Surgery Partners, Inc. Q4 FY2021 Earnings Call

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. 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 variants 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 have 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 prior year quarter. Same-facility revenues increased by 9.6% compared to the prior year quarter, with 5.2% higher net revenue per case and 4.2% case volume growth. New physician recruiting efforts continue to produce strong outcomes, adding 24% more new recruits to our facilities in the fourth quarter compared to the same quarter in 2020. We now estimate over 4,600 physicians use our facilities on a regular basis. And finally, the transition of procedures out of traditional acute care inpatient settings continues to accelerate, joint replacements in our ASCs were up 55% as compared to the prior year quarter and approximately 88% for the year. We continue to believe that our strong financial results are a reflection of the numerous macro tailwinds associated with the benefit of performing procedures in a high quality, lower-cost patient and physician-centric setting. With a total addressable market of over $150 billion, our company was built for this moment in time. Before I turn the call over to Eric, I would like to take a moment to discuss the M&A pipeline and our efforts to continue to consolidate this highly fragmented industry. After raising significant capital in 2021, we are pleased to announce that we have closed approximately $325 million in transactions at an average adjusted EBITDA multiple of approximately 8 times, including three deals that were closed in late December. Our business development team consistently manages an active and robust pipeline that remains strong heading into 2022. As a point of reference, we have already deployed an incremental $34 million in acquisitions since the beginning of 2022. As Dave will discuss in a moment, we entered 2022 with a strong balance sheet with significant cash on hand and an untapped revolver. This position gives us conviction to reach our commitment to deploying at least $200 million in capital for the full year 2022. I want to emphasize the confidence we have in our long-term growth prospects. Our management team continues to demonstrate their ability to navigate the complexities of not only the pandemic, but other challenges as it executes on the organic and inorganic growth strategies to provide significant year-over-year growth. Off the strength of our fourth quarter reported results and recent acquisitions, we are raising our outlook guidance for 2022 adjusted EBITDA to a range of $370 million to $380 million. This outlook is inclusive of the anticipated headwinds we see associated with the pandemic, including labor and supply cost pressures. With that, let me turn the call over to Eric, Eric?

