Surgery Partners, Inc. (SGRY) Q1 2021 Earnings Report, Transcript and Summary

Greetings, welcome to Surgery Partners, Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference call is being recorded. I will now turn the conference over to your host, Tom Cowhey, CFO. Thank you. You may begin.

Good morning, and welcome to Surgery Partners' first quarter 2021 earnings call. This is Tom Cowhey, 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 morning's press release and the reports we file with the SEC. The Company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, 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 our most recent quarterly report when filed. With that, I'll turn the call over to Wayne. Wayne?

Thank you, Tom. Good morning, and thank you all for joining us today. While it's been only a few short weeks since we last spoke with investors, our execution in 2021 continues as our team drives toward achieving over 25% growth in adjusted EBITDA this year. While January was a short month that saw COVID rates on the rise, and February was impacted by winter storms, our teams remained focused and delivered nearly $73 million in adjusted EBITDA in the first quarter of 2021, representing nearly 57% growth over the prior year quarter. This strong performance and our early April momentum give us confidence to increase our full-year outlook to at least $320 million of projected adjusted EBITDA. As the country's inoculation rates increase and as the deferred care from recent COVID spikes return, our unique position in the industry as a safe haven for patients and providers seeking surgical care remains steadfast. Our strong first quarter performance showcases the value of our business model and the accelerated development of many of our key initiatives, including our physician recruiting efforts, which continue to outpace last year's strong results and grew new physicians by over 25% year-to-date as compared to the prior year period. Total joint replacements, which almost doubled in 2020 compared to 2019, continue to grow in 2021, increasing over 120% in the first quarter as compared to last year. And our total joint replacement growth is buoyed by our surging robotic case volume with cases associated with our investments up over 65% versus the prior year quarter. All of this comes together in our strong 17% same-facility revenue growth with volumes up nearly 9% over the prior year quarter, complemented by equally strong net revenue per case growth of approximately 8%. As mentioned in our fourth quarter call, during 2020, we continued to prune our portfolio to allow us to focus on our core business of short-stay surgical facilities. We are now primed to move on the offensive and capitalize on what we see as a major migration of cases from the inpatient to outpatient setting. As we've discussed previously, we believe that the existing market for surgeries that can be performed in our purpose-built surgical hospitals and ASCs represents a $90 billion opportunity today and we further believe that there are approximately $60 billion of new surgeries that are migrating from inpatient settings into our target segments, the vast majority of which is musculoskeletal and cardio procedures. It is with that lens that we raised nearly $250 million of deployable proceeds in January with the goal of leveraging our investments in our platforms to accretively deploy capital in our targeted markets and specialties. We've spent the early part of the year identifying and negotiating with potential targets, while maintaining a disciplined approach to deploying capital. Our pipeline remains robust with even more opportunities ahead of us than just a few weeks ago. And our target remains to deploy $200 million or more in proceeds this year, a goal we expect to make progress toward over the coming quarters. In summary, we are a leader in an industry with a $150 billion total addressable market, significant tailwinds with high acuity musculoskeletal and cardio surgical cases transitioning to our purpose-built surgical facilities and a platform for consolidating a highly fragmented industry. Our company was built for this moment in time. With that, let me turn the call over to Eric to walk you through some of our recent accomplishments in greater detail. Eric?

