Earnings Call Transcript - SGRY Q4 2020

Operator, Operator

Greetings, and welcome to Surgery Partners Fourth Quarter and Year-End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Tom Cowhey, Chief Financial Officer. Thank you, sir. You may begin.

Tom Cowhey, CFO

Good morning, and welcome to Surgery Partners' Fourth Quarter and Year-End 2020 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 filed 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 quarterly report when filed. With that, I'll turn the call over to Wayne. Wayne?

Wayne DeVeydt, Executive Chairman

Thank you, Tom. Good morning and thank you all for joining us today. As we begin our call this morning, I would like to take a moment to reflect on the unique times we're living in today. A year ago, we held our year-end earnings call having delivered double-digit adjusted EBITDA growth over the prior year. And we were well on our way to delivering similar growth in 2020 having achieved over 9% same-facility revenue growth in the first two months of the year. COVID-19 was something we were all watching from afar, primarily out of concern over the impact on global supply chains for items such as personal protective equipment. Little did we know that, four short weeks later, we would be seeing an 80% reduction in same-facility volumes and facing a global pandemic. I'm humbled by the efforts of our colleagues and physician partners that supported the health care system and the needs of our patients during this crisis. When we could not know what the future held, these brave individuals were on the front line serving the critical needs of a heavily burdened health care system while supporting our patients and communities. As a company, Surgery Partners was and continues to be uniquely positioned during the pandemic, where our freestanding purpose-built facilities are more than ever before, a safe haven for patients and providers who were seeking surgical care. We saw surgical volumes quickly rebound in mid-2020, and even exceed prior year volumes in select higher acuity specialties. Our business model was pressure-tested in 2020 and has proven to be resilient. Our results in this challenging environment give us confidence that the company we built should support sustainable long-term double-digit growth in 2021 and beyond. Specifically, as we look at the fourth quarter, results were impacted by a surge in COVID-19 cases across the US. Infection is up nearly two times, and hospitalization is up over three times over the course of the fourth quarter. Despite these pressures on the health care system, our results continued to affirm the power of our business model and the value proposition we provide. Some notable highlights include the following: adjusted revenues increased to $565 million, approximately 8.5% growth over the prior year quarter; same-facility revenues increased by nearly 6% compared to the prior year quarter, with higher net revenue per case more than offsetting slightly lower volumes as a result of the pandemic; and finally, the transition of procedures out of traditional acute care inpatient settings continues to accelerate. Joint replacements in our ASCs were up 110% as compared to the prior year quarter and for the year. Even with the disruption of COVID, joint replacements in our ASCs have increased by approximately 96%. We have been positioning our company over the past three years for this moment in time. As we've continually highlighted, significant management time and resources have been focused on pruning non-strategic assets to eliminate distractions and focus our resources into our core purpose-built short-stay surgical facilities. As mentioned in the third quarter call, we closed our Logan lab facility and completed the sale of certain anesthesia assets. In the fourth quarter, we also sold our optical GPO. Since 2018, we have been reallocating dollars from lower-growth non-core assets into core surgical facilities with higher growth opportunities. In 2021, we are now ready to move on the offensive and capitalize on the $150 billion total addressable market that we believe we are uniquely positioned to capture. Current market conditions, along with our solid operating results afforded us the opportunity to access the capital markets with an equity offering in January of 2021 raising over $260 million of gross proceeds through the sale of over 8.6 million shares to a long-term-focused shareholder base that complements our existing holders. This dry powder gives us the ability to aggressively pursue our growth agenda while maintaining our disciplined approach to capital deployment that Eric will speak to in more detail. Before I turn the call over to Eric, I wanted to emphasize the confidence we have in our long-term growth prospects. The pandemic has created many obstacles, but it has also accelerated some of the tailwinds we've been anticipating and repositioning the company to capitalize upon. Our management team has a proven track record of execution that our 2020 results only emphasize. We are a trusted partner of choice and we believe we are in the right space with the right product at the right time, setting up the runway for both near, mid- and long-term double-digit growth. With that let me turn the call over to Eric. Eric?

