Surgery Partners - Q3 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Surgery Partners'Third Quarter of 2023 Earnings Call. Currently, all participants are in listen-only mode. A Q&A session will follow the formal presentation. If anyone should require your operator assistance during the conference, please press star then zero on your telephone keypad. Please note, this conference is being recorded. It is now my pleasure to hand you over to Chief Financial Officer, Dave Doherty. Please go ahead, sir.

Dave Doherty (CFO)

Good morning. My name is Dave Doherty, CFO of Surgery Partners, and I'm here with our CEO, Eric Evans, and our executive chairman, Wayne DeVeydt. Thank you for joining us for our third quarter 2023 earnings announcement. During our 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 at surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or 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'll turn the call over to Wayne. Wayne?

Wayne DeVeydt (CEO)

Thank you, Dave. Good morning, and thank you all for joining us today. We are pleased to report another quarter of consistent growth in revenue and Adjusted EBITDA, exceeding our prior guidance. Including our non-consolidating facilities, we performed over 172,000 surgical cases this quarter. When adjusted for divested facilities and factoring in one less business day, this was nearly 6% more than 2022. Other than the impact of Hurricane Idalia, which marginally impacted our Florida and Georgia facilities mid-quarter, we did not experience any pressure from external factors as we continue to produce steady, predictable growth in our key growth areas.

This strong case growth, combined with increased acuity and contributions from recent acquisitions, generated $674.1 million of net revenue and $105.5 million of Adjusted EBITDA, resulting in a 15.7% margin. Dave will share more details regarding our financial results, but let me highlight a few. Net revenue of $674.1 million was almost 9% more than the prior year, with same facility revenue growth in excess of 14% in the quarter. On a year-to-date basis, same facility revenue growth was nearly 11%. Adjusted EBITDA was $105.5 million, representing nearly 10% growth over the prior year quarter and a 14% on a year-to-date basis.

Adjusted EBITDA margins improved 70 basis points sequentially to 15.7% as compared to the prior quarter. Finally, we completed the acquisition of two additional short stay surgical facilities in the quarter and have deployed approximately $135 million year-to-date. The pipeline of future acquisitions is robust, which allows us to be highly selective and remain disciplined in our acquisition strategy. Specifically, we have well over $200 million currently under LOI and a significant number of additional opportunities in early conversations. We continue to be pleased with our balanced approach to growth, with all pillars of our long-term growth algorithm either meeting or exceeding our expectations.

Based on the strength of our third quarter results and our continued positive outlook on our numerous investments in the business, we are raising our full year Adjusted EBITDA guidance to a range of $436 million-$440 million, with approximately $2.75 billion in consolidated revenue. Dave will discuss our guidance in more detail later in the call. With that, let me turn the call over to Eric to highlight some of our operational initiatives and recent investment activities. Eric?

Eric Evans (CEO and Director)

Thanks, Wayne, and good morning, everyone. We are pleased with our third quarter results, which represent another quarter of consistent and predictable growth across all of our core service lines and consistent with our company's growth algorithm. From an operational perspective, our specialty case mix is right where we expected, and volume was in line with our expectations, with over 146,000 consolidated surgical cases in the quarter. Our non-consolidated facilities, which are an increasing part of our portfolio, exceeded our expectations with almost 26,000 cases. In the quarter, our same facility case growth was 2.9% when compared to the third quarter of 2022, and net revenue growth per case was 11%.

We expect to continue to see both volume and rate growth, with rate growth in excess of our long-term guidance throughout 2023, due to the strength of our physician recruiting and case mix acuity. On the recruiting front, our various initiatives continue to drive strong year-over-year growth, fueling growth in MSK procedures, particularly total joint cases in our ASCs. Year-to-date, we have recruited nearly 500 new physicians to our short stay surgical facilities, with approximately 40% representing MSK specialties, and we remain on pace to recruit more physicians than last year, with an increasing focus on higher acuity procedures. To provide some context, we continue to see strong growth in total joint procedures performed at our ASCs, which have increased approximately 60% year to date compared to 2022.

As Wayne mentioned, we have deployed approximately $135 million year-to-date on 15 transactions, which includes three additional facilities closed in October. We continue to rapidly integrate acquisitions into our operations, bringing the full benefit of our revenue cycle, procurement, managed care, and physician recruiting teams to yield significant synergies within the first 18 months of ownership. We remain committed to our annual capital deployment goal of at least $200 million. As it relates to divestitures, we have divested our interest in seven facilities as part of our disciplined portfolio management process. As previously discussed, the timing of these divestitures has an ongoing impact on our revenue as we redeploy the capital. Moving to our de novo activity, we have been intentionally focused on syndicating with surgeons that recognize the importance of moving high-cost procedures to a lower cost, high-quality, purpose-built surgical facility.

Based on deals we have under syndication, we have 17 short-stay surgical facilities in various stages of our pipeline, many of which are slated to open in 2024. These facilities include both consolidated majority-owned partnerships as well as minority interest unconsolidated partnerships. They include a mixture of two-way partnerships under development between us and physician partners, and three-way partnerships with our new health system partners. We expect this pipeline to grow significantly over the next two years and to provide us with future buy-up opportunities. Dave will share how we think about the financial performance of these unconsolidated facilities in his remarks, but our growth in this area further enhances confidence in our long-term mid-teens growth expectations.

Before I turn the call over to Dave, I'd like to take a moment to address the current environment as it relates to anesthesia providers, as well as some of the questions we have received regarding the impact of GLP-1 on our long-term growth algorithm. Starting with anesthesia, I would like to point out that anesthesia availability and cost pressures are not new, but rather something that we have been managing for a few years. It's widely known that the current supply of anesthesia providers, from M.D.s to CRNAs, is constrained, and that recent reimbursement changes for their services has impacted their profitability. Other than the limited number of providers that we employ, the anesthesiologist or CRNA is responsible for billing and collecting for their services performed in our facilities.

