Good afternoon, and thank you for joining us. My name is Lisa Gill, and I am Head of Healthcare Services here at JPMorgan. It's with great pleasure this afternoon that we have with us Surgery Partners. Presenting for Surgery Partners are Eric Evans, CEO, and then after Eric does the presentation, he's gonna join myself and Dave Doherty for just some Q&A. So with that, let me turn it over to Eric.
All right, good afternoon, and Happy New Year, everyone. My name is Eric Evans. I'm privileged to serve as the CEO of Surgery Partners. Delighted to always talk about the company. It's always a nice opportunity. I would just, before I get started, mention that we did pre-release this morning, reiterating our 2023 guidance and providing an earnings of at least or better than $495 million Adjusted EBITDA next year. So in case you missed that, just wanted to make sure I, I said that. Also, I'm gonna do my best to stay relatively short on my presentation, so we can have at least half the time for questions. For those online, I'll do my best also to reference slides as we go forward.
So really, three topics that I'm gonna cover today. First of all, just an introduction to Surgery Partners, who we are, what makes us unique, what, what's our history and our story. Number two, some investment highlights for our company that I think makes us one of the best investment opportunities within healthcare services. And finally, a little bit of a track record for us on what we've done from a financial metric standpoint, consistently over the past five years, where we see those metrics going in the future. So, with that, I'll dive in. This is who we are today. You can see, a portfolio of our map. We've built our company over 20 years, approaching 160 surgical facilities across the country. And I would highlight a couple of things on this slide.
First of all, we use this as leverage to make us a better company. So if we find something in Providence, Rhode Island, where we have an opportunity, whether it be in supply chain, clinical quality, our goal is to make sure that the next day we're doing that same thing in LA. So we use this, these 160 facilities, as a way to quickly provide better service for our nearly 5,000 surgeons that are on our staff, as well as the 650,000 patients we treat annually. You can see we're now across 32 states, and the numbers at the top are trailing twelve. I'd also mention here, we're a pure play surgery operator, so we kinda say that term just to make sure what I mean.
We are independent, so we're not owned by a big health system. We're not owned by a health plan. We are primarily partnered with physicians, and that is something we're proud of, that independence. We think it differentiates us in the marketplace. That portfolio has really been anchored by really consistent, strong performance and from financial standpoints. You can see our CAGR over the past six years has been about 18% for our adjusted earnings. Very proud of that. Importantly, the majority of that has been organic. Same store growth through physician recruitment, service line development. And at the bottom, you can see 350 basis points of margin improvement over the past several years. The good news is, that trend isn't changing. We feel that that's the trend for us for the foreseeable future.
We'll talk more about that in just a second. Our growth algorithm is very simple. For those of you who followed our story, it hasn't changed, it's consistent. It's easily understandable and therefore executable by our team. I'll start on the left-hand side. We expect to get 4%-6% growth a year from top-line growth. That's consistent of 2%-3% case growth and 2%-3% volume growth. And for those online, I'm on slide 7. And recruiting and service line expansion are part of that 2%-3% case growth. We've outran the 4%-6%, I'll be honest, over the last several years because we've been continuing to grow acuity. But in a normal year, we think 4%-6% should be your expectation on top-line growth.
If you go to the right side of this slide, capital investment, that should be another 4%-6%. If you think about the highly fragmented nature of our marketplace, we have lots of great M&A opportunities. I'll go into more detail in the future or in a future slide on. Health systems, health plan partnerships, we announced 3% of those this year. I'll talk more about that in a second. And the final, newer to our playbook is de novos. We have 17% of those in flight. We expect to do double-digit de novos for the foreseeable future per year. And so at the bottom, that average, that averages out to 11%-17% growth. We expect to be in that range, hopefully in the mid-teens on average for the next few years.
The upside of that, of course, is over time, as we continue to increase our free cash flow, capital investment opportunities certainly could be more. Our company, fortunately, is also built on a foundation of a very, very strong product. So at the top of this slide, you can see we are a preferred provider for patients. We have high, very high patient satisfaction scores, well above the national averages. We have very happy physicians, high retention rates, really strong same-store growth, both of our new recruits and our existing partners. And at the bottom, because of our value proposition, we are well positioned for continued growth. So 40%-60% savings when you compare procedures done in our short stay surgical facilities versus traditional acute care. And because of that, CMS continues to lean in, right?