Eric Evans, CEO

Thank you, Wayne and good morning. Today I will focus my comments on three areas: first, I will provide a few additional highlights of our fourth quarter results; second, I'll spend a moment on our 2021 guidance; and third, I will dive a little deeper into how we plan to deploy capital in 2021. We were very pleased with our fourth quarter results, highlighted by same-facility revenue growth of nearly 6% and by total company adjusted revenue growth of approximately 8.5%. These increases were driven by revenue growth at our new hospital in Idaho Falls which achieved revenues approaching $20 million in the quarter and increased mix of higher acuity cases such as orthopedic and spine surgeries. Also of note, we saw a rebound in GI cases in the fourth quarter nearly equaling the total cases from the same period in 2019. We are quite encouraged by the continued strength of our recovery which allowed us to end 2020 with $256.6 million of adjusted EBITDA placing us in the upper half of our guided range. Our ability to continue to drive strong same-facility growth is a direct result of our investment in physician recruitment and targeted facility level and service line expansions that enhance our ability to earn those procedures that generate the highest contribution margin for our portfolio. Let's walk through each of them starting with physician recruitment. We continue to see increased demand for new positions for our short-stay surgical facilities and our targeted physician recruitment approach has focused our efforts on the highest quality physicians. Year-to-date, we've recruited over 560 new physicians who generated 15% more revenue per case as compared to the 2019 cohort. But the success of our recruiting program is not just a function of our most recent additions. As we look back to the contributions of those physicians we recruited in 2019, they generated 22% more revenue than in the prior year, inclusive of the impact of COVID. This highlights the compounding benefit of our physician recruitment efforts and we believe our data-driven approach and digital innovation will be a differentiator to continue to accelerate our physician-driven growth in 2021. Over multiple years, we have also been making investments in expanding our musculoskeletal footprint and more recently in expanding our presence in cardiology as we think about longer-term opportunities. We have invested in these areas because of their large and growing addressable markets. Specifically, we estimate that there is over $60 billion of cases that will shift from inpatient to outpatient over the next several years and we estimate that over 60% of those procedures are in musculoskeletal and cardiology. Currently, 80% of our facilities have the capability to perform musculoskeletal procedures and the number of physicians performing joint replacements in our facilities is up 34% year-over-year. We have expanded facilities, added operating and procedure rooms and invested in new equipment to capitalize on this opportunity. For example, in 2020 we increased our installed base of robotics in our ASCs by almost 60% to enhance MSK growth and have plans to further expand in 2021. As Wayne noted, these investments have led to a 96% increase in total joint procedures performed in our ASCs in 2020, despite the pandemic. Another service line we are particularly excited about is cardiology. We now have five surgical hospitals and two ASCs that perform cardiology procedures. The ASCs are early-stage expansion in pilot programs which are showing promising returns, while our surgical hospitals, including our newly acquired Bakersfield Heart Hospital, continue to mature and expand their high acuity cardiology capabilities. We are planning to more than double the number of ASCs that perform cardiology procedures in 2021 and continue to evaluate surgical hospital expansion opportunities as well. 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 a range of $250 million to $260 million of adjusted EBITDA on our second quarter 2020 call. The predictability of our model allowed us to achieve full-year results in the upper half of that range with the results we announced this morning. In January of this year, we first introduced 2021 adjusted EBITDA guidance of approximately $315 million. We maintain our conviction that we will achieve these results in 2021, but recognize that seasonal patterns of earnings from our core operations are likely to be more weighted towards the back half than has been typical over the last few years, as patient sentiment reacts to lower infection and hospitalization rates, as well as increased vaccination percentages and deductible coverage. Our teams are aligned and we are executing on our initiatives across recruiting, managed care, procurement, revenue cycle, and expense management to achieve our goals. We also expect that our new community hospital in Idaho Falls will contribute positively to results in the second half of 2021, a milestone for that important project and a testament to the relentless efforts of our Idaho teams to achieve profitability in the midst of the pandemic. One final item that I would like to address relates to our strategic efforts to expand our footprint through acquisitions. As Wayne mentioned, we have pruned additional assets from the portfolio and have been using the proceeds to reinvest in our facilities and to grow our platform. Specifically, we plan to continue to pursue high-growth facilities that provide physicians and patients with more convenient, cost-effective options for care. As mentioned on the third-quarter call, we completed the acquisition of a majority interest in Bakersfield Heart Hospital in California in October. We also acquired two other facilities that help us expand our footprint in Idaho and California. These transactions are expected to more than offset the earnings from the sale of our anesthesia assets and other portfolio optimization efforts. As we take a step back, our sector remains highly fragmented. There are approximately 240 physician-owned hospitals in the United States, a number that will not grow due to restrictions in the ACA. Further, we estimate that over 70% or over 4,200 Medicare-certified ASCs are either independent or are only affiliated with a hospital and are targets for further consolidation. We believe we are in a strong position to further expand our portfolio in 2021, and we have the financial capacity to execute on over $400 million of transactions. Over the last three years, we have deployed nearly $300 million on acquisitions at a weighted average multiple of approximately seven times adjusted EBITDA. The discipline with which we will deploy capital is not changing, because we have more capital to deploy. Our teams are patient and diligent, and we believe that we can effectively deploy proceeds over time at multiples that will create substantial value for our shareholders. To summarize our position, we believe that the pandemic has fundamentally changed the way patients, surgeons, and health plans will think about the role that purpose-built short-stay surgical facilities will play in health care delivery, which continues to drive the shift of surgeries to our facilities. This has been our company's differentiation strategy and now more than ever our value proposition is resonating with key stakeholders in the health care environment. We remain very confident in our long-term organic growth model and believe that scaled independent operators such as Surgery Partners are uniquely positioned to grow in this new marketplace. With that, I will turn the call over to Tom, who will provide additional color on our financial results and outlook. Tom?