These providers have chosen to work with us in our facilities for the same reason our surgeons and other stakeholders do: for the convenience, efficiency, and clinical quality we are known for. In other words, they generally prefer working with our surgeons in our facilities. With the pressures facing this service line, we have been working with our anesthesia providers to ensure they remain engaged and profitable. We have many opportunities to assist them, including realigning surgical schedules to maximize their OR time, working with our managed care teams on improved payer interactions, or in some cases, offering a revenue guarantee or stipend. These standard practices have been in place in certain markets for several years, and the financial impact is not material to the company's results.

Despite the increased focus on this subject, we have not experienced any delays or canceled cases because of this issue, nor do we expect to see material changes to our operations or financial results in the future. We are, however, taking the opportunity to find innovative ways to partner with national and regional anesthesia groups to alleviate pressures, and these conversations have been very productive. To reiterate, this has not been a material issue for us, and I do not expect this will be a material issue for us in 2024. Moving on to GLP-1s. We are proponents of a healthier population and have high hopes for success in pharmaceutical and behavioral changes that benefit individuals affected by diabetes and obesity. While we are encouraged by the promise of these drugs, there is much to be learned about the overall effectiveness, long-term side effects, and other factors, including reimbursement.

While we do not know the ultimate impact of these drugs, it is believed that such drugs will lead to fewer comorbidities and a healthier, more active lifestyle, which generally bodes well for our short-stay surgical facilities. In short, we do not expect a change in our long-term growth algorithm due to the expected impact of GLP-1s and related treatments, and would bias to more upside for purpose-built, short-stay surgical facilities due to the continued shift of procedures from the inpatient to the outpatient setting, particularly for healthier populations. In closing, I've been in this role for almost four years and have never been more optimistic regarding our future and the number of tailwinds impacting our business. The desire and need to move more procedures to purpose-built, short-stay surgical facilities has never been greater, and our company has been positioning itself to capture industry-leading growth associated with these tailwinds.

The combination of investments in both our existing facilities and new de novos, coupled with our entry into three-way joint ventures with high-quality health systems, gives me increased confidence in our ability to grow high single to low double digit organically. This growth, coupled with an existing and growing M&A pipeline and a talented, deep, and experienced leadership team, provides further optimism for long-term, sustainable mid-teens adjusted EBIT growth. With that, I will now turn the call over to Dave to provide additional color on our financial results, as well as the outlook for the remainder of the year. Dave?

Dave Doherty (CFO)

Thanks, Eric. I will focus on our third quarter financial results, key metrics for our unconsolidated and managed facilities, and our outlook for the remainder of the year. Starting with the top line, we performed over 146,000 surgical cases at the facilities we consolidated in the third quarter. When combined with facilities we don't consolidate, we performed over 172,000 cases, representing a slight increase over last year. Adjusting for divested facilities and one less business day in the quarter, total cases grew nearly 6%. These cases spanned across all our specialties, with an increasing focus on higher acuity procedures, which is reflected in our double-digit same facility growth this quarter. The combined case growth in higher acuity specialties. Specific managed care actions and the continued impact of acquisitions supported consolidated revenue growth of 8.6% over the prior year.

This growth was accomplished despite revenue headwinds associated with facilities divested in 2023. On a same facility basis, total revenue increased 14.2% in the third quarter, with case growth at 2.9%. Net revenue per case was 11.0% higher than last year, primarily driven by higher acuity procedures. There were no unusual events that affected the third quarters of both 2022 and 2023. Adjusted EBITDA was $105.5 million for the third quarter, giving us a margin of 15.7%, in line with our expectations of continued margin expansion. Inflationary pressures related to labor and supply costs have moderated this year, but we remain vigilant in monitoring these factors across our portfolio.

Consistent with prior quarters this year, the third quarter labor and supply costs are a lower percentage of revenue than the prior year. As we mentioned in prior comments, we have increased investments in facilities that are not consolidated, including both de novos and acquisitions. Because they are not consolidated, the earnings of these facilities are reflected in equity earnings of unconsolidated affiliates and management fee revenue, a component of revenue in our income statement. To provide some context on our non-consolidated activities, we have ownership interest in 23 facilities that are not consolidated. Revenue from these unconsolidated facilities grew 71% in the third quarter over last year, representing growth of over $66 million. This revenue growth is a combination of acquired minority interests and the value proposition we bring to these partnerships.

We benefit from this growth in two ways: management fees, which are based on revenue, and our share of the income generated at the facility. The Adjusted EBITDA contribution from the unconsolidated and managed-only facilities was $10.2 million in the third quarter, which is approximately 30% higher than last year. In addition to our existing facilities, we have 17 de novos in various stages of development, with 10 that are expected to open over the next 18 months. Based on our robust de novo pipeline and momentum, we would anticipate opening double-digit de novo facilities annually for the foreseeable future. The development costs for de novos are not material to the company. In the quarter, we incurred approximately $200,000 of development costs associated with de novos. Moving to cash flow and our balance sheet.

As we've noted in the past, we expect to produce at least $140 million of free cash flow in 2023. In the third quarter, we generated free cash flow of $63.2 million, and on a year-to-date basis, we have generated $91.4 million. We remain confident in the ability to meet our target of at least $140 million of free cash flow in 2023. Based on our current growth algorithm, we anticipate free cash flow to exceed $200 million annually by 2025. We ended the quarter with $236 million in consolidated cash and an untapped revolver of $545 million.