During COVID, they added total joints, they added cardiology. Really pleased to see this year they've added total shoulders and total ankles. So we see tremendous opportunity, obviously, there for continued growth. All of that couldn't be possible without our culture. So our company is a very mission-driven company with core values we talk about a lot. These aren't things we just put on the website or print on a piece of paper. We use this to operate the company. Our mission statement is to enhance patient quality of life through partnerships. So two things I'll point out. One is, we understand our mandate to growth is by having a superior clinical product that has great patient satisfaction. We also understand everything we do is in partnership, so everything we own is with physicians. It's what allows us to have great clinical outcomes.
It's what allows us to have great alignment. I could spend the rest of the presentation on this slide going through our core values. I won't, but I will point out the last item on here, which is setting and exceeding expectations. You saw our financial slide just before. Our goal is to always be a meet and beat company, and we have proven that consistently over the past several years. With that, let me jump into investment highlights. Six things I want to cover today. One is we have an amazing adjustable market. Our TAM is $150 billion. It's got a lot of macro growth drivers in it, including the aging population and the movement to high value, higher quality or higher value settings for patient care.
So you think about a cardiology, orthopedics, we can save $10,000+ per procedure. Makes a big difference, obviously, for the healthcare system. Number two, we're an industry leader in those specialties where that movement is happening. The third thing we'll talk about is our product. We are very, very proud every day of the 13,000 employees who are dedicated to providing outstanding patient quality, and we'll talk about that. Fourth, we have an amazing M&A pipeline. So if you think about our business, not only do we have the great organic growth, but we're in a very fragmented industry, and we've proven track record of finding accretive opportunities year after year. We have a great management team. Dave Doherty is here with me. Our Chief Development Officer, Jennifer Baldock, is in the back.
Very, very proud of our team. We put them up against anybody in the industry. And lastly, we have consistently delivered on what we said we're going to do. So those are the six things we're gonna run through. I'm gonna start with our market. And we are in a, I think, a sweet spot of healthcare services. If you look on the left-hand slide, part of slide 12, you'll see kind of what's happening in healthcare. All of you are aware of this trend. Everything is pushing to put patients in the lowest acuity, the lowest cost setting you can. So, ideally, everyone gets treated at home. I don't think that's gonna happen anytime soon, but you can see the movement that's consistently been happening across the industry.
It's happening to us on some of the lower acuity stuff, but we're sitting in a sweet spot, and I'll tell you why. So you think about the ASC industry today. It's about a $40 billion industry growing at 6%. If I stop there, that's a great marketplace. Really, really excited to be part of that. What makes this industry what makes our opportunity so different, though, is how much still sits out there to grow the market. So there's another $55 billion-$60 billion that today sits in the HOPD world that could be better served and better done at a higher value in our settings. And on top of that, there's another $60 billion that currently sits in the inpatient surgery world that'll be moving into the outpatient space in the coming years.
So you think about that, great market today growing at 6%, but another basically $110 billion moving into our space in the coming years. We are well positioned to capture that. 60% of that movement is in specialties where we-- that are core to who we are. So super excited about the opportunity in that $150 billion TAM. Within that world, we believe we have the right specialties, so I'll highlight that our, our CAGR growth on total joints has been 95% for the last five years in our ASCs. So rapid growth in those specialties. In ophthalmology and GI, also very strong growth that is aligned with the aging demographics. We're in the right markets, so 40% of our facilities are in the top five MA states in the country.
It's a very similar percentage when you look at our commercial, top 5 commercial markets. We have the right partnerships. Because it's such a fragmented industry, we have a lot of choice. We have partnered with many of the top groups in the country. We look for high-quality partners that are like-minded, that see the world the way we do, and we feel, we know we have fantastic independent physician groups and health system partners that are helping us drive our growth. And finally, we have the right facilities. So, the vast majority of our facilities are multi-specialty, meaning we have all the levers of growth. We also have renovated these facilities dramatically. So we have 26 facilities since 2018 that we've expanded or completely renovated. I mentioned earlier, we have the 17 de novos.
We've also added 37 robots to those facilities to position ourselves to capture those higher acuity cases moving forward. We are well positioned in this world. We have a very diversified case mix, but it's in the focus specialties where we see the, the highest profitability. You'll see our largest service line is musculoskeletal, MSK. It represents more than 50% of our revenues, followed closely by ophthalmology and GI. On the right-hand side, I would highlight, since 2019, our lowest of our core growth specialties is ophthalmology at 3.7% case growth per year, right? So really strong, kind of across all specialties, case growth since 2019. I'll also highlight cardiology at the top. That's a small in.
