Surgery Partners, Inc.

Greetings and welcome to the Surgery Partners Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty. Thank you, Mr. Doherty. You may begin.

Good morning, and welcome to Surgery Partners' third quarter 2022 earnings call. I'm Dave Doherty, the company's CFO. Joining me today is our Executive Chairman, Wayne Devite, and our CEO, Eric Evans. 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 morning's press release and the reports we filed with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we 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 this morning's press release, which is posted on our website at surgerypartners.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I'll turn the call over to Wayne. Wayne?

Thanks, Dave. Good morning, and thank you all for joining us today. This morning, we're pleased to report third quarter 2022 adjusted EBITDA of $96.2 million, a 26% increase as compared to the prior year quarter. Net revenue grew 11% to $621 million from a combination of case growth and an increase in net revenue per case from higher acuity procedures and rate improvements, as well as our continued execution on deploying capital for high-value acquisitions. As we've experienced in prior quarters, we've managed the rate of supply cost inflation and premium labor cost pressures at levels consistent with our historical trend, The combination of our top line growth and focus on controllable costs allowed us to report an adjusted EBITDA margin of 15.5%, 180 basis points above the prior year, and 150 basis points above our second quarter margin. Each of these results is within the expectations we set internally and those that we guided to in our second quarter call. Dave will go into these results in greater detail in a few minutes. As you know, We operate in a sector of the healthcare landscape that has many immediate and long-term tailwinds. These tailwinds and the team's execution has allowed us to effectively manage the macro environment challenges that both our country and others in healthcare are experiencing. As we've discussed in the past, this team has been monitoring many of these pressure points and reacted with structural controls, aligned incentives, and rapid responses. Today's reported results are continued evidence that this business model is durable and resilient, and we have the management team engaged in the right areas to capitalize on core growth opportunities. Although the impact of COVID-19 is still being felt across our country, we did not experience any material direct impact related to the virus in the third quarter. We continue to proactively address the tertiary effects of the pandemic, as we did in the third quarter when we experienced atypical elevated levels of physician, clinical, and support staff vacations this summer, as many individuals took some well-earned time with their families and friends after two years of restrictions. You may recall that we noted the expected impact of these known extended vacations when we reported our Q2 earnings and factored that into our Q3 guidance range for revenue and adjusted EBITDA. Despite the headwind of Hurricane Ian, We are very pleased that the outcome of the third quarter was in line with our expectations, with revenue at the midpoint of our guidance we shared on our last quarterly earnings call. Eric and Dave will go into slightly more detail, but let me share a few highlights. Same facility revenues increased over 5% compared to the prior year quarter, with over 3% case growth and nearly 2% higher net revenue per case. New physician recruiting efforts yielded over 155 new recruits to our facilities in the third quarter, bringing our overall new recruits in the first nine months of the year to nearly 430, consistent with last year at this time, with recruits spanning all of our core high growth specialties. As our recruiting and onboarding efforts become more refined, we are benefiting from positions that bring more cases and more revenue than prior recruiting cohorts. For example, The first year net revenue contribution from the nearly 430 physicians recruited this year is 56% higher than the initial revenue contributions from last year's cohort. The 2022 cohort is bringing more cases with higher overall net revenue per case than the prior year class did. And as we've discussed in the past, as our recruiting cohorts mature, there's a compounding effect for multiple years as it relates to our organic growth. And finally, The transition of procedures out of traditional acute care inpatient settings continues to accelerate. Joint replacements in our ASCs for the third quarter were up approximately 91% from the prior year. Over the past three years, our total joint program has had a compounded aggregate growth rate of approximately 114%, while our cardiac program rate of growth is over 24%. We will continue to focus on this significant shift in site of care in our recruiting efforts, acquisition, and de novo investments. We believe our strong financial results reflect the numerous macro tailwinds associated with the benefit of performing procedures in a high-quality, lower-cost, patient- and physician-centric setting. With a total addressable market of over $150 billion, our company is very well positioned to capture the significant shift of care to the outpatient setting. Our M&A team continues its disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples. Our team is currently managing a robust pipeline of potential targets. Late in the third quarter, we added another short-stay surgical hospital to our portfolio with the acquisition of Kansas Spine and Specialty Hospital and acquired minority interest positions in two ASCs from Value Health. The effective multiple on these acquired facilities was under eight times. In addition, we purchased a minority interest position in three de novo ASCs from Value Health in the quarter. Eric will speak further to the continued execution on acquisition opportunities related to our Value Health partnership in a moment. Our balance sheet remains strong with no exposure to interest rate changes until 2025 and no material debt maturities until 2026. We believe our existing acquisition pipeline, our transition to generating positive free cash flow to support execution on that pipeline, along with an accelerated focus on de novo development further enhances our long-term growth trajectory. Based on our solid performance during the first three quarters of the year and our Q4 outlook, we are reaffirming our full-year guidance for 2022 adjusted EBITDA to a range of $375 million to $385 million, and we anticipate full-year 2022 revenue in the range of $2.5 to $2.55 billion. Dave will discuss in more detail our outlook for the remainder of the year. With that, let me turn the call over to Eric. Eric?