When combined with the free cash flow we are projecting, we believe our current and future liquidity position does well in this macroeconomic environment, while giving us flexibility to maintain our long-term acquisition posture of deploying at least $200 million per year for M&A. As a reminder, our corporate debt is less than $1.9 billion, with an average fixed interest rate of 6.7%, with no material debt maturing until 2026. We are continually reviewing our debt stack for opportunities to extend our maturities well past 2026, while minimizing the impact on our projected free cash flow. We are monitoring the rate environment and forward interest rate curve as we consider both factors for any potential refinancing and the ability to limit interest costs through an appropriate hedging strategy.

Our third quarter ratio of total net debt to EBITDA, as calculated under our credit agreement, was 4.1 times. With the earnings growth we expect, we are confident this ratio will continue to decline. Carrying the momentum of our third quarter results, we remain optimistic and confident about the company's growth and are raising our outlook for 2023 Adjusted EBITDA to a range of $436 million-$440 million, with the midpoint representing over 15% growth compared to 2022. Further, our outlook for consolidated revenue is approximately $2.75 billion, representing over 8% growth from 2022 and is inclusive of overcoming more than $100 million of divested revenue. As we've discussed previously, our revenue and Adjusted EBITDA guidance is impacted by the timing of acquisitions and divestitures.

We are currently in the midst of our planning process for 2024, but wanted to provide investors with some thoughts on the factors we are considering for our 2024 growth goals with our senior leadership team and board of directors. At this time, we do not foresee any material headwinds as we head into 2024.

We believe the consistent momentum of our business that we have been experiencing will continue in 2024. Specifically, we expect organic growth above our long-term growth algorithm, supported by continued surgical case migration from higher-cost settings and efficiency initiatives, leading to top-line growth and continued margin expansion. Our margin expansion reflects ongoing investments in procurement and revenue cycle, as well as the integration benefits from recent acquisitions and de novos. Additionally, our 2024 contracted managed care rates are already 90% negotiated, and we will continue to benefit from the compounding effect of physician recruiting as we enter 2024. Finally, our ongoing acquisition strategy, supported by a robust pipeline of potential acquisitions, combined with contributions from de novo facilities we expect to open in 2024, provide further tailwinds in support of our growth algorithm.

At this early stage in our process, we remain confident in our ability to deliver mid-teen Adjusted EBITDA growth. We look forward to providing greater visibility into our 2024 projections for revenue, Adjusted EBITDA, free cash flow, and capital deployment targets in a future presentation. With that, I'd like to turn the call back over to the operator for questions. Operator?

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now be conducting the Q&A session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to leave the question queue. For participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Kevin Fischbeck of Bank of America. Please go ahead.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Great, thank you. I guess, maybe to start off, the pricing number looked really strong in the quarter. Can you just remind us kind of where the actual core pricing is versus kind of the acuity benefits and payer mix shifts that might happen year-over-year? And was there anything unusual in the quarter on the revenue per case side?

Wayne DeVeydt (CEO)

Hey, Kevin, good morning. I'd start by saying, no, nothing unusual other than we continue to bias towards the higher acuity cases. As you saw in the prepared remarks, the total hips and joints done in our outpatient settings were up over 60% against the prior year backdrop, which, as you know, had strong growth that year as well. So, I'd put it more in the 50/50 bucket of how much is acuity mix impacting the revenue component, versus how much is really just the core growth and managed care rates that we're getting along the way.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Then, I guess in your prepared remarks, you guys made a comment that the consolidated cases were basically as expected, but the unconsolidated cases came in better than expected. Is there something behind that? Is there a point that you're making there about the, kind of the power of, you know, having maybe a three-way joint venture or syndication, or is there anything else to that?

Wayne DeVeydt (CEO)

Well, I think it's fair to say that part of the reason we've been biasing to this additional growth lever is we think it's an untapped opportunity for employed doctors that are part of systems. And it gives us a unique way of bringing kind of our chassis and our playbook to it. So, you know, I wouldn't say we're over-indexing on that, but I think ultimately we wanted our investors to understand the strategy's working out, and it's slightly better than we had expected so far. And we don't really see those trends diminishing at this point. I think the key thing is, as you know, Kevin, because they're not consolidated, those metrics do not end up in our same store either, in terms of the volume component.

And so ultimately, you know, just feel very good about how we're kind of running into the new year with the M&A pipeline, as well as with the same store metrics.

Eric Evans (CEO and Director)

Yeah, and Kevin, I'd just add to that difference, differential, I mean, we are pointing out the strong growth there, but part of that is, you know, we bring things on when they're new. We bring a lot of synergies, and so we expect there be kind of outsized growth early on. We've been pleased with how those have taken off, and certainly, it's a big part of the growth story.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

All right, great. Then maybe just last question. I appreciate the commentary on the professional fees. It seems to be a hot topic. Is there? Can you help just size that for us? Like, what was the professional fee spending in the quarter?

Eric Evans (CEO and Director)

Yeah. So I'll let Dave size that in a second. Just, just to readdress, kind of, you know, when you think about physician services, you know, in our business, again, because we're not a traditional acute care company, we're short-stay surgical, the only exposure we have is on anesthesia. We don't have hospitals. We don't have ER docs per se. So, we have exposure on anesthesia. We've had exposure for a number of years, but quite honestly, our side of care is a preferred side of care for anesthesiologists. When I lived in the traditional acute care world, I used ASCs and surgical facilities, short-stay surgical facilities, as a way to try to lower, subsidies or try to get a good deal with anesthesiologists. So we're in a preferred setting.

We have, you know, a few places where there's pressure, but it is, it is really immaterial. We talk about managing this. I mean, we're certainly proactively managing the pressures that anesthesiologists feel by helping with scheduling, getting more efficient, you know, being really proactive and being a good partner with them. But the size is, is immaterial. Dave, maybe you can give them just a rough size of the risk we see next year.