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 impacted 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 physicians that focused on higher acuity orthopedic cases continue to be successful. Our ability to manage through the significant impact of COVID in the quarter demonstrates the resiliency and popularity of our business model. Another factor that we are watching and managing very closely is the labor pressure seen in our industry. As we have said before, we are not isolated from these pressures, but we are somewhat insulated due to the workplace environment in which we operate. In our fourth quarter results reported this afternoon, you will note that our labor costs were just under 29% of total revenue consistent with our third quarter, but about 100 basis points higher than the reported amount in 2020. We certainly anticipated some of this increase, but where we projected it and where it showed up were in those regions that were affected more significantly by the Omicron variant, most notably in our California facilities. Based on our comprehensive review, we believe these pressures are localized, not widespread and largely temporary responses to supply and demand pressures. We have considered some of the regional labor rate pressures in our plans for 2022. Rest assured that we constantly monitor and closely manage these costs. When we saw this trend begin to emerge in early 2021, we developed more robust and detailed intelligence reporting that enhanced our operators' and executives' ability to proactively manage labor efficiency, premium labor statistics, and other key metrics with the objective of rapidly identifying hotspots as well as best practices. Early trends we are seeing in January support our view that any labor pressure we experience is largely temporary, regional hotspots of COVID-related deferrals and labor pressures that abate nearly as quickly as they arise. Dave will talk about this in more detail next, but our reported adjusted EBITDA of $114.4 million for the quarter and $339.6 million for the year represent a new all-time high for our company. We continue to benefit from our relentless focus on physician recruitment and targeted facility-level service line expansions that contribute to higher overall revenue per case rates and generate the highest contribution margin for our portfolio. Let’s walk through each of these areas, starting with physician recruitment. As Wayne mentioned, our recruiting team was very productive in the fourth quarter, recruiting 24% more physicians in that quarter than the prior year quarter. For the full year 2021, we recruited nearly 625 new surgeons, 13% more than 2020 across all of our core specialties, meaningfully outpacing the loss of physicians due to typical attrition such as retirement or relocation. We continue to be bullish on the migration of procedures to our lower cost settings, particularly in the orthopedic, spine and cardiovascular specialties. Over 80% of our facilities perform MSK procedures and approximately 60% have the potential to perform cardiac procedures, which we believe is the next big wave of migration. To earn this growth and support our specialist recruiting, we have been investing in robotics, state-of-the-art clinical equipment and OR capacity to position us as the most convenient and efficient provider for these high growth areas. For example, we now have 39 robots in our system and expect that number to be 43 by the end of 2022. Since 2019, we have doubled the number of robots in our facilities. All of this has helped fuel our growth in MSK procedures, particularly total joint cases in ASCs, which have grown 88% in 2021 when compared to 2020. Our orthopedic procedures exceeded 90,000 and have grown by 50% since 2017, when we strategically focused on this specialty. We do not see this growth slowing in the near future. While we remain focused on growing the specialty, we are preparing for the next wave in cardiac procedures that is in the very early innings. Not only are we investing in equipment and renovations of existing facilities to capture this migration, we are also increasingly focusing on our pipeline of de novo opportunities and partnerships with key influencers in this space. As Wayne mentioned, our pace of capital deployment has accelerated with approximately $325 million of acquisitions completed in 2021 at multiples consistent with what we have historically seen of approximately 8 times. We have talked about the strength of our pipeline in the past, and that was demonstrated by the pace of acquisitions completed in December, where we put $185 million to work in three separate deals, including an orthopedic surgical hospital in Omaha, Nebraska, which we are very excited about and proud to add to our platform. Reporting this important aspect of our growth is a dedicated development team, which is now supplemented by dedicated functional teams that are involved in all phases of the deal from due diligence through integration. This approach gives us greater confidence in seamlessly integrating new facilities into our portfolio and enhancing the future growth of these facilities. We target acquisitions pricing around 7 to 9 times adjusted EBITDA plus or minus, depending on the specialty, but we target our internal team to bring that down at least a full turn within the first 18 months based on our platform synergies. So far, our 2021 acquisitions are on track to hit this aggressive target. As Wayne mentioned in January, we closed two additional deals for approximately $34 million within our targeted multiple range. Our process for executing on M&A opportunities is now core to our DNA and allows us to begin focusing on additional areas of organic and inorganic growth, such as de novo partnerships and partnerships with health systems and health plans. We will share more news on these fronts in the coming quarters as there are exciting opportunities that are in the early stages of development. We are also exploring unique partnerships that position us to gain higher market share from large and growing physician practices incentivized by value-based compensation. Earlier this month, we announced a partnership with Privia Health in the state of Montana. This partnership gives Privia an entrance into this important geography and gives our facilities access to best-in-class physician clinic technology that fosters efficiency, allowing our doctors to focus on what matters most to their patients. Although this deal is projected to be neutral to our 2022 earnings, it represents a potential long-term value creation opportunity as we expand our high value services across the state of Montana. Together, we are monitoring this partnership in anticipation of leading to additional strategic growth opportunities elsewhere in the country. Moving on to guidance, as we think about the momentum we have as an organization, the performance of our business allowed us to guide to at least $370 million of adjusted EBITDA on our third quarter 2021 call, which we reaffirmed in January of this year. Since then, having developed our operating plan for 2022 and having delivered a strong fourth quarter print, we are raising our 2022 adjusted EBITDA guidance to a range of $370 million to $380 million, with revenue growth of at least 12% over 2021. Underlying this updated guidance is a great deal of optimism in 2022. Returning to what our new normal will be and earning our share of the continued migration of high acuity cases should yield very strong results, particularly when coupled with our completed M&A. As Wayne stated, we continue to target at least $200 million of capital deployment every year and 2022 is no exception. With our January acquisitions, we are starting out strong. We are also being somewhat cautious as we are cognizant that COVID remains a part of our lives, and with it comes the potential for labor and supply cost pressures and short-term volume disruptions. As the year progresses, we are confident that we can manage through these risks, as we did in 2021. Our teams are highly aligned and we are executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations to achieve our goals. To summarize our position, our company’s differentiated strategy is built on the premise that we provide a cost-efficient, high-quality, and patient-centered environment in our purpose-built short-stay surgical facilities. And now, more than ever, our value proposition is solidifying with key stakeholders in the healthcare environment. We remain confident in our long-term organic growth model, and we believe that scaled independent operators such as Surgery Partners in collaboration with our physician partners are uniquely positioned to grow in this new marketplace. With that said, I will turn the call over to Dave, who will try to provide additional color on our financial results and our outlook. Dave.

