint venture with you initially, correct?

Hey, Whit, that's correct. I do think one of the things that we try to do with any partner as we show our value, we think there could be opportunities in the future to earn that business as we show what we can do across the state, but that is correct from the start. We will be start -- we'll be looking at new offensive opportunities together.

And Dave, you mentioned that you spent $60 million on acquisitions. The cash flow statement has $40 million net of cash. I presume that, that's just net of the divestitures. Do I have that correct? And is it safe to say that you received $20 million roughly for those asset sales?

Yes. No, I don't think that's a safe assumption, Whit. I think that cash flow statement is net of the cash acquired as we go into that as well as any assumption of debt, the mechanics, I think, of just how that shows through. I can walk you through that a little bit later.

No, no. That's fine. You spent $60 million, okay, I got it. One last one, just want to make sure, from a modeling perspective, I get this right. I think you said you plan on selling $100 million of revenue, and I presume a portion of that has already closed. There's more to come. Is all of that consolidated today? Is any of it coming through equity earnings? I just want to make sure that we get our models right.

Hey, Whit, it is all consolidated today. When we initially modeled, we assumed a midyear convention in terms of when we would sell these, very similar to how we assume on acquisitions. So it does create a headwind for us. The full headwind is not the $100 million, think about it being about half of that is the actual headwind versus our original guide. But based on the strength in the quarter, we're more than [ lapping there].

Okay. But $100 million annual, but $50 million as you think about a mid-year convention relative to the guidance. And then one -- sorry, one last one. Just as you look at the development pipeline and the acquisitions that you will close, should we expect any of those to be consolidated?

Hey, Whit, yes, absolutely. I mean, we'll continue to look at any and all models, right? We said this, we're pretty agnostic to the structure as long as it -- we have to manage it. We have to feel good about the growth prospects and what we can bring to it. But yes, we will continue certainly to buy consolidated positions. What I would say is with the health system partnerships, you're more likely to have nonconsolidated positions, certainly with those going forward. Typically, with de novos, you'll often start in a nonconsolidated position, but we'll buy up over time. And so I think it's going to be a healthy mix with and we'll continue to get really good guidance to you guys. You guys can think about the revenue impacts. As we've said before, we're agnostic to structure. Our job is to grow EBITDA, grow market share, grow cases and whatever structure makes the most sense for us to expedite that we're going to take.

Our next question is from Bill Sutherland with The Benchmark Company.

Can you go back and just in the quarter, you said 4 de novos, I think, and 10 value health consolidation. Was that --

We recently completed four de novos, and we've got 10 that are underway that are fully syndicated. We have a lot more than that in the pipeline. I'm glad you asked about this. I will say this is another additive opportunity for our -- to our growth algorithm. When you think about how we think about the business, there is no reason we shouldn't be double-digit syndicated new de novos annually moving forward, a really strong pipeline, and we're excited about those partnerships, in particular because they're really heavy ortho.

Yes. And could you update us on the Value Health relationship kind of where you stand with facilities and development plans?

So Value Health, we've had a number of facilities. I don't have the full numbers in front of me, but Bill, we'll follow up with that. We've acquired a fair amount of facilities that were existing facilities that have been added into our portfolio, some of which we've actually bought up to a consolidated position already. We continue to work with them on new de novos. Many of those 10, we just talked about are value health partnerships that we've worked on together. So certainly, that's been a really impressive part of our partnership. And they continue to work on their bundled health model and their value-based care pricing for hyper specialties in orthopedics and cardiology bariatrics. We are pursuing opportunities in those -- in multiple areas, and we're going to continue to push forward on that. As you can imagine, that's part of the value-based world that is pretty nascent, but there's real opportunities we're seeing it in certain of our centers already, and we hope to see that grow in the future.

And then you got a lot in your plate, but are you potentially in discussion or are you in discussions with potentially other health system relationships?

Look, we've been in discussions for the last couple of years. We've got a lot of health systems interested in talking to us. Some of those are less interesting to us than it might be them to partner with Surgery Partners. So we've had to be very picky on who we choose. But yes, no, I do -- I think you should anticipate there will be additional health system partners. As we move forward, we're going to be very disciplined on that and make sure when we do choose those, they're going to be a great partner over time to significantly move the needle on our value-based goals and really driving value within health care. So I appreciate that question, Bill, and it's certainly a new additive growth lever that we're excited to keep pushing on.

Our next question is from Stephen Valiquette with Barclays.

So you guys mentioned that the $60 million in acquisitions completed in the first quarter at an average multiple of just under 8x, and the deals were focused mainly on MSK procedures. I guess I'm curious, can you just remind us how this -- the sub-8x multiple to stacks up versus recent history on acquisition multiples? And also with the overall ASC industry seeming to have a pretty strong year of potentially accelerating growth in 2023, just curious if the industry strength is expected to have any impact on the acquisition multiples as the full-year progresses, just based on the pipeline of additional deals that you're evaluating now?

Hey, Stephen, let me first start by saying we have not seen multiples change, [indiscernible] seeing on our current pipeline, are we seeing them change in this environment, which is encouraging. I would also highlight that when we discuss multiples, we are using actual trailing 12 months EBITDA. So we do not give you synergized multiples. So if you look at our sub-8, that's been our track record for the last 5 years. If you look at even last year, the multiples for the entire year remained sub-8 on a -- as we aggregate them and for the current year. I don't see those trends changing. So from our perspective, we -- as we've always said, though M&A is lumpy, and we're going to be very disciplined in what we approach and how we approach it. But we're super encouraged and the pipeline is strong, and I would expect us to continue to announce more acquisitions throughout the year and potentially exceed our $200 million.

Yes. And Stephen, I just had a couple of things I'd add on there. Just a reminder, not only do we buy a sub-8 trailing 12, but in the first 12 to 18 months, our operating systems job is to take a turn, turn and a half off that. So that's our starting point. When you talked about -- first of all, you also commented on the strength of the industry. I'd just like to say we're all excited about that. It's not surprising to us. There's a lot of great companies in our industry. We're seeing that growth return because it is such a great marketplace. I don't think that's going to change the multiples, but certainly, we think high-quality assets are still going to be kind of in that range. And as Wayne said, it's been quite consistent. We continue to be excited about what that pipeline looks like.

Great. Well, listen, as we conclude, I would like to recognize the significant efforts and commitment to excellence of our over 12,000 colleagues in nearly 5,000 physicians. We take to heart the responsibility for providing the best environment for our physicians to perform exceptional procedures of the highest clinical quality and the privilege that we have to serve over 600,000 patients in what are often their most vulnerable moments. I'm very, very proud to work alongside my many talented colleagues and professionals as we work to deliver on our mission more fully, which is to enhance patient quality of life through partnership. Thank you for joining our call this afternoon, and I hope you all have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.