Surgery Partners, Inc. (NASDAQ:SGRY) Q4 2023 Earnings Call Transcript
Surgery Partners, Inc. (NASDAQ:SGRY) Q4 2023 Earnings Call Transcript February 26, 2024
Surgery Partners, Inc. beats earnings expectations. Reported EPS is $0.44, expectations were $0.37. Surgery Partners, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Surgery Partners Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dave Doherty, Chief Financial Officer of Surgery Partners. Thank you. You may begin.
Dave Doherty: Good morning. My name is Dave Doherty, CFO of Surgery Partners. I'm joined today by Eric Evans, CEO, and Wayne DeVeydt, Executive Chairman. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements. These risk factors are described in this morning's press release and the reports we filed with the SEC, each of which are available on our website, surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
These measures are reconciled to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Wayne. Wayne?
Wayne DeVeydt: Thank you, Dave. Good morning, and thank you all for joining us today. My remarks this morning will focus on our full year 2023 results and the positive catalysts we see as we head into 2024. I'll then turn the call over to Eric to provide further insights into our operating environment, along with details for the quarter. Finally, Dave will conclude with additional color on the quarter and an updated view related to the strength of our balance sheet and full year guidance associated with calendar year 2024. Starting with our 2023 results, we are extremely pleased with substantial progress we achieved related to our strategic initiatives and how these initiatives further catalyze our growth engine as we enter into 2024.
Specifically, our growth algorithm continued to deliver mid-teens growth with full year adjusted EBITDA exceeding $438 million, representing 15% growth over the previous year. Despite the macro headwinds faced by our industry over the past four years, including the inflationary impact on labor and supply costs and the global pandemic, the company has grown adjusted EBITDA at a compound annual growth rate of over 14% per annum and expanded margins by 210 basis points. These headwinds have slowly abated throughout 2023. Digging deeper into our results. The combination of our consolidated and unconsolidated facilities performed approximately 707,000 cases in 2023, 4% more than 2022, with all specialties growing in line or in excess of our expectations.
When combined with our targeted increased acuity and contributions from recent acquisitions, net revenue grew 8% to $2.74 billion, inclusive of approximately $100 million of revenue divested early in the year, and adjusted EBITDA margins improved by 100 basis points, reflecting our cost discipline, acuity mix and enhanced rates. We anticipate our 2023 cost initiatives and pricing to represent tailwinds for 2024 as we continue to recognize the run rate benefits associated with our scale. Our 2023 growth was balanced with same-facility revenue growing more than 11%, representing case volume of approximately 4% and rate improvement of 7%, driven by acuity mix and enhanced managed care rates. Rounding out our growth story, we continued our disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples.
In 2023, we deployed approximately $165 million associated with 15 transactions at an aggregate sub-8 times multiple on a pre-synergized basis. While this number is below our targeted goal of at least $200 million per year, we also closed an additional $60 million in transactions in early January that we had anticipated closing in the fourth quarter. The timing of our acquisitions had a nominal impact on our 2023 results, as Dave will discuss, and serve as a tailwind to 2024 earnings. Our business development team continues to manage a robust pipeline of attractive opportunities and we remain committed to deploying at least $200 million annually. As of this morning's call, our team has a strong pipeline of transactions under LOI and we continue to source new deals.
Similar to 2023, the timing of acquisitions and related activity can be difficult to predict and we continue to use a mid-year convention when providing our outlook for 2024. All in, we are pleased with the balanced approach to growth with all pillars of our long-term growth algorithm either meeting or exceeding our expectation. Before I turn the call over to Eric, I want to highlight some additional accomplishments related to our balance sheet. The company was able to effectively refinance our term loan late in the year at favorable terms and pricing, extending the maturity on the majority of our outstanding debt to 2030. Associated with this refinancing with support from our banking syndicate, we were also able to increase our revolving credit facility to $700 million, reflecting the continued strength of our business model and confidence in our growth algorithm.
