Surgery Partners, Inc. (SGRY) Q3 2024 Earnings Call Transcript

Greetings, and welcome to the Surgery Partners Third Quarter 2024 Earnings Call. This conference is being recorded. Now, I would like to turn the call over to Dave Doherty. Please proceed.

Good morning. My name is Dave Doherty, CFO of Surgery Partners. I'm joined today by Eric Evans, our CEO; and Wayne DeVeydt, our Executive Chairman. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements. These risk factors are described in this morning's press release and the reports we file with the SEC, each of which are available on our website, surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Wayne. Wayne?

Thank you, Dave. Good morning, and thank you all for joining us today. Before turning the call over to my colleagues, I would like to share highlights of our third quarter financial results and our outlook for the balance of the year. This morning, we reported net revenue of $770 million, representing growth of greater than 14% over the prior year quarter. On a same-facility basis, net revenues grew 4.2% with surgical case volume growth in the quarter at 3.7%. Adjusted EBITDA grew 22% to $128.6 million, generating adjusted EBITDA margins of 16.7%, expanding 100 basis points as compared to the prior year quarter. Our results were marginally affected by Hurricane Helene, which impacted several of our facilities and operations in Florida, Georgia, and North Carolina, as many took precautionary measures in the last week of September. This storm and Hurricane Milton that followed largely only affected the scheduling of cases, but we did have several facilities that sustained damage. At this point, all of our facilities are reopened, but some are only performing limited volume. In the third quarter, we continued to see growth in total joint replacements in our ASCs, increasing 53% in the quarter when compared to last year and a 5-year CAGR, that's greater than 80%. We continue to experience strong and sustained growth in this area as physicians, payers, and patients increasingly see the value of performing these procedures in an ASC environment, and we are well positioned to capture this ongoing shift into our sites of care. Eric will provide additional insights into our physician recruitment and the expansion of our total joint programs in his remarks. Moving to M&A, while we continue to focus on expanding our footprint in existing markets, we've been pleased with our team's ability to enter and grow in those markets that represent the largest commercial and Medicare footprint opportunity, specifically Florida, Texas, California, New York, and Illinois. In the quarter, we deployed $24 million on five end market transactions. On a year-to-date basis, three of our acquisitions were in our targeted high-growth markets of New York and Texas. In addition, last week, we completed an acquisition of two leading multi-specialty orthopedic-focused ASCs in the Chicago market in partnership with Duly Health, the largest independent multispecialty physician-directed medical group in the nation. These ASCs have a demonstrated history of strong operating and financial performance and have a very favorable outlook for high acuity growth moving forward. These new ASCs will join two other ASCs we operate in the Chicago market. We're excited about the growth potential of this market, fueled by a strong network, Duly's reputation for providing an excellent patient experience, and high-quality clinical care and execution on our proven growth and efficiency capabilities. Our business development team continues to source a robust pipeline of acquisitions and de novo investment opportunities, and we believe the capital deployment aspects of our growth algorithm remain achievable. On the strength of these results, we continue to project full year net revenue and adjusted EBITDA outlook of greater than $3.075 billion and $508 million, respectively. This outlook represents at least 13% and 16% growth in net revenue and adjusted EBITDA, respectively, as compared to the prior year. With that, let me turn the call over to Eric to provide additional highlights for the quarter. Eric?