Tom Cowhey, CFO

Thanks Eric. First, I'll spend a few minutes on our fourth quarter financial performance before moving on to liquidity and some considerations as we move into 2021. Starting with the topline. Surgical cases declined by just over 2% in the fourth quarter to just under 135,000 primarily due to the impact of increased COVID infection rates in certain geographies. Adjusted revenues for the quarter were $565 million, approximately 8.5% higher than the prior year period. As Eric mentioned, reported results included approximately $19 million of contribution from our new community hospital in Idaho Falls. On a same-facility basis, total revenue increased nearly 6% in the fourth quarter. Looking at the components of this increase our case volume was approximately 3% lower than the prior year period, offset by higher net revenue per case that increased over 9% driven by acuity mix and pricing. Turning to operating earnings. Our fourth quarter 2020 adjusted EBITDA was $90.8 million, a 7.6% increase from the comparable period in 2019. Using the December guidance from the COVID Relief Bill, we recognized an additional $13 million in the fourth quarter as grant income, which increased adjusted EBITDA by $9.2 million after accounting for non-controlling interests. Year-to-date, we have recognized approximately $46 million of CARES Act grants as grant income out of $59 million of CARES Act funds received in 2020, translating to approximately $31.1 million of adjusted EBITDA impact. The remaining $13 million of CARES Act grant money has not been recognized as revenue at year-end and will now be treated as a deferred liability on our balance sheet. We continue to monitor updates to federal revenue recognition guidance in 2021 and plan to reevaluate and update our accruals during the first half of 2021. Based on current guidance, the high rates of COVID at the start of the year and continued investments in qualifying expenses to protect and prepare for COVID-19 patients, we believe it is possible that we will be able to recognize the vast majority of the remaining CARES Act grants on our balance sheet in the first half of 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 in mid-2021. During the quarter, we recorded $8 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. Of note, fourth quarter 2020 transaction integration and acquisition costs included approximately $0.6 million of EBITDA losses associated with our de novo hospital in Idaho Falls as that facility continues to make progress towards achieving profitability. We expect to report results from this facility separately through 2021 until the facility becomes profitable in the second half of the year. Moving on to cash flow and liquidity. We ended the quarter with a strong cash position of $318 million, which includes approximately $120 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 commence in the second quarter of 2021 and continue into 2022. Our revolver was undrawn as of December 31, 2020. As Wayne mentioned on February 1, 2021, we closed on an equity offering for just over 8.6 million shares sold at a price of $30.25 per share. Net proceeds from the offering were approximately $249 million after underwriting fees and expenses. Concurrent with the equity raise, we amended our revolving credit facility to renew the term for an additional five years and increased the capacity by $50 million to $170 million in total availability, which is then reduced by outstanding letters of credit. While not reflected in our year-end financial statements, the proceeds from our equity offering will meaningfully reduce our leverage ratios in 2021 and have the potential to reduce leverage further as we deploy proceeds towards accretive uses. Moving back to the fourth quarter, Surgery Partners had operating cash flows of approximately $9 million, made a $17 million payment on our tax receivable agreement, sold our optical GPO for an undisclosed price, and purchased two surgery centers in Idaho and California and the Bakersfield Heart Hospital in California for just over $90 million. 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 remains stable at seven times. Normalizing for the impact of the Medicare advanced payment funds, the ratio of total net debt-to-EBITDA would have been 7.4 times. Net proceeds from the equity offering would lower leverage by approximately 0.7 times as of December 31, 2020. The company has an appropriately flexible capital structure with no financial covenants on the term loan or our senior notes. As mentioned on our prior calls, the company's lenders under its revolving credit facility provided substantial flexibility for this calculation in 2021. Through the fourth 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 enables us to go on the offensive heading into 2021. As Eric mentioned, we continue to project adjusted EBITDA of approximately $315 million for fiscal year 2021. The vast majority of our 2021 adjusted EBITDA guidance is projected to come from organic initiatives and would represent nearly 23% growth over our 2020 COVID-impacted baseline. On the topline, we believe we can achieve 18% to 20% revenue growth over the 2020 baseline driven by strong case growth as we remain a destination for high acuity procedures and as lower acuity procedures return in earnest. 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. As we look deeper at our preliminary 2021 outlook, we believe that our typical seasonal progression may vary as compared to recent history. Due to COVID-19 continuing to impact behaviors and delay procedures in the early part of 2021, the impact of winter weather and power outages in Texas in February, the prospects for improved seasonal performance in the second half of 2021 as deferred payer-related to COVID returns and as our new community hospital in Idaho Falls achieves profitability and is brought into earnings. While we do not provide quarterly guidance based on the factors I just noted, first quarter underlying results may represent less than 20% of our projected full year performance prior to any recognition of CARES Act grants. Risk to our annual outlook remains the potential for more extended COVID-19 impacts than we are currently contemplating, potentially offset by our ability to recognize CARES Act grants that were deferred at year-end and our ability to deploy capital. Should our business continue to rebound as projected and as we have previously discussed, incremental M&A would represent upside opportunities for our outlook. As we evaluate risk versus opportunities in 2021, we remain confident in our annual outlook and continue to see strength and momentum across multiple product lines and geographies. We have a collaborative veteran management team coupled with facilities that offer outstanding clinical quality and stellar patient satisfaction scores. The fundamentals of our business are incredibly strong with a $150 billion total addressable market. After navigating through the uncertainties of 2020, we have entered 2021 as a stronger, leaner, more resilient company that is well-positioned for accelerated growth in the near, mid- and long-term. With that, I'd like to turn the call back over to the operator for questions.