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 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 positive adjusted EBITDA. Moving on to cash flow and liquidity. In November 2021, we closed on our second significantly oversubscribed equity offering of the year, resulting in net proceeds of approximately $306 million. Proceeds from this offering were partially used to fund the $185 million in acquisitions that were completed in December. We ended the quarter with a strong cash position of $390 million, which includes approximately $60 million of Medicare advance payments. We have held these advanced payments as deferred revenue in our financial statements. Recoupment of these funds from future Medicare revenue will continue through the second quarter. Moving on to cash flows in the fourth quarter. Surgery Partners had operating cash flows of approximately $20 million. We made a $21 million payment under the tax receivable agreement and as I mentioned in December, we closed three deals worth $185 million. These deals have an average year one deal multiple of approximately 8 times. As you have heard us discuss before, we target a range of 5 times to 6 times credit agreement leverage. We think that range represents a good balance between maintaining an appropriate capital structure while acknowledging the significant equity value we can create through accretive deployment of capital. The company’s ratio of total net debt to EBITDA at the end of the fourth quarter, as calculated under the company’s credit agreement, decreased to 5.6 times. Normalizing for the impact of Medicare advance payment funds, the ratio of total net debt to EBITDA would have been approximately 10 basis points higher. This leverage ratio was positively impacted by the equity raise in November, partially offset by our acquisitions. We expect this leverage to float in the upper 5 times to lower 6 times range in the near-term future. 2022 is also a turning point for us as we expect to begin generating positive free cash flow from operations that we can redeploy. Some of the other material uses of cash include the last of the largest payments under our tax receivable agreement in December for approximately $20 million, continued funding for the Idaho Falls Community Hospital maturation and the repayment of the final 50% of deferred payroll taxes from 2020 of $8 million. We are also expecting material cash inflows from a shareholder lawsuit settled late last year and an earn-out payment from our 2020 sale of anesthesia assets collectively worth approximately $40 million. We have further opportunity to meaningfully lower our fixed charges if we refinance our 2027 notes, which are callable at 105 in April of this year and carry a 10% coupon. Our $210 million revolver was undrawn as of December 31, 2021. As we evaluate both our cash on hand and the untapped revolver, we project that we will have sufficient liquidity to execute on the $200 million annual capital deployment goal, inclusive of the most recently completed acquisitions in January. And as a reminder, the company has an appropriately flexible capital structure with no financial covenants on the term loan or our senior notes. Through the fourth quarter, our continued emphasis on expanding key service lines such as orthopedics and cardiology, targeting high value physician recruits, and engaging in strategic rate negotiations have all continued to fuel our growth trajectory. After a strong finish to 2021, with the fourth quarter results we released this afternoon and the momentum carried into 2022, we are raising our guidance for 2022 adjusted EBITDA to a range of $370 million to $380 million. We are optimistic about 2022, but believe this range is prudent given the continuing risks associated with the COVID-19 pandemic and related labor and inflation costs, which we have successfully navigated so far. On the topline, we believe we can achieve at least $2.5 billion of revenue, representing at least 12% growth over the 2021 baseline driven by a balance of case growth and rate growth, as organic growth efforts from investments in recruitment, revenue cycle, and managed care are combined with the contributions from 2021 acquisitions, which will help overcome the impact of the phasing out of sequestration in mid-2022. At the midpoint of those ranges, our reported adjusted EBITDA margins would expand when compared to 2021 results after excluding the effects of grants from prior year results. As a reminder, our business has a natural seasonal pattern, largely driven by annual deductibles resetting for commercial payers that tend to skew our results lower in the first quarter and higher in the fourth, relatively speaking. We are projecting 2022 will have a seasonality pattern consistent with pre-pandemic levels with first quarter underlying results representing an estimated 20% of our projected full year performance and the fourth quarter representing approximately 31%. We are confident in our organic growth model due to our consistent historical same-facility revenue growth, the opportunity to maintain and capture new share in high acuity procedures, and our ability to leverage our scale through procurement, revenue cycle, and overall workflow efficiency. Risks to our annual outlook remain the potential for more extended COVID-19 impacts and increased labor cost pressures in certain markets beyond that, which we are currently contemplating. These risks are offset by our ability to deploy additional capital on accretive transactions and continued focus on managing our operating costs. As we evaluate risks versus opportunity in 2022, we are confident in our outlook and continue to see strength and momentum across multiple product lines and geographies. I am proud to join the ranks of this highly skilled and experienced management team and to continue to support the physician partners and clinicians in our facilities that offer outstanding clinical quality and an exceptional patient experience. The fundamentals of our business are strong with a $150 billion total addressable market and solid momentum enabling us to continue to earn our fair share of this enormous growth opportunity. With that, I’d like to turn the call back over to the operator for questions.