Thanks, Wayne, and good morning, everyone. We are pleased with our third quarter results, with consistent and predictable growth across all our core service lines. Once again, all elements of our long-term growth algorithm contributed to double-digit top line and bottom line growth. Diving deeper into our results, same-facility net revenue growth was 4.2% in the third quarter, comprised of 3.7% growth in our surgical case volume and 0.5% rate improvement. As we mentioned on our last call, we anticipated net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the second half of the year, which our results to date demonstrated. On a year-to-date basis, we have reported same-facility net revenue growth of just under 9%, with growth balanced between both volume and rate. On a consolidated basis, our specialty case mix and volumes were mostly in line with our expectations with 163,000 consolidated surgical cases in the quarter, with particular focus in our high acuity business lines. Continuing the wave of strong recruiting we've been experiencing this year, over 230 new physicians started utilizing our facilities in the third quarter, with a continued focus on recruiting in high acuity areas such as orthopedics, spine, and cardiology. This brings our total recruits for the first three quarters of the year to just over 640, on pace to exceed last year's total. The initial volume and average rate per case performed by the 2024 recruited physicians exceed the volume and rates from last year's recruiting cohort. As a reminder, each of our recruiting cohorts continue to drive strong compounding year-over-year growth, with our 2023 class generating 126% more revenue in 2024 compared to the comparable period in 2023. Our recruitment activities, accelerating de novo development, and acquisitions have continued to fuel our growth, especially in musculoskeletal, with nearly 194,000 MSK-related procedures performed year-to-date in 2024, representing 21% growth over last year. More importantly, total joint cases in our ASCs continue to grow at a disproportionate rate, with just over a 50% increase in case volume in the quarter. We do not see this growth slowing in the mid- to long term as hip, knee, and shoulder surgeries continue to transition into the ASC setting. That shift in site of care is in the early innings, and we are well positioned with our recruiting team and our portfolio facilities to continue growth in this high acuity space. Moving to operating margins, which improved in the quarter by 100 basis points over the prior year quarter to 16.7%. This improvement reflects both our ongoing procurement and operating efficiency initiatives that continue to benefit from our increasing scale along with synergies achieved on our previously acquired facilities. Finally, diving deeper into our capital deployment activities. I am very pleased with the progress that we have made on the M&A front this year, including the acquisitions Wayne just spoke about. These acquisitions accelerate our company's growth. and together with the de novos in process continue to position us with an increasing number of short-stay surgical facilities that are focused on sustainable, long-term, and high acuity growth. In closing, I'm proud of our Surgery Partners' colleagues and our many talented physician partners for their relentless focus on delivering a superior patient experience with high clinical quality. With the benefit of our collaborative, growth-oriented corporate team supporting our unique physician partnership model, I remain highly confident in our long-term growth outlook. With that said, I'll now turn the call over to Dave to provide additional color on our financial results. Dave?

Thanks, Eric. Starting with the top line, we performed nearly 163,000 consolidated surgical cases and 189,000 total surgical cases in the third quarter. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double-digit growth in MSK-related surgical cases. The combined case growth in higher-acuity specialties, specific managed care actions, and the continued impact of acquisitions supported revenue growth of 14.3% over last year to $770.4 million. As Eric and Wayne mentioned, our same-facility total revenue increased 4.2% in the third quarter. We continue to forecast our same-facility net revenue growth to exceed our growth algorithm target of 4% to 6% in 2024, with full year same-facility revenue finishing in the high single-digit range. Year-to-date, our same-facility net revenue was 8.7%. Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the fourth quarter. Adjusted EBITDA was $128.6 million for the third quarter, giving us a margin of 16.7%, in line with our expectations of continued margin expansion. We continue to believe annualized margins will improve by at least 50 basis points over full year 2023. We ended the quarter with $222 million in cash. When combined with the available revolver capacity, we had over $815 million in total liquidity. We reported operating cash flows of $65 million in the third quarter. This amount was impacted by the timing of routine transactions involving working capital as well as a marginal impact on collections due to Hurricane Helene. We remain confident in our working capital management efforts and the underlying cash generation from our portfolio. Moving to the balance sheet, we have $2.2 billion in outstanding corporate debt with no maturities until 2030. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025. And after that, we have interest rate caps in place that limit the variable rate component of our $1.4 billion term loan to 5%. In the event the interest rate environment becomes more favorable in the future, we will capitalize on such improvements. Our third quarter ratio of total net debt-to-EBITDA as calculated under our credit agreement was 3.8x consistent with the prior quarter end. As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but over time, we project this leverage ratio will be below 3.0x. Carrying the momentum of our year-to-date results, we remain optimistic and confident about the company's growth. We continue to project full year 2024 net revenue and adjusted EBITDA greater than $3.075 billion and $508 million, respectively. This guidance implies continued year-over-year margin expansion, consistent with our long-term guidance. With that, I'd like to turn the call back over to the operator for questions.