Operator, Operator

Thank you. Our first question comes from Brian Tanquilut with Jefferies. Please go ahead with your question.

Brian Tanquilut, Analyst

Hey, good morning, guys. And congratulations on a good quarter and a good year. I guess my first question, Wayne, we've obviously been talking a lot about cardio as an emerging opportunity along with MSK. So how different is the push into cardio going to be versus ortho in terms of recruitment and maybe facility investments that you need to make? And in terms of what kinds of procedures are you guys anticipating to emerge into ASC say two to three years from now?

Wayne DeVeydt, Executive Chairman

Got it. Hey, Brian, first thanks for the question and good morning. Let me first just highlight what is probably obvious to all of us, is that the MSK kind of playbook that we ran will be the same playbook that we run for cardio, but the MSK opportunity is top of the first inning, right, of a nine-inning game at this point and is really exploding. That being said, we actually think the same dynamic will be happening with cardio probably in the next two to three years is where I would position it. And we're looking at kind of more of the more mid-2020s when that really starts to accelerate. And so the idea would be to capitalize on the massive MSK opportunity in front of us today and position ourselves to basically allow that run rate to continue for the next decade because in five years from now, we'll be at the high watermark of cardio moving over. A couple of things that are in some ways uniquely different, but not all unfamiliar, right? As we prepared in the MSK environment, there was a lot that we had to do around robotics, repositioning our facilities, how we staff those and schedule those et cetera. Those same dynamics have to be run in the cardio playbook. So, I'm going to ask Eric maybe to highlight a little bit more of how we're phasing this in. Now I think with MSK, we knew the wave was coming. The pace we had to move was much quicker to position the company the last three years. But I think with cardio we have a chance to be a lot more strategic in how we position. Eric?

Eric Evans, CEO

Hey, Brian. Good morning and thank you for the comments. We’re really excited about cardiology as it’s a new area for us. With PCIs being approved this year from Medicare, there’s significant interest. From a physician recruitment perspective, many cardiologists across the country now have the chance to take ownership and become more involved in ambulatory facilities, and we’re noticing a lot of enthusiasm for this. Currently, over 60% of our facilities have the necessary fluoro capacity for basic cardiology procedures, such as pacemaker implants and cardiac rhythm management. This enables us to enter the market with minimal capital investment, and by training staff and collaborating with local physicians, we can partner with those who haven't had these opportunities before. While cardiology has been commercially viable, the majority relies on Medicare, which has opened doors for us to act. We have around 60% of our facilities ready to engage with local cardiologists about initiating their cardiac rhythm management services with us. These physicians have enjoyed their experiences and recognize that they can expand their outpatient services. When we consider adding a cath lab to a multi-specialty facility, the investment will be higher and will require more training. However, the training and equipment needed for total joint procedures were similarly extensive, making this a maturation process. We view cardiology as the next significant wave of services that can transition from hospitals after musculoskeletal care. Clinically, the technology has progressed to ensure these procedures can be performed safely on the same-day basis at our facilities. We are also increasing the acuity in our surgical hospitals with two dedicated heart hospitals, one in Lubbock and one in Bakersfield, along with expanding heart programs in Montana and Idaho Falls. This growth presents a great opportunity on both sides of our short-stay surgical facilities, especially on the ASC side, where we can engage with a new group of excited doctors. We intend to approach this carefully and thoughtfully, starting our efforts this year.

