Surgery Partners, Inc. (SGRY) Earnings Call Transcript & Summary

Okay. Time flies fast in the hallways. Well, it's my pleasure to introduce Surgery Partners. It's one of the nation's largest, fastest-growing short-stay facility owners. Over 180 locations, 32 states includes ambulatory surgery facilities, surgical hospitals, laboratory, multispecialty physician practices, will generate nearly -- getting close to $2 billion of revenue in 2019. We have the CEO, Wayne DeVeydt. I think he's doing the presentation. Right, it's you? And Wayne, come on up and I always like to welcome fellow folks from St. Louis that went to the University of Missouri. So not many of us around, but...

That's right.

Glad when they show up.

Thanks, Gary. Again, for those from St. Louis, I just want to remind you, the Blues won the Stanley Cup after a 50-year drought, something we're very proud of, since we were the Cubs of hockey for too long. Let me first just start off by saying thank you for the opportunity to be here today and to talk a little bit about the Surgery Partners story. I apologize for those on the far left, obviously the room layout is a little bit unique. But hopefully, the slides will be easy to understand as we walk through this. Starting with this one, which hopefully you can read. But let me just start with the legal disclosure. I -- I'd just remind you that we would really encourage you to look at our periodic filings on Form 10-K and 10-Q and the risk factors therein. We will be making some forward-looking statements during this presentation, and we will refer to certain non-GAAP measures. So let me start with a little bit about our story, right? We thought we would take you through a little bit about who we are, what is Surgery Partners today? And where did we come from? Two is, we'd like to walk you through a little bit about what makes us unique, but what is our value prop and why do our patients and our physicians and our surgeons we work with value it. And then finally, talk a little bit about how do we drive shareholder value. So starting with who we are. I know this initial slide feels a little bit like mom and apple pie, right, as we talk about core values. But it's important to emphasize what journey we've been on for the last 2 years. If you go back to 2017, we did the acquisition of National Surgical Healthcare. That brought both Surgery Partners, which is a company that had been created through time through acquisitions; and NSH, which have been built through acquisitions together. What we had weren't 2 cultures that we had to make one, but rather a multitude of cultures through acquisitions that had occurred over a period of time. Bain Capital became the largest shareholder of the company during that year in late August. And it was through that process that we decided it was time to redefine our company, redefine our culture, who we were going to be as a company, and how we were going to position ourselves for the company that we are today. In essence, using a hockey analogy. Again, reminding everyone how good the Blues were last year that we were skating to where the puck was going, not where the puck was at. And so if you think about this, as we mentioned earlier, the model started with building back to 2004. The important point I'd like to make on this slide is this. This is a highly fragmented industry today. Only about 30% of the industry has been consolidated so far. And yet, it took 20 years to get to a company of our size and scale, right? So this positioning is unique for us. We're in a position where we've created a business model that we can begin to plug and play. And that's resulted in us being the leading independent surgical facility operator in the U.S. Now there's a lot to see on this slide, and I want to break it down to some really simple items for you. First and foremost, as broad-based as we are across the U.S., I want to emphasize that's a value creation for our shareholders. One is, we are not, in any way, shape or form, tied to a single reimbursement structure. We have many payers across the 31 states that we interact with. We're not bound to one government payer or one state payer, right? Those become massive risk mitigants as you think about health care and the political debate that's occurring. More importantly, we operate short-stay facilities. As you'll see, we have 112 ambulatory centers and 15 short-stay surgical hospitals. Our procedures are elective in nature. We plan for them. We work with our patients upfront. We work with our surgeons upfront. They know what their cost is when they come into the facility. We don't have balance billing issues to deal with because we deal with it on the front end. We're an in-network provider. We don't have out-of-network issues to deal with, right? These are all part of the value proposition that we've built over the last 20 years. But what's most important is how we've shifted the business with the new management team we brought in 2 years ago to position us for where we are today. We can all debate what the future is going to look like. We can all debate whether health care is going to move to a single payer. We can all debate whether there's going to be insurance companies, whether the government is going to take over, whether the consumer makes the decision or whether the employer makes the decision. The one thing we can't debate is this. Our population is getting older, 10,000 Americans a day are turning 65, and the majority of health care is consumed in the latter parts of life. And so as we built this model over the last couple of years, we created a structure that aligned with where the majority of health care is consumed, which is the later parts of life. What you'll see on this slide, we'd like to emphasize, is between GI, ophthalmology, think about cataracts, glaucoma and then musculoskeletal, think about hip replacement, knee replacement, spine. 