Dave Doherty (CFO)

Yeah, yeah, sure. So first off, and you can see this in our P&L, which is in our press release this morning. We'll give more details, obviously, in the Q. But in the quarter, just over $70 million of total professional fees we were recorded in there. And those professional fees, you know, include a number of different activities, including, you know, the medical supply costs that we have, the malpractice insurance, and all of those other things. The component that relates to anesthesia, which has been talked about a lot, most recently, of that is,

Dave Doherty (CFO)

... relatively small, like less than $10 million for the year that we look at. So inside the quarter was really small. And as we've kind of modeled out and looked towards next year, although it's still early and we're putting together the budget process, that variance that we're looking at is no more than $a few million. So easily something that we can absorb, as we go into it. I think one of the things, just to reiterate a point that Eric mentioned earlier, because we've gotten this question a couple of times, anesthesia has, you know, this pressure that you, that we cite on cost side and profitability for them has not impacted, in any way, our cases.

We've not had to cancel one case, due to anesthesia-related matters, this past year. So we don't believe that this is a problem area for us as we've seen elsewhere in the services industry.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

All right. Perfect. Thank you.

Eric Evans (CEO and Director)

Mm-hmm.

Wayne DeVeydt (CEO)

Thanks, Kevin.

Operator (participant)

The next question comes from Jason Cassorla of Citi. Please go ahead.

Jason Cassorla (Equity Analyst)

Great. Thanks. Good morning. I just wanted to go back to the same facility revenue per case in the quarter. Did that include any benefit from insurance proceeds related to cyber impact? And then I guess, you know, with that level of growth, it would imply perhaps a bit more margin expansion, just given the flow-through of rates to the bottom line. You said that 50% of that growth was related to acuity, but maybe can you just help on the pricing flow-through, and then, you know, the likely kind of margin offset that would come with the focus of higher acuity cases? Just any more color would be helpful. Thanks.

Wayne DeVeydt (CEO)

Yeah. So first, the short answer is no, the same store did not benefit from any unusual items and did not have any cyber recoveries in it. In terms of the margin expansion, I would say that we're actually very pleased because sequentially it's up 70 basis points. I understand you're-- probably the math you're applying. I think you'll see further expansion going into Q4. We did make more additional investments in the quarter. Anytime we see strength in the quarter, we're going to take advantage of that to make additional investments. And candidly, you know, our compensation structure is reflective of the fact that our team continues to outperform some of our expectations, and so there's additional accruals in the quarter related to bonus, et cetera.

But no concerns on our end, and I think you'll see margins expand not only in Q4, but you'll continue to see that expansion as we go into 2024.

Eric Evans (CEO and Director)

And Kevin, one point of a little additional clarification. I think Wayne answered that question 50/50. I, you know, I think he roughly right, probably more on the side of acuity than the rate, so I want to be clear on this. This is... You know, we have a really strong beat that's been based on really nice acuity growth this quarter. We've had some nice managed care rates, but, you know, I wouldn't say that half that 14 is managed care. So we, we've got some rates. We're certainly working on that, but the majority of this is finding and attracting the right high-end cases and driving into our facilities.

Jason Cassorla (Equity Analyst)

Great. Awesome. Thank you for the clarity. And then, just as a follow-up, I wanted to ask on capital deployment, I guess, relative to your $200 million plus for the redeployment of the divestiture activity target. I guess, given year-to-date spend at $135 million, and your comments on your pipeline, just curious on the timing of that spend. It seemed to slow a bit in the third quarter. Is that just kind of timing related? And I guess just broadly, any commentary or incremental commentary on the capital deployment environment would be helpful. Thanks.

Wayne DeVeydt (CEO)

Great. Great. Let me start by saying in the six years that this team has been together, the current pipeline of opportunity and what we have under LOI is greater than we've seen in any single year, and we don't see that slowing down as we head into the new year. Regarding timing, we actually anticipate with the over $200 million under LOI, that some of these will get closed in the fourth quarter, and still feel pretty confident about our targeted $200 million goal for the year. If it was to slip, we're really talking about slipping into the first half of next year, which we don't really see as a deterrent towards our long-term growth algorithm. But absolutely no concerns on our end.

We continue to apply appropriate due diligence on all facilities, and, you know, Eric and Dave continue to remind the teams that, you know, we don't manage to the quarter, we manage to the long-term growth algorithm. And so, we're not necessarily gonna accelerate a close, to achieve a near-term, you know, goal. But I, I would tell you no concerns at all on the, on the kind of run rate of $200+ million. And if anything, I would argue we're probably gonna jump out of the gate even stronger next year.

Jason Cassorla (Equity Analyst)

Great. Thank you.

Operator (participant)

Our next question comes from Whit Mayo of Leerink Partners. Please go ahead.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Thanks. Good morning. Dave, can you go back and maybe just unpack the comments on the managed care actions that you undertook in the quarter? I guess the corollary to this question is really just maybe an update on the revenue cycle initiatives, the focus on revenue conversion now that you're, I think, all in one clearinghouse. My sense is these numbers aren't small, so maybe just any update around those would be helpful. Thanks.

Eric Evans (CEO and Director)

Hey, good morning. I'm gonna jump into the managed care question. I'll turn it to Dave over revenue cycle. There was no specific managed care action in the quarter. I mean, other than our normal contracting, you know, we clearly continue to develop strong relationship with payers, explaining and using math to show them our value proposition. I think we're getting increased traction with that over time as they see the benefit of what's primarily an independent model, us and docs, the benefit we bring to them from a cost perspective. And so as Dave mentioned, you know, we do have 90% of that of our planned increases for next year already in place, contract-wise, but there's always negotiations happening there.