Brian Tanquilut, Analyst

I appreciate that. And then I guess second question for me, obviously pretty good equity offering earlier this year. The cash balance is huge. So it sounds like you have a very good pipeline. But I guess for Wayne and Tom, how are we thinking about leverage targets going forward or longer term? And just maybe another incremental insights from the pipeline that you're seeing on the M&A front?

Wayne DeVeydt, Executive Chairman

I’ll begin by discussing our M&A activities and the current landscape. Following that, Tom will elaborate on how we are managing our leverage and our long-term expectations. Initially, I want to reiterate Tom's points. According to our prepared remarks, we have approximately $400 million available to invest, which is a strong position considering there are over 4,200 independent ambulatory surgery centers and more than 200 physician-owned surgical hospitals. We are pleased to have these funds and to operate in such a vast market. Our strategy encompasses three main areas. First, we are looking at individual ASC facilities that could gain from scale, whether through integrating into an existing market or expanding into new ones using our national scale. This is part of our pipeline. Second, we have a targeted program for surgical hospitals, as demonstrated by our acquisition of Bakersfield Heart Hospital, with a focus on musculoskeletal and cardiology areas that we plan to pursue actively. Lastly, there are several smaller platform assets available as well. In addition to these, we are also working on three-way joint ventures with major hospital systems. Overall, I don’t foresee any challenges. Eric agrees with me, and we believe we can realistically invest between $200 million and $300 million this year out of the $400 million available, potentially a bit more or less. Looking at the big picture, we believe we can effectively utilize these funds. We currently have several letters of intent in progress and are optimistic about those offers. We plan to be prudent with our capital, as we have a history of doing so. Now, Tom, could you provide some insights about our current leverage position and the impact of the equity offering, as well as our future outlook?

Tom Cowhey, CFO

Yes, definitely. Brian, as mentioned today, our leverage ratio stands at around 7 times credit agreement EBITDA. If we incorporate the equity offering as cash into the calculation, it reduces the ratio by about 0.7, bringing us down to the low 6s. We believe there is a significant amount of growth potential ahead and we have effective uses for that capital that should at least keep the overall leverage ratio stable. However, I want to point out that there is some complexity regarding the Medicare advance payments, which we will need to start repaying in the second quarter. This will slightly pressure the overall ratio. We expect to remain in the mid to low six range for the next several quarters, which we view as a good target. Our ultimate goal is to lower it further alongside growth. Looking at this year, we anticipate an opportunity to generate free deployable cash that could enhance our M&A prospects. The TRA payments are stabilizing and should start to decrease after the next two years, following 2022. There are many positive aspects, particularly in this rate environment, that we can and will continue to pursue to boost our cash flow generation moving forward.

Brian Tanquilut, Analyst

I appreciate that. Last quick question for me, Tom. What's the right share count to use for Q1 and the incremental M&A included in the guidance?

Tom Cowhey, CFO

The vast majority of our $315 million is organic in nature. M&A presents a potential upside to our outlook depending on how COVID progresses for the rest of the year. I will need to follow up with you regarding the share count, but it will be just over 8.6 million shares. I expect the K to be filed within the next 24 hours, so you'll have all that detail soon. You might be looking at a number on a fully diluted basis in the low 80s, assuming the conversion of the Bain preferred and all dilutive securities. I'll follow up with you, as I don't have that information readily available at the moment.

Brian Tanquilut, Analyst

Awesome. Congrats again. Thanks, guys.

Tom Cowhey, CFO

Thank you.

Eric Evans, CEO

Thanks, Brian.

Operator, Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.

Kevin Fischbeck, Analyst

Okay. Great. Thanks. Just wanted to get a little color on the rate dynamic. I guess, obviously, we've seen the rate growth be strong, but it still has decelerated I guess as the year has gone on. And I guess that's just largely a function of kind of lower acuity volume coming back into the system. But just wanted to get a sense of given all the investments you're making in cardio, ortho where should we think about that rate per case kind of normalizing going forward?