85% of our book of business is in the core areas that are aligned with an aging population. If you go to the 17% roughly on other, we have ENT, which is a high-growth area, and other procedures in there as well. We'll go deeper on that in a minute about how we're positioned for the future. The last thing I'd like to highlight about our company is a little bit about our management team and what's unique about this. The important thing to recognize is that over the last several decades, the managed care space, the payer space, has consolidated. We're down to really 5 very substantive players. We've seen on the hospital and provider space substantial consolidation over the last 2 decades. We represent that white space in the middle, right? Moving away from pure provider, large box space to the more efficient, smaller facilities, elective in nature, where we can really control the patient experience from start to finish. We represent a value proposition in the industry that's at a lower cost. Now that's not one we can debate. Medicare makes it very easy for us all to monetize and value, right? You can see that on average, the exact same procedure that Medicare pays for inpatient is roughly 45% less reimbursement than in outpatient setting. And there's a reason for that because there's more efficiencies that can be garnered, and you can economically make the model work. So with that that's one point I want to make. The second point I want to make is that this management team averages over 20 years of experience. Why is that relevant? It's relevant for a couple of reasons. One is political cycles come and go, right? This team has been through a multitude of political cycles, right? Recessions come, strong economies come, right? The health care ecosystem evolves. This is a team that's experienced and has been through those segments. But more importantly, this is a team that, when you actually look at it, is vertically integrated. We all know now that we're seeing the vertical integration of health care. It's been talked about for decades, and it's been failed upon for decades. But we're seeing payers engaging more with consolidating providers, we're seeing providers moving more towards the payer side. And so what you have is a truly vertically integrated management team, representing individuals like myself, that grew up on Anthem, the payer side; Tom Cowhey, our CFO, growing up at Aetna; to individuals like our new CEO, which was announced this morning, I'll be moving into the Executive Chair role, Eric Evans, who grew up on the provider side. And so what you see is an organization that really understands kind of the soup to nuts of how integrated health care works. With that, let me talk a little bit about what makes us unique. A lot to read on this slide, but I'm going to boil it down to this. We have great assets. It's really that simple. We have great assets, aligned to the high-growth specialties. And I'm going to give you some detail about those specialties that are growing the fastest in our country. At the end of the day, great assets don't matter if you don't do table stakes, which is superior clinical quality and a great customer experience. And we're going to show you some data on that as well. The other thing that's really important is we're the leading independent, emphasis added, surgical facility operator in the country. Being Switzerland, when a health care debate is occurring on how best to fix the cost problems in our system is a good place to be. We can work with payers on solutions. We can work with providers on solutions. We can do it locally. We can do it regionally. We can do it nationally. And it's a big part of our value proposition as we convince surgeons to partner with us to offer a better experience for their patients. Now one of the things you're going to hear about there is our opportunity on scale, that while this company was built over 2 decades, it wasn't until 2 years ago that we redefined the management team. We brought in individuals that built scalable assets and actually started taking full advantage of what an entity of our size and scale should be able to do over time. And so we'll talk about that as being an asset and a unique, attractive thing about us. And then finally, a trusted partner of choice. We live in an industry where I remember when my former CEO joined Anthem, people said, "Why did you go to the dark side?" I remember when I came over here, people said, "Why did you go to the dark side?" I don't know what the dark side is exactly, but what I do know is if you're trusted, you'll win.

Equity research.