Thank you, Wayne, and good morning, everyone. Today, I will focus my comments on three areas. First, I will provide a few additional highlights of our first quarter results. Second, I will provide additional details around some of our key strategic initiatives, and third, I'll spend a moment on our expectations for the rest of 2021. We were very pleased with our first quarter results, highlighted by the following: our adjusted EBITDA that exceeded our expectations and grew nearly 57% over the prior year quarter, total company revenue growth of approximately 16% led by strong year-over-year revenue growth at our new hospital in Idaho Falls, which achieved revenues approaching $17 million in the quarter, and same-facility revenue growth of over 17% and with meaningful growth in both volumes and net revenue per case, as well as increased mix of higher acuity cases, such as orthopedic and spine surgeries. Also of note, we continue to see a rebound in GI cases in the first quarter. We are quite encouraged by the continued strength of our trajectory in April and are optimistic we will see these trends continue as we move forward into the rest of 2021. Margin performance was solid in the first quarter with adjusted EBITDA margins reaching 14.2%. Looking more closely at our underlying performance, when you exclude CARES grants recognition, first quarter adjusted EBITDA margins are 12.1%, a 160 basis point increase over the prior year quarter, and consistent with our first quarter 2019 margins. We are encouraged by this performance as we consider the substantial increases in both government payer mix and acuity mix that we continue to see in our first quarter results as compared to prior periods. Moving on to some operational highlights. Our ability to drive leading same-facility growth is a direct result of our investments in physician recruiting, targeted facility level and service line expansions, and our relentless data-driven focus on managed care contracting. We continue to see increased demand from new physicians for our short-stay surgical facilities and our targeted physician recruitment approach has focused our efforts on the highest quality physicians. As Wayne mentioned, we continue to execute well in this area and we added over 25% more new physicians in the first quarter of 2021 as compared to a year-ago. Further, we continue to focus both our footprint and our recruitment targeting toward higher acuity cases. Over 25% of our ASCs performed total joint cases in the first quarter of 2021 and importantly in March alone, we saw an over 30% increase in the number of physicians who are performing total joint cases as compared to the prior year. This has led to a 122% increase in total joints performed in our ASCs in the first quarter of 2021 as compared to the prior year; an exceptional result. Another key component of this increase has been our investments in robotics across our ASC footprint. Robotic cases were up nearly 70% over the prior year quarter on an installed base that has reached over 20 of our ASCs as of the end of March and continues to expand where we believe we can achieve an appropriate return on investments. As we continue to improve and refine our operational excellence and execution, we also continue to look to add to our portfolio and deploy capital. We currently have a pipeline of transactions under letter of intent that total over $125 million that we will look to close in the coming quarters. We are also evaluating over $200 million of transactions at an earlier stage in the process. While acquisition activity is always fickle and is subject to change, this robust pipeline of opportunities, which are at attractive multiples and in attractive specialties and geographies, gives us a high level of confidence that we will be able to meet or exceed our capital deployment goals for this year. Moving on to outlook for the remainder of 2021. As we think about the momentum we have as an organization, we now believe we will produce at least $320 million of adjusted EBITDA in 2021. We believe this floor for our performance this year reasonably captures the upside that we recognized in our first quarter results, while maintaining a prudent posture, given how early we are in the calendar. We continue to believe that continued strong operational execution, additional CARES Act grant recognition and capital deployment could represent further upside opportunities to this revised outlook. To summarize, I want to spend a moment thinking about some of the milestones we have achieved over the last several years. We have made significant progress in focusing our portfolio, selling non-core businesses and closing our toxicology lab. We have invested in our recruiting teams to earn new business and in our managed care teams to ensure we are paid fairly for the significant value we create leading to robust same-facility growth. We have focused on higher acuity procedures and we now estimate that over 50% of our revenue is generated from our musculoskeletal service lines. We have prudently managed our balance sheet, raising equity capital to accelerate inorganic growth and restructuring our obligations to achieve interest savings and defer maturities. And this operational execution has led to robust shareholder returns, which will allow the company to convert our outstanding preferred stock into common shares in just a few weeks, reducing future dilution. We are excited by our progress so far this year and we remain confident that we can continue to build on this momentum. With that, I will turn the call over to Tom, who will provide additional color on our financial results and outlook. Tom?

