Greetings. Welcome to Surgery Partners’ Third Quarter 2021 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] Please note this conference is being recorded. I would now turn the call over to your host, Tom Cowhey. Please go ahead..

Good morning. And welcome to Surgery Partners’ third quarter 2021 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 afternoon’s press release and the reports we file 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 and in our most recent quarterly report when filed, which will be available on our website at surgerypartners.com. With that, I will turn the call over to Wayne.

Wayne?.

Thank you, Tom. Good afternoon and thank you all for joining us today. As we approach the end of 2021, we continue to be encouraged by the resiliency of our business model and the execution of our associates in these rapidly changing times.

The third quarter had many headwinds to navigate, including surging COVID-19 cases, labor shortages and inflation, and a major hurricane in Louisiana that impacted a number of our facilities.

Despite these headwinds, the strength of our value proposition combined with our organic and inorganic strategies resulted in 10% year-over-year case growth and record breaking quarterly revenues of $559 million. Our third quarter adjusted EBITDA grew to $76.4 million, representing 25% growth over the prior year quarter.

While we continue to remain cautious as to the impact of the previously mentioned headwinds on our operations, we are pleased to be able to increase our full year 2021 outlook today to between $325 million and $330 million of projected adjusted EBITDA.

Our growth continues to be driven by a relentless focus on and execution of our key strategic drivers. Some highlights, our physician recruiting efforts continue to outpace last year’s strong results. Our current active physician base, having added nearly 10% new physicians to our facilities this year, is now over 4,400 strong and continuing to grow.

Total ASC joint replacements, which approximately doubled in 2020, compared to 2019 continue to grow in 2021, increasing approximately 108% on a year-to-date basis, as compared to the prior year period.

This growth is led by Medicare total joints, which grew by approximately 300% year-to-date and now represents over one-third of our ASC total joint procedures. On a same-facility basis, we continue to be pleased with our same-facility revenue growth, which increased 8.3% in the quarter over a more normalized third quarter 2020 baseline.

Volume made up over 6% of this growth, while net revenue per case increased by approximately 2%, as the return of lower acuity cases, such as ophthalmology and GI partially offset other rate and high acuity growth.

We will compare to the 2019 pre-COVID baseline quarter-to-date same-facility revenues are up nearly 17% as compared to 2019, with approximately 3 points attributed -- attributable to volume growth. On the capital deployment front, we spent much of the year identifying and negotiating with potential targets, while maintaining a disciplined approach.

We are pleased to announce that we have closed over $130 million in transactions so far this year at an average adjusted EBITDA multiple of less than 7.5 times. The vast majority of which was deployed in three transactions that closed August of 2021 and then a syndication transaction that closed this week.

Our pipeline continues to expand, driven by the persistent efforts of our business development teams. Currently, we have approximately 225 million of single-site acquisitions under Letter of Intent at attractive multiples that are expected to close in the next three months to six months, subject to our typical due diligence procedures.

We continue to target deploying at least an additional $100 million in proceeds by the end of this year, and at this stage, we believe we were highly likely to exceed our annual capital deployment goal of $200 million in 2021. In summary, we are executing well on our growth plans.

We remain a leader in an industry with significant tailwinds and a total addressable market of $150 billion with high acuity musculoskeletal surgical cases and cardio procedures continuing to transition to our purpose built surgical facilities.

We are executing on our organic and inorganic strategies, and plan to be a consolidator in this highly fragmented industry. With the benefit of capital deployment and continue to strop strong pipeline of both organic and inorganic opportunities, we believe our business is capable of sustained mid-teens adjusted EBITDA growth.

With that, let me turn the call over to Eric to walk you through some of our recent accomplishments in greater detail.

Eric?.

Thank you, Wayne, and good afternoon, everyone. Today I will focus my comments on providing a few additional highlights on our third quarter results and some of our key strategic initiatives before covering our outlook.

We were very pleased with our third quarter results, highlighted by, adjusted EBITDA that grew 25% as compared to the prior year quarter; total company revenue growth of nearly 13%, led by a strong year over year revenue growth at our new hospital at Idaho Falls, which achieved revenues over $21 million in the quarter and posted its first profitable quarter of EBITDA contribution.

Margin performance was also solid in the third quarter with adjusted EBITDA margins of approximately 14%.

Margins, which reflect our continued investments in our near- and long-term organic growth initiatives, along with headwinds associated with labor shortages and inflation, are projected to increase in the fourth quarter of 2021, consistent with historical performance, as seasonal commercial mix intensifies.

Our ability to drive industry leading same-facility growth is a direct result of our investments in physician recruiting, targeted facility level and service line expansion, and our data driven value-based approach to managed care contracting.

