Surgery Partners, Inc.

Greetings and welcome to the Surgery Partners First Quarter 2023 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Dougherty, Chief Financial Officer. Thank you, Dave. You may begin. Good afternoon. My name is Dave Doherty, CFO of Surgery Partners, and I'm here with our CEO, Eric Evans, and our Executive Chairman, Wayne DeBite. We appreciate you joining us to discuss our financial results for the first quarter of 2023. Today, we will make forward-looking statements. There are risk factors that may impact those statements and could cause future results to be materially different from them. These risk factors are described in this afternoon's press release and the reports we file with the SEC. which are available on our website at surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this afternoon's press release. With that, I'll turn the call over to Wayne. Wayne?

Thank you, Dave. Good afternoon, and thank you all for joining us today. I'm pleased to report Surgery Partners' first quarter adjusted EBITDA of 90.1 million, 17% higher than last year's first quarter, which generated an adjusted EBITDA margin that grew 60 basis points to 13.5%. Including our non-consolidated facilities, we performed approximately 176,000 surgical cases in the first quarter, 12% more than 2022 with contributions from all our core specialties consistent with our expectations. This strong case growth combined with increased acuity and contributions from recent acquisitions generated net revenue of $666 million. Consistent with our prior quarters, our first quarter results demonstrate top line growth, organic margin expansion, and contributions from recent acquisitions which are the cornerstone of our long-term growth algorithm. Dave will share more details regarding our financial results, but let me highlight a few. Net revenue of $666 million represents nearly 12% growth from the prior year, with same facility revenue growth of 10.3%. This organic growth rate was a combination of case growth of 5.3% and net revenue growth of 4.8 per case. As we pointed out in prior quarters, the case mix of our business has been stable since early 2022, with all specialties growing at rates consistent with our expectations. Physician recruiting efforts yielded nearly 150 new surgeons in the first quarter, representing all of our core high-growth specialties. As we start the year, we continue to be encouraged by the quality of physicians that choose our high-quality surgical facilities. We anticipate recruiting approximately 500 to 600 new physicians annually, Our prior year recruiting cohorts continue to demonstrate strong year-over-year growth, with first quarter recruits from our 2022 cohort generating 78% more revenue in the current year quarter as compared to the same period last year. Finally, joint replacements in our ASCs increased 84% since the first quarter of 2022, as we continue to focus on the significant shift in site of care in our recruiting efforts, acquisitions, and de novo investments. Our M&A team continues its disciplined approach to sourcing and executing on strategically aligned acquisitions at attractive multiples, and we finished the first quarter deploying 60 million at a sub-eight times multiple. Our M&A pipeline is robust, and our balance sheet remains strong, giving us continued confidence in our ability to meet or exceed the annual goal of deploying at least 200 million through acquisitions. As Dave will discuss in a few minutes, We also unlocked additional capital for redeployment by executing on components of our asset portfolio refresh. We will be redeploying this capital in higher growth short stay surgical facilities. Together with the board, I'm optimistic and have high confidence in both the near term and the long term growth prospects of surgery partners. As I mentioned earlier, all growth levers that support our long term growth algorithm are working as expected with top line growth, margin expansion, and prudent capital deployment. While our execution over many quarters has been strong and consistent amid a volatile environment, for the first time in years, the broader healthcare services operating backdrop feels more constructive for providers, including decelerating labor inflation, more consistent volumes across the ecosystem, and a more constructive rate environment. Off this, the strength of our first quarter and our continued investments we are raising our 2023 adjusted EBITDA to be greater than $430 million. This outlook is inclusive of the anticipated headwinds and tailwinds that Dave will discuss in more detail. With that, let me turn the call over to Eric. Eric?