Thank you, Wayne, and good morning, everyone. As Wayne mentioned, we are very pleased with the results of our third quarter as we continue our positive trajectory that started before the pandemic. We have learned much regarding the resiliency of our business model and the requisite tools in the toolbox needed to earn market share throughout the pandemic and current broader macro environment. Specifically, we have seen the strength of leveraging our data-driven culture with strong partnerships that have been created with our physician partners. These partnerships, coupled with our data-driven approach to decision-making, truly enhance patient quality of life. From an operational perspective, year to date, our specialty case mix has stabilized, with all core specialties growing. In fact, our overall cases have grown at a 4% CAGR over the past three years. As we noted last quarter, we experienced some extended vacations in the quarter, but those were in line with our expectations. What we did not anticipate, however, was Hurricane Ian, which had a significant impact on our ASCs in the Florida region. Out of an abundance of caution for the safety of our teams and patients, we significantly limited operating hours in canceled or rescheduled cases that were planned for the last week of September. During that week, 19 ASCs and 15 practices that were located in hurricane warning counties were impacted with canceled or rescheduled cases. Although many of our colleagues were impacted, we did not experience any loss of life or catastrophic injuries. We continue to reschedule canceled procedures and still have some facilities under repair. We expect to fully resume operations in the region in the fourth quarter. The hurricane is expected to result in the cancellation or rescheduling of over 1,000 cases, but the full impact is unknowable, as many residents in the area are still in the process of rebuilding or resettling. We have determined that the hurricane adversely impacted the third quarter earnings by approximately $1.1 million. As you may recall, we experienced similar losses in the third quarter of 2021 when Hurricane Ida made landfall in Louisiana. Much like last year, we have excluded the impact of the hurricane from our reported adjusted EBITDA. Despite Hurricane Ian and the atypical vacations we saw this quarter, we performed almost 148,000 surgical cases in the third quarter. nearly 6% more than last year. On a same facility basis, net revenue grew by 5.1%. Our strong competitive position in our markets, superior operational execution, and broader macro tailwinds drove a healthy contribution of 3.3% same facility case growth. Our organic growth initiatives, coupled with the acquisitions completed over this past year, have translated into strong top-line growth of 11%. Adjusted EBITDA came in at $96.2 million with a 15.5% margin. Income recognized from CARES Act grants were not material in the third quarter. This margin expansion of 180 basis points slightly exceeded our expectations for the quarter and is attributable to cost-controlled discipline and robust revenue growth. As we mentioned on our last call, we closely monitor inflationary impacts to our labor and supply costs. Our enhanced reporting of labor and supply costs allows us to identify any new trends early and to react accordingly. In our third quarter, we did not experience system-wide increases in premium labor, which we define as either contract labor or overtime. In fact, in most of our markets, the overall utilization of premium labor is abating, as is the contract labor rates the market is demanding. Premium labor as a percentage of our total salaries, wages, and benefits in the third quarter of 2022 continues to be consistent with the same ratio in pre-pandemic periods. Our favorable workplace environment allows us to recruit faster and is a key enabler to maintaining the high clinical quality and exceptional patient experience we are known for in the communities we serve. We are also working with our GPO and key suppliers to understand inflationary factors that could impact our businesses. In the third quarter, supplies were approximately 27.9% of net revenues. slightly improved from last quarter and 70 basis points lower than the third quarter of last year. Given the global environment and continued disruptions to the supply chain, we acknowledge the potential for increased costs moving forward. At this point, we are not seeing unusually large price increases in commodities, in plant costs, or deliveries, but we remain vigilant in managing this risk and have active initiatives underway to proactively