Wayne DeVeydt, Executive Chairman

Hi, Kevin. Good morning. I'll let Eric and Tom add their thoughts as well. You pointed out that our gross income nearly returned to the previous year's level in the fourth quarter. This clearly affects our financial metrics, but we're okay with that impact. We want to see our gross income recover alongside our musculoskeletal procedures that we're currently performing. An interesting aspect will be how volumes are affected this year and whether musculoskeletal procedures can offset that in terms of pricing. For instance, last year in January and February, there was no significant COVID impact until March. Despite that, we've reported strong performance in our total joint procedures last year. Currently, in January and February, while COVID has affected our figures—January being particularly high in cases and February being affected by severe weather in Texas that disrupted many facilities—our total joints have increased by 100% this January-February compared to the previous year, which had no such challenges. I believe we'll continue to see revenue growth. This is reflected in Tom's remarks about our initial revenue expectations, which we anticipate will improve over time, presenting an opportunity for upside. While we expect lower-priced procedures to gradually return as the backlog clears and vaccinations progress, we're optimistic that our higher-priced procedures are also maintaining their momentum. Eric, do you have anything to add?

Eric Evans, CEO

No. To clarify the three areas we are focusing on, the first is our managed care commercial relationships where we have made significant advancements in achieving fair market value. However, there is still more work to be done to ensure fair payment across all markets, which has led to ongoing discussions. We are balancing partnerships with payers to ensure fair compensation while also creating incentives that guide patients to the optimal locations for their care, benefiting both them and our physicians. The second area is Medicare, which has shown better support for ambulatory surgical centers this year compared to previous years, providing a positive impact. The third area pertains to acuity growth. As Wayne mentioned, we expect to see continued growth in areas like orthopedics, spine, and specific cardiac procedures. The key question is how much this growth will be balanced by the backlog of lower acuity procedures that we anticipate will return as the year goes on. With more vaccinations, we believe there will be pent-up demand in this space. Overall, we are very optimistic. We believe the combination of volume and rates gives us a growth range of 4% to 6%, and we have consistently aimed to be at the higher end of that range or outperform it. We feel very confident that we can achieve that again in 2021.

Kevin Fischbeck, Analyst

Okay. That's helpful. And I guess when you talked about the equity raise I think you mentioned that some of that capital will be going towards expanding cardio et cetera. And I guess you made some comments here about a number of sites. I guess, how much capital does it take to expand the number of sites that can do cardio? Is that going to be a big part like internal investment if you get part of that cash? Or is that also deals focused on those types of areas?

Eric Evans, CEO

Initially, the capital required for cardio expansion will be relatively small. Over time, more capital will be needed, especially as we consider additions like cath labs, but the business case will support that investment. Currently, our capital outlay is minimal. We're also investing in our robotics program in a capital-efficient manner by working closely with vendors. We do have to retrofit our facilities and expand rooms regularly, which is accounted for in our baseline capital plans. In the short term, I don’t anticipate significant changes to our capital run rate, but we remain focused on increasing acuity. Tom, do you have anything to add?

Tom Cowhey, CFO

As you consider the proceeds from the equity offering, I view them as funds available for mergers and acquisitions. The capital we require in the short term will be a minimal portion compared to the funds we aim to allocate toward M&A. My perspective is that the primary use of this capital will likely be for development. Additionally, if there are local initiatives that we cannot finance through our local partners and present strong organic growth opportunities, we would certainly utilize those funds for those purposes. Our returns on internal investments generally surpass those of our acquisitions, which are already favorable. However, I foresee most of those funds being directed toward development.

Kevin Fischbeck, Analyst

Great. Thanks.

Operator, Operator

Our next question comes from the line of Frank Morgan with RBC. Please proceed with your question.

Frank Morgan, Analyst

Good morning. I want to revisit the guidance. You mentioned some points in your follow-up comments, but I’m interested in how the CARES Act money is reflected in the results. Also, you stated that Q1 would likely be your lowest quarter, indicating it would be less than 20%. Can you confirm if that 20% refers to your EBITDA contribution? That's my first question.

Wayne DeVeydt, Executive Chairman

Yeah, that's correct. Go ahead. Finish your question and then I'll touch on the other stuff.

Frank Morgan, Analyst

Yeah. And I just want to make sure there was a nuance to the answer about organic versus some acquisition in those numbers. So just hoping you could maybe flesh that out just a little bit more detail. And then also is there any early signs of where you can talk about how first-quarter results have actually proceeded maybe in January and February as we move through the quarter?