Thanks, Eric. First, I'll spend a few minutes on our first quarter financial performance before moving on to liquidity and some considerations as we move into 2021. Starting with the topline, surgical cases increased over 8% in the first quarter to over 125,000 cases. Revenues for the quarter were $512 million, over 16% higher than the prior year period. As Eric mentioned, reported results included approximately $17 million of contribution from our new community hospital in Idaho Falls, nearly an 85% increase as compared to the prior year quarter. On a same-facility basis, total revenue increased over 17% in the first quarter. Looking at the components of this increase, our case volume was approximately 9% higher than the prior year period and net revenue per case increased almost 8%, driven by acuity mix and pricing. Turning to operating earnings. Our first quarter 2021 adjusted EBITDA was $72.9 million, nearly 57% higher than the comparable period in 2020. In the quarter, we received approximately $7 million of new grant funds and using guidance from HHS, we recognized an additional $15 million of CARES Act grants in the first quarter as grant income, increasing adjusted EBITDA by $10.7 million after accounting for non-controlling interests. At March 31, we have approximately $5 million of grants that have not been recognized in earnings and are treated as a deferred liability on our balance sheet. We continue to actively monitor guidance from HHS to determine the ultimate appropriateness of grant recognition as we await clarity when the submission portal opens later this year. Based on current guidance, we continue to believe it is possible that we will be able to recognize the majority of the remaining CARES Act grants on our balance sheet in 2021. In the unlikely event that we are unable to recognize these funds in accordance with CMS guidelines, we expect to repay them to the government. During the quarter, we recorded $9.4 million of transaction in integration and acquisition costs. Of note, first quarter transaction in integration and acquisition costs included approximately $4 million of losses associated with our de novo hospital in Idaho Falls, as that facility continues to make progress toward achieving profitability. We expect to report results from this facility separately through 2021 until the facility becomes profitable, which we expect in the second half of the year. Moving on to cash flow and liquidity. We ended the quarter with a strong cash position of $542 million, which includes approximately $120 million of Medicare advance payments. We have held these advance payments as deferred revenue on our financial statements. Recoupment of these funds from future Medicare revenue commenced in the second quarter and will continue into early 2022. Moving back to the first quarter. Surgery Partners had operating cash in net inflows of approximately $50 million, generated approximately $248 million of net cash inflow from the February 2021 equity offering, deployed $13.3 million through acquisitions, disposals, syndication activity and CapEx investments; and made a cash dividend payment of approximately $5 million on the preferred stock to reduce dilution to common shareholders. Looking forward to the remainder of 2021, some of the other material uses of cash include the tax receivable payment of approximately $21 million in the fourth quarter; continued funding for the Idaho Falls Community Hospital until it becomes profitable; and approximately $75 million of projected repayments for Medicare advance payments this year. The company's ratio of total net debt to EBITDA at the end of the first quarter as calculated under the company's credit agreement decreased to 6.1x as a result of net proceeds from the equity offering and increased trailing 12-months adjusted EBITDA. Normalizing for the impact of Medicare advance payment funds, the ratio of total net debt to EBITDA would have been 6.4x. Additionally, subsequent to the quarter close, on April 1, Surgery Partners made its final payment of $32 million to the Department of Justice relating to Logan Labs, a delayed payment that was agreed to as part of our 2019 settlement agreement. As a reminder, Logan Lab ceased operations in the third quarter of 2020. As Eric mentioned, on May 3, 2021, we also closed on a debt refinancing transaction which extended the maturity of $1.55 billion of term loans to August of 2026, including refinancing approximately $119 million of incremental term loans incurred in April 2020. The company is also in the process of extending its $1.2 billion of interest rate swaps to take advantage of prevailing market rate. The net of these transactions is that the company projects it will save over $7 million in annual cash interest, while extending important maturities. In light of the refinancing transactions and the equity capital raise that we completed in January, Moody's upgraded the corporate credit rating of the company on April 20. We'd like to take this moment to thank our lenders and the agencies for their continued support of the Surgery Partners credit as we continue to execute on our growth, and deleveraging strategies. Finally, in late April, the company announced that it had sent notice to Bain Capital of its intent to convert the entirety of Bain Capital's preferred stock into approximately 22.6 million shares of common stock on May 17, 2021 based on meeting all the criteria for a conversion at the election of the company, including achieving a volume weighted average closing price in excess of $42 per share for 20 out of the prior 30 trading days as of April 15, 2021. Following the execution of this conversion, the company will have approximately 82.5 million common shares outstanding. Bain has been and continues to be a valuable partner and investor and as Bain stated at the time of the conversion announcement, we remain confident in their commitment to supporting management as we execute on our strategies to drive growth and continued shareholder returns. Throughout the first quarter, our continued emphasis on expanding key service lines such as musculoskeletal and cardiology, targeting high-value physician recruits and engaging in strategic rate negotiations have all continued to fuel our growth trajectory. This core growth, coupled with the capital we have available to deploy, has enabled us the opportunity to go on the offensive this year. We remain confident in our growth model and our first quarter performance has provided us the opportunity to increase our 2021 adjusted EBITDA guidance to at least $320 million. Our revenue outlook remains unchanged. Key considerations for our change in outlook include our strong first quarter performance, including the recognition of CARES Act grants and a strong volume performance in March, as well as tailwinds from the delay of sequestration. While we do not provide quarterly guidance, as we think about the seasonal progression of earnings this year, we would remind investors of our previous statements that we continue to believe that earnings will be more back-end weighted in 2021 as deferred care related to COVID returns, and as our new community hospital in Idaho Falls achieves profitability and is brought into earnings. As we look more directly at the second quarter, we project that it will represent approximately 25% growth over second quarter 2020 adjusted EBITDA of $58.2 million. We believe our revised outlook remains prudent based on the early stage of the year and are encouraged by our April volume trends, which continue to show a rebound in lower acuity cases as our higher acuity volumes persists and grow. Further, we are excited by the prospects to accelerate growth through capital deployment this year. In short, we are off to a strong start and our team is focused on continuing that momentum throughout the remainder of the year and beyond. With that, I'd like to turn the call back over to the operator for questions. Operator?

Thank you. [Operator Instructions] Our first question is from Brian Tanquilut with Jefferies. Please proceed.

Hey. Good morning, guys. Congrats on a really strong quarter. Tom, I'll start with you since you mentioned the guidance. As I think about your beat in Q1 and the guidance raise, is it right to just think that that's just conservatism that you're raising the year by a slightly lower number than your beat for the quarter?

Hey, Brian. This is actually Wayne. First of all, good morning and appreciate the question. Let me just start by stating the obvious, the quarter was quite strong, and while we saw a heavy impact from the pandemic in January in particular and we were equally impacted by the storms in Texas with the many facilities we had down there. We obviously were able to cover all those impacts and post 25% plus a guidance still for the year. I would simply say that it's still early in the year and we remain prudent by giving in at least $320 million. But that being said, if the trends we saw in the quarter and that we saw in March and that we are seeing in April were to persist, we would clearly be raising guidance more by 2Q. So more to come, but we think right now it's prudent to just maintain the posture. We're four months into the year.

Now, that makes a lot of sense. And Wayne, since I have you now, obviously same-store performance has been really strong, off the charts, if you want to call it that, right? How are you thinking about your ability to sustain these high levels of organic growth going forward?

Yes. So it's interesting because, Brian, I think we're not as surprised as a management team at these volumes and growth because these were a multitude of investments that we had put forward over really the last three years, whether it be the community hospital that we built out in Idaho Falls, the many de novo ASCs and, as we've been talking about, the compounding effect of our physician recruiting efforts. And I'm going to ask Eric actually to comment on where that same-store growth is coming from because I think the one thing I want to emphasize is that what we're most proud of isn't necessarily the company that we've built in the last 3.5 years, it's really this culture of execution, which is emanating in all of our operations. And so maybe, Eric, maybe highlight a little bit about when you think about that growth, like, I think people will be surprised to see that while the hospital in Idaho is driving some of that, it's a very small piece of it relative to everything else happening.