address. Moving on to our organic growth levers, we continue to benefit from our relentless focus on physician recruitment and targeted facility level and service line expansions. These efforts contribute to higher overall revenue per case rates, as well as generate the highest contribution margin for our portfolio. Our physician recruiting team has been meeting the increased demand for new physicians in our short-stay surgical facilities by targeting the highest quality physicians. As part of our value proposition to new recruits, we have demonstrated a unique ability in our industry to predictably, consistently, and cost-effectively staff our facilities with high-quality front office and clinical teams, a capability that often contrasts with and separates us in the eyes of our physician partners from alternatives in the market. In the third quarter, we added over 155 new physicians spanning our key specialties. bringing our first three quarters total to nearly 430 new surgeons using our facilities. As Wayne highlighted, each of our recruiting cohorts continues to drive strong year-over-year growth, and we are encouraged by the early strength of our current year recruiting class. As a point of reference, the average net revenue per position in the 2022 cohort is already 55% more than the very strong 2021 cohort that we recruited last year. All of this has helped fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed approximately 25,000 orthopedic procedures this quarter, 9% more than the prior year quarter. We do not see this growth slowing. And as we have discussed, we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings. With an increasing share of orthopedic and cardiac procedures moving into lower-cost, high-quality, short-stay surgical facilities, We are considering all options to capture our fair share, including our robust M&A pipeline, as well as investments in robotic equipment, renovation of existing facilities, and developing de novo facilities. These investments often require minimal spend, are financed at the facility level, and are only authorized when we determine that the ROI is strong in the near term. As Wayne mentioned, late in the third quarter, we acquired Kansas Spine and Specialty Hospital, as well as Value Health Minority Equity Stakes and Management Agreements and two ASCs. We are very excited to integrate Kansas Spine and Specialty Hospital into our portfolio, as it provides additional capacity to expand our high-value, higher-acuity MSK service line. This hospital was recently named one of 2023's 100 Best Hospitals for Spine Surgery and is widely known as the premier neuro-orthopedic surgery hospital in the Wichita market. and complements our existing Cypress ASC in the market. We also acquired interest in three ValueHealth de Novos. We expect these facilities to grow disproportionately over time, leveraging our differentiated and specialized operating system. These transactions represent the continuation of our partnership with ValueHealth as we maximize our combined strengths and capitalize on the rapid migration of high-acuity cases to the high-quality short-stay facilities that we own and operate. In addition to the initial syndicated projects acquired from ValueHealth, There are multiple other de novos in development across our portfolio. With the acquisitions of Kansas Finance Specialty Hospital and these ASCs, we have achieved our capital deployment commitment for 2022. We continue to manage a robust pipeline of acquisition targets, including the remaining opportunities we are evaluating with Value Health. Our approach to capital deployment will provide meaningful contributions to future earnings in 2023 and beyond. Given the results we reported this morning, Along with our outlook for the remainder of the year, we are reaffirming our adjusted EBITDA guidance range of $375 to $385 million. This guidance prudently considers that we are still in a pandemic environment and in a period of inflation that could pressure margins. As you can see from our results so far this year, we are confident we can manage through these risks. Our teams are highly aligned, and we are executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations to achieve our goals. In summary, I'm very proud of the team's accomplishments this quarter. Our company provides a cost-efficient, high-quality, and patient-centered environment in purpose-built short-stay surgical facilities that provide meaningful value to all of our key stakeholders. With that said, I will turn the call over to Dave to provide additional color on our financial results as well as our outlook. Dave?