Wayne DeVeydt, Executive Chairman

Sure. Frank, let me start with your last question first. I want to ensure we’re on the same page. January is always an interesting month to follow December, which tends to be a very large month for us. This year, particularly, we have two fewer business days in January compared to last year, making comparisons challenging. Looking ahead to February, we have a significant business presence in Texas, and power outages and snow affected several facilities across the Southeast, especially in Texas during the middle of the month. Recognizing this reality, we feel optimistic about our scheduling for March, as the trajectory looks promising. We believe we will be able to book many of those cases, but I am uncertain if we will complete all of them in the first quarter. As we consider the trajectory for the second half of the year, with Idaho Falls coming online, we anticipate it will have a neutral impact in the third quarter and a more substantial contribution in the fourth. Examining the technical seasonality of our business and referring to 2019, the percentage of the $315 million that occurred in the first quarter may be slightly lower this time around. Regarding CARES grants, they act as a natural hedge against COVID. We carried over about $13 million to $14 million from last year and received a bit more funding, a few million dollars, earlier this year from applications made back in 2020. We plan to recognize some of these grants in the first quarter or the first half if possible, as they counterbalance COVID’s impact during this period. I hope this addresses your question.

Frank Morgan, Analyst

Sure. You mentioned Bakersfield a couple of times today, which I believe closed back in October. Will it be a meaningful contributor? Idaho Falls will definitely contribute in the second half of the year, but will Bakersfield also contribute immediately, or does it have a ramp-up period?

Wayne DeVeydt, Executive Chairman

Bakersfield has been contributing and started doing so right away. However, I must acknowledge that they were affected by COVID. As a surgical hospital with an emergency department in Southern California, where COVID rates have been very high, its performance has been impacted. We view it as a valuable asset and are pleased to own it, but it seems to have experienced a somewhat slow start.

Eric Evans, CEO

This market has definitely been one of the most affected in the country, and Bakersfield stands out in that regard. The asset is a high-acuity hospital that is also developing its orthopedic services. We are collaborating with several orthopedic surgeons in the area to expand that service line. In California, new hospitals are scarce, so having a physician-owned hospital in a market where it can lead in value and partner uniquely with physicians positions this asset for strong contributions this year and even more in the future. While the market has faced challenges due to COVID, we remain optimistic and are pleased to include it in our portfolio.

Wayne DeVeydt, Executive Chairman

Yeah. This is Wayne. I think it's clear what everyone is witnessing in January and February. We remain very optimistic about the performance and future direction of the business. We still feel good about everything, and while there's a bit of timing involved in the transition between Q1 and Q4, it's not a concern for us. If anything, it reinforces our belief in the strength of the business. As I mentioned regarding total joints, it highlights why we continue to expect a successful year.

Frank Morgan, Analyst

That's great. Maybe just one more and I'll hop. I can ask this one quite a bit. Obviously, Bain is an investor. They've been around I guess coming up on four years now, but at the same time they are all these great growth opportunities. The market is more receptive for your shares. What do you say to investors who ask about that kind of where is Bain's? Where is their head right now in terms of how long they're positioned to remain part of the company's? Thanks.

Wayne DeVeydt, Executive Chairman

Thanks, Frank. I guess maybe I'm being a little cheeky when I say this, but not intending to, but Bain is an investor like any of our other long shareholder investors. And so I guess as a management team, our focus has been just do our job, right, focus on driving long-term growth, focusing on positioning this company to be the best in our industry. And I would simply say Bain is a very happy shareholder. And I think as you can see in the follow-on we did, it was all primary, no secondary. And I think that just shows kind of Bain's bullishness on where the company is going. And I think the power of the equity offering and how well the stocks performed since then I think shows the fact that there's a lot of investors that share their same sentiment. So, I guess my comment to investors would just simply be view them no different than any other shareholder that believes in the business model.

Frank Morgan, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. Our final question comes from the line of Ralph Giacobbe with Citi. Please proceed with your question.

Ralph Giacobbe, Analyst

Great. Thanks. Good morning. Just the 18% to 20% revenue growth was better than we had. Maybe if you could help on how much is coming from completed deals? And I know you mentioned that nothing is assumed in M&A on EBITDA. I just want to confirm that that's also the case on revenue. And then also if you could just give us a sense of the same-facility revenue growth embedded in guidance and split between volume and pricing just given the unusual dynamic of the base from 2020? Thanks.