Cardiology today is about 1.5% of our cases, a little less than 3% of our revenue. We do expect that to grow rapidly. I'll spend a second on that in a moment. We didn't just choose those three specialties by accident. We spend a lot of time. We're a data-driven company, and our biggest bottleneck, our most expensive asset, is our OR time, right? So we spend a lot of time thinking about what are the highest contribution margin procedures we can do per minute in our ORs. You'll notice it's no accident, ophthalmology, GI, orthopedics, cardiology. So we look at this constantly. We try to find ways to maximize how we use that valuable time, and it continues to play into our growth.
When I think about cardiology and MSK in particular, the reason we highlight those so much is they're really, really important for on the payer side of the community, right? These are procedures where patients can save, the health system could save five figures plus, $10,000+ per procedure. When you think about EPs, PCIs on the cardiology side, you think about spine surgery and total joints. On the orthopedics side, we've invested a lot of money to be ahead of that, starting in 2017, and really positioning ourselves to have the catchment to drive that growth. 80% of our facilities today perform MSK procedures, and you can see some of the strong brands we've built off to the right. On the cardiac side, we're in the early innings.
We're adding about five procedures, about five new programs a year in our ASCs. I will highlight those today are primarily cardiac rhythm management, right? These are not full-blown cath labs yet, so we're starting with things like, AICDs, lead extractions, EP procedures, but we do, in our de novo pipeline, have cath lab-based ASCs being built, and we are, every time we look at expanding an ASC, we're having that conversation: Is now the right time to add a cath lab? So we see that as a, as a big future growth, play for us. Everything we do is built around utilizing a very capital efficient flywheel.
So when you think about our growth, we start with, do we have a facility that's in the right sweet spot of our demographic growth and kind of trending for growth based on the community stats? Then we add our physician recruitment engine to that. So many of you following this will know, we recruit about 600 new physicians a year to our facilities. That's obviously a big part of our same store growth. We focus a lot on adding orthopedics and cardiology because those matter, A, most to the payers. They also provide a very high contribution margin per minute. Once we add those surgeons, we slowly start increasing acuity, right? So we might start with a CRM program and then go to a Cath Lab. We might start with sports medicine and then go to total joints.
We then look for in-market opportunities to grow, and finally, we use our scale to drive payer strategies and reduce our supply chain costs. So this is what we apply, kind of every single facility, every single service line. And to see that in action, so we've applied that in orthopedics for the last 6-7 years. You can see that has been a 10% CAGR on orthopedic procedures since 2017. We do over 100,000 MSK procedures per year, and just this year, we have added 100 new orthopedic surgeons through September. So big focus. It allows the team to execute in a very clear way using that flywheel and is paying off in our results. I mentioned earlier cardiology. We are very, very excited about the cardiology opportunity. It is not gonna be overnight, though.
So just like orthopedics was not, there's a couple barriers to cardiology moving quicker. One is it's a highly employed specialty, so physicians, even if they wanna be independent, they often have a three-year employment agreement, so there's some delay there. There are about 20 states that still have not followed CMS in making PCIs and higher acuity ASC procedures available based on CON laws in the state. But all of that stuff will go away over time with the numbers. It's been proven to be safe and efficacious. Cardiologists are reaching out to us on a regular basis saying, "Hey, we wanna do this. We're not happily employed.
We wanna have a seat at the table." This is one that over the next several years, we expect to be one of our leading growth engines, and over time, will be just as big, if not bigger, than the orthopedic opportunity we're in the middle of today. This is a big one for me. I don't think we have the mandate for the kind of growth we are experiencing without having a great product. So really proud to say that of all 10 clinical metrics that are part of the ASC Quality Collaboration, we are above benchmark. All 10 of our surgical hospitals are either four- or five-star from CMS, and you can see at the bottom the numerous other awards we win.
We have to maintain and continue to drive a differentiated product, and we've done that consistently over the past many years. All that results in an NPS score that I think anybody would be proud of. Our Net Promoter Score is comparable to really well-known names across different industries. Patients don't have that experience in the traditional healthcare system. If you think about traditional acute care, the scores are probably 20 points lower. So it's a big differentiation point for us to have patients not only save money, but leave with a much better experience. Part of how that works is the way we partner with physicians. So physicians often, and I used to be in big hospitals, you do feel like a cog in a wheel. In our facilities that are focused factories, they sit at the table with us.
They help drive clinical protocols. They have ownership in how that patient experiences the facilities, and that really allows and enables everything that I'm talking about today. This is not something that happens just by accident, right? These physicians put a lot of blood, sweat, and tears in their facilities, and you can see at the bottom, we have a very, very high retention rate because of that. We also have other partnerships, the three-way JVs I'll talk more about in a second. We're doing more health system partnerships recently. And then we also have multi-facility management agreements that are a small part of our business. Part of what allows our portfolio to work so well is we've spent the last five or six years moving to in-state systems. So that's everything from revenue cycle to HRIS.