Thanks, Eric. I will first talk about our third quarter financial results and liquidity before providing additional perspectives on our outlook for the remainder of the year and broad perspectives on 2023. Starting with the top line, we performed almost 148,000 surgical cases in the third quarter of 2022, 5.6% more than the same period last year, with strength across all our specialties, especially in orthopedics, where we grew by 9.1% versus prior year. We believe our volumes are near normalized levels as we have effectively managed the continuing impact of the pandemic through enhanced visibility and proactive efforts to reschedule procedures canceled due to patient or physician illness. This growth was in line with the expectations that we shared with you last quarter, despite the impact Hurricane Ian had on many of our Florida centers. Largely attributed to this case growth, we saw revenues rise 11% over last year to $620.6 million. This growth is a combination of the organic growth factors Eric described and contributions from our prior year acquisitions in consolidated facilities. As a reminder, many of our more recent acquisitions are in non-consolidating facilities that provide us the opportunity to enhance performance through operational excellence and to buy up over time. Because of this ownership structure, we do not include their revenue in our consolidated net revenue. I noted last quarter that when we evaluate M&A opportunities, we are agnostic to the accounting treatment of the assets we acquire. Our focus is to acquire high-growth, high-quality assets aligned with our targeted specialties at the most favorable multiple possible. On a same facility basis, which we report on a days-adjusted basis, Total revenue increased 5.1% in the third quarter, with case growth at 3.3%. Net revenue per case was approximately 1.8% higher than the prior year period. Hour-stained facility revenue growth was negatively impacted by approximately 40 basis points due to the effects of Hurricane Ian. Adjusted EBITDA was $96.2 million in the third quarter, which included approximately $300,000 a benefit from the recognition of grant income from CARES Act grants. Adjusted EBITDA margin was 15.5%, a 180-point expansion from the prior year. As I've mentioned before, we are diligently managing inflationary pressures affecting our labor and supply costs. Although we are not immune, these factors were not material to the results we are reporting this morning. Our salaries, wages, and benefit costs as well as our medical supply costs were in line with prior year, pre-pandemic levels, and our expectations. Given the market dynamics, we will continue to carefully monitor these cost factors, proactively deploying cost mitigation tactics to help offset potential pressure. But it does continue to represent a risk to future results that we are incorporating into our future guidance. We ended the quarter with approximately $155 million of cash Recoupment of the 2020 Medicare advance payments has largely occurred, with an immaterial amount remaining as deferred revenue on our balance sheet. We reported negative free cash flows in the third quarter, which was due to the timing of spend on large CapEx initiatives and seasonal working capital. We generated $30 million of cash flows from operations, had $53 million of distributions to our partners in CapEx, and repaid $13 million of Medicare advance payments. On a year-to-date basis, we have generated positive free cash flows of $37 million. Through October of this year, and excluding our de novo investments, we have deployed approximately $243 million on 12 transactions at a sub-8.0 times multiple. These centers are primarily focused on MSK procedures and are well-positioned to support and strengthen our same facility growth trends in future years. 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 6.0 times, consistent with our expectations and the second quarter. We expect this leverage to float in the upper five to lower six times range in the near term as we continue to deploy capital for accretive assets. To enhance our liquidity position, In the third quarter, we worked with our banking syndicates to expand the borrowing capacity under our revolving credit facility, bringing the total capacity under that instrument to $350 million. On September 30, we did not have any borrowings outstanding under the revolver. As a result of this expanded capacity, our total liquidity at the end of the quarter was almost $500 million. representing consolidated cash of $155 million and our undrawn revolver capacity. It is worth noting that the acquisition of Kansas Spine and Specialty Hospital was partially settled in October. This solid liquidity position supports both our local facility working capital, investments and capitalization, as well as future M&A. On the debt front, we have approximately $2.4 billion in gross debt at the corporate level. All of this debt is effectively fixed with the benefit of the interest rate swaps and caps we entered into in prior year, leaving us with no exposure to incremental interest rate fluctuations. In addition, we have no material debt maturities until 2026 and approximately 15% of our debt due by 2025. With today's interest rate environment, we are not exposed to significant rate risks. Also, as a reminder, we continually refresh our asset portfolio to align with long-term market growth trends. Our portfolio refresh is anchored on the premise that we can sell certain assets at a relatively high multiple and then redeploy the capital at a relatively low multiple with stronger future growth prospects. Therefore, when combining proceeds from these ongoing portfolio management activities, our current liquidity position, as well as our generation of free cash flow, we are well positioned to approach the capital markets opportunistically. To be clear, we are confident in our ability to fund current and future M&A opportunities. With the third quarter results we released this morning, we are optimistic about 2022 and anticipate full-year 2022 total revenue in the range of $2.5 to $2.55 billion. This reflects the impact of recent acquisitions, including those that are not consolidated, the third quarter and continued impact of hurricane-related closures, and our view of the pandemic. In addition, we are reaffirming our 2022 guidance range for adjusted EBITDA to $375 to $385 million. We continue to believe this range is prudent given the macroeconomic environment we are facing. In our business, there is a large focus on the seasonality of the surgical cases we perform. Other than the pandemic-affected 2020, in our fourth quarter, we typically experience higher case counts by patients with commercial insurance payers that have deductible limits that reset annually. Our guidance for the fourth quarter anticipates a similar level of demand late in the fourth quarter. We are currently in the midst of our planning process for 2023, but wanted to provide investors with some thoughts on the headwinds and tailwinds as we evaluate our 2023 growth goals with our senior leadership team and the board of directors. From a headwind front, items we are contemplating include the full-year impact of the return of CMS's sequestration, the potential elimination of the Hospitals Without Walls program, minimal recognition of grant income, continued active management of labor and supply inflationary pressures, and finally, any impact of COVID-19 or unknown new variants. These headwinds are offset by the annualization of our 2022 acquisitions, which, as I reported earlier, is in excess of our $200 million commitment, in addition to 2020-23 acquisition activity. Organic growth and efficiency initiatives that we expect will continue to provide top-line growth and continued margin expansion. And contributions from our in-process de novos, including the continued maturation of the community hospital we opened in Idaho during the pandemic. As we evaluate these headwinds and tailwinds, at this early stage in our process, we remain confident in our ability to grow adjusted EBITDA double digits, with our team focused on actions that will help us achieve our targeted long-term mid-teens growth. We look forward to providing greater visibility into our projections for revenue-adjusted EBITDA and capital deployment targets in a future presentation. We have stated for years now that we believe we have a powerful and unique business model that benefits from favorable organic trends, demographics, and a fragmented marketplace that provides ample opportunity for consolidation. Our year-to-date 2022 results speak to the strength of our operations and our business model, and we believe that 2023 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star, then 1 on your telephone keypad. Make a confirmation turn when the catcher line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. It is requested that question is kept to one question and one follow-up question. One moment, please, while we pull for questions. Our first question is from Brian Tangelet of Jefferies. Please go ahead.