As we add new service lines and procedures, there's always a chance to go back and say, "Hey, we're gonna create a bunch more value for you. How do we work together for a win-win?" So I'm really, really proud of our managed care team. They've made a lot of gains, but I also think some of the gains they've made is being proactive in getting us set up to take on those higher acuity cases. And so, you know, some of this is just access to the right payers with the right incentives for physicians, and some of it is ongoing rate negotiation. But there was nothing particularly different in this quarter. With that, maybe talk about revenue cycle.

Wayne DeVeydt (CEO)

Yeah, maybe, maybe just one, one additional point or context as to why I said what I said, 90% in there. Like, we're in the middle of doing our, our budget process, and so Eric and I had the pleasure of talking to our board about kind of progress and our confidence that we have going into 2024.

Dave Doherty (CFO)

And some of what you see, as Eric was mentioning, managed care is an ongoing effort that we do, right? Day in and day out, our dedicated team kind of focuses on this. And what gives us some degree of confidence when you look at the contributions on the top line side, is how much work that team has done and contracted going into next year. So when we give guidance and as we give the visibility into 2024, our confidence is driven by the fact that we've already got 90% of, our contracting baked in this space. So, so that's, that's why it's there, and it is, again, when you go back to what we have, what we have built over the past several years, is a consistent plan, that allows us to have some degree of predictability to it.

I'm glad you asked on the revenue cycle front. We have talked about this in the past. Revenue cycle represents two opportunities for us. One is cash flow generation on a faster basis. It also allows us to get greater yield through our results. In rev cycle, it's a difficult job, as you know, in the healthcare services sector for us. You know, we deal with payers, you know, that are constantly trying to find the right way to move business into our facilities. And so we're always dealing with the managed care providers, making sure that we're following their protocols appropriately, and making sure that we do the right things on the front end to make sure that we decrease denials on the back end.

Then when we do have denials on the back end, that we're actively managing those in accordance with our contracts with the payers. When you do that properly, you get increased yield opportunities. We've done a pretty good job of that in the build that we have done over the years. We get to apply that logic every time we do an acquisition. So this is one of the values that we provide when we do M&A. So when we often talk about, you know, buying companies and then taking a turn off of those effective multiples in the second year and a half of ownership, part of that is applying our rev cycle approach, getting better yield and accelerating cash.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

That's helpful. One just follow-up. Can you just... Of the seven divestitures that you've made year to date, can you just maybe size kinda how you're tracking relative to that $100 million target? Thanks, guys.

Dave Doherty (CFO)

Yeah. So in the quarter, we estimate roughly $35 million plus or minus of revenue that we're jumping over this year from revenue that we incurred last year in the third quarter that we don't have this year from those seven acquisitions. So, yeah, we don't spike that out separately. We do that intentionally 'cause I think we're proud of the growth that we have. But that's the business that we would have disposed of earlier this year.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Thanks, appreciate it.

Operator (participant)

Our next question comes from Brian Tanquilut of Jefferies. Please go ahead.

Brian Tanquilut (Healthcare Services Senior Equity Analyst)

Hey, good morning, guys, and congrats on the quarter. Maybe Wayne or Eric, as I think about your comments on GLPs, maybe if you can just walk us through maybe a little more detail on how you think that is a positive, and if there's a near-term benefit from procedures getting done just because people are healthier. Just, you know, maybe if you can help us think through the modeling of that, impact, at least near term and medium term. Thank you.

Eric Evans (CEO and Director)

Hey, Brian, thanks for the question. And, look, there's not a ton of information out there, right? We have done our research to the best we can based on, you know, what we think the uptake could be, what the potential impact could be. There are puts and takes, as you can imagine. You know, there are patients that are ineligible for surgery today because of weight, that will become eligible. There are patients who are overweight, who might lose weight and become more active. And when you look at the types of procedures we do, which tend to lead towards things that are less affected by comorbidities, if you look at the overall patients we have, for us, you know, we see definitely impacts of people that will become eligible.

We understand there might be some people who are healthier longer, but they also become more active. We have a lot of stuff that, you know, is based on activity and wear and tear. We think about things like GI, doesn't affected by this in particular, as far as risk go, from what we can tell. Ophthalmology, obviously, a lot of that is, some of that can be diet-related, a lot of it's not. We look at the pros and cons. We looked at the relative size of the market, and the, the reality for us is we don't see this as material to our business.

So maybe there'll be data that comes out in the future that changes that opinion, but at this point, Brian, like, if anything, it allows more patients who have fewer comorbidities to be taken care of in our sites of service. We think that's a net benefit. But we still see the relative impact on an overall population of procedures as being relatively small. So that's as much as we can tell you right now, and I think that's it. If anybody's telling you more than that, they have data that I've not seen. So I think that's kinda where we all sit.

Brian Tanquilut (Healthcare Services Senior Equity Analyst)

No, appreciate that. And then maybe, Dave, as I think about your swaps, just, I know you said fixed rate in your debt, just any color you can share on your swaps, and then maybe, also how we should be thinking about funding the $200 million of deals in the pipeline.

Dave Doherty (CFO)

Yeah, yeah. I, I appreciate you asking this question, because we obviously do look at this, and we're aware of how this is kind of viewed from the outside. So let me, let me start with free cash flow generation. I mentioned it earlier in my prepared remarks, but, hopefully, the results that we printed this morning demonstrate the confidence that we have been having all year in our ability to generate free cash flow this year of north of $140 million. And I can assure you, our modeling still shows us kind of progressing nicely up to $200 million+ of free cash flow in 2025.

So, you know, from a cash flow generation, you know, get to that year, and you can see that the business is generating sufficient free cash flow to support its operations. So what we're really talking about here from an exposure area is the gap year of 2024.