Wayne DeVeydt, Executive Chairman

So Ralph, there are a couple of different questions in your inquiry. First, I want to highlight that we had some mergers and acquisitions that we closed in late 2020, which do impact revenue. It's important to remember that we needed to replace the revenue we lost from selling certain anesthesia assets, closing the lab, and finalizing the sale of our optical GPO. These factors are contributing to the challenges we are facing. The M&A from last year is primarily focused on overcoming those challenges. As Tom has mentioned, a significant portion of the revenue we expect to see this year comes from both organic growth and M&A. However, the majority of the EBITDA growth is primarily driven by organic efforts. If we can complete M&A earlier in the year, it will positively influence our revenue outlook and potentially enhance adjusted EBITDA as the year progresses. I'll now pass it over to Tom to provide more detail on the breakdown.

Tom Cowhey, CFO

Yes, Ralph, we usually don't provide guidance on same-store sales. The situation with COVID in 2020 has created somewhat unusual comparisons starting after March 15, which may inflate the numbers slightly. As we reflect on the portfolio work we completed at the end of the fourth quarter, it's clear that revenue growth is benefiting somewhat from that. Regarding our comments on mergers and acquisitions, the plan we shared primarily focuses on organic growth. There may be some small development activities in certain markets for minor acquisitions, but they are minimal. Overall, we anticipate that most of our efforts will be focused on organic growth. While there may be a slight increase in revenue from our recent acquisitions compared to what we've divested, it's not significant. The low baseline in 2020 plays a big role here. We expect strong growth in case volumes and an increase in acuity, which together will likely lead to revenue that exceeds your expectations, but I don't think it's much more than that.

Ralph Giacobbe, Analyst

Okay. All right. Fair enough. And then you've been clear on the M&A opportunity and your focus there obviously. What about de novo? Is that at all part of the growth story? Are there opportunities there? And then I guess separately but also related to investments, you talked about spending in robotics. Maybe just give us a sense or an idea around that and what our expectations should be for this year? Thanks.

Eric Evans, CEO

Yes, I will address the first question. We regularly pursue de novos and are always seeking those opportunities. They generally offer great returns, although they do take longer to realize. We currently have several projects in progress and also have expansion and replacement facilities in our portfolio, which will continue annually. So, this approach is certainly part of our strategy. However, it is not a major component of our M&A plan since it involves a longer timeline. We do engage in this area quite a bit, and typically it requires relatively little cash since we partner locally rather than owning the facilities outright. A portion of our funds is indeed allocated to de novos, which we appreciate, and we intend to do many of them as opportunities arise. Regarding robotics, in the ASC sector, we increased our robotic platform installed base by about 60% last year. We are considering several additions this year. While growth may not be as aggressive this year, we will keep adding robotic technology to better serve local physicians and improve patient access to our high-value facilities. We expect to add several robots this year, although perhaps not as many as we did in 2020. These investments tend to be capital light, and the financing has been managed effectively with our vendors, so it hasn’t consumed significant capital. We will continue deploying these where it makes sense to capture market share.

Ralph Giacobbe, Analyst

Okay. Got it. And then one more if I can squeeze in. There was a little bit of an increase in bad debt in the fourth quarter. What's driving that? And I guess, any concerns? Or what are the assumptions for that in 2021?

Wayne DeVeydt, Executive Chairman

No, I would say the accounts receivable was up slightly, and a lot of that is related to our new facility. I didn’t have any concerns about bad debt in the fourth quarter. We have teams dedicated to monitoring and pursuing collections, and we also work with a variety of vendors for specialized needs. Overall, I did not have any worries regarding bad debt in the fourth quarter.

Operator, Operator

All right. Well, everyone before we conclude our call, I don't want to miss this opportunity to say thank you to our over 10,000 colleagues and over 4,000 physicians for their contributions in 2020, and obviously going forward. Surgery Partners collectively serves thousands of patients each day, and more each day and what are often their most vulnerable moments. We take the trust and faith of our physician partners and our patients place in us incredibly seriously and we are privileged to make a positive difference in so many people's lives. I am excited about and humbled by the opportunity to lead Surgery Partners, as we work to more fully deliver on our mission of enhancing patient quality of life through partnership. In our efforts, we believe and we clearly are part of the solution to many of the challenges facing our nation's health system, and we're extremely proud of the value we are creating for all of our stakeholders. As we execute against our goal to become the preferred partner for short-stay surgical facilities across the US, it is the daily efforts of each and every one of our Surgery Partners' colleagues and physicians that get us there. So, I want to thank them again and thank you all for joining our call this morning. Have a great day. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.