We achieve these results while also overcoming substantial headwinds, including heightened COVID senses in some of our larger surgical facilities and Hurricane Ida, which disrupted several of our facilities, including our surgical hospital in Houma, Louisiana, which remains closed at this time due to the severity of damage, it’s not expected to reopen until late in the fourth quarter.

We continue to see new and increase physician demand for our short-stay surgical facilities and our targeted recruitment approach remains focused on attracting the highest quality physicians.

As Wayne noted, we are executing well in this area and our 2021 new physician class is 7% larger when compared to the new physician class of 2020 at this stage in the year.

Another key component of our industry leading same-facility growth has been the investments we have made to become a national leader in outpatient total joint procedures in our ambulatory surgery centers. Our current footprint now accounts 39 ASCs that perform outpatient joint procedures across 17 states.

We have grown ASC joint volumes by 108% year-to-date, after nearly doubling our volume in 2020. Robotics cases are up 62% year-to-date on an installed base that is reached 14 of our ambulatory surgery centers, with 34 total robots deployed across our surgical facilities.

While ASC total joint procedures still represent a small portion of our overall case mix, they are an important and fast growing part of our value proposition to consumers, providers and payers. Another focus for our team has been to position our business to capture the longer term opportunity in cardiology.

While cardiology has always been a focus at some of our surgical hospitals including Lubbock Heart & Surgical Hospital and Bakersfield Heart Hospital, we also have new or revitalized programs in 2021 at four of our ambulatory surgery centers and one additional surgical hospital, with plans to expand to another six locations in 2022.

Our ASC focus to-date is in cardiac rhythm management procedures, including pacemakers, ICD implants and replacements, and loop recorder implants. But we are also looking at expansions into higher acuity interventions to include PCIs, as those procedures were approved by CMS for ASCs last year.

We look forward to continuing to update investors on our progress in this area over the coming years. On the consolidation front, we are pleased to have closed the acquisition of three facilities during the third quarter, deploying over $130 million of capital year-to-date.

As Wayne mentioned, our current pipeline remains robust with approximately $225 million of additional single-site opportunities under Letter of Intent.

These acquisitions remained in our core specialties in very appealing geographies and attractive multiples that will improve over time as we bring our expertise and operational efficiency, as well as recruiting, managed care, revenue cycle and procurement to bear.

We also continue to explore ways to enhance our unique position and independent structure in value based care arrangements, both through new product opportunities and partnerships, and hope to announce details in the coming quarters.

Moving on to outlook for the remainder of 2021, we continue to be optimistic about the trends as we enter the fourth quarter of 2021.

With strong support from our year-to-date results, improving national COVID hospitalizations and a full quarterly benefit from our recent acquisitions, we have raised our outlook guidance to $325 million to $330 million of adjusted EBITDA.

As we think about the longer term, our goal is to grow adjusted EBITDA in the mid-teens driven by volume, rate and efficiency gains, and with the benefit of $200 million of annual capital deployment. At this stage, we have no reason to believe that 2022 will be an exception to our growth formula, even with the headwinds our industry is facing.

To summarize, we are excited by our progress so far this year and we remain confident that we can continue to build on this momentum. With that, I will turn the call over to Tom who will provide additional color on our financial results and outlook.

Tom?.

Thanks, Eric. First, I will spend a few minutes on our third quarter financial performance before moving on to liquidity and some considerations we have as we move into the final quarter of 2021 and into 2022.

Starting with the topline, surgical cases increased 10% in the third quarter to nearly 140,000 cases, driven by recovering volumes in our ophthalmology and GI business line, as well as acquisitions, partially offset by lower case volumes in our pain management business.

Revenues for the third quarter were $559 million, nearly 13% higher than the prior year period. As Eric mentioned, reported results included approximately $21 million of contribution from our new community hospital in Idaho Falls, up 39% increase as compared to the prior year quarter.

On a same-facility basis, total revenue increased 8% in the third quarter. Looking at the components of this increase, our case volume was 6% higher than the prior year period and net revenue per case increased 2%, driven by a return of lower acuity cases to pre-pandemic mix levels.

Turning to operating earnings, our third quarter 2021 adjusted EBITDA was $76.4 million, 25% higher than the comparable period in 2020 or 15% higher than the comparable 2020 period when the impact of CARES Act grant is excluded.

As a reminder, due to changing regulations, we reverse certain prior CARES Act grant accruals in the third quarter of 2020, which ultimately were recognized in later periods. No grant funds were recognized in the third quarter of 2021. At September 30th, we have less than $1 million of grants deferred liability on our balance sheet.