Eric Evans (CEO and Director)

... you know, where, where you're gonna be generating between $140 million and $200 million of free cash flow. Again, we're not gonna give that guidance just yet. We'll give it in upcoming calls. And that's when you look at our balance sheet, and our balance sheet right now, you know, sits with $236 million of cash and an untapped revolver of nearly $550 million. So when management says, and when I say that, you know, we have confidence we'll be able to support the growth that we've committed to of at least $250-$200 million of capital deployment, that's why we have that confidence.

Now we do, to your point, we do have a debt stack that we look at, that there's no material debt coming due until 2026. To your point, we have interest rate swaps and caps in place, mostly swaps at this point, that fix our current term loan variable rate to just under 6%. I think we're at 5.9% effective interest rate. We'll have that all the way through March of 2025. And then at that point in time, obviously, I hope that we have done a refinancing opportunity, or we'll be close to that at that point in time.

So that we'll time the market, you know, in the most favorable environment that we can see, and then we'll go out to the market and, of course, reestablish our hedging strategy in what's gonna make sense to us. I think what we have valued, and I think our investors have valued, is the predictability of our free cash flow. So a hedging strategy will always be important to us. In today's environment, that means we have to look at the forward interest rate curve and see what kinda makes sense for us. But as we sit here today, fully hedged in a position of strength because of that predictability that we have over the next several years.

Brian Tanquilut (Healthcare Services Senior Equity Analyst)

Appreciate that. Hey, Wayne, maybe one more question, if I may. I know we've been asked a lot about site neutrality. How are you thinking about, you know, the proposals that are out there, whether it's from MedPAC or whatever is going around, in D.C. right now? Thank you.

Wayne DeVeydt (CEO)

Hey, Brian, thanks for the question. I'm gonna let Eric actually expand on this, since he just provided the board an update, along with some of our, some of our long-term outlook views. The short answer is, we actually think this is a net positive to us. But Eric, maybe expand on, on kind of what we, what we disclosed to the board and, and on the optimism we have.

Eric Evans (CEO and Director)

Yeah, Brian, let me, let me start with, you know, the whole thesis of our business is the savings we create in the system by driving patient care to the right side of care, right? That is, that is absolutely why this company, I think, exists. It's why we create a lot of value. It's why we're part of the answer in healthcare. So for us, you know, any legislation that actually encourages patients to get their care done in the right place is something we fully support. So let me set it up there. Let me secondly say, we don't own and operate traditional acute care hospitals, right? We have six surgical hospitals that do take care of extended stay scheduled patients. Many of them don't have ERs, right?

So you think about a given market and how we think about the world, we like the opportunity in a given specialty, whether that's orthopedics or cardiology, to provide the whole spectrum of care to our physician partners. So if you think about our surgical facilities, where that maybe something would move to an ASC, we're already doing that. You look at our surgical hospitals, we have ASC strategies. Many of them have ASCs, and many of them multiple ASCs. So the idea is, we think it's a unique opportunity in our short stay surgical facilities. Again, very different than traditional acute care. They're purpose-built for higher acuity scheduled procedures. As we think about that world, we love that opportunity with our partners to cover the entire gamut of acuity in a value-based way that allows the patient go to the right side of care.

So that's, that's addressing any risk we might have. The bigger, the bigger issue is our bigger catchment on the ASC side. You know, we have 130+ today. We're adding a bunch of de novos. As you know, we see that number growing on its way to 200 over the next few years. All of those sites benefit from anybody leaving the HOPD hospital site. So we, we feel like we're very well positioned and been proactive on moving into the right side of care in markets where we have the higher acuity capabilities. And in the other cases, we see that as a net positive. So it's, again, core to our business. We believe in it. We're excited about it. We think it's the right answer for the health system.

And so, you know, net-net, you know, we think definitely not a risk, and we really think there's some opportunity there. Dave, maybe you wanna add something? Yeah. So, you know, of course, you can expect that we're tracking what's going on up in D.C., you know, and kind of following the, the conversation. As Eric mentioned, this is, this is the company's thesis, so, so it logically makes sense for us. As we've looked at the closest proposal that we've kinda seen with some degree of specificity, you know, there are, there's this concept that stuff might move out of our larger acuity centers into our ASC environments.

If you take just a bearish case and assume that, you know, those types of cases in the environment that they've kinda set up, so again, very worst-case scenario, in 2026 and beyond, what we're talking about in our calculations is less than 1% of our business. And I say, when you look at just the bearish case, that's purely the bearish case, right? Assuming that there is no further improvement opportunities inside our ASCs, and no replacement of those cases outside of our larger facilities, which, you know, is unrealistic. You know, this company, as you know, is very strategically focused. And if you have an effective date of 2026 or beyond, overcoming a 1% headwind is not something that intimidates us in any way.

Brian Tanquilut (Healthcare Services Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, in the interest of time, we ask that you please limit yourselves to two questions. Thank you. Our next question comes from Sarah James of Cantor Fitzgerald. Please go ahead.

Sarah James (Managing Director and Healthcare Services Equity Analyst)

Thank you. I just wanted to follow up on the train of thought from that last question. So as you think about where you're investing to capitalize on, on the new regulatory environment, does that have a link to your case mix? Because I noticed, you know, the 40% of hiring that's coming in in the MSK space is above your current case mix. So do you see evolving into that being a more dominant part of your business?

Eric Evans (CEO and Director)

Yeah, Sarah, great question. I mean, look, I think we have been talking for quite some time that we are focused on growing in areas... First of all, higher acuity areas in our ASCs and surgical facilities, it is the highest contribution dollar per minute, and so it makes logical sense we're focused there. We also know it's what matters most to the health system, to payers, to CMS. The amount of savings we can drive is incredible for those procedures, often $10,000+ a case. And that's why, yeah, absolutely, you should see that mix continue to change. Now, that doesn't take away the fact we love our GI business, we love our ophthalmology business. They're great businesses. But when you think about our ASC, so if you think about our de novos, for example, almost all of them are ortho or cardio-based.