Yes. Equity research is definitely the dark side. You'll win the new game, right? And so being a trusted partner is important. But that means acknowledging what you do well and being very transparent about what you don't do well and not trying to offer a product that you can't really value for the market. So let's walk through our assets. So why do I think we have great assets. Now this is a 7-year view. The majority of this happened though in the last couple of years as we started transitioning to focusing on MSK. Hips and knees are growing at a faster rate than any other surgical procedure in the country. And you're seeing more and more movement from an inpatient setting to an outpatient setting. What I like about this slide though is you'll see we've had growth in every major segment. But we've grown 4x in MSK. And half of that, we doubled our MSK in our ASCs, just in the last year, from where we were at in 2018. So it's all about positioning for when the future growth is coming. Why is this relevant? First of all, let's just level set the industry, ignore Surgery Partners for a minute. As you look at this slide, surgical cases in the U.S., agnostic to type of procedure or even location, whether it be inpatient or outpatient, are generally growing at a 1% clip. And that 1% between now and 2025 is really a reflection of an aging population. Again, back to bet on demographics. As you think about the aging population, some segments, again, procedure agnostic, are growing at a faster rate, specifically ophthalmology, orthopedic and spine. So if you think about that previous slide we showed you, 2/3 of our book of business is aligned with the highest growth segments from just a surgical case perspective. You'll see ENT also has an outperformance growth rate, and we have about 3% ENT that sits in our other bucket today. The reason we highlight this, in particular though is if you think about the muscular skeletal opportunity that's in front of us today. Our recent estimates show that Medicare spends approximately $7 billion a year on total joints. Over 100 million Americans have chronic pain, right? Why is that relevant? Well, when you go to the next slide, this is the big reason. Technology advances are happening quickly. Commercial payers have been doing total joints in our facilities already. And as you can see here, knee replacement is growing at a 5% rate. Hip replacement is growing at roughly a 5% rate. So you have the fastest-growing segments with the largest acuity payments out there with a demographic that is aging in. In November of 2019, CMS announced a couple of things. In addition to the rate environment for the subsequent year, they also announced that total knees would be able to move into an ASC setting. That's a whole new opportunity for our organization to pursue. Remember, these procedures are being done today already in our facilities, but we were unable to capture any of the Medicare opportunity that was out there. In addition, Medicare put total hips on the no longer inpatient-only listing. That's usually an early indication of the trend of eventually moving into an ASC setting. So if you think about this, people have asked us, well, can you size that opportunity that you've never been able to capture within your ASC facilities? Right now, the projection is there'll be about 1.9 million hip and knee procedures projected by 2026. I don't know if these percentages are right. I'm just using data that's been published. But 48% are not deemed to be of an acuity level that requires being in a hospital setting. We think the catcher's mitt we built is the right one. It's structured around demographics. It's structured around high-acuity items such as hips, knees and spine. But getting people to your facilities and getting a surgeon to select your facility is all about what makes you unique. Now again, as we said earlier, clinical quality is table stakes, you have to do it well. The patient experience matters, right? If a patient isn't happy, they're not willing to recommend you. They're going to make that known to their surgeon and their surgeon is going to make that known to their other patients. And so this is kind of a vicious cycle. You have to get the first 2 right. If you get the first 2 right, everything else falls into place. Physicians engage and you become the trusted partner. At the highest level, we measure clinical quality on many fronts. We can all debate what you measure. Now here is a point of view, when you just look at the Joint Commission at hospitals or you look at the ASC surveys, we do better than average. And when you consider that we have only 10% of the hospitals in the U.S. are 5-star rated facilities and several of our surgical hospitals have been given the 5-star rating, it shows our commitment to quality. But patient satisfaction matters. And it's not just from the moment that they get the procedure done, but it's when they come in the door. It's the cleanliness of the property. It's understanding the financial commitment they have to make and paying that deductible upfront or that co-pay upfront. It's knowing that they're going to be taken care of when the procedure is done and then getting them home safely. And these are the scores that we get from our patients. But the most important question is, would you recommend us? Would you