Yes. Brian, thanks for the question. Clearly, we're pleased with over 17% same-store growth. And I would point to a couple of things. Portfolio wins that – not surprised by this, this is actually our expectation coming into this year as far as where our growth is. And what I would point out is it's really balanced growth. So if you look at that, even if you remove the Idaho Falls Community Hospital, which came into same-store earlier this year from a growth standpoint, it's less than a couple of points of that growth. So you're still at 15% and I will tell you that is a balanced growth. It's not driven by one region, it's not driven by one facility or one type of facility, it really is kind of a combination of the very specific physician recruitment efforts, the service line investments, the focus on ortho, obviously. We're not surprised by where the growth number came in, we feel like this is what the plan was and we feel good about the recovery. But I would just point out that it's really balanced, it's across the way we're operating our facilities, the way we're approaching growth, no specific geography, no specific type of facility and really pleased with the operators' performance.

And just as a note that Idaho Falls Community Hospital will ramp up. I mean that is going to continue to drive to organic growth as the year progresses and as those several years progress. You should know, though, relative to that growth, it represented less than 2% of our same-store growth. So the other 15%-plus is across our entire book of business and of course, we see that being an asset that will only grow only more as we get further into the year.

Makes sense. And then last question from me, Eric, as you talked about physician recruitment and the momentum you're seeing there and I know you were very early – you're one of the earlier guys in MSK, right, in building that capability. So as we start thinking about cardio as an opportunity, what are those conversations like? How different are those conversations with cardiologists? And if any color you can give us in terms of what you're seeing in the momentum there?

Yes. It's a great question. Clearly, we are excited about what CMS has done to open up cardiac to short-stay surgical facilities, right. So we see that as an opportunity. I do think we're in the really early innings. So if you think about how many years it's taken us to get the momentum in orthopedics, we're in the early innings, but those conversations are going quite well. I would tell you, just like we've added total joints to five to 10 centers a year for the last several years, our hope is to get five to 10 cardiac centers a year started. And then we're talking about from a cardiac standpoint, that does not mean cath labs initially. That means conversation with cardiologists, you want to move over cardiac rhythm management. We even have a health system partner who is working with us to move some of that stuff out of their cath labs to create capacity. And so we see some of those early steps happening, those established relationships. And clearly the one thing that we have a track record of is when physicians experience the way we run facilities, our very patient-centric approach and they are built to be really efficient. We win them over time. But it's early innings. As I mentioned earlier too, a couple of things I would say, we are also developing cardiac further in our surgical hospitals. And so I would mention, just in the last quarter we had a hospital that opened an open heart program and we had another hospital that started for the first time doing cardiac rhythm management procedures. So we're seeing it in our surgical hospitals as well. It is a market-by-market story when it comes to cardiology because unlike orthopedics, when we first started, it was not as consolidated from a physician employment standpoint. So there are many markets in the country where all the cardiologists are employed. There are also many markets where they're not. So the markets where they're not, obviously, I think, will transition faster, because they have less complex and less things to manage through. Other markets will take a bit of time structurally. But when you look at the value creation opportunity and how much we can save the healthcare system by making sure those procedures are done in the right location, we think it's going to be the same kind of – it's going to be multi-year, but it's going to be the same kind of growth. We have really strong growth in cardio. It's a small end right now, right. So we think that's going to continue. It's going to be an outsized growth for a while and there will come a tipping point where we'll be able to really start showing more like ortho growth, but it's a ways out.

Awesome. Thanks and congrats again.

Thank you.

Thanks, Brian.

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

Okay. Great. Thanks. Just want to confirm, it sounds like your guidance doesn't assume any new CARES money, but the guidance, I guess, also doesn't include the CARES money you received to date or I guess I want to make sure we're on the same page there.

Hey, Brian. It's Tom – I'm sorry, Kevin, it's Tom, excuse me. The guidance is for what we believe we'll print at the end of the year and so incorporates the fact that we had nearly $73 million worth of EBITDA printed in the first quarter.

Okay. Great. And then it seems like a lot of the growth that you guys are driving today is because of the physician recruiting that you're doing. I guess, I just want to understand where we are in that trajectory because I guess at some point, I would imagine that the facility start to reach capacity and you can't keep adding physicians at this type of clip. I guess, how much longer do we have this type of run rate?

So it's a great question. This is Eric. I'll just dive in on that one. We have a lot of runway left. There are a lot of physicians still out there for us to work with. From a capacity standpoint, it varies by market, but I will say that what you don't see is that every year where we're adding capacity, we're building new facilities to make sure we're kind of ahead of that trend. We don't have a lot of markets where we face capacity constraints at this point and where we face them, it's a relatively capital-light opportunity for us to add capacity. And so we do try to watch that closely. We don't see any near-term change in our opportunity to recruit physicians. And in fact I would add that, as cardiology gets added, there's a whole new group of docs who are now in a recruitment opportunity for us from a same-store perspective. On the ortho side, our success is actually allowing us to use those peer positions to help us recruit that kind of drive success in the market. Clearly, the outcomes we're driving on higher acuity procedures are getting physicians' attention because they now see that it's a really safe great place them to come. And again, coming out of COVID, I would just point out from a physician sentiment standpoint, we made a lot of ground up because a lot of docs who maybe hadn't tried us in the past had an opportunity, and certainly they see the efficiency of what we do. But we don't see any near-term change in that opportunity.