Hey, good morning, guys, and congrats on the quarter. I know it wasn't easy. So, I guess, Wayne, my first question for you, I mean, I appreciate all the color on your views on the capital needs of the company and the the access to capital right now. But as I think about your views longer term on acquisition spend, a lot of investors are still wondering if you'll need to tap the equity markets or the debt markets at some point. Just want to hear your thoughts on that and how you're thinking about cash flow generation and capital deployment as we think about 23 and beyond.

Hey, Brian, good morning and appreciate the question. Look, let me anchor on a few things for all of our listeners and shareholders. You know, first and foremost, a big part of our long-term growth model is a combination of not just the organic initiatives and the de novos and the physician recruitment, but clearly it's around capital deployment. And with over 4,000 independently owned ASCs out there, we like the opportunity of continuing to do this at an aggressive pace, especially at these highly attractive multiples. Our model has been baked on to get to the mid-teens growth that we target on us deploying at least $200 million a year. And I'd like to get folks to at least anchor on that number first because I think that's the important one to anchor on as you think about the long term. As you heard Dave say in the prepared remarks, we have about $500 million of liquidity right now when you look at both kind of consolidated cash flow as well as our undrawn revolver as of September 30th. what you can't see in our current results is that our run rate cash flow is positive, free cash flow. We had the remaining payments to CMS this year for Medicare. We had the tax payments. I say all that to say that as we go into next year, we believe in our forecasting that we will do approximately $100 million of free cash flow that can be used towards M&A. And as you think about that, that says we have a gap roughly of 100 to get to your least number But we also have about half a billion of opportunity there between our revolver as well as our consolidated cash. So I say that to say that we have a path to whether this, what we think is hopefully a storm that will start to subside in this upcoming year. And then we'll have an opportunity to further evaluate then where we see the markets. We would love to refinance some of our debt, but I'm not sure that we view debt long-term as the right place to go and put more debt on this asset. Quite the contrary. We've committed to taking our leverage down, and we've been doing that, and we will continue to do that. And we'll be opportunistic. If we think the right opportunity exists that we can, you know, raise capital for our shareholders while delivering, we'll do that. But I would tell you that we feel very confident in our ability to deliver for the next several years on that commitment. That cash flow number will continue to grow because of the way it converts. all of our substantial one-time payments related to either the CARES Act and those items that had to be refunded or related to the tax agreement we had subside after this year. And so I think you'll really start to see the power of this engine and its ability to fund M&A from free cash flow.

I appreciate that. I guess, Eric, just for you, so obviously CMS put out their final rule for ASCs recently, and we think about 2023 How should investors be thinking about both commercial rate trend and your interpretation of the benefit or impact to you guys from the CMS rule?