Dave will elaborate further, but with this new term loan, our credit agreement defined leverage was 3.5 times at the end of the year. Together with my fellow Board members, we are encouraged by the continued focus of this management team to capture the benefits of the strong industry- and company-specific tailwinds. Based on the recently completed 2024 budgeting process, we expect net revenue, adjusted EBITDA and margin growth in line with our long-term growth algorithm. Specifically, we are providing initial guidance for net revenue of at least $3 billion and are reaffirming our previously provided adjusted EBITDA of greater than $495 million. We strive to provide you with guidance that balances our optimism for the company's growth with an appropriate amount of conservatism.
We look forward to updating you on our progress as the year unfolds. With that, let me turn the call over to Eric to highlight some of our operational initiatives, industry trends and recent investment activities. Eric?
Eric Evans: Thanks, Wayne, and good morning, everyone. I will echo Wayne's pride in results for 2023 and our initial outlook for 2024. Importantly for our investors and per my past comments, our performance remains consistent and predictable. Our unique partnership model and our approach to enabling our physician partners' independence and strong community reputation allows us to naturally benefit from the continued side-of-care shift to our safe, high-quality and cost-effective facilities. We work every day to bring the benefits of a professional, scaled management company, while keeping the invaluable local feeling connection that differentiate our surgical facilities. This approach preserves the strong reputation our partners have earned, allowing them to focus on their patients, knowing their preferences and input will remain an integral part of the facility they help build.
Together, our partners win, our payers win, and most importantly, our patients get the best care possible for their surgical care needs. When this happens, we deliver consistent high-quality results as we have done over the past four years, despite managing through a global pandemic and a challenging inflationary macro environment. As we finish 2023 and begin 2024, let me provide some highlights. Our organic growth initiatives translated into a strong full year 2023 top-line same-facility growth of just over 11%. Our same-facility cases grew 3.9% in 2023 and rates grew 7.1%. As we've consistently demonstrated, the rate improvements we are seeing in our existing facilities are benefiting from the strategic focus on recruiting physicians specializing in higher acuity procedures, such as total joints.
We now perform orthopedic procedures in over 70% of our short-stay surgical facilities and total joint procedures in over 35% of our ASCs. In our ASC facilities alone, we've seen a 50% increase in total joint procedures in 2023, which is a contributing factor in our same-facility rate growth. As recent acquisitions and de novos are fully integrated into our portfolio, the majority of which are orthopedic based. We expect to see this rate improvement remain at or above our long-term growth assumptions in 2024. Net revenue of $2.74 billion grew 8% in 2023, with our organic same-facility growth, de novos and consolidating acquisitions combining to overcome the impact of divestitures. In addition, in 2023, nearly half of our acquisitions were in facilities that do not consolidate under accounting rules, but generate significant revenue on a deconsolidated basis.
Revenue growth in our non-consolidated entities exceeded 60% in 2023 as compared to the prior year, and we expect continued growth in 2024. Our underlying growth story remains consistent, and we continue to position our portfolio of assets to earn market share in each of our core specialties. Moving to our physician recruiting efforts. Our recruiting team had another banner year of new recruits with an increased focus on physicians that perform MSK-related procedures. Their efforts are a core competency, helping our facilities create long-term value by recruiting physicians that are interested in a long-term relationship with our facilities and those that bring strategically important capabilities to our portfolio. We added nearly 700 new physicians in 2023 across all specialties and the average net revenue per case of these recruited physicians is 27% higher than those physicians recruited in the prior year and 44% higher than the 2021 recruiting class.
Based on our experience, there is a compounding multi-year growth factor that recently recruited physicians bring, giving us increased confidence in our 2024 growth. As you know, we are in the early innings regarding migration total joints into the highest-value settings, our short-stay surgical facilities. Such cases initially started with the transition of total knees in 2020 and total hips in 2021. Since being removed from the in-patient-only list, these procedures have experienced a three year CAGR of 77%. We do not see this growth slowing nor are we seeing cases returning to the in-patient setting. In 2024, we're working with our orthopedic surgeons who are excited to bring additional joint programs to our ASCs with new focus on Medicare total shoulder and ankle surgeries that are now permitted to be done in an ASC setting for the first time.