Kevin, one thing I would add too, is we've been obviously very data-driven in our analysis of how we recruit and then how that matures over time in terms of volume and as we've talked about the compounding impact of getting doctors and retaining them and then how that grows over time, I think what's been a nice surprise for us in some ways is how COVID has put a bigger spotlight to a lot of doctors that were maybe uncertain about that change of moving procedures in doing that. And by having that accelerate and happen, that word of mouth of that fear factor of the unknown is actually spreading much faster than we thought, and that's why the number of docs we recruited in the first quarter, I want to make sure that point that came through in our prepared remarks is up 25%, not overall we finished last year but it actually took all the doctors we recruited last year in the first quarter. We recruited that amount and 25% more. Like we are really growing those physicians that are coming on board. And those new docs because we're focused on the right procedures are in the right acuity and in the right volumes. And I think as Eric said, back in 2018 and 2019, we really started looking at facilities that we thought would hit capacity. So we started, we kind of take a two-year lens when we look at capacity and if we see that there is a need there, we start building out then. And so when you think about down in Tampa, our most productive facility was at the scenes and a year and a half later we opened up a 5-OR, state-of-the-art facility that now has given us runway for the next decade there. And so that's the approach we take. So always know that as a company too, our lens is always two years out, because we always have this view that this growth is going to continue.

Yes. And Kevin from the organic perspective, one of the thing I would add, it's not just the new physicians, our existing physicians every year CMS adds new procedures that are allowed right. And so we look at our docs that are coming to our facilities now, and we look at what volume are they doing in new procedures that they can now do suddenly do at our facility. They already like us. So every year we get that bump of new market share and then we're really focused too on if there is procedures that can be done in an ASC environment and we have physician partners or physicians that use us and like us doing those procedures elsewhere, why is that happening? And that has really been the key driver behind why robotics has been such a big part of our story is we took a very data driven approach to figuring out what is it we can do to earn additional procedures from physicians who already like us. And a lot of that was simply just making sure they had the right tools available and so we've been extremely focused on doing that, that's allowed them to – they already liked us and now they can do more of their book of business with us. And so that's been a huge win for us.

All right, that's great. I guess maybe just last question, I guess with this guidance raise, obviously it's early to talk about 2022, but since some of this is CARES, I mean are you guys have given us double-digit kind of compounding growth algorithm for us. Is that something that we can apply to this newer guidance or is it still kind of early and COVID impacting numbers, we still kind of think about the $315 million is a jumping-off point for next year.

So obviously it's very immature or early for us to be talking about 2022 and beyond. But Kevin, we made it very clear that with the capital raise we did in Q1, our ability to consolidate a fragmented industry plus our unique approach to organic double-digit growth that we thought we would be in the low to mid-teens growth rate going forward. So I don't know that I would necessarily change that outlook and it simply will mean if we're capturing the opportunity sooner, it just means we have more to go get later in the year for next year. So, all in, I feel real good about where we finished this year that we will double-digit off of that.

Yes, Kevin, I think it's important to realize that we've talked about and really have delivered double-digit organic growth on a mostly organic basis, right. There is some portfolio reshuffling that I think happened in late 2020. But as we think about what we added and what we replaced, we think we're at a little bit, basically at par there. And so when you – when we think about the nearly $250 million worth of deployable capital that we received just from the equity offering, our ability to deploy that at attractive multiples should drive kind of that third leg of the stool, but quite honestly, we haven't really been able to capitalize on as much as we might have wanted to over the course of the last two to three years. And I think that's the real difference maker as you think about how do we get to something that is north of just double-digit into kind of the teens. It's the ability to really deploy capital and I think that's really the bridge here.

All right, that's helpful. Thank you.

Thanks, Kevin.

Our next question is from Ralph Giacobbe with Citi. Please proceed.

Thanks, good morning. I guess first, was the weather – was there a weather impact in the quarter or do you think you got all that back in the quarter or maybe there's spillover into 2Q? And then, what are your updated thoughts I guess on pent-up demand coming back, I think it's hard for us to sort of see given the growth in your physician recruiting sort of just the adds of new physicians relative to sort of to the argument of kind of pent-up demand and whether that's still sort of something that's on the come? And maybe just how you're seeing scheduling patterns at this point? Thanks.

Thanks, Ralph. Let me just start by saying, yes, we were impacted in Texas. I mean we had four surgical hospitals, several ASCs in that market and we had the same impact of being shut down for a period of time, almost a week in many locations as everybody else was impacted during that window of time. It's hard to gauge how much has come back and when it comes back, as I always try to remind people, if you lose a week in a year, you can never get that week back, you might get the cases back, but you lose those days of doing services. But nonetheless, that's another reason we're very optimistic about the strength of the quarter, because we do think some of those cases came back though in March. In fact, we know they did, but we'll never get those days back this year. But again optimistic about our growth trajectory there. I'll let Eric and Tom comment maybe a little bit more about kind of the rebound still in other procedures and how April has looked so far and kind of where we're going.