Thank you very much, sir. We have a first question from 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 the December or January timeframe. 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 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.

Thank you, Brian, for your comments. We are very happy with how we concluded the year. Regarding the impact of Omicron, we certainly noticed it, with some regions affected more than others. However, as we’ve mentioned previously, we never cancel procedures; they are simply rescheduled in a short timeframe. We’ve observed some pressure points, but they tend to resolve quickly. Patients are usually rescheduled within a month, definitely within a quarter. What’s particularly encouraging as we end the year and move into early 2022 is the recovery in areas where we hadn’t fully restored activity, like ENT and pain management procedures, which are returning strongly. Although January had some impact, we have witnessed a rebound in February, and we expect our quarter to align with our projections. Regarding labor pressure, as Wayne mentioned, we do face challenges when staff are ill, often needing to cover shifts with premium labor, such as overtime or contract staff, primarily overtime for us. However, I want to emphasize that our jobs are generally elective and during normal business hours, which don’t require extended overtime. Our staff is specialized, focusing on specific areas rather than having to cover a wide range of responsibilities. Our staffing ratios are significantly higher than those in traditional acute care hospitals, giving us a strong starting point. The pressure we experience is largely manageable, especially during high-demand periods like Q4, where additional labor is needed. Fortunately, we’ve seen this pressure declining across hospitals and within our own operations as well, allowing us to explore opportunities as past acute care sectors have done to address nursing shortages and optimize the use of all levels of clinical staff. Overall, we are optimistic about our ability to navigate these challenges, and we have seen a quick recovery in our markets, making us encouraged as we start the year and manage through what has been the most significant disruption due to COVID thus far.