During the quarter we recorded $10.2 million of transaction, integration and acquisition costs. The primary driver of this expense was one-time external spend on closed and pipeline acquisitions.

Of note, third quarter 2021 transaction, integration and acquisition costs did not include any losses associated with our de novo hospital in Idaho Falls for the first time since the hospital began operations. We do not expect to adjust for Idaho Falls Community Hospital results in future periods.

Moving on to cash flow and liquidity, we ended the quarter with a strong cash position of $330 million, which includes approximately $80 million of Medicare Advanced Payments. We have held these advanced payments as deferred revenue in our financial statements.

Recoupment of these funds from future Medicare revenue commenced in the second quarter and is expected to continue into early 2022. Moving back to the third quarter, Surgery Partners had operating cash net inflows of $15 million, which included the CMS recoupment of approximately $20 million related to the Medicare Advanced Payment program.

In the quarter, we deployed $102 million on acquisitions, syndication activity and CapEx investments.

Looking forward to the remainder of 2021, some of the other material uses of cash include a tax receivable agreement payment of $21 million in the fourth quarter, continued funding for the Idaho Falls Community Hospital, repayment of 50% of the deferred payroll taxes from 2020 of $8 million and over $30 million of projected additional repayments for the Medicare Advanced Payment program this calendar year.

Further, we expect to deploy capital on acquisitions throughout the remainder of the year with a goal to close at least another $100 million of transactions by year end.

As we evaluate both our cash on hand and our untapped revolver, we project we will have sufficient liquidity to execute on the full $225 million pipeline that both Wayne and Eric discussed, if prudent to do so.

The company’s ratio of total net debt-to-EBITDA at the end of the third quarter, as calculated under the company’s credit agreement was 6.25 times, up slightly from the second quarter primarily due to the deployment of cash at attractive multiples that were higher than our leverage ratio and also due to the repayment of Medicare Advanced Payment Funds inside the quarter.

Normalizing for the impact of the remaining of Medicare Advanced Payment Funds, the total ratio of net debt to EBITDA would have been approximately 0.2 times higher.

Moving on to our outlook, as we evaluate our full year revenue, our momentum and closed acquisitions gives us confidence to now project that we will achieve between 19% and 21% revenue growth over our 2020 results, implying revenues of approximately $2.21 billion to $2.25 billion.

Relative to adjusted EBITDA, our primary profit metric, we project that we will achieve between $325 million and $330 million in 2021, implying between $100 million and $105 million of adjusted EBITDA in the fourth quarter.

This projection assumes continued COVID impacts, including labor and inflation and incorporates a small benefit from the recently completed syndication activity at one of our larger surgical hospitals mentioned earlier.

We currently project that other pipeline acquisition activity is likely to transact late in the fourth quarter, and the benefit of such activity is likely to be modest, but could represent further upside to this projection.

We are currently in the midst of our planning processes for 2022, but wanted to provide investors with some thoughts on headwinds and tailwinds as we evaluate our 2022 growth goals. These include, the benefit of CARES Act grants in 2021 that we are not projecting to occur in 2022 and the likely return of sequestration.

These headwinds are offset by, a continuing return of volumes in our COVID-impacted business lines and geographies, organic growth and efficiency initiatives, the annualization of our completed 2021 transactions and the impact of any additional 2021 or 2022 acquisition activity.

As we evaluate these headwinds and tailwinds at this early stage in our process, we project that we will achieve at least $370 million of adjusted EBITDA next year and look forward to updating and refining those estimates as we move through our processes and see how our acquisition pipeline continues to develop.

We have stated for years now that we believe we have a powerful business model that benefits from favorable organic trends, demographics and a fragmented marketplace that provides ample opportunity for consolidation.

Our 2021 results speak to the strength of our operations and our business model and we believe that 2022 should continue to capitalize on that momentum. With that, I’d like to turn the call back over to the Operator for questions.

Operator?.

Thank you. [Operator Instructions] Your first question comes from Kevin Fischbeck with Bank of America..

Okay. Great. Thanks. Just want to turn to your guidance for a second here, very helpful to explicitly say out that the $370 million. But I guess, one of the things that -- in the press but in here you mentioned it’s kind of a headwind really was labor cost.

Could you give a little bit of sense, it sounds like there might be a pressure into Q4 and how are you thinking about that as you think about next year’s guidance, does that moderate or are you assuming some pressure in there as well?.

Kevin, let me start, and then, I will ask Tom to throw a little bit on there and appreciate the question. First and foremost, I do want to remind folks that our business model is fairly unique in that most of our individuals that work for us are on a set schedule.