Yes. Thanks for the question, Ralph. So as we talked about, we started the quarter pretty impacted by COVID, March really, really turned the corner on volumes for us and we've continued strength in April, and I would say in both those months ahead of expectations. What's interesting is, when you talk to our operators, what they are seeing is that – what they're hearing, doctors' offices are busier, even our clinics where we have physicians are really seeing a rebound in scheduling and again that's a process, right. So they come in, they start getting busier in the office and that starts to play out in the coming months. And so I feel pretty good the fact that we're kind of ahead of expectations before we're actually seeing that refill in the office is coming through. That's a positive trend. We also have a little bit of deferred care relative just timing of people getting their vaccines. In some cases that affects when they're able to have procedures or have pain injections, and that delay is real and so there's people that have a certain amount of time, they have to put off care. And so what I would say when we think about scheduling, scheduling is now kind of running at or above-expectation and that's before some of these other things that we think probably do have some deferred care. It's early to say that. And I do want to get too far ahead of myself. But there's lots of reasons to agree with the consensus that we're going to be more back half weighted than normal. And we are going to continue to see this rebound. And I'll tell you there's a lot more optimism amongst the physicians and what they're seeing in clinics. So that's kind of my high level. I don't know, Tom, what you might add.

As you think about some of the specific categories, right, that's maybe one of the easier ways to think about whether or not there is deferred care. And so we saw some of our musculoskeletal and orthopedic groups were much less impacted in 2020, particularly in the back half of March, by the beginnings of the COVID outbreak. I mean we saw – it is still mid single-digit growth in those in over 2020 inside the first quarter, right. So really strong growth there, really a function of the recruiting and the robotics and all the things that we've been talking about. What we actually saw for the – what we did see in the pandemic, particularly based on the CMS guidance was some of the GI procedures really dropped off, right. Some of the ophthalmology procedures really dropped off and those were the ones that CMS specifically targeted as surgeries that should be deferred inside those early windows. We've now in the first quarter just gotten back to a little bit of growth on GI over the 2019 level, right. So a point or two. And so as I look at things like that, I am encouraged by the fact that it's back, but I know that there is a lot of other deferred care out there and I think about the growth that we're seeing in other lines of business, and I know that there is more opportunity there. Ophthalmology came back a little sooner, but still we think that there is more opportunity for growth and some of the pain management, just the simple injections, which are really part of the overall process for some of the larger orthopedic procedures as part of that that whole management of the chronic condition, which ultimately leads to a replacement. Some of those are really based on office visits and there is still well below 2019 levels. We think that there is opportunity for that to continue to come back, particularly as we see those vaccination rates continue to rise.

Okay, got it. Very helpful. And then just my last question. Can you talk a little bit about the margin profile of the company at this point? Guidance puts you a little – looks like little above the 14% range, slightly higher than 2019. I guess the question is as you accelerate in the higher acuity, should we see better margin or is that really going to show via sort of top line? And then as you accelerate M&A, just give us a sense, do deals typically come on at lower margin or what's the ramp we should consider for that? Thanks.

Yes. So there is a couple of things in there and let me help you try to unpack some of it. The first thing is that we know, because we've done the math that those high acuity implant cases per minute of operating room time generate the highest dollars of profitability across our portfolio, right. So we want to do those every place we can and even if we had to pick and choose which oftentimes, we don't, but if we had to, we'd rather fill an operating room with an implant case than with a lower acuity case, because while the percentage margin may be better on the lower acuity case, the dollars of contribution margin per minute are better on this implant cases. That said, we know that we have to now account for the cost of the implant in our margin and we get paid for that in our revenue. But usually not a much of a markup. And so, first thing you should realize is that if you took the total company margins and you just normalize them for the pass through of the implant, our margins go up by probably about 10 points or more, right. And so there is a really large impact there as you think about the impact of those implant cases and the cost of the pass-through on the implant itself. The second thing that I think we need to be conscious of, particularly as you look at let's say the first quarter margins. We've achieved parity with 2019. Right, but we've done that with over 400 basis points of mix shift towards government, relative to that 2019 first quarter and we've done that with your supply costs up well over 100 basis points, which is a function of the shift in the mix. And part of how it is that we've made that up is exactly how we said we would, which is on additional G&A efficiencies, which is helping to keep the margins constant. And so as we think about the margin profile, we do continue to think that there are benefits to scale that we continue to push to capture, by standardizing a lot of the processes that we do to leverage what we can provide at corporate and we're going after those each and every day, but there is going to be some pressure on those margins, kind of a counterweight as we grow more inside those higher acuity cases. But we continue to believe that margin should drift upwards over time as we – and I think something on the long-term in the kind of the mid-teens area is appropriate for this business and that's the target that we're driving towards.

Got it. Makes sense. And then anything on M&A, how we should think about that and those deals coming on?

Pipeline is robust. I'm going to let Eric comment since he's been doing a lot of these visits around – we commented in the prepared remarks around what's under LOI, but maybe, Eric talk a bit about pipeline and our expectations of our goals of hopefully exceeding $200 million of deployment this year.

Yes, just to clarify, I think you were asking about the impact of acquisitions on margins. Is that?

Yes, yes.