These procedures have been done safely in our ASCs for commercial patients for a number of years and we're excited about the growth opportunities in both the near and future term as additional procedures continue to be removed from the in-patient-only list. Moving to the business development front. We are excited about our fast-growing de novo portfolio, of which eight opened in 2023 and 12 are syndicated and currently under development, scheduled for openings in 2024 and early 2025. We remain selective in partnership opportunities with other health systems. While multiple opportunities exist, we are focused on forming long-term highly-aligned partnerships with like-minded organizations that deliver high quality at a sustainable cost to the system and are accretive to our earnings.
Last week, we announced a partnership with Parkview Health, a premier community-based health system, as we look to expand our capabilities in my home state of Indiana. This partnership joins similar partnerships we announced last year as we accelerate our de novo capabilities with like-minded partners who will share in the development efforts with us. In a similar vein, our integration with Intermountain Health's managed-only facilities in Utah is progressing as planned, and we are actively working with them on syndicated de novos. Although these won't be a material contributor to our 2024 growth, the long-term prospects are incredibly attractive. As we expand our focus on de novo opportunities, we are positioning our team to manage at least 10 de novo centers in development annually.
In addition to our de novo development, as Wayne mentioned, we deployed approximately $225 million on 16 transactions in the past 13 months. These transactions were bought at attractive multiples, averaging less than 8 times historical earnings. We continue to rapidly integrate our acquisitions into core 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, which will be in addition to the $60 million deployed in January of this year. In closing, I'm proud of our management team and our many talented physician partners and colleagues for effectively managing through inflationary labor and supply pressures over the past few years.
Additionally, we have effectively managed challenges related to anesthesia costs, which, as a reminder, is not a material expense within our structure. With inflationary pressures abating, coupled with how well our teams are effectively executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle and operations, we are confident that we will achieve our 2024 goals. I've 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 is positioned to deliver industry-leading growth associated with these tailwinds. This, 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 EBITDA growth.
With that, I will now turn the call over to Dave Doherty to provide additional color on our financial results as well as the 2024 outlook. Dave?
Dave Doherty: Thanks, Eric. I will first talk about our 2023 financial results and liquidity before providing detail on our outlook for 2024. Starting with the top-line. We performed nearly 606,000 surgical cases in our consolidated facilities and over 153,000 in the fourth quarter alone. On a same-facility basis, we grew cases 1.4% in the quarter and 3.9% for the full year. This marks the 12th consecutive quarter of same facility case growth and the third consecutive year this growth has been above our long-term target growth rate. The combined case growth in higher acuity specialties, specific managed care actions and the continued impact of acquisitions supported consolidated revenue growth of 4% in the fourth quarter and 8% for the year, inclusive of approximately $100 million of revenue headwinds associated with facilities we divested in early 2023.
On a same-facility basis, total revenue increased 8.1% in the fourth quarter and 11.3% for the year. Same-facility rate growth was 6.7% and 7.1% for these periods, respectively. We have seen this rate growth all year, primarily driven by higher acuity procedures. Our strong revenue growth was equally reflected in our adjusted EBITDA growth, which was $142.3 million in the fourth quarter, 17.8% higher than last year. This gives us a margin of 19.4%, 230 basis points higher than 2022. As Wayne and Eric mentioned, our full year adjusted EBITDA was $438.1 million, marking another year of mid-teens growth at just over 15%, with a margin that has expanded 100 basis points to 16.0%. Margins benefited from revenue growth, effective cost management and contributions from our equity method investments, which we sometimes reference as minority partnerships.