recommend to use this facility to someone else? Our Net Promoter Score is 91. And these are best-in-class names you see up on this board. So we're not comparing ourselves to those that aren't high Net Promoter Scores. These are high Net Promoter Scores. Personally, when I joined, I questioned this. It seemed too high for me. I questioned the data. So we ran a new independent survey, 19,000 respondents, and we scored a 91. Statistically, it's meaningful. So when you have a great clinical experience, you have a great patient experience, what does that translate to? It translates to physicians trusting you and saying they would use the facility and they would recommend that facility to other physician partners to use. And this is what we want to show you as well. If we do the NPS score on a physician basis, we score very well against best-in-class names. So moving to how we drive shareholder value. Let me start with a little bit of the journey I talked about. Two companies came together in late 2017, Bain Capital makes a significant investment in our organization. And we start this 3-year journey with 2020 being the start of the third year. Started in 2018, the idea was, was a transformational build We rebuilt our strategy. We established a new management team. I joined in January, 2 years ago at this time. CEO joined, COO joined. We have great boots on the ground operators. You see our results regarding customer service and clinical. But we had an opportunity to really redefine our corporate leadership and where we wanted to take the company. And that included pruning items that were not aligned with our short-stay surgical facility goals Or weren't aligned with the right growth goals that we have for the right specialties. So 2018 was a really transformational year of resetting and rebuilding. 2019, which is this year, was a year proving that we built a model for sustainable double-digit growth. As you probably saw this morning, we reconfirmed our guidance. We've been achieving the numbers that we said we would achieve every quarter for the first 3 quarters of this year. To achieve double-digit growth this year, you have to anchor on what current consensus is. We reaffirmed our guidance, and if we achieve current consensus that would represent 15% EBITDA growth in the quarter over fourth quarter of last year. The company is hitting on all cylinders right now, which lends us to where we're at. We made the 2-year investment, we made the heavy lift, and we're now on the pace for what we would call that sustainable double-digit growth. I'm not going to cover this slide. This is available on the web page. We put this out there. But this shows you a little bit of some of the accomplishments we had in 2018 in pruning the asset base, recharging the organic growth engine, rebuilding the M&A pipeline and then ultimately, starting to leverage scale. The slide I want to highlight for you is this next one. And as simple as it sounds, it's probably the most important slide that gets the least amount of appreciation in our business model. And that was, we spent the last 2 years building a platform, a standardized platform so that we can future plug-and-play the fragmentation of a deconsolidated industry that's moving to consolidation. So today, these numbers are real. These are the numbers today after this 2-year journey. 89% of our surgical facilities are now on an in state patient accounting platform. 95% are now on a clinical surgical facility claims clearinghouse. We had 18 variant systems when I joined the company. But today, we've moved to the platform approach, 95% are on a data warehouse. We did a soft close 4 business days after year-end and knew all of our clinical cases that were performed in our facilities. We knew where they were, we knew the revenue, we were in a really strong spot. We couldn't have said that 2 years ago. And then finally, you can't be a consolidated entity when you have 3 corporate headquarters through years of acquisitions. And so we shut those down and have moved our headquarters permanently to where we're at in Nashville, Tennessee. These were important steps in the transformation of the culture, but more importantly, in getting to the spot we are today, which is the ability to really now grow double digit. 2019, I do want to take a moment though to highlight for you. So what did we do in '19? So once we got through the major pruning activities, the growth goal then was to start investing in our surgical facilities. We have now completed, as of year-end, 7 de novo through either operating room expansions or new facilities. De novos have a long digestive period, about 18 months to see the value creation. So to get to the value beginning in 2020, you had to start these activities in 2018. That is a big reason for our growth next year. We also did our largest de novo in our history, which is a large acute care hospital attached to our surgical facility in Idaho Falls. That new facility opened up in November of 2019. And as of today, I'm proud to announce that we're already deemed and accredited and have been approved by CMS for payment. Moving to accelerated growth. We know in this industry, producing 4% to 6% growth is where you'd like to be, with the goal of being at the high end of that. That would be strong organic growth. Through the first 9 months, we