They are not working necessarily weekends or extended over time and they have worked with these physician partners for a big part of their life and career.

And so I am not saying that we are isolated in any way, shape or form from the broader labor dynamics that are affecting the industry as a whole, but you really should know that we are somewhat insulated though from the impacts that are as meaningful to others versus our own business.

And so with that being said, we clearly were impacted in the quarter, but we feel we have the ability to kind of manage through them.

I think, Eric, you recently had looked at some data on this, just kind of looking at our year-over-year comps back even in 2019 and kind of our wages and labor versus today and how we rapidly reduced our staffing but then to build back up, but maybe comment a little bit on some of those statistics as well..

Sure. So, I guess, to reiterate Wayne’s point, we certainly are not immune to this, but just to put a perspective around it, if you look at our labor as a percent of revenues, SWMB, it’s actually at a lower level than it was in 2019.

So we clearly have markets where we are feeling this impact, and I guess, I would add, so big picture, if you think about that, that we feel like it’s been managed quite well.

And part of the reason we have had such success there is a lot of the labor efficiency actions we took during the pandemic have held and we are able to have that number actually come in lower than it was in 2019, which we are pretty proud of. I would add to that, just a little bit more about our business.

We try to hold core staff in all of our facilities to meet the general demand and then we work with flex staff, as most facilities do to deal with the peaks and troughs, that flex staff has a lot of pressure, right, and we see that we are working through that.

The good news is our continued efforts around getting more efficient about how we schedule cases, how we run our ORs, we think that allows us to manage that appropriately and it’s showing up that way so far..

Yeah. I think, Kevin, to answer your specific question relative to the guidance, as we think about headwinds and tailwinds, that’s certainly one, but we think that it’s manageable as we think about some of the efficiencies that we still can get out of our operations.

And hopefully, as we see a little bit of the COVID hospitalization subside, some of the demand for contract labor will subside as well and some of that pricing will normalize. And so as we consider all those factors, we think that we have adequately reflected that in our preliminary outlook at this stage..

Okay. Thank you. And I guess the other comment on guidance, yeah, you mentioned that the return of volumes and renovation of volumes into next year is going to be one of the tailwinds.

Can you just remind us -- it sounded like you were saying in Q3 you are kind of back to a normal mix as you might expect it, but I guess the comment is more kind of year-to-date? Can you just remind us what areas are still kind of year-to-date below average and how we should think about that volume versus price dynamic as we go into next year, because I was assuming it’s the lower acuity specialties and how to think about that?.

Yeah. No. That last point is a great one, Kevin, because I think some investors got a little confused by our second quarter print, because the return of lower acuity cases had a dampening effect on some of the net revenue per case growth.

As we look at our business lines, actually consistent with what we would have said in the second quarter and the place where we are probably feeling the most pinch is still the pain management business. We still are materially below 2019 volumes and we are actually probably about 10% off of what we would have seen in 2019 now.

Some of that is portfolio we are shuffling, but some of that is just -- those are -- those tend to be office visit based and those office visits haven’t returned to the same pace that we might have hoped that they would have by this stage.

I would say even as we look inside our orthopedics business though, one of the things that’s really interesting is as you do a double click there, we are seeing growth in a lot of the higher acuity procedures, but some of the lower acuity orthopedic procedures that are really tied to sports medicine have not rebounded and are actually still depressed relative to some of those 2019 levels.

And then you look at other specialties, which are small percentages of volume like E&T and they are in almost that pain management kind of category. They tend to be office visit follow-through and so we haven’t seen that rebound.

And so there’s a couple of business lines that they are lower net revenue per case, but they are excellent profitability for us, especially when you think about putting incremental volume through existing shifts in capacity and so we are hopeful that as we see some of that return, that will help to offset some of the other headwinds that we are seeing from CARES grants, which we are not projecting or any impact from sequestration to help us normalize some of that out..

Okay. Great. Thanks..

Next question, Ralph Giacobbe with Citi..

Thanks Good afternoon. This is Jason Cassorla on for Ralph Giacobbe. I guess just going back to the 4Q commentary with the -- you are expecting above $100 million in EBITDA.

Can you walk through what gives you the confidence of that number and maybe if I missed it, can you help us parse out the benefit of acquisitions that are embedded in fourth 4Q? Thanks..

Jason, this is Wayne. Let me maybe start off with, obviously, we have some insights to October results in terms of volumes at this point in time, clearly too early for us to be closing our books since we are only two days since the month ended. That being said, we also start getting early reads on what November scheduling looks like at this point.

So still a lot to do in the quarter and December is always a very big month for us. But some of the confidence really just comes from what this team has done over the last three-plus years and the ability to execute and find a way to get to where we need to get to.