Moving to our balance sheet. As Wayne mentioned, we completed a significant refinancing of our term loan in December, extending the maturity to 2030 with more favorable terms. Concurrent with this refinancing, we increased and extended our revolving credit facility. We are fortunate to have a strong banking syndicate supporting a revolver that has a borrowing capacity in excess of $700 million. As we have demonstrated, we will be opportunistic in approaching the capital markets. We will have that same discipline as we manage the two relatively smaller notes that come due over the next three years and look to hedge future interest rate exposures. I look forward to sharing more about our opportunities here in the coming quarters. Our corporate debt the end of 2023 was approximately $1.9 billion with an average fixed interest rate of 6.7%.
Our full year 2023 ratio of total net debt to EBITDA, as calculated under our new credit agreement, was 3.5 times. Under the terms of the new credit agreement, there was a change in the definition of net debt used in that calculation, with asset-backed finance leases now treated consistently with other asset-backed operating leases and excluded from the calculation of net debt. This revised calculation is more reflective of the fundamental nature of assets and liabilities and conforms to market practice and definition as the prior language dated back to documents constructed over six years ago. Relative to the former term loan definition, this change benefited the calculation by approximately 0.4 turns. With the earnings growth we expect, we are confident this ratio will continue to decline, although the timing of acquisitions could temporarily pressure this calculation.
In the fourth quarter, we generated free cash flow of approximately $19 million, giving us full year free cash flow of $110 million. Although we are incredibly proud to have turned this company into a positive cash flow position, I must acknowledge that this amount is lower than we previously messaged. The difference is primarily due to two timing-related matters. The first was the timing of collections for paper-based billings and related insurance recoveries associated with the cyber threat we experienced in Idaho in 2023. And the second being amounts we earned in 2023 related to certain new state-based government programs that will settle in 2024. Neither of these factors affect the positive trajectory that we are experiencing, but our original projections did not reflect the delayed collections on these items.
Having said that, our pride comes from the fact that this is the company's first year turning our free cash flow positive in a sustainable way. This growth in free cash flow is closely linked to the growth in our adjusted EBITDA, a trend we expect to continue to meaningfully enhance the company's liquidity position. Our updated view for 2024 free cash flow is in the range of $140 million to $160 million. This view reflects a more conservative view to reflect our core value of setting and exceeding expectations. We ended the quarter with $195.9 million in consolidated cash and an untapped revolver of $704 million. When combined with the free cash flow we are projecting, we believe our current and future liquidity positions us well, while giving us flexibility to maintain our long-term acquisition posture of deploying at least $200 million annually for M&A.
We are carrying the momentum of the strong finish to 2023 into 2024, with all of our growth engines operating effectively. As a result, we are reaffirming our guidance for 2024 adjusted EBITDA to greater than $495 million, representing at least 13% growth over 2023. Additionally, we are setting 2024 revenue guidance to be greater than $3 billion. We expect to deploy at least $200 million of capital on M&A in addition to the $60 million we deployed in January, with additional spend depending on the timing of any portfolio management opportunities underway. There are always puts and takes to our early guidance with risks we track and opportunities we pursue. Generally, we feel we have built a conservative outlook for 2024, subject to the timing of our capital deployment.
As Wayne mentioned, the pipeline is strong with over $200 million already under LOI, with the majority of the transactions representing consolidating entities. As a reminder, we are agnostic to the accounting treatment if the deal is right for the company and our shareholders. Our guidance implies continued margin expansion, reflecting our ongoing and accretive progress in procurement and revenue cycle as well as the integration benefits from recent acquisitions and contributions from de novos we expect to open this year. We have high confidence in these growth levers based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting and managed care contracting. Once again, our well-established and proven growth algorithm is firing on all cylinders and enables the company to confidently guide to double-digit adjusted EBITDA growth and margin expansion in 2024 and beyond.
With that, I would like to turn the call back over to the operator for questions. Operator?
See also 15 States That Don’t Tax Retirement Pension Payouts and 15 Highest Paying Countries for Chefs.
To continue reading the Q&A session, please click here.