Yes. So I want to make sure I'm asking the right question. So you see, I would say that in general we bring opportunities to centers we buy, right. So we expect that probably initially they're going to have, maybe a little lower margin profile than our overall business. But we were pretty quickly to bring what we bring to the table, whether it's supply chain, managed care, revenue cycle, we bring all those things. And so our expectation is when we buy something that's part of how we lower the effective cost for our business right. As we go in, we raise their margins, we find opportunities to take our platform and drive additional earnings. So I think you're probably right in saying that initially, when we bring something on, it could be slightly margin dilutive, but the expectation over time as we get them to at least where the rest of our portfolio is and as we drive everything forward they will benefit from that.

Okay, got it. Thank you.

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

Hey, everybody. Thanks for taking the question and good start to the year. Following up on Ralph's question on M&A and just, Eric, maybe a little more color on focus and kind of what valuations you are doing right now?

Sure. So as we mentioned earlier Bill, we're really pleased with our pipeline. We have a lot of attractive opportunities and attractive geographies. Focus is highly matching what our current portfolio is like we have a lot of focus on orthopedics. We see strong opportunities in orthopedics. There are some cardio opportunities and certainly, we also see our bread and butter kind of GI in ophthalmology facilities. We have a really nice pipeline of single ASCs that are multi-specialty to add to the company. We're also looking at a few kind of multicenter opportunities and surgical hospitals. And so we look at the balance of what's in our pipeline, we feel quite good. We've talked. We have high confidence. We'll get to that $200 million plus of M&A. As I mentioned in my comments, it's always a little fickle right? You don't want to get ahead of this but valuations are in our historical range, we still find very attractive valuations and very accretive valuations. And we've got some just great physician groups we're talking with across the country. We expect to be able to execute on those. We have a very experienced team that's focused and as we mentioned $125 million plus under LOI, we've got a bunch of other stuff we're looking at it and new opportunities coming in every day. So it's a highly fragmented industry. It is still really attractive multiples and we have full confidence, we'll get to that $200 million plus of deployed capital this year.

Great. And Tom, I guess you mentioned the pick-up in the government mix into payer mix. Can you help us think about the trend in payor mix? Is it – is that a big piece of it? And also thinking about maybe the degree to which you start to do work directly with employer, self-insured?

Yes, that's a great question. The second one, in particular, the mix as you think about government is as you look at the year it is less intense in terms of the migration. But as you think about the quarterly progression, it clearly is – has an impact. As you look at some of the headline deductibles, it doesn't seem like the rate of change is quite as high, but as you think about what's happening with even HMO and PPO deductibles on regular way course, consumers are paying more out of their pockets and in times of economic uncertainty that that helps to influence their decisions. And so, part of what we're doing to combat that is to actually think about new payment models where we can try to pull some of that utilization to the left on the calendar by helping them to finance their deductible spend. But as we think about quarterly progression of earnings, it's clearly something that has impacted us over the course of the last couple of years and we expect that trend to continue, which is why we're trying to be creative in how it is that we help with patient financing. Eric, I don't know if you...

Yes. And the direct to employer, I'd like to say just a couple of things on value based care and how we think about this. So let me just start by kind of granting you guys on the fact that we save to help us a bunch of money, just in our flat fee for service rates. So if I'm thinking about our place in the value based care world, just simply working with insurers and working with employers to get patients to the right site of care where they have a great experience and better outcomes saves a tremendous amount of money. So when we're thinking about like where do we go in value based care, negotiating against ourselves, and we're such a value proposition is interesting and can be challenging and so a lot of – so our first step is just by ourselves, we are naturally value based care and we save the health system hundreds of millions of dollars versus the alternative. And so when you think about going direct to employer, maybe taking on risk, we're not opposed to it if there is the right model and certainly we'd love to share in the savings we're creating and we try to do that as much as we can. But I think the amount of opportunity that still exists just working with our health plan partners and working with employers to get patients to the right location its huge. And so we are naturally value based care and then we're looking for ways clearly where there is an employer that has an interest or there is a local markets that want to take a different approach, we're absolutely open to that. But our way of doing services provide such a value that it sometimes it's hard to go beyond that until we first captured that.

And you do, and it looks like just population, demographics et cetera, that the Medicare will creep into a just a larger piece of the total mix?

Yes, I think over time, we're seeing that, but I would say to, the first quarter is a little bit of anomaly. We have seen year after year after year that – well, part of it, CMS is actually opening more things to us that we're getting more Medicare market share right. Part of it this year is you do have a group of folks who were probably the least likely to want to come out during COVID that now have gotten vaccinated probably move that a little bit more than normal. But yes, I think over time, you're going to continue to see that go up. I think the good news is over time, we're also had every opportunity to gain commercial market share. So to us it's a end, it's not just Medicare.

Right. Okay, thanks guys. Appreciate it.

Thank you, Bill.

Our next question is from Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. I know you touched a little bit on this acquisition pipeline. The amount of deals you have $125 million under LOI. Could you share with us what kind of revenue contribution you think $125 million of acquisitions could be?

Yes, let's, I don't know if I have those top of my head, but it is, I would say this that we've talked historically about multiples. The multiples are staying very competitive with what we've been able to execute on the last couple of years and the margin profile is pretty similar. So we can get to that number pretty quickly. Tom's going to take you through it, but...