And you should recognize that, we actually have some confidence in underlying results that have been able to not only overcome some of the labor we talked about and some of the general inflation pressures.

But it’s important to recognize that we had a hospital that was fully set out in a surgical hospital in Houma, Louisiana for the entire month of September and we are anticipating that will not reopen until the end of the quarter. And so we believe the core run rate looks strong.

We think it’s indicative of the fact that if we can come out of the third quarter with the elevated COVID that we saw that there’s a lot of reason for optimism going into the fourth quarter. So it’s more really a function of we are data driven in how we evaluate our business.

We hold our executives accountable for execution and we would expect to continue to deliver..

Yeah. And I would just point out on the Q4, when you look at that number, I would also point out that, it’s really -- it matches our previous seasonality. So we are not actually showing you a percentage in Q4, that’s not matching up with what we have done over the last several years. We do have -- there are some acquisitions in there.

It’s not a huge part of that number, and certainly, Idaho Falls, as we mentioned, it came above the line this quarter. It will be a contributor to the fourth quarter, which it hasn’t been historically. So we feel good about that number, it matches up with historical performance and early indications are that, that trend is holding..

Yeah. I would say, the only other point I’d point out there is, we -- I don’t think this has dramatically changed from kind of the updates that we gave folks after the second quarter. But I’d also say maybe the one new thing here is the recently completed syndication transaction.

And I think that as we think about that relative to the hospital that we are not going to see any benefit from over the remainder of the year. Those two are pretty close to counteracting each other and so we think this is indicative of where kind of the run rate will be..

Got it. Okay. Thanks. And I guess just my follow-up, just wanted to turn to capital deployment and your commentary around at least $100 million for the rest -- expected for the rest of the year.

And can you just maybe delve into the $225 million pipeline, it seems like it keeps increasing and what’s driving this accelerated capital deployment outlook? And then just quickly, can you just remind us what your criteria is for acquisitions outright and if you are looking to build out any certain specialties or is it geographic concentration or maybe just what you are looking for there? Thank you..

So let me unbundle a little bit of this and start by saying, we clearly are focused on what we view as the high-growth specialties with broad industry dynamics to have several tailwinds, that would include muscular skeletal, cardiology type procedures.

We are still always attracted though to other businesses such as ophthalmology and GI, if we can get those assets at attractive multiples.

In terms of the robustness of the pipeline, I would simply say that, the pipeline is kind of, in some ways, a living organism in that there are things that we put under LOI that ultimately when we get to the quality of earnings, we may or may not like, and there are things that we continue to like.

And the LOI is a very important gating process though for us to get to an acquisition that we think not only aligns with those specialties that we just highlighted. But more importantly, with the type of company, we think we can drive real value and growth from.

And so that being said, many of these transactions in that $225 million, as Tom said, we thought we could do at least another $100 million this quarter are well in the due diligence phases and in the latter parts of those phases that give us a lot of confidence that there’s more reasons to believe we will get these over the finish line than there are to not believe that.

I don’t think the robustness of pipeline is going to diminish. I mean at the end of the day, this is a business that if you want to be successful, scale matters and it’s a business that if you really want to grow and grow disproportionate to the broader industry scale matters.

And I think the more that surgery partners can continue to execute and show the value creation for the facilities we bring on, the more it becomes a little bit easier to convince the next acquisition that we can really drive the value that we are telling these physicians. So, in general, I really don’t see the pipeline slowing down.

But Eric, anything you want to add?.

No. I’d just remind everyone the biggest companies in this space if you added us altogether were less than 20% of the total market, right. We have got over 4,000 centers out there that are potential targets. And so, we have got, we have got a lot of running room here.

We are obviously a national scale independent operator that has a particular attractiveness to a lot of docs who like that independent approach and we are having great success there. We don’t see that changing. We certainly like our pipeline. It is in high growth specialties. We do look a lot of demographics. We dive deep on all of these.

So clearly, we have robust criteria we go through, but we feel - we feel good about the pipeline, it’s not slowing down. And we are excited to continue to execute on that for the foreseeable future..

Got it. All right. Thank you..

Next question, Brian Tanquilut with Jefferies..

Hey guys. Congrats on a good quarter. I guess my first question in your press release, as you talked about the strength in the quarter, you talked about you highlighted health plan collaboration as one of the drivers of that.

Maybe if you can just help us think through what that is and how that’s playing out and how that’s driving growth in your business?.

Sure. Thanks, Brian. I will take that. And thank you for the kind comments in the quarter. We are happy with that as well. So we are working with a lot of major health plans, all the time on discussions and as you can imagine health plans are quite interested in finding ways to get more patients to our sites of care.

And so we have talked about the system in the past, but there is definitely growing and broadening discussions around how do you get the incentives right for specialist to take there are cases to the best place possible for those patients on value.

And so increasingly, you are seeing payers, be more open to this idea of raising prop fees finding other incentives to get positioned to grow the right side of care. And then just broader, broader partnerships around how do we collaboratively think through with the payer for those high-dollar specialties, where we can make a big difference.

So total joints where we might save them 20,000 a case, cardiac cases where we can save them, we are saving them five figures. They really start to matter for payers, and payers I think are increasingly focused on site of care as one of their primary ways to control cost. And so, we hope to have more to talk about in this space.

I will tell you we are having a lot of conversations, not only with payers. But I would say value based care providers in general. Some of the new pay providers - anybody in this space that’s trying to find ways to be part of the answer on the healthcare cost continuum when you get to procedures were in the sweet spot.

We are independent, we don’t come with conflicts. We have the ability to lower their cost trend and those conversations are only increasing and we expect to have a lot more to talk about that over the coming quarters..

Okay. And then I guess my follow-up question, you talked about how your Medicare joints, were up 300%.

So how much runway, do you think is left there or in your view what percentage of joints are being done outpatient now and where can you take that?.

Yes. So we are just getting started there right like so it’s been tremendous growth. We grew it - nearly a 100% last year were up again over that this year. I would say this, if you look over the next decade. The amount of joints being done in the outpatient setting I think triples your CAGR is something over 20 right.

And so, we are just getting started on the opportunity. We clearly believe that we can take disproportionately take market share in this space, because of our facility presence because of our experience. So we are early we are still early innings in joints obviously it’s a lot farther along and cardiology.

But, we feel like over the next six to 10 years. This is going to be a tremendous growth engine for our industry..

Thanks guys. Congrats again..

Thank you, Brian..

Thank you, Brian..

Next question Whit Mayo with SVB Leerink..

Hey. Thanks, Eric. You mentioned earlier some efficiency opportunities around scheduling.

I was just hoping, maybe you could delve into a little bit more detail there, just anything new around either peri-operative or post-operative that makes you enthusiastic about finding some additional efficiency opportunities going forward?.

Yes, Whit we have gotten a lot more sophisticated on our data driven approach to scheduling. We have better visibility than we have ever had. Part of this was built out during the COVID pandemic.

But the ability to take like centers across the country and compare how what our cost look like how efficient we are scheduling what the gaps are between different cases. How we line up specialties and actually take a data-driven approach to say I have got 20 centers that are below our median that opportunity can be a lot of money.

Now, it’s not always easy to get, but at least gives us a very data driven way to identify where we have opportunities. And so we are just, we are getting better at that path, all the time.

We are getting - the pandemic allowed us to have a different conversation with our physicians around operations and they have been much more engaged on helping us think through. The best way to line up cases, the best way to ensure you don’t have gaps, we are really, really disciplined about the right people in the room, that’s not a problem for us.

Like every time, we are going to have the right staffing in the room. The real magic is, how do you minimize gaps and how do you stage you are cases in specialties in a way that allows you to maximize that OR time, which is our most precious resource and just from a data standpoint, we are making strides there.

And we believe that efficiency opportunity as we continue to push through on that getting cases started on time, minimizing the gaps, being able to make sure that - all of our rooms are as utilized as possible, that’s an opportunity that we think can help us offset any pressure we might have on the labor side..

That’s helpful. And maybe just an update around revenue cycle, just where are you in consolidating some of the systems. I think you have got many disparate systems out there.

And two, maybe just on like contract management things you are doing to reduce some of the claims leakage?.

Yes. Thanks for that Whit. There is a lot of opportunity still on revenue cycle. I will say we do have a distributed system, but we actually do as we have evaluated it. We do quite a good job out at our facilities. When we have a decentralized operation, it tends to be reasonably efficient.

That said, you hit on one of the places where we are focused on trying to drive data improvements and that’s contract management. And so, we have various tools that we use across our ASCs, most of which are on one platform HST.

I mean we do use some of the tools that they provide to help us to understand under and over payments, which is really what the contract management system is looking to do. I mean we are rolling out a new contract management platform.

We have had great early success with that we have used it at a small handful of some of our surgical hospitals and we will be rolling it out to another wave in the coming months.

And as we have gone through that we have had a lot of lessons learned, but we have also seen a lot of additional opportunity even at some of our higher performing facilities.