Good morning, Brian, and thanks for the question and the kind words to start the quarter. We're obviously very pleased with the quarter. The CMS ruling obviously is better than initially came out, so we'll take that. Certainly we feel good about the impact that that has on the ASCs. I think there's still some arguments that given inflation we were hoping for a little bit more, but better than we expected. I would say this. We continue to believe with our positioning, you know, with the commercial payers that because of our value position, we're able to find a really nice, happy medium that allows us to grow revenues appropriately. And we feel good about where those negotiations are. You know, with Medicare coming in, you know, near 4%, clearly we have some room on revenue. And on the commercial side, those negotiations are always a little bit of a dance between steerage and being the high-value player and making sure we're paid fairly. And a third of those come up each year. We feel well-positioned on that. Clearly, we are trying to make sure that we more than impact or more than offset inflationary pressures, and that's the focus of the managed care team. And I feel really good about their ability to do that, and certainly the Medicare increase helps offset that and was a net positive to where we started. I don't know, Dave, if you want to talk more about the specifics of COVID.

Yeah, I think I agree with you, Eric. It was obviously very good to see the Medicare rates go up a little bit from what we saw in the proposed rule. You know, we have three aspects of that rate that affect us. The ASC rate, I think, came out relatively favorable. The headline news on the hospital rates also was pretty positive. You know, I would encourage folks to take a look at the impact of that 340B drug program change, which did have a dampening effect on that headline number that obviously we're still working through. All of those things will factor into how we look at next year and, of course, how much of that will flow through our commercial rate program, but generally positive versus where our expectations were in the middle of the year.

Our next question is from Kevin Fishbeck of Bank of America. Please go ahead.

Great. Thanks. I just want to dig into the margin side a little bit because I guess there are a couple of comments there that left me wondering exactly how you're thinking about the margins. If the guidance assumes a lower revenue number but a higher margin than what you had previously, it sounded like, generally speaking, things came in line with what you were thinking. So you're just trying to bridge that change in the guidance on the margin side. Thanks.

Hey, Kevin. Good morning. A couple things I would anchor on regarding margins. First and foremost, you know, our business model has a fair amount of variable costs associated with it, and we flex that up and down. I think I would highlight the fact that, one, we were very much aware of what we saw being kind of the atypical vacation in July, and we started flexing, you know, from that perspective our G&A quickly. And it was no surprise that the hurricane was on its way. In fact, we you know, took the initiative to cancel many of the procedures, shut down our facilities, but then flex our G&A accordingly. That in and of itself, you know, I think because of our ability to use data and drive those decisions quickly didn't influence margin, but what it did do is it took away the headwind that you would typically see when revenue is being impacted from those type of factors, such as the hurricane. But outside of that, I would point to a few things. One is Our G&A initiatives we've been investing in years are really just continuing to ramp up. I actually think our underlying margins would be even better if it wasn't for the current environment that we are in. As we mentioned, you know, we now have almost all of our facilities on a standard data warehouse. We now have our entire HR functions on one HRIS system. Over 90% of all facilities are on a single HRIS system. These are all investments that we've been making over the last several years, but they've all been staged along the way. This is the first year that you're seeing kind of the full force and power of all these investments coming together and kind of the long-term benefits that come with that. The second thing I would highlight for you is to keep in mind that we are doing much more acquisitions through this value health partnership arrangement we have, whereby we acquire a minority interest, we take over 100% of management, so we get a management fee, and we have the ability over time to buy up. The reason that it's so relevant is that, one, because of the way the accounting rules work, When those acquisitions occur, you get zero revenue, zero revenue associated with it because you have the inability to consolidate. But you do get the impact of the EBITDA. And so you'll start to see a miscorrelation at times between, you know, what's happening with EBITDA versus revenue. But nonetheless, the quality of that earnings is quite strong and the cash flow continues to be quite strong. And obviously, to the extent we buy up to become a majority owner, then that will flip where we will start recording 100% of the revenues. But that's the other factor that's been affecting us, especially in this year as we continue to move down these partnerships that we've been building. Dave, anything you want to add on the margin front?

Yeah, just because your question relates to our guide point from last year or from last quarter going into this quarter. And, yeah, you're right. The reported adjusted EBITDA number is a little bit better than what our guide was or really at the top end of our range. And revenue was right in the middle, which, again – And this market, I think, was a remarkable outcome for the third quarter. I'm really pleased with how the team managed that. But mechanically, when you look at what gets reported in adjusted earnings, you do get the benefit of grant income that was received and recognized inside the quarter. That was about $300,000. And the impact of the hurricane that we took out of adjusted earnings is about $1.1 million. You know, when you do the math behind those things, you'll probably find that our margins was in line maybe a little bit better than our conservative guide point that we gave in the second quarter.