So, like, we are very, very focused on moving where we can add the most value, and that certainly provides protection against lower acuity stuff that maybe does change spaces. And look, you know, we don't talk about that, but on the lower end of things, things leave to our facilities, and that's okay because it's the right answer overall. I would like to point out, too, you know, the recent CMS announcement, you know, they added shoulders and ankles, in particular, total shoulders. You know, we were really pleased during COVID that we had some facilities that were accepted and able to do total shoulders. We had fantastic clinical results. We saved patients a lot of money. Initially, they weren't included on coming off the inpatient-only list.

We were certainly pleased to see that, and we see those kind of opportunities to continue to push higher acuity patients safely into our space with a better experience, better outcomes, and, you know, really just ultimately the best answer for the healthcare system as a tremendous opportunity. One little stat I'd throw out, too, going back to this site transition, it's still a 3:1, the number of joints, total joints that are in the HOPD versus the ASC environment. So we're in the early innings of a lot of this stuff. You will see us continue to change that mix to higher acuity over time, just because that's where the puck's moving.

Sarah James (Managing Director and Healthcare Services Equity Analyst)

Great. And then, can you provide any color on your case mix, volume by specialty this quarter?

Wayne DeVeydt (CEO)

Yeah, Dave's, Dave's just looking at it.

Sarah James (Managing Director and Healthcare Services Equity Analyst)

Sorry about that.

Wayne DeVeydt (CEO)

Yeah, Dave's looking at it now, just so we can give you the exact specifications.

Eric Evans (CEO and Director)

Yeah, and this information will be in our queue a little bit later today, just so you have it. So, the nearly 3% same facility growth that we saw in cases this year, in the quarter, is our top three kind of target areas, ophthalmology, GI, and MSK, particularly the ortho component of MSK, are all north of 4%, same facility growth. So those are all growing very nicely for us. It's not gonna change the overall mix of the business, but that's where you can see that higher acuity come through in our same facility calculations.

But I think it's fair to say, much like we've seen all year, Sarah, that you know, our growth engine is kind of running along all of our specialties, so we're seeing kind of nice growth in every single one of those areas.

Sarah James (Managing Director and Healthcare Services Equity Analyst)

Yeah. Thank you.

Eric Evans (CEO and Director)

Yep.

Operator (participant)

Our next question comes from Ann Hynes of Mizuho Securities. Please go ahead.

Ann Hynes (Managing Director and Senior Equity Research Analyst)

Hi, good morning. In the past, you have talked about your revenue algorithm as 2%-3% case growth, 2%-3% revenue per case growth. But I feel like that's a little stale given, especially this quarter, with revenue per case up 11%. How should we think about that going forward, just given the mix of higher acuities changing? That would be my first question. And my second question is just on Q4 seasonality. The EBITDA ramp going into Q4 seems like a little higher than normal. Is there anything that you would call out for Q4? That would be great. Thanks.

Wayne DeVeydt (CEO)

Ann, good morning. I'll take the first question, then I'll have Dave talk about seasonality.

Eric Evans (CEO and Director)

The growth algorithm.

Wayne DeVeydt (CEO)

Yeah, on the growth algorithm, let me, let me remind everybody that, the three components of the growth algorithm, I'm just gonna focus on the one that you've highlighted, which is the 2%-3% volume and then the 2%-3% rate. And, and as that's starting to become somewhat stale in light of what we continue to produce, I'll start by answering, this way, which is we fully expect going into next year to be north of the high end of that range, right? Which is clearly 6%. We have no indication that, that should slow. So I think that's a fair question you're asking, and it appears that we ought to be able to outperform that on a same-store basis.

We continue to target the 2%-3% on volume because we want the team to be focused on the right procedures and the high acuity procedures. And so if you were to look at it last year, you know, we had a very strong year last year with 3.8% volume growth on a year-to-date basis. You look at it this year, we're at 3.5% on top of that strong growth last year. So I still think that 2-3 is the right, you know, algorithm target, but we would bias towards the high end of that range, if not slightly better. Clearly, where you're gonna see this differentiated approach is gonna be on the 2-3 that we talk about for the revenue component.

I think a combination of the acuity mix we were going after, the combination of the new rev cycle initiatives that Dave's put forward, et cetera, yeah, we clearly will be north of that. And again, to give you an exact percentage, we don't want to get ahead of our board as the team is coming forward with the final plan for next year, but all in, we should easily exceed our 6% top-line algorithm that we've laid out for you.

Eric Evans (CEO and Director)

Yeah. And, Ann, let me, let me just address that seasonality question because I've and maybe you can show me the numbers that you're looking at. But if you take the midpoint of our guidance, it what would imply is our fourth quarter results should come in, somewhere around, you know, the low thirties, around 32% of our full year guidance at that midpoint. That's consistent with what we have seen in the past... you know, with the exception of the COVID year, if you go back to 2019, 2018, you go back to last year, you know, we have a higher proportion of our business in the fourth quarter.

It's you know, as a CFO, that's what makes it you know, I always sweat Christmas 'cause I'm trying to see how those cases come in, but that's all a result of you know, our patients kind of chasing after the deductible before it resets at the beginning of the year. So you see a higher preponderance of commercial business and higher volume. Both of those things typically come through you know, starting in late November and going all the way through the end of the year, and that's just how the business kinda runs. It's predictable enough for us to kinda put that in there, but nonetheless, it still does... it contributes to that higher average growth rate that you see inside the fourth quarter.

Ann Hynes (Managing Director and Senior Equity Research Analyst)

All right, great. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and then one to place yourself in the question queue. Our next question comes from Bill Sutherland of The Benchmark Company. Please go ahead.