And so rev cycle continues to be a place where I think based on our history, we haven’t standardized a lot of our operations and there still remains a tremendous amount of opportunity there and our teams are going after it on a weekly and monthly and yearly basis..

Okay. Thanks guys..

The next question Gary Taylor, Cowen. Please go ahead..

Hey. Good afternoon and thanks for taking my call. My two question I want to ask about supplies a little bit positive trend there, at least as a percent of revenue. And I presume that’s still, when we look year-over-year, partly the lower acuity procedures coming back.

Is there anything else to think about in terms of supply trend and in particularly with joints moving up, et cetera as we move into next year, do you still think there is a favorable percent of revenue on supply trend?.

Yes. We have made a lot of progress there Gary over the course of the last couple of years just in getting the average price of our implants down.

We have targets, particularly at our surgical hospitals where there was a lot of disparity and we are actually moving now towards our ASCs as that becomes a bigger business to ensure that we don’t have a local contracting where we are not getting the best price based on the number of joints that we buy as a system.

I think we have seen some pressure on some of the PPE items, but that’s been reasonably manageable. And I think we have done a better job in tightening our protocols to ensure that we have got safe procedures that are being done with the appropriate use of PPE and not excess use especially given some of the price increases that we have seen there.

Much as we have made real strides I think ensuring availability by having things like a centralized warehouse, where we have a couple of months of PPE on hand to ensure that supply shortages or disruptions are not really going to interfere with that. But I think that there is a tremendous amount of opportunity there.

There is also opportunity just in enhancing our spend that on contract and so one of the things that we have started to do right now is we are rolling out a new system for our procurement to enable us.

A) to make lives of some of our associates, easier and make buying decisions simpler and that also helps us to ensure formulary compliance by showing individuals like products where they might be more cost effective because there on contract with our GPO.

So a lot of our teams are doing a great job on the procurement front, we have seen year-over-year enhancements and they have driven meaningful dollars of synergies and we don’t expect that to stop anytime soon..

Appreciate. Just one more quick one on professional fees just trying to make sure we are modeling that right. I am not sure last year is a good comp, but kind of versus 2019 that’s been running up a couple of hundred basis points, percent of revenue.

Is that just a mix effect of either Idaho Falls or some of the geographies on your ASC acquisitions that’s impacting that number as a percent of revenue?.

You nailed it on the head. Most of the increase in that number is associated with the Idaho Falls Community Hospital..

Okay..

And so 2019 is not a good comparison period because that hospital opened in mid to late November of 2019. And so, you are probably looking at a better run rate now for what we think the reasonable expenses are year-to-date..

Got it. Thank you..

Next question Bill Sutherland, The Benchmark Company..

Thank you.

Nice quarter despite Idaho and Delta, speaking of which, can you give us a feel for the size of the impact that they had on the quarter?.

COVID I think is a little bit harder to attack where we can talk a little bit about that, but and maybe I will let Eric do that. More specifically, we lost in the month of September about $0.5 million at our closed facility in Houma. And we have excluded those - that loss from our results, we haven’t made any prospective adjustment.

But we have excluded the losses, I mean we expected, continue to exclude any losses until that facility reopens which we expect to be late in the fourth quarter.

As we think about what the impact of that is in terms of loss profitability, it’s probably about $1 million over the course of 2021, but and maybe Eric can talk a little bit about some of the COVID impacts..

Yes. I mean COVID just - what we have heard from many of our peers. This last - this past quarter, the third quarter was by far in an away our heaviest COVID period. Now keep in mind, I will put that in context, we are primarily an elective business, although we have some hospitals that have ERs. And do see a fair amount of emergency patients.

It was by far in a away our highest number of COVID patients we have treated. I think the impacts for us are kind of interesting and that in some places the impact really isn’t so much directly on us as it is the availability of post-acute or higher level care beds.

And so as we think about higher acuity procedures, some of them require a transfer to a post-acute facility and/or you need to in case of complication, have the ability to transfer to higher level facilities that was an impact to some of our markets that again is, we expect that to reverse as those beds are opening up which we are seeing in many of those markets.

So the third quarter was, we were impacted by COVID. We were impacted by COVID in several markets and there were geographies that were impacted where you saw some cancellations. Certainly there was some pressure on our ability to do some of the higher acuity procedures we would normally be able to do.

But I am really proud of how the team managed through it still delivered a good result and we see those -- all of those challenges related to COVID we see as being transient it just a matter of how long it last and we were positive.

It’s good to see the positive trends for Q4, but whatever happens what I am really proud of is our facilities have shown that there are safe haven for surgical patients. We have done it very safely in all kinds of COVID environments and we feel like that will continue..

Right.