That’s awesome. And then I guess my follow-up, in your prepared remarks, you talked about the de novo strategy as well as the Privia joint venture. So just curious if you could share with us some comments on how you are addressing or how you are, 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 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 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 and 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 resonate. With that said, there’s a growing amount of what I would refer to as payviders, and you hear him call that where they are really focused on providing care, but also really aligning reimbursement, particularly for primary care around the most value-based or value effective treatment. And we as an independent operator, the only national independent operator are really well-positioned to partner with organizations that are like-minded around how we drive efficiency in the healthcare system. And so when you think about Privia in Montana, as we mentioned, it’s not going to be a game changer of this year. But if you think about this model where historically we have relied almost exclusively around recruiting the best physicians and having them with their reputations, bringing patients to our facilities because of the cost, quality, and value proposition, the idea of being able to align with a like-minded primary care group that’s growing across the state that’s really trying to drive value and make sure people are taken care of in the right set of care is quite attractive. We see opportunities over the longer term in Montana, certainly in other states where we work, whether it’s Privia or other value-based care providers where we have an aligned kind of footprint or it can build an aligned footprint. We think we are extremely well-positioned to do that at the independent short-stay national operator. So there will be more to come on that. It is certainly a newer development that allows us to directly tie to kind of the beginning of the referral stream to changing that way that if people are incentivized to really drive value, we are a natural choice, so excited about that.

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 value creation occurs much sooner than the typical time 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 a 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 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 may be somewhat transient, either returning or relocating, etc. 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. 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, etc. 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 believe you’ve covered the main points. We have a highly experienced team that employs a data-driven approach to foster growth. Each year, we are making progress not just in procedures but also in attracting the right doctors in every market. I can confirm that our pipeline continues to strengthen, and it is not slowing down. This year, our pipeline is as robust as it has ever been, and I would even say stronger than before. We view the remaining opportunities as a crucial part of our organic growth. When we acquire a new facility, a significant value proposition we offer is our strategic approach to marketing and engaging with key physicians in the community who can enhance the value of our facilities. We have executed this strategy effectively, and I don’t anticipate any changes in that regard.

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.

I would like to address how we are approaching next year. In the latter half of this year, our performance has remained consistent as a percentage of revenue compared to 2019, showing improvement over 2020 and stability when compared to the previous month and quarter. This achievement can be attributed to the efficiencies we gained during the COVID period, which allowed us to operate more effectively. We are maintaining a higher rate this year due to anticipated fluctuations. Based on our understanding and management strategies, we believe we can navigate this situation effectively because we have a strong track record of employee retention. Additionally, the pressures from floating nursing capacity are easing, and similar to industry practices, we will continue to explore ways to optimize physician workload and adjust our service mix to meet demand.

Thank you for including me at the end here. I would appreciate if you could share more information or details regarding the cardio opportunity as a significant area for future high acuity growth. Specifically, could you provide insights on the timeline? Will the growth be as rapid as we have seen in other cases, and any additional details you can share would be helpful?

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 at 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 definitely a growing interest among specialists to have cath lab procedures available in the 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, 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 next $60 billion that’s moving out of facilities tends to be a place where the acute care world has really nice margins in cardiology. We tend to provide a very, very attractive value proposition, while still having really attractive margins. And so it’s a place we are excited to grow in. We will do it kind of at a pace that makes sense. We want to make sure, obviously, we do a fantastic job on quality. We are building those things into place, but we see this as a much like orthopedics. It’s going to be one of those things that we started orthopedics in 2017. We grew that we mentioned in our prepared remarks to be that by 50% over that period, I would expect something very similar in cardiology. I don’t think that number is at all out of the realm now, again, you are starting from a little bit lower end, but the growth prospects there are tremendous but the growth prospects there are tremendous and there is growing interest. Now a little bit different in this timeframe, when the peaks first started, cardiology is a heavily employed specialty. And so in certain markets, those contracts tend to be three years. They are not necessarily happily employed, but heavily employed. And so we do see opportunity for disruption, especially as some of these centers get up, prove out the case and we are excited to be one of the leaders in making and helping make that transition happen and creating a bunch of value for the healthcare system.

Yeah. So I 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 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 of 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 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.

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, and 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.