Thank you. Our first question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Hi. Good morning. You've got Jack Slevin on for Brian. Thanks for taking the question. Just to kick off on the free cash front. I just want to make sure I caught all the details there correctly, Dave. So as we understand, I know you're sort of pulling back from some of the framework that you had laid out on free cash before. But if you just think about your broader expectations on cash generation, would you say most of the movement or the weakness in the quarter is due to working capital events that are going to swing back some point in the next couple of quarters? Or if you could just unpack sort of the moving pieces on the free cash piece, both in the quarter and over the next couple, that would be great. Thanks.

Hi Jack. Good morning. I'm going to have Dave elaborate on some of the details you asked about. But maybe just to start, we continue to be pleased with our cash flow generation and our opportunities for deployment. But to make sure that we're all aligned, when we think about our cash flow modeling, it's based on a static environment and includes anticipated diligence and integration costs at our commitment to deploy the $150 million to $200 million on M&A. So think about it as it's a static model that assumes that. But we're a growth company. And so the pace and size of our acquisitions can impact our cash flow from quarter to quarter or year to year. But we continue to feel good about the cash generated and available to fund both our de novos and our future acquisitions. But to get more specific on kind of the starting point, which is you start with operating and you kind of go from there. Dave, do you want to elaborate further? Thanks.

Good morning, Jack. Our operating cash flow for the year to date is nearing $190 million, compared to $230 million last year. We distributed approximately $122 million to our partners, and our maintenance capital expenditures have remained stable at about $30 million. The primary reason for the year-over-year change in cash flow is the variable spending on transaction-related costs. This includes the execution costs of deals completed this year and the integration of previous acquisitions that are becoming part of our business model. These variable costs are closely linked to our spending levels, which are currently about twice our historical norm. Our M&A spending has more than doubled year-to-date, but we also experience fluctuations in working capital activities, such as the timing of payroll and other accrued liabilities. Additionally, we are facing some industry-related challenges regarding payer dynamics. However, the impact on our business is less pronounced due to our focus on scheduled services, allowing us to communicate with payers in advance. The hurricane also affected us by disrupting cash collection activities in Florida and the Southeast, where many of our cash and billing experts are located. We experienced a dip in cash collections during the last week of September, but we expect some recovery. Nonetheless, the transaction and integration-related costs have been somewhat unpredictable. Thank you, Jack.

Okay. Got it. That's really helpful. And then just a quick follow-up, maybe taking a step back further. One of the things that we've been perceiving a little bit of misunderstanding in the market around the surgical hospital strategy. And so I guess I wanted to ask maybe taking a step back and it's probably for Eric or Wayne. As you think about sort of what the strategy is with the surgical or physician-owned hospitals? Why you like that side of service and how that business is tracked relative to the broader overall consolidated Surgery Partners business? Would love to get a little bit of color on where you stand on those things.

Sure, Jack. Thank you for the question. I want to clarify how our surgical hospitals differ from traditional acute care settings. Our typical hospital has a patient count of five and nearly no ER visits, making them highly focused on elective procedures. We view these facilities positively in our strategy as they form the foundation of our ecosystem. For various specialties like orthopedics or cardiology, this structure enables physicians to collaborate with us across the entire range of patient needs. In markets where we have these facilities, we establish Ambulatory Surgery Centers (ASCs) around them, which allows us to provide a comprehensive surgical approach and gives physicians greater independence to treat all their patients within our partnerships. This has proven to be a significant asset for us. Again, I want to emphasize that these hospitals are essential for expanding our ASC presence and fostering deeper partnerships with physicians to serve their entire patient populations.

Got it. Thanks.

Thank you. Our next question is from Joanna Gajuk with Bank of America. Please proceed with your question.

You mentioned the impact of some of the collections. And I know there was an add-back of less than $1 million to get to adjusted EBITDA for hurricanes, but was there any impact on volumes in the third quarter and fourth quarter for that matter?

Yes, the impact from the hurricanes was somewhat marginal, but it did affect a large swath of the Southeast, as you know, and the timing of that was not really good for us. It all happened in the last week of the quarter. So there was an impact clearly inside the third quarter. Some of that will impact our facilities into the fourth quarter. There was only one of our facilities that sustained damage and the community was fairly significantly impacted. So we are tracking that one pretty carefully as we go into the second quarter. The facility itself is open, but it's on a partial schedule right now. All of our other facilities have reopened and are back to business as normal, but marginal impact on revenue and cases.

Okay. So it's too small to quantify?

Yes.

Okay. So now I guess, on volumes, I guess same-store cases, they suggested, I guess, tracking around, call it, 4% year-to-date growth. So is this sort of how we should think about going into next year when it comes to same-store case growth?

Yes. Well, so first off, I think it's too early for us to talk about 2025. So I'll just reiterate how proud we are of what we've been able to produce so far this year. With our same-facility rate growth now at 4% on a year-to-date basis, that exceeds our long-term growth algorithm that we often talk about of 2% to 3%. So great momentum, great support for our facilities, and great organic growth that I'm proud that our facilities are able to achieve. It is too soon for us to look at 2025. But if you look at our long-term history on case growth, you'll see we've constantly been above that long-term growth algorithm.

Okay. I guess somewhat helpful, but I understand you're not ready to talk about next year specifically. But I guess another question when it comes to volumes, your peers have talked about some headwinds from lower Medicaid and self-pay impacting outpatient surgeries. But I mean, your volume is still pretty solid. So presumably, that's not really impacting you as much. How you think about those dynamics?

Yes. Great question. So a reminder, and this goes back to my earlier comment on our surgical hospitals. We don't have much Medicaid business. We have very little ER business. We are primarily elective, almost all Medicare and commercial group. And so we have not felt that impact, and we have continued to grow at a rate that matches our algorithm and consistency we expect.

Thank you so much for taking the questions.

Thank you. Our next question is from A.J. Rice with UBS. Please proceed with your question.

Hi, everybody. Just another thought on the volume and pricing question. As you see the shift to the higher acuity to joints and other things, how does that impact the trend for volume versus pricing? Do those procedures generally just take longer surgical time but on the other hand yield higher revenues? So that may just have a long-term impact on the metrics between pricing and volume. Any thoughts on that?

I would start with what you just said, which is clearly, these are procedures that require more operating room time but have a higher dollar contribution per minute than other procedures. And so we prioritize those within our facilities where we can. And then obviously, we are able to fill in the time with other lower acuity procedures, but still nonetheless important high-margin ones. Relative to the growth algorithm, it's simple, right? It's 2% to 3% of volume and it's 2% to 3% of rate. We have a track record of consistently outperforming that. This year, we're close to 9% on the same-store basis. We don't see anything changing regarding the growth algorithm going forward. And we have generally seen our business model to be agnostic to who's in office because ultimately, this is really about a shift of higher acuity procedures into a lower-cost, higher-quality setting. So I would continue to expect to see it play games with the math from quarter to quarter, but I don't think it will play games with the math on a year-over-year basis.

Okay. The only other question is regarding the hurricane's impact. Some are highlighting the effect on the supply chain, IV bags, and similar items. Did any of that affect you? Or do you anticipate it will in the fourth quarter?

Yes, thank you for your question. This is something we closely monitor. You're referring to the facility in North Carolina that affected liquid supplies. I'm proud of our procurement team for responding quickly to this situation, and I'm pleased to report that we have not canceled any cases due to the shortage. Our rapid response was aided by our diverse portfolio of companies and supply chain partners throughout the country. As of now, we do not foresee long-term pressure, and we are beginning to see conditions improve. The combination of our available inventory and strong partnerships with our providers has enabled us to navigate this challenge effectively. Thank you for your question, A.J.

All right. Thanks a lot.

Our next question is from Andrew Mok with Barclays. Please proceed with your question.

Hi. Good morning. I just wanted to clarify expectations around free cash flow for the year. I think you said you're pleased with the cash flow generation, but also noted higher transaction costs. So less clear to me whether we should still be thinking about the $140 million to $160 million free cash flow target for the year. Is that still achievable? Thanks.