And just one more on the M&A front did you, did I reiterate here that the entire bundle of deals that you are looking at our single site or are you buying groups at all?.

This is Wayne. That’s a good question. No you heard it correctly. Those are single site facilities that we have around $225 million in the pipeline under LOI currently. Obviously, we continue to look at more facilities and just that we continue to look at platform assets, but at this point under LOI it’s a single site facilities..

And your more traditional two way deals?.

Correct. Correct..

Okay. Thanks, gentlemen..

Thank you..

Next question Tao Qiu with Stifel..

Hey. Good afternoon. I think you called out $20 million revenue contribution from the Idaho Falls hospital and positive EBITDA for the first time.

And looks like you have got good momentum there, could you provide more color on the improvement given the higher COVID cases there? And I think you also mentioned in the past that the facility equipment should be up to $25 million in EBITDA.

And how should we think about the speed of that ramp and how much of $370 million guidance in the contribution from de novo?.

So I will jump in here. We have been including the revenue in that hospital this year it’s the first time has come above the line on EBITDA and it was small in this quarter, but it’s nice to have a positive. Obviously as launching a new hospital during a pandemic was not ideal timing and so that hospital is been impacted by that.

Look, we are really positive on that market that $21 million of revenue was pretty big growth over prior year. It was COVID impacted in that market as many of our markets have been, but they continue to see growth. They continue to make progress. We still believe in the long-term $25 million opportunity in that market.

I do think with COVID and the delay of some of our more acute plans including becoming a trauma center and some other things we want to get done there. Clearly that timing has been impacted, but we remain incredibly bullish on Idaho Falls, our position in that market that community hospital and its potential and it’s continuing to make progress.

It’s behind, but we are excited about where it’s going..

You comment on the guidance, how much of that is in that $370 million of guidance?.

It’s a modest year-over-year increase now, realized that we haven’t actually. Are you talking about the - for the full year there is a benefit that’s inside the fourth quarter for 2021.

For next year I think that the ramp that we are currently anticipating as we complete our processes right so not like I have a formal approved budget that I am talking to. Here we are looking at big macros we don’t anticipate that it’s going to be a meaningful year-over-year contribution.

It’s probably going to take a little bit longer for some of the services and some of the other programs that we have there to launch, but we think it will be positive momentum as we think about 2022..

Sounds good.

And just one more on the return of the 2% Medicare sequestration next year, could you quantify the dollar impact on the revenue?.

Yes. Probably the easiest way to think about that is if you say hey, how much is your Medicare revenue? It’s between 35% and 40% of our total, and you are looking at maybe a 2% headwind there and rough math, if you look at kind of a 60% impact for that EBITDA less NCI, that NCI impact minority share.

So you are probably looking at plus or minus a $10 million headwind from the sequestration..

Great. Thank you. Thank you for taking my questions..

Thank you. Our last question comes from Frank Morgan with RBC Capital Markets..

Good afternoon. Most of my questions have been answered, but I guess you mentioned the syndication that’s coming up that will - transaction that’s coming up here in the fourth quarter. Just curious if you can give us a little bit more detail about the specifics there, the size of it in the contribution that will make? Thanks..

Hey, Frank. One thing to keep in mind first of all this is a, what I will say is it’s a facility that we are extremely bullish on. We had a number of physicians that were in the latter stages of production in terms of their involvement and prepare for retirement.

And so from our perspective, we actually like the idea of buying up into the facility knowing where we see this asset going over time. What it really does, it gives us a lot of flexibility now on whether we want to re-syndicate to some of the new recruits we bring in or not.

Relative to the economics in the quarter, I kind of view it a little bit as a flush with what we had happen with our surgical facility that had to be closed now for the remaining quarter due to the hurricane. So net-net, it will be positive run rate going forward.

But as it relates to the quarter in a lot of ways it’s offsetting the headwind from a closed facility..

Okay. Thanks..

I will now turn the call over to Eric for closing remarks..

Great. Well, first of all, I appreciate everyone’s time and before we conclude our call today. I do want to take a moment as we always do to say thank you to our over 10,000 colleagues and over 400 physicians for their many contributions. This past quarter saw the most stress on the U.S.

healthcare system from the COVID pandemic as compared to any quarter to-date. And I am humbled by the efforts of our frontline colleagues and partner physicians as they continue to - fulfill our mission to enhance patient quality of life through partnership.

As we execute against our goal to become the preferred partner for operating short-stay surgical facilities across the U.S. it’s the daily efforts of all of our colleagues and physicians in the field and all of our corporate staff here that will allow us to get there. So, thank you to them and thank you all for joining our call this afternoon.

Hope you have a great day..

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..