Okay, that's helpful. I think I can then squeeze in two questions for my second question. You mentioned as one of your headwinds the elimination, the potential elimination of the Hospital Without Walls program. Can you talk a little bit about what that is, how meaningful that is for you? And then secondly, you mentioned the potential to, you know, sell some assets and redeploy them at better multiples. I mean, any way to size, you know, that opportunity? Thanks.

Yeah, so thanks for the question. On the hostile fault walls program, you know, it's not material, but we do have a number of centers that took advantage of the ability to become hostile fault walls. It requires extra staffing. It allows us to do higher acuity procedures. We're actually quite hopeful, actually, with the success of that program, that Medicare is going to look at those procedures and continue to think about moving them permanently into the ASC space. But clearly, that program allows you to access HOPD Medicare rates for those specific facilities. It's not a huge number, but it certainly is something we've got to overcome. And, you know, we'll overcome that in a couple of ways. One is hopefully you know, continuing to drive increased volume at those centers, which we've done. And the second is using these as examples of the high-quality work we can do on what had previously been considered too high-acuity procedures to be done in ASCs, but actually were done quite safely. So we were really excited about our ASCs that were able to step up and provide that higher level of care. Again, not a huge number of those. It's a handful within our company, but it did make a difference for that period of time, and it's something that we'll have to outgrow in other ways. As far as your second question, which was on our portfolio management work, look, that's going to be something ongoing that we're quite excited about just because we think that increased diligence in that area allows us to proactively make sure that our facilities are with their best natural owner. There are times where we see opportunities. where our asset is highly valuable to someone else. We maybe don't have the same growth perspectives on that facility as we do on other opportunities. And we think that can be relatively meaningful. So the idea here is we're in a particular market or a particular facility, we sell it at a higher multiple than we can put the cash back to work for. We've done some of that this year. We expect to do more of that going into next year. All of those things take time, but it certainly gives us more confidence in our ability to deploy that $200 million cash number because it gives us a real arbitrage opportunity. So, you know, as far as sizing that, we haven't done that publicly, but it's meaningful.

Yeah, I mean, maybe, Kevin, to give you a gauge, though, I would say that as a member of the board, chair of the board, we talk to management all the time about, you know, we'd like to look at the portfolio as just that, but we always look at kind of the bottom part of our portfolio, and is it in the bottom because it's it has the ability to grow and we can influence and grow disproportionately, or is it at the bottom because we've maximized its growth potential and we have other individuals in the market that may like that asset and we have an opportunity then to get a unique arbitrage. And so we're generally looking at something that has, if you looked at all the assets combined, that have EBITDA in the 5 to 10 million range total. So it's not a massive number if you think about what we would be doing, but if you're thinking about 5 to 10 and if you can get a multiple that's potentially double-digit and you're able to acquire it, say, sub-8, sub-7, you can see how quickly the math works and why it's an easy arbitrage for us. And it also affects the long-term growth rate. And so we are constantly doing this every single year in the portfolio. We are always looking at the bottom group of assets that we want to understand better as to is this the right time to liquidate and redeploy that capital, or is it the right time to further invest? And we think that the team's done a real nice job of showing the power of that. And I think it's another reason we have a lot of confidence, not just in the $100 million of free cash flow that we'll generate next year, but the idea that you know, that we have a lot of assets out there, that we have a lot of very substantial interest in is what I would say at what we see as attractive multiples if we can get them over the finish line.

Our next question is from Lisa Gill of J.T. Morgan.

Please go ahead.

Thanks very much, and thanks for the details this morning. I just want to go back to, you know, the headwinds, tailwinds that Dave talked about. If I look at your current guidance and I look at consensus, it looks like consensus is about 15%, call it mid-teens, growth on 2023. Is that the right way to think about it? Obviously, you talked about, you know, a few more headwinds in totality versus tailwinds, but obviously that doesn't always align for how we think about that impact, how that impacts the numbers. So that would just be my first question is, you know, a mid-teens growth on EBITDA the right way to think about this business?

Yeah. Hey, Lisa. Thanks for the question. You know, first off, it is a little bit too early for us to be talking about how we kind of quantify that and responding to kind of the consensus out there is a little bit difficult because we don't, you know, obviously our math looks a little bit different in how we build up our process. I will say this. Eric and I have gone through, we're going through our budget process right now. Eric and I have gone through how do we feel comfortable that we're a double-digit earner on a short-term as well as on a long-term basis, and You know, I'm looking at Wayne right now, and yeah, he's definitely shaking his head that this is what the board expects of us and our ability to kind of get there. So, you know, we will be providing that guidance, kind of how we think about that in our future calls, but at this point, somewhat prudent for us to, you know, stay a little bit quiet into the specifics of how we get there. But double-digit is definitely our goal.