Hi Andrew, thanks. I think the thing that we were trying to point out to folks is just to recognize that the static nature of our cash flow modeling does not reflect the dynamic nature of when capital is actually deployed, which is why we've moved away from that free cash flow metric. So in this current year, we're 2x on M&A deployment. And so ultimately, that means we're doing more integration and more diligence. So backing into a static model is one thing, but in a dynamic model, we're in a point where we're saying, look, providing that number no longer provides value.

Got it. That's helpful. And then if I look at the G&A line in the quarter, it looks like it was down about $11 million or nearly 30% sequentially. Can you give us more color on what's driving that G&A lower? Was that planned or in response to some of the challenges from the hurricanes and things of that nature?

Yes. So as a reminder, kind of our second quarter G&A did have a stock-based compensation true-up of about $8 million that we talked about in our call last quarter. So if you normalize for that amount on a full year basis, our Q3 G&A expense is in line with our expectations.

Thanks.

Thank you. Our next question is from Tao Qiu with Stifel. Please proceed with your question.

This is Tao Qiu from Macquarie. Thank you. I'm just wondering if you guys have any comments on the final Medicare ASC payment rule? In particular, we noticed that not many procedures were added to CPL this year. Any potential regulatory changes under the second Trump presidency? Remember, under his first term, CMS made the decision to phase out the IPO list. Do you foresee kind of acceleration in terms of size shift in the second term? Thank you.

Thank you for the question. You’re correct that there wasn’t a significant change to the list this year. However, the key growth drivers have been added in recent years, and we believe there is still much potential in that area. Overall, we're pleased with the Medicare update, which has exceeded our usual expectations, particularly in terms of pricing. Regarding the list, there were no major surprises, and we have plenty of capacity within the current procedures. As for your question about the election, the good news is that our sector has been well-received by both administrations due to the considerable value we provide, and we don’t anticipate that changing. You mentioned the Trump administration's previous efforts to eliminate the inpatient-only list, and we will see how that unfolds. However, I believe our biggest opportunities are already within our reach, and we are actively pursuing them.

Great. And second, a clarification question. So D&A expense stepped up $15 million from the quarter, I think it's probably largely related to the $220 million acquisition done in the second quarter. But anything else that's contributing to the higher step-up this quarter?

Yes. That's the introduction of new assets that have joined our portfolio in the past two years. So that would be driving most of that increase.

Thank you.

Thank you. Our next question is from KeyBanc. Please proceed with your question.

Hi, thanks for the question. I wanted to ask one on physician recruitment. It seems like you're maybe running a little bit faster this year in terms of just new doctors joining the platform. Curious if that was the case? And if you had any comments in terms of how we should think about the maturity of those physicians as they come onto the platform, how long it takes for them to migrate their business over to your facilities?

Yes, Matthew, thank you for your question. We are very pleased with our recruitment this year; it is set to be a record year and is ahead of last year. Each year, we become more mature in this area, utilizing a lot of data to enhance our targeting. Additionally, higher acuity specialists are increasingly recognizing the benefits and quality we offer and the opportunity to work with us in creating value for the health system. This is an area where we are gaining momentum. Regarding the recruitment, we noted in our prepared remarks that the last cohort has significantly increased. Typically, after the first year, we see that group double or more in the second year, with continued growth into years three and four. This results in a compounding effect. We are certainly excited about this class, particularly because a large portion of it consists of high acuity specialists. We remain a very attractive place for physicians, especially those who want to maintain their independence while having more control, a better lifestyle, and the ability to deliver significant value for both their patients and the health system.

Great. And then as a quick follow-up with the election last week, there's been, I think, some focus with the acute care hospitals at least on what happens with the exchanges and the enhanced subsidies there. I was curious if you could kind of characterize your exposure to exchanges. My sense was it was pretty limited, but just would be great to hear your perspective on that.

Yes. No, it's a great question. It is relatively limited. But I would say that I think we're not going to predict where that's going to go with the administration, but it's relatively limited, but we are well positioned, obviously, in that place to deliver a high-value product, and no matter kind of how they structure it. And so we'll be watching that carefully, but don't anticipate that's anything material.