are north of 7% growth organically. In fact, we're at 7.6%. Our fourth quarter will be stronger than that. We are just hitting our stride now, and you're going to see more of that come through. Why is that? Because last year, we added over 500 new surgeons using our facilities. Through the first 9 months of this year, we added over 433, that number is over 500 now. And we increased our total joints in our facilities 2x over what we did last year in our ASCs alone. And those trends are not slowing down in Q4 or as we move into next year. Because we now had a leverage scalable asset, we bolstered our end market. There is nothing more efficient that we could do than finding a bolt-in to our existing facilities and leveraging the scale we built, both nationally and locally. As you'll see, we deployed almost $40 million in capital at a 5.4 effective multiple. There are over 4,000 of these opportunities available to us. We plan to pursue them aggressively. And then finally, we are only in the early innings of leveraging our scale. Those platform numbers I showed you just happened over the last 2 years. We're now at a point that we can really leverage what a scalable asset looks like. So how does the math work? It's very simple. We have to achieve 4% to 6% in top line growth, 2% to 3% in volume. You saw the slides I highlighted earlier. Just getting the average of average for the industry, we ought to be able to get 2% growth because we're in the right specialties. We know hips and knees are growing even faster, right? So 2% to 3% is our target. But then we're saying we got to really get 2% to 3% in rate growth as well. If you look at what we've been doing, again, 6% would be the high end. We're doing 7.6% through the first 9 months. I would expect us, over the next 3 to 5 years, to continue to be at that high end of 4% to 6% due to the opportunities in front of us. We should get margin expansion from leverage. We have not taken advantage of all the opportunities available to us. The first 2 years were low-hanging fruit. When I joined the organization, we had 25 health benefit plans with 10,000 employees. We have one health benefit plan now. It makes sense. It's more efficient. We save money. We talk about the most basic things, transcription, right? Doctor transcribed into a recording, somebody actually goes and types it out for them. We had so many different vendors that we went to 1 and our cost went in half. Those really basic opportunities is what we've gone after the last 2 years. It's not sexy, it's not creative, it's not unusual, it's basic blocking and tackling. But now that we have system platforms, we can now go after RCM opportunities. Now that we have platforms, we can go actually after procurement, not in the sense of just lowest price, but actually going to preference pricing. So there's many opportunities to drive 3% to 5%. And then the last one is capital investments. It's a real simple math. You got to do de novos. Pipeline got started 2 years ago. You got to expand ORs. We started the pipeline 2 years ago, that continues to grow. And you have to do acquisitions. Now we're in an industry, because of the fragmentation, that still values assets at 7 multiple or less in many cases, not in all, but in many. So if you assume that you can deploy roughly $100 million a year of capital, or $80 million to $100 million a year in capital, which is what our goals are, what you'll see is that, in essence, you're able to accrete 3% to 5% EBITDA growth at multiples that are substantially lower than what we're at today, which is a great multiple arbitrage for our equity shareholders. Now I would tell you the math is simple. You add these 3 up and you see it's 10% to 16%. Our commitment has been double-digit growth. We'll achieve it in 2019. We will be guiding for it in 2020. We believe we will continue to do that for the sustainable future. Because as some of our low-hanging fruit wanes over the next 2 or 3 years, a lot of our M&A capital deployment grows and a lot of our margin expansion opportunities just begin to take off. So as you look at the math, it's pretty simple. In 2018, we finished at $235 million of EBITDA. We reaffirmed guidance this morning on 2019. We're telling you today that we'll do double-digit in 2020. And if you just do the most basic level, which is, well, what is the minimum double-digit of 10%, it shows that by 2024, we can believe that we can be north of $420 million of EBITDA. So my concluding slide is this. I guess the way I would summarize it is that for the last 2 years, we put all of our energy to be in the spot we are in today, okay? It's been a tough road. It's been a hard road, right? But here we are with really strong assets that have been pruned and are basically short-stay surgical facilities. That's what we do. We don't deviate from that. We've had a great platform for fragmented. But today, we have holistic infrastructure. So our ability now to go on the offensive more around M&A is in front of us. And finally, I would simply say we have a very focused management and vision and a focused Board of Directors. And we think that's evident not only in our 2019 results, but we think you'll continue to see that in 2020. With that, I want to thank you for your time today. I know we're doing Q&A just down the hall and to the right. Have a great day.