Bill Sutherland (Managing Director and Senior Equity Analyst)

Good morning, guys. Most of mine have been asked, but hey, Eric, I'm kinda curious on the non-consolidated deals. Are you... I mean, directionally, is it moving in the same direction as the consolidated deals in terms of the mix of specialty? And second, add-on is, are you all looking a little increasingly at multi-specialty centers as you particularly do three-way deals?

Eric Evans (CEO and Director)

Yeah, so great, great questions. Let me start with the first question. So the non-consolidated deals are actually even higher acuity in totality than our current book of business, so we've used it as a way to expand into those procedures that matter most. So the answer there is, from a directional mix perspective, that's true. We've also, like I said, been very pleased with the early growth we're driving in those facilities. Both proves our value, and it also is taking advantage of the synergies we bring to those facilities. So, you know, as we've talked about before, we, for forgetting accounting for a second, we're gonna make the best earnings decision for the company and then figure out the best way to talk to you guys about it. So that's, that's been something we've been very, very pleased with overall.

Your second question? Sorry.

Bill Sutherland (Managing Director and Senior Equity Analyst)

Uh, multi-specialty.

Eric Evans (CEO and Director)

It was around multi-specialty. Oh, multi-specialty. Oh, yeah, so multi-specialty, so you should know the vast majority of our ASCs today are multi-specialty, and we do still have some single specialty ASCs in both ophthalmology and GI. But yeah, the vast majority are multi-specialty. Wherever we can, we turn the single specialty into multi-specialty. And if you look forward, I would say what's interesting about our de novos, I think they will ultimately be multi-specialty. Many of them are ortho-focused. What that allows you, though, is bigger rooms. You're building for more complex cases, which does allow you to fill in any gaps with other specialties over time.

So you might see some of those come out of the gate, really, really specialized and taking off on those areas, but we see opportunities there over time to add service lines like we always do. Our bias is definitely towards multi-specialty because it allows us to use all of our different growth tactics and levers. It allows us to really, really leverage our recruitment team, and so, you know, over time, we would expect that continues to be the direction.

Bill Sutherland (Managing Director and Senior Equity Analyst)

And so your de novos are more tilted toward MSK than cardio?

Eric Evans (CEO and Director)

Yes. They're more tilted towards MSK than anything else, for sure. And like I said, we're still in the early innings of that. We're excited about that. There is obviously some cardio there, and look, cardio is one of those ones that it's gonna be, again, a big growth number over the next several years on a small end. You know, guessing when it reaches its full potential is a little bit like guessing when orthopedics finally came over the hump, but we do expect to continue to see that take off in the coming years.

Bill Sutherland (Managing Director and Senior Equity Analyst)

Okay, great. Thanks very much.

Eric Evans (CEO and Director)

Of course.

Operator (participant)

Our final question comes from Ben Hendrix of RBC Capital Markets. Please go ahead.

Ben Hendrix (Healthcare Services Equity Research Analyst)

Hey, thank you. Just a quick follow-up question. Most of my questions have been answered, but you appreciate the commentary, the early commentary on 2024 and the commentary about the strong rate growth being 50/50 core growth and mix, with maybe a little bit of bias towards acuity. But any thoughts on how that migrates into your early 2024 commentary? Thanks.

Eric Evans (CEO and Director)

Yeah. So it's too early, Ben, for us to talk about 2024. So all we're gonna tell you at this stage is that we are, we do see our growth algorithm continuing. And again, it, you know, we've talked about this theme of consistency, right? That is what we wanna be known for. It is also just generally the way this business operates, right? We generally do not have kind of unusual events that that cause spikes one way or another. So there's a degree of predictability that you can assume from what we have accomplished so far this year, and that ought to continue into next year. But at this stage, I don't think we're going to give... I know we're not going to give guidance on 2024.

We just gotta finish doing the work and then making sure we get through our board before we talk publicly about that.

Wayne DeVeydt (CEO)

Ben, what I would reiterate, and we continue to say this: We're a mid-teens growth company. That's the expectation. We have the opportunity to do that. We don't see that changing. There's nothing. Well, sort of with, as I said in my prepared remarks, having sat in this seat for four years, you know, I've got more opportunities and more levers and more tailwinds than I've ever had. And so when we talk about that long-term mid-teen growth, we've got as much confidence in that as we've ever had. More, more so, and I'm super excited going into 2024. We'll share more of that with you, obviously, in the coming months.

Ben Hendrix (Healthcare Services Equity Research Analyst)

I appreciate that. Just very last one, and apologies if I missed it. Within that double-digit de novo growth, any thoughts on how the mix of that pans out between kinda your consolidated, non-consolidated equity method mix going forward? Thanks.

Eric Evans (CEO and Director)

Yeah. A lot of the de novos, especially early on, are gonna be non-consolidated. So some of them will be non-consolidated because we have a health system partner, which has unique advantages and, you know, probably won't give us the opportunity to buy up. Some of them are us and docs, where we will have distinct opportunities to buy up. And so, but initially, those will be non-consolidated facilities in general.

Ben Hendrix (Healthcare Services Equity Research Analyst)

Thanks.

Eric Evans (CEO and Director)

Yep, absolutely.

Operator (participant)

Thank you. Ladies and gentlemen, it appears we've reached the end of the Q&A session. I will now hand over to management for closing remarks.

Eric Evans (CEO and Director)

Thank you, and I wanna appreciate, really appreciate everyone's engagement today. Before we conclude, I would like to reiterate just how proud I am of our team of professionals and surgeon partners who work so closely together to deliver on our mission, which is to enhance patient quality of life through partnership. Their work and contributions allow us to deliver consistent and predictable results that we talked about today, and they also support a sustained growth for all of our stakeholders and continue to serve our communities with the highest clinical care in low-cost settings, with the convenience and professionalism our facilities are known for. Thank you so much for joining our call today, and I hope you have a great day. Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.