Thanks, Wayne, and good afternoon, everyone. The start of 2023 for Surgery Partners has been productive as the company again delivered on its commitment for double-digit growth and continued to position the company for long-term growth. by completing five acquisitions and four divestitures, and by signing two strategic partnerships with Marquee Health Systems. Combined, these actions position us well to not only deliver on our updated outlook for 2023, but also on our long-term double-digit adjusted EBITDA growth trajectory. Dave will discuss the details of our financial results and the drivers of our increased guidance, and I will dive deeper into our operations and the portfolio changes we are making this year. From an operational perspective, our specialty case mix is right where we want it to be, and volume was in line with our expectations with over 151,000 consolidated surgical cases in the quarter, 6.1% more than last year. Let me reiterate what we shared throughout 2022. The effect of the pandemic on our results is completely in the rearview mirror. Since 2019, each of our specialties and subspecialties have experienced growth consistent with or exceeding our long-term growth. To put a finer point on this, since early 2022, all our specialties recovered from the pandemic with strong growth rates throughout the year. In aggregate, our quarter one case volume inclusive of 2023 has a four-year CAGR of 4.9%. In the quarter, our same facility growth exceeded 5% when compared to the first quarter of 2022, continuing our consistently strong growth trajectory. As Wayne mentioned, this case growth included contributions from higher acuity cases, which helped our same facility net revenue per case increase almost 5%, and combined to provide a double-digit same facility revenue increase in the quarter. We expect to continue to see both volumes and rate growth in excess of our long-term guidance ranges throughout 2023. Labor and supply costs remain well under control, allowing our adjusted EBITDA of $90.1 million to generate 13.5% adjusted EBITDA margin, 60 basis points of expansion compared to last year. Physician recruiting, which targets the highest quality physicians, added approximately 150 physicians in the quarter. 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 the 2023 recruiting class. All of this has continued to fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed over 26,000 orthopedic procedures this quarter, and the volume of total joint surgeries that shifted into our ASCs increased by 84%. And as we have discussed, we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings, starting in earnest over the next three to five years. We do not expect the shift of these orthopedic and cardiac procedures to slow down, and we continue to position our portfolio to take advantage of this high growth opportunity. In the first quarter, we deployed $60 million acquiring two new ASCs and increasing our ownership position in three other facilities, including two from a prior year minority interest acquisition from Value Health. These acquisitions, which increase our multi-specialty capacity, have an average purchase price multiple of less than eight times trailing 12 months earnings. We are rapidly integrating these acquisitions into our operations and expect to yield further earnings from our operating system synergies in the first 12 to 18 months post-acquisition. On the de novo front, since 2019, we have opened four new ASC facilities and have 10 fully syndicated de novos under construction. Many of these projects are slated to open in late 2023 or early 2024. These facilities include consolidated and minority interest ownerships and our multi-specialty with a concentration in orthopedics. In addition, as we mentioned in prior calls, we consistently evaluate our portfolio of approximately 150 short-stay surgical facilities to ensure we are the best owner of the assets and that they meet our high expectations for both growth and margin performance. Although each of our facilities generate revenue and earnings, in certain cases, the monetization and redeployment of the proceeds of our portfolio management efforts will be net accretive to the company's earnings. Year to date, we have divested our interest in four facilities and expect to divest of another four to six facilities by mid-year. The aggregate proceeds from these divestitures will be redeployed at a lower multiple and will be accretive to future earnings. Our pipeline of new acquisition opportunities remains strong and supportive of our commitment to deploy at least $200 million plus the incremental proceeds from divestitures this year. Finally, I'm pleased to announce new strategic partnerships with two prominent health systems. Intermountain Health, and Ohio Health. While decades of growth remain in our core business of two-way JVs with surgeons, Surgery Partners has emerged as a partner of choice for hospital systems, revisiting their outpatient strategy. We are winning in this area because we are differentiated in our ability to consistently drive same-site growth through data-enabled physician recruiting. We bring a rigorous and disciplined approach to facility management, including on labor and supply costs. and more recently, our proven de novo capabilities at scale. Our deep operational excellence stands out. Accordingly, Intermountain and OhioHealth are like-minded health systems that are joining with us on a long-term growth strategy, supporting the country's migration of procedures into the highest value setting. Through these partnerships, we will combine Surgery Partners' industry-leading management expertise with the strong market reputation Intermountain Health has earned throughout the mountain region, spanning Nevada to Montana, and the equally strong reputation Ohio Health has earned in Ohio to create regional ASC networks. Specifically, in partnership with Intermountain, we will provide management services for 19 current and future ASCs in the Utah and Idaho markets. We will also partner with Intermountain to co-develop additional ASCs throughout their regional footprint in the years to come. Surgery Partners is now also the partner of choice with Ohio Health as it accelerates its plans to create a statewide ASC network in Ohio. In this partnership, we will provide management services to ASCs that we jointly acquire or develop in the coming years. These partnerships with like-minded health system partners represent significant opportunities to serve these growing communities and to expand our scale. Although they will provide minimal earnings in 2023, we expect rapid and material contributions to our growth story over the next several years. We look forward to sharing more details about these developing ASC networks throughout the year. In summary, I am very proud of the team's accomplishments this quarter. Not only have we continued to excel within our core operations as evidenced by our consistent financial results, we are executing on our commitment to position the company's footprint for long-term growth and success. More than ever, 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'm going to turn the call over now to Dave to provide additional color on our financial results as well as our 2023 outlook. Dave?