Yes. It's probably $80 million to $100 million. It could be a little more depends on what the margin profile of the businesses that we're acquiring are kind of free corporate margins on the business are generally start with a two, right. And so if you think we're buying at our historic multiple of 7x and just take a 20% margin that get you like $80 million, $90 million worth of revenue. So it clearly could be accretive. That's probably a rough rule of thumb, just to think about it. Obviously how it rolls and will be very specific to the individual deals and transactions and the type of business that they're focused on. So as you have again that higher implant business mix, you could see a larger revenue contribution than kind of the rule of thumb might otherwise tell you.

Yes. In some cases, I would reiterate too, like we have revenue opportunities typically when we buy a new business. Some of these centers we might buy into maybe they've done orthopedics in the past, but they haven't been all the set up a total joint program. We try to find pent-up revenue opportunities with our acquisitions, in what we bring expertise. So…

Hello?

We're still here Frank, sorry.

Sorry about that, yes.

Okay. And then also on Idaho Falls, I appreciate the color on $17 million of revenue. When this thing finally sort of matures and stabilizes out a year from now or whenever that point is, what should we expect the revenue and EBITDA run rate to be there?

The EBITDA run rate, we've talked about as part of the credit agreement adjustments, right. So it's about $25 million is kind of the run rate EBITDA contribution that we're expecting. And you can take a look at where the revenue run rate is now and where it was in the fourth quarter. We think it's starting to get to the point where you can get a reasonable estimation, based on the last couple of quarters, and probably a little bit of expected growth there. So it should be north of $100 million.

Got you. My last one, just could I get a little more color on the specifics of the volume recovery and also the mix kind of as you went through the months of the first quarter? And then just to kind of get – I mean it sounds like, obviously you have a lot of good momentum going. But just trying to get a better picture on the sort of the magnitude there. So, any color on kind of how volume trends accelerated month-to-month as well as the overall mix of business? And I'll hop. Thank you.

Frank, that's a tough one to answer for a couple of reasons. Not because I don't have the data, but because, I think in some ways the data could be a little bit misleading, right. Because you have – as you think about January two less business days, we're a business day focused company. As you think about February, we had a loss of about a week at cases, particularly in the southeast. And so I'm not sure that there are particularly good comps right, as you think about what the year-over-year looks like. We do think that we saw – the calendar definitely was helpful in the month of March. We do think that we saw some rebound of those and some rescheduling of those February cases in March. But as we look kind of year-over-year at the overall quarter, we're still looking at musculoskeletal growth year-over-year, that's up mid single-digits. Same thing with ophthalmology, year-over-year, first quarter to first quarter, you're looking at kind of mid-teens on GI right and you're looking at double-digit growth in some of our other categories as well. So it was a strong rebound. It was really focused in the month of March, which obviously the back half of March in 2020 makes that a funny comp as well. Overall, kind of net-net as we think about it, same-store was almost 9% volume growth, which we're really encouraged by as we think about scheduling for April, we're encouraged by what it is that we're seeing today and we're hopeful that that momentum will continue.

Thank you.

Before Eric makes closing comments, I just wanted to make one comment on behalf of the Board of Directors and while we're very excited about these financial results that this company has produced and this management team has executed on, we're actually more excited about the fact that they've built a real high quality, high safety company. And we continue to see these come through on every national recognition platform we can have and I cannot emphasize enough that those are paramount to how we view this company right, building a great catchers mitt only matters if you offer superior safety and quality to consumers. And as you're very much aware, only 8% for example, hospitals in the country received the coveted five-star rating and over 75% of our surgical hospitals have that rating, but even more recently, there is over 6,000 hospitals in the United States and HCATs recently came out with those that received the highest score around definitely recommending these facilities. And only 27 out of over 6,000 in the entire country got in that list. 27 and several of ours are on that list of 27. And I just emphasize every day that we have built – this team has built really an exceptional company. And this is why we have so much optimism as we go forward and really believe as a Board of Directors that we have tremendous runway in front of us around the opportunities that are available for us. So I want to make sure that nobody loses sight of the fact that the quality and safety continues to be paramount and really what you see in these financial results are simply a reflection of what this company is built around those two factors. So with that Eric, I'll turn it over to you.

Yes, thanks for those comments Wayne. Clearly our product is the foundation of the company, right. Before we conclude our call, as I always do, I want to take a moment just to say thank you to our over 10,000 colleagues and our over 4,000 physician partners and physicians who work in our facilities for their contributions. We collectively serve over 600,000 patients a year. And obviously that's a growing number. Thousands of patients each day in what are often in their most vulnerable moments. I want to give a special shout out to our nurses and clinical caregivers the next week as Nurses Week. They are certainly the foundation of our company and have proven once again this past year, why nursing is the most trusted professional in the country. We take the trust and faith of our physician partners and patients and colleagues they place in us incredibly seriously and are privileged to make a positive difference in so many people's lives. I am excited about and continue to be humbled by the opportunity to lead this company as we work to more fully deliver on our mission, which is to enhance patient quality of life through partnership. In our efforts, we clearly are part of the solution to many of the challenges facing our nation's health system and are extremely proud of the value we are creating for our stakeholders as we execute against our goal to become the preferred partner for operating short-stay surgical facilities across the U.S., it is the daily efforts of my colleagues at this company and our physicians that will get us there. So thank you for your time today. Thanks for joining us and we'll talk again soon.

Have a good day.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation.