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Surgery Partners, Inc. (SGRY)

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Surgery Partners, Inc. (SGRY)

Q3 2017 Earnings Conference Call

November 9, 2017 8:30 AM ET

Executives

Clifford Adlerz - Interim Chief Executive Officer

Teresa Sparks - CFO

Analysts

Brian Tanquilut - Jefferies

Kevin Fischbeck - Bank of America/Merrill Lynch

Tejus Ujjani - Goldman Sachs Group Inc

Bill Sutherland - The Benchmark Company

John Ransom - Raymond James

Seth Canetto - Stifel

Frank Morgan - RBC Capital Markets

Kyle Smith - Jefferies LLC

Rishi Parikh - Barclays

Presentation

Operator

Good morning. And welcome to the Surgery Partners' Inc. Third Quarter 2017 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Teresa Sparks. Please go ahead.

Teresa Sparks

Thank you, Operator. Good morning. And thank you for joining us today for Surgery Partners' third quarter 2017 earnings conference call. 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 expectations, anticipations, beliefs, 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 and provided in our annual report on Form 10-K and our quarterly report on Form 10-Q each is 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 quarterly report on Form 10-Q.

With that, I'll turn the call back over to Clifford Adlerz, our Interim Chief Executive Officer of Surgery Partners. .

Clifford Adlerz

Good morning. And thank you for joining the call. It has been a dynamic first few months in my role as Interim CEO. Our first challenge was the natural disasters impacting several of our markets and our main priority was ensuring the safety and wellbeing of our colleagues in these areas. We are pleased to report that all of our employees are okay. Our facilities suffered only minor damages and we appreciate the swift response by our entire team in addressing immediate needs. As this is my earnings call I'd like to frame up this morning's discussion around three primary topics. First, Teresa will provide a brief update on our third quarter and year-to-date results which are in line with our pre release on October 31st. I'll then provide an update on the status of our integration efforts related to NSH and how we are leveraging these efforts and creating focus and discipline around our core operations. And finally I'll outline some of the 2018 headwinds and tailwinds and the efforts we are undertaking to achieve growth and improve underlying financial performance.

At the onset before stepping through each of these three topics I want to clearly state I am very excited about the opportunities ahead of Surgery Partners given the business is well aligned to take advantage of the long-term trend for an increasing number of surgical procedures moving to high quality, more cost efficient outpatient facilities. Moving forward, the organization is focused on several key initiatives including setting appropriate growth objectives and providing this corresponding guidance to our investors. Integrating NSH to achieve the scale benefits of a larger, more diversified organization. Focusing our efforts on core outpatient surgical facilities by driving performance improvements to achieve increased same facility growth and enhance margins, and evaluating and completing accretive acquisitions of short stay surgical facilities. I'll elaborate further on these items but in short these are the main areas of organizational focus and action.

With that backdrop, let me hand the call over to Teresa for an update on our financial results and near term outlook.

Teresa Sparks

Thanks Cliff. As you saw last week we pre announced select financial results in the quarter and updated guidance for 2017 in order to provide greater transparency regarding the state of business, the any challenges we face during the quarter and their impact on our financial results.

For the quarter, total revenues increased 8.4% to $306.3 million from $282.7 million for the third quarter of 2016. Total revenues reflect the contribution of one month of revenues from the NSH business, partially offset by the impact of certain industry headwinds and hurricanes. On a normalized basis total revenues increased 16.7% to $330 million. As a reminder, normalized revenue is adjusted for the impact from hurricanes as well as the one time adjustment disclosed in our earnings prerelease.

Our same facility revenues in the quarter on both normalized and pro forma basis reflecting the NSH acquisition increased 2.9%, which is a result of a 3.3% increase in net revenue per case offset by a slight decrease in case volumes. On a sequential basis, we have seen stabilization in the payor mix between commercial and government payor. Our adjusted EBITDA margin on a normalized basis declined to 13.1% from 15.8% of revenue as compared to the third quarter of last year. This decline margin was primarily driven by an increase in our medical supply and implant cost driven by higher duty cases and an adverse payor mix shift within commercial. We have launched specific initiatives to address margin with a focus on procurement and medical supplies. Cliff will elaborate on this in a moment.

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