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Surgery Partners, Inc. (SGRY)

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Surgery Partners, Inc. (SGRY)

Q3 2016 Earnings Conference Call

November 10, 2016 8:30 A.M. ET

Executives

Mike Doyle - Chief Executive Officer

Teresa Sparks - Executive Vice President and Chief Financial Officer

Analysts

Brian Tanquilut - Jefferies

Tejus Ujjani - Goldman Sachs

Frank Morgan - RBC Capital Markets

Joanna Gajuk - Bank of America

John Ransom - Raymond James

Ralph Giacobbe - Citi

Chad Vanacore - Stifel

Presentation

Operator

Greetings and welcome to the Surgery Partners Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Mike Doyle, CEO for Surgery Partners. Thank you. You may begin.

Mike Doyle

Thank you, operator. I’d like to welcome everyone to Surgery Partners’ third quarter 2016 earnings call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer.

I’ll now turn it over to Teresa to review the Safe Harbor statements.

Teresa Sparks

Thanks Mike. Before we begin, let me remind everyone that during this call Surgery Partners’ management may make certain statements that constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

These include remarks about future expectation, anticipation, believes, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in the company’s earnings release posted on the website, provided in our Form 10-K and subsequently filed Form 10-Q as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today’s call, the company will discuss 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 adjusted EBITDA and adjusted net income to net earnings calculated under GAAP can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent Form 10-Q.

With that, I’ll turn the call back over to Mike.

Mike Doyle

Thanks, Teresa. Surgery Partners continues to focus on our differentiated model that strategically aligns physicians through employment and partnership opportunities. Our value proposition is uniquely positioned as physicians again access to our surgical facility and our ancillary services, creating the most economical health care delivery system for our patients.

The continued expansion of high-deductible health plans has accelerated the focus of players and patients to seek care in lower-cost settings. With the broad acceptance of the high quality of care that is provided on an outpatient basis, we continue to solve for the most challenging healthcare issue, which is cost.

Through our relationships with payers and physicians, we provide a much-needed solution for patients who face higher co-pays and deductibles and are absorbing a higher percentage of the increasing cost of healthcare. We appreciate the hard work of our dedicated physicians and employees who provide outstanding care to our patients in an accessible and affordable setting.

In the third quarter, we generated 18% growth in total revenue and 10.3% growth in same facility revenue. Our total cases increased 9.1%, and our same facility case growth was 4.3%, compared to the third quarter of 2015. Revenue per case increased 8.1% in total and 5.8% on a same facility basis. The growth in the quarter was lower than experience in the first half of the year, largely due to the softer than expected volumes in July.

While we do not usually break out results by month, July results very uniquely impacted by physician vacation schedules concentrated in fewer working days in the prior year in addition to the timing of holidays and compressed summer vacation schedules in the Southeast. The results of the month of July were temporarily, as our volume growth resumed a normal pace in August and September.

Our business and our strategy remain solid, with significant growth opportunities, as providers and payers are increasingly focused on pursuing a path of value-based care inherent in our network of outpatient surgical and ancillary services. During the quarter, we expanded that network as we closed on four acquisitions late in the quarter, an ambulatory surgery center in Louisiana; two physician practices, one in Florida and one in Idaho, along with an anesthesia practice in Arkansas.

The ambulatory surgery center acquisition in Louisiana provides us with an opportunity to expand our ancillary service offerings in a new market. The acquisition of the two physician practices and the anesthesia practice demonstrate our ability to successfully grow existing markets with our ancillary services, building an enhanced network of options for our physicians and patients.

We continue to see strong interest from physicians in our model, both from an employment and partnership perspective. We have made significant investments in our infrastructure, allowing us to provide an employment alternative to physicians. With this option, doctors are able to maintain many aspects of their independence and explore new opportunities for growth, ensuring that their practices will continue to thrive.

We also continue to expand our service offerings. We currently provide anesthesia services to 47 surgical facilities, including 38 facilities within our own network. Payer interest continues to accelerate around total joint and complex spine procedures. We are performing total joint procedures at over 20 facilities and complex spine procedures at over 30.

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