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Surgery Partners (SGRY)

SGRY Q3 2024: 9% Same-Facility Growth, Rising M&A Costs Pressure FCF

Reported on Nov 12, 2024 (Before Market Open)
Pre-Earnings Price$31.43Last close (Nov 11, 2024)
Post-Earnings Price$28.07Open (Nov 12, 2024)
Price Change
$-3.36(-10.69%)
  • Strong Organic Growth: Management highlighted 9% same-facility net revenue growth year-to-date and a blend of rate and volume improvements that exceeded their long-term algorithm, suggesting resilient underlying business performance.
  • Robust Physician Recruitment: The company is experiencing record physician recruitment with over 230 new physicians in the quarter and a strong compounding effect in subsequent years, positioning the business for sustainable growth.
  • Strategic Expansion via M&A and De Novo Launches: The firm is actively deploying capital on select high-acuity acquisitions and de novo launches—such as the Chicago market deal and initiatives in cardiac and orthopedics—to drive margin expansion and long-term revenue growth.
  • Increased M&A-related costs: Management indicated that current capital deployment, integration, and transaction costs are significantly higher—over 2x the historical norm—which could pressure free cash flow and overall margins in the near term.
  • Operational vulnerability to adverse weather: The hurricanes impacted cash collections and scheduling at some facilities, signaling that weather-related disruptions, even if marginal now, could pose further risks to operational consistency.
  • Regulatory uncertainty: Questions on the Medicare ASC payment rule and potential future regulatory changes highlight a risk that shifts in policy—especially under a different administration—could adversely impact revenue mix and margins.
  1. Free Cash Flow Details
    Q: What drove Q3 free cash flow?
    A: Management explained that $65 million in operating cash flow was impacted by variable transaction costs and working capital timing, with expectations of improvement in later quarters.

  2. Free Cash Flow Clarification
    Q: Is the $140–$160M free cash target achievable?
    A: They clarified that heightened M&A costs and changing transaction timing have made traditional free cash targets less reflective, shifting focus away from the static $140–$160M figure.

  3. Free Cash Flow Threshold
    Q: What free cash level supports self-funded growth?
    A: The team remains confident in their liquidity and balance sheet strength, though they did not commit to a fixed threshold beyond $200 million.

  4. M&A Pipeline
    Q: What is the status of the M&A pipeline?
    A: Management highlighted an opportunistic approach with robust capital deployment for high-acuity growth, underscoring a strong and active M&A pipeline.

  5. Buy-Up Opportunity
    Q: Any changes in physician buy-up behavior?
    A: They noted that buy-up opportunities remain opportunistic and are balanced with physician commitment, thus not significantly altering their revenue modeling.

  6. De Novo Strategy
    Q: What progress is seen in de novo launches?
    A: The company has opened 17 de novo facilities and expects to maintain a pipeline of about 10 per year, favoring minority interest investments for attractive economics.

  7. Hospital Strategy
    Q: How do surgical hospitals fit into the strategy?
    A: Management differentiates surgical hospitals as elective-focused assets forming the ecosystem that underpins broader ASC growth and enhanced physician partnerships.

  8. Cardio Procedures
    Q: What are expectations for cardio procedure growth?
    A: They are optimistic about increasing cardio procedures like EP and rhythm management, with 70% of facilities already equipped to support these services.

  9. Volume vs Pricing Impact
    Q: How do volume and pricing influence earnings?
    A: Management noted that 4.2% same-facility revenue growth reflects a blend of volume improvements and modest rate pressures driven by calendar effects.

  10. Medicaid/Self-Pay Impact
    Q: Are Medicaid/self-pay pressures affecting volumes?
    A: They reported negligible impact from Medicaid and self-pay dynamics, as their elective procedure model continues to drive consistent growth.

  11. Supply Chain Impact
    Q: Did supply shortages affect operations?
    A: Management quickly addressed supply chain issues, such as IV bag shortages, ensuring no case cancellations and minimal operational disruption.

  12. Hurricane Collection Impact
    Q: How did hurricanes affect collections?
    A: A recent hurricane caused a marginal delay in collections and billing timing in affected areas, with expectations for normalization in upcoming quarters.

  13. Same-Store Growth Outlook
    Q: What are the same-store growth expectations?
    A: The company reported nearly 9% year-to-date same-facility growth and expects continued performance above their long-term targets.

  14. G&A Expense
    Q: Why did G&A expenses drop sharply?
    A: The sequential drop of nearly 30% in G&A was due to normalization after a prior stock-based compensation adjustment, aligning expenses with expectations.

  15. D&A Expense Increase
    Q: What drove the $15M D&A increase?
    A: The rise is mainly attributed to new asset integrations, including contributions from a $220M acquisition over the past years.

  16. Medicare ASC Rule
    Q: How have Medicare ASC rule changes affected the business?
    A: Management expressed satisfaction with the Medicare update, noting limited procedural list changes and ample growth opportunities within the current framework.

  17. Exchange Exposure
    Q: What is the company’s exposure to health exchanges?
    A: They confirmed minimal exposure to exchanges, maintaining focus on elective procedures within primarily Medicare and commercial segments.

  18. Physician Recruitment Maturation
    Q: How quickly do new physicians mature on the platform?
    A: Management highlighted that new recruits tend to double their revenue contribution in the second year, reflecting fast and compounding growth across cohorts.

  19. Physician Recruitment Outlook
    Q: What is the long-term trend in physician recruitment?
    A: The long-term outlook remains stable as independent physicians increasingly prefer this model for efficiency and scheduling benefits, supporting sustained recruitment momentum.

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