Great. Thank you.

Thank you. Our next question is from Sarah James with Cantor Fitzgerald. Please proceed with your question.

You've talked a lot today about lumpiness in timing of cash use for growth and also general needs like payroll. And I'm wondering with that in mind, if we're thinking about the broader threshold of what level you can consistently operate at for free cash flow to self-fund growth? Is it really not the $200 million that I feel like the Street had their mind at, but something higher like $250 million or $300 million just to account for this lumpiness in the use of cash?

Yes, I'm not following Sarah, the $200 million to $300 million. But I will tell you, based on everything that we've modeled and based on the strength of our balance sheet that we have no concern over our ability to fund M&A on a go-forward basis, even with the experiences that we've been seeing so far. So our modeling over the next five years would suggest that the use of our total balance sheet liquidity is sufficient such that at the end of that 5-year period, we end with a leverage below our 3.0 target, nothing on the revolver, and strong cash flow generation. So at this point, our growth algorithm does not need to change whatsoever. We feel really confident as we sit behind that. And that is inclusive of that inorganic growth lever that's out there.

Got it. And wondering if you could clarify, are there any moving pieces that impacted revenue per case this quarter?

Yes. As we mentioned on our last call, our same-facility rate growth would be influenced by the way same-facility growth is calculated. I want to remind everyone not to focus too heavily on same-facility cases or rates in any specific quarter. We typically examine this over a longer-term horizon to adjust for the unusual variances that may arise from the calendar. I want to reiterate that we’re seeing approximately 9% growth year-to-date in our same-facility metrics, with contributions coming from both ends. In the third quarter, our same-facility rate aligned with our expectations, as we had anticipated in our second quarter call. The case growth we experienced during the quarter was robust, aided by a predictable calendar that encouraged a return of higher volume but relatively lower acuity procedures in GI and ophthalmology. Consequently, this dynamic is likely to create some downward pressure on the rate you see. However, we've observed a 50% increase in our total joint replacement procedures, which are high acuity. This underpins the rates we're reporting. When you look at the overall net revenue per case generated by the company, you'll still be impressed. The way the same-facility calendar functions within a quarter may lead to some unusual outcomes, which will likely persist in the fourth quarter. Nonetheless, this information is consistent with our previous predictions, and we are proud of our underlying performance.

Thank you.

Thank you. Our last question is from Bill Sutherland with The Benchmark Company. Please proceed with your question.

Eric, could you discuss cardio for a moment? I've noticed that EP procedures are increasing significantly. Can you share how that integrates into your case mix now?

Yes, Bill, thanks for the question. And you've heard me talk about cardio a couple of times. I would start with just saying we're excited about the future of cardio. It is cardiac procedures and their ability to move into the ASC safely. So that's stuff like you mentioned EP, cardiac rhythm management. Those procedures, in particular, are easier to move into our facilities and don't require a cath lab. Over 70% of our facilities have fluoroscopy to do those procedures today. And so we've talked a lot about we're trying to add five to 10 facilities a year that add that capability. Again, we see this as probably one of our fastest growing service lines, albeit on a small end. So we expect that to be a rapid growth. I do think there will come a time where it will turn the corner, much like we saw in orthopedics, but it's a highly employed specialty. And Bill, as you know too, a lot of these docs, they haven't historically practiced in ASCs. And so there is a little bit of a learning curve, but we're working through that. We do have a lot of interest in the area, but again, small end, rapid growth, we expect it to be really kind of being a rapid curve over the next several years, but somewhat muted by the fact that it's the most heavily employed specialty and also certain states haven't caught up with CMS yet. But we're excited about it, Bill. We do see it as kind of the next big wave. If you think about after orthopedics, but we're still in the early innings there. So both opportunities are fantastic.

Yes, Bill, I want to add to that quickly for another point of reference. Similar to what we experienced in orthopedics, we are preparing as a company. We understand the driving factors well. Currently, 70% of our facilities have the capability to handle cardiac opportunities, so we are positioning the company for when this opportunity arises.