Okay, great. I appreciate that. Thank you.

Yeah, just speaking on behalf of the board, I can assure you that we continue to challenge this management team to identify all opportunities and levers to hit our long-term mid-teens growth goal. As you know, I think we all can agree this has been an incredibly unique year from a macro environment perspective. And if you strip out CARES grants, you know, our growth rate year over year is over 20%. And we're really proud of what we do with this company and how we push these guys and this entire team. I would say, as Dave said, the prepared remarks were quite intentional in saying we have high confidence that we will be double-digit. Now we're just trying to figure out where we fall at relative to those mid-teen targets that we've been shooting for. And then, you know, how do we continue to build more catalysts between now and going into the next year that help give us high confidence that that will be achieved regardless of the environment that we're in. And that's the piece the team is still working through.

And then, you know, Wayne, just a bigger picture question around value-based care. I mean, you and I have had conversations in the past as we think about one, your relationship with Privia, but two, the move in the market towards value-based care. How do you think about that impact on, one, margins over time, and two, the actual shift in that direction? Will we see more of that in 2023?

So it's a great question, and you and I joked about this in the past, right, that I think we've heard people talk about value-based care for about two decades now, and And it does seem like it's finally getting its real moment and real momentum behind the number of companies, including Previa and others, that have built the technology to really be able to track and monitor this. I do think it will get more momentum in 2023. I think I can assure you from our discussions with folks, as we've said before, and we don't say this flippantly, we really mean this and believe this, we are the value in value-based care. Like, we are the key component to make the math of all the technology that folks have built actually work. the math that aligns with both the cost structure and the quality. And so I think you will continue to see what I would call for the first time real proof points in VBC, like real proof points that individuals can share within their existing bottle and that we can share with payers that show that. And then ultimately relative to margins, 100% is the answer to your question, which is this will improve margins for us. And this will allow us to start taking a bigger piece of pie over time. The key for us is just proving to the world that it actually works. Because I think people have heard this for decades and they want to see that It truly does work. But we have a lot of confidence in it, and we're excited about the early relationship with Privia and how that's proceeding.

Our last question is from Ben Hendricks of RBC Capitals. Please go ahead.

Hey, thanks, guys. You noted vigilance around supply costs amid the inflationary environment. Can you remind us of how much your supply falls under GPO arrangements and long-term supply contracts? We've heard commentary from peers about supply contracts coming due in the coming months. Do you guys have any large renewals coming up that could present a material step up given the inflationary pressure? Thanks.

Yeah. Hey, Ben. You know, your question is a good one related to supply chain because our GPO is one of the areas that we believe is a good technical hedge for us or structural hedge for us against inflation. We have a great relationship with our GPO. A majority of our supply spend is underneath that, and we have more room to grow inside that. It provides a huge amount of benefits for us in a number of ways. One, that GPO gives us a lot of data visibility. And with data, you can make much more informed decisions and spread that across our portfolio so our operators and our clinicians can do their job much more effectively. And from a cost management side, that data gives us good, strong visibility into where cost trends are, and the visibility that we have there is pretty tremendous. Our GPO is not up for renewal, but what you may be referring to and what others have kind of talked about is underneath the GPO, they manage long-term contracts with key vendors. And so they can see on a cyclical basis when those contracts come up for renewal. Now, the good news on that is you get good visibility to them. It's a staggered impact. But the GPO is not limited to one or two kind of key vendors. It gives us the opportunity again to see which vendors inside their portfolio may be a little bit better priced and allows us to give that visibility again to our operators so they can make more informed decisions inside there. So the GPO has been just a – a great tool for us, and it was one of the ways that we helped to navigate our expectations for this year. It will definitely inform us as we think about 2023 and we provide that guidance.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to hand the call back to Eric Evans for closing comments. Please go ahead, sir.

Thank you, and I appreciate everyone joining us today. Before we let you go, I would like to recognize the significant efforts and the commitment to excellence of our 11,000 colleagues and nearly 5,000 physicians. Collectively, we take to heart the responsibility for providing the absolute best environment for our physicians to provide exceptional clinical quality and a differentiated patient experience. We know that more than 600,000 patients each year place their trust in us in what are often their most vulnerable moments. I am privileged to work alongside these professionals and colleagues as we work to more fully deliver on our mission to enhance patient quality of life through partnership. Thank you all for joining the call this morning, and have a great day.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.