Great. And then I was looking back at my notes on the de novo, where you stand with fully syndicated launches. And maybe update us on where they fall into the calendar now and the mix of consolidated and minority interest partnerships.

Yes, that's a great question, Bill. We are really enthusiastic about de novos as a significant growth opportunity. We aim to open 10 de novos each year and currently have several in the pipeline. So far, we have launched 17 de novos, including five this year, with a few more expected to open in the next six months, targeting six by the end of 2025. Most of these will start with minority interest, allowing us the potential to transition to a consolidated structure in the future. I want to emphasize that even though minority interest investments aren't consolidated, they are still beneficial for us. They represent an excellent use of capital compared to M&A, given their low cost of entry. If we can manage the timeline, we will gain both the earnings from minority interests and management fees as the facilities expand. The financial outlook for these de novos remains very positive, and we have no plans to alter our long-term strategy of opening 10 de novos every year.

Got it. Thanks.

Thank you. Our next question is from Benjamin Rossi with JPMorgan. Please proceed with your question.

Good morning. Thanks for taking my question. On M&A, you mentioned the Chicago deal in the opening comments. Just curious how you're approaching capital deployment? Where you see the pipeline as we wrap up the year? And whether you consider yourself in a more opportunistic position at this point for targets that align strategically with your pursuit of higher acuity procedures?

Ben, thanks for the question. I'll start with saying, as we've always said that M&A is fickle and the timing can be obviously difficult to predict. But as you mentioned, the Duly acquisition, we're very pleased with what we've added to our portfolio this year. It reflects a redeployment of capital for assets that we divested last year, along with over $200 million of incremental capital being deployed, which is consistent, obviously, with our growth profile. We're obviously not providing guidance on 2025 as far as the future outlook of what we're going to do with capital. So I'd caution getting ahead of that. But to your point, we've always been opportunistic. And so that continues to be our position. We're well positioned to continue to grow high acuity procedures.

Got it. And just on the buy-up opportunity, can you remind us of your buy-up opportunity on your current book? And then are you seeing any change in physician behavior regarding potential buy-ups on a stronger volume environment?

We always look for buy-up opportunities across our portfolio. While there aren't many currently, we anticipate more as we develop our new projects, as Dave mentioned. Opportunities will continue to present themselves as they mature. Each year, we evaluate these opportunities while balancing the need for physician commitment and support. We're generally opportunistic in this area, but right now, significant opportunities are limited as we consolidate most of our facilities.

Yes. I understand that it can be frustrating for those trying to project revenue. However, I have previously stated that we are indifferent to whether it leads to consolidation criteria. As Eric pointed out, we must ensure a healthy mix of the physician ownership model, which is essential to our business model. The syndication opportunity exists in all our deals, but it will not be motivated by a desire for consolidation. Instead, it will be focused on the long-term sustainability of each of our facilities. Thank you, Benjamin.

Got it. Thanks for the color.

Thank you. Our last question is from Ryan Langston with TD Cowen. Please proceed with your question.

This is Will on for Ryan. Most of my questions have been asked, but I guess I would just ask kind of on the long-term outlook for physician recruitment. Are you seeing anything new in terms of shifting preferences for these physicians to work in your environment versus employed or a hospital?

Ryan, great question. I would say, in general, it's very stable. We continue to have strong interest, as you can see in our recruitment numbers, mostly because we provide an opportunity for them to be more efficient with their time, right? We provide more like a time machine that allows them to have consistent scheduling, allows them to get more procedures done and gives them a chance to have more say in their practice. I do think there's a lot of surgeons who are frustrated with the current system and how much time they end up having to spend on things that they don't see as efficient, and we're an answer to that, right? We continue to be an answer to that for independent physicians. And we haven't seen that kind of wane at all. Okay. So I appreciate all everybody's questions. I think that was the last question. I'll go ahead and just wrap up. Before we conclude, I would like to say on behalf of our entire management team, thank you to our colleagues that partner with our physician partners each and every day to deliver on our mission to enhance patient quality of life through partnership. And I want to thank you all for joining our call this morning. Hope you have a great day.

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