This company historically was a roll-up of roll-ups in some ways. We spent five years kind of creating that systemness. That is proving to be very valuable. It allows us to have data to move faster. It allows us to use things like robotic process automation, you'll notice at the bottom, to drive value to these centers in ways they can't possibly do on their own. And lastly, that also enables all of those functional areas that are part of, if you go back to my growth algorithm, that middle core operating system, that 3%-5% earnings growth, that's what this is, this slide's about. It's managed care, supply chain, revenue cycle, the things that we bring in that instantly reduce the cost of the facilities we buy and that every year get better for our physician partners.
I mentioned earlier that a big part of our growth algorithm is M&A, and, this segment continues to be extremely fragmented. So if you look on the left-hand side, there's over 6,200 Medicare-certified ASCs in the country. Over half of those are still independent. So over half of those are still in play, for us to be able to help consolidate, help drive, better results for. In addition to that, there's another 6,000 ASCs that are non-Medicare approved, right? So there's 12,000 ASCs out there. The vast majority of them are independent. We talk about having a target of at least $200 million of M&A every year. That is going to be available for the foreseeable future. There is tremendous amounts of consolidation still happening.
On the right-hand side, the physician-owned hospitals are short-stay surgical hospitals, which we also love. There's a set amount of those. There'll never be more unless the Affordable Care Act gets changed. But when they come up, we certainly like to add them to our portfolio, because what it allows us to do is then have a physician JV model across the care continuum. We put them with ASCs, and we're then able to take higher and lower acuity surgical patients. So I mentioned my colleague, Jennifer, in the back of the room. On page 26, we kind of give you a feel for what we've been doing in M&A. On the left-hand side, one thing we are committed to is always looking at our portfolio and doing proactive portfolio management. So we have 160 centers.
In any given year, there's always gonna be a handful that maybe aren't, we're not the best natural owner of, and so we spend time diligently looking for opportunities where we can sell something for a higher multiple, redeploy those funds in a faster growth market or center. The acquisitions in orange, you can see over the past several years, including this year, where we, we've closed $225 million through today. We did have some deals slip into January, but you can see a consistent track record of exceeding that $200 million acquisition number. All of those at sub-8. Sub-8 multiple is what we shoot for, and then our goal is to take a turn to a turn and a half off in the first 18-24 months.
So we spend a lot of time doing that. Obviously, that translates pretty well when you look at our stock multiple as far as accretion. On the partnership side, I mentioned earlier, this is something we have really ramped up as far as part of our growth strategy. So this year, we announced our partnership with Intermountain Health. We'll be transitioning and managing all their facilities in Utah, and we are also growing JV to equity JVs, ASCs across the Mountain West with them. Methodist Health System in Dallas, we bought into their existing facilities, 4 in Dallas, and we have a bunch of interesting projects underway in Dallas. In OhioHealth, same thing, statewide ASC partnership to go and move transition patients, higher acuity patients into the ASC setting. Finally, on the pipeline, 17 de novos, I mentioned this earlier.
That's gonna be a great growth opportunity for us going forward, that we see 10+ a year, and our pipeline remains really, really strong. So, Jennifer's already got $200 million under LOI heading into the year, another $100 million, where we have submitted offers. We have a great team. I will, for sake of time, not go through the team in great detail, but we have a team that's very experienced. They've been through lots of different health cycles. We have deep experience in managed care world, we have deep experience in the value-based care world, and we have deep experience in healthcare service operations, and this team has been the ones that have allowed us to drive such consistent performance. Lastly, our track record.
So our last fifteen consecutive quarters, we've met or beat our guidance, and we want to be a beat, a meet and beat company. I mentioned earlier, if there was one core value I wanted you to focus on, because it matters to this room, is that our goal is to always set and exceed expectations. We built that into our culture. We just set more expectations this morning that our job is to meet, meet and beat. Quickly, because I wanna make sure we have lots of time for questions. Here's a little bit of a track record. Covered some of this. You can see on the right-hand side, I already covered our growth history on Adjusted EBITDA, but same story on net revenue. You can see the CAGR over the past seven years has been nearly 13%.
It's been strong, it's been consistent, and quite honestly, this page is what I wanna spend a moment on, which is we don't expect that to change. So we have high visibility into our mid-teens growth. We have every expectation that by the end of 2027, we will have bottom line earnings of $750 million or more, and we're excited to continue to grow the company at a mid-teens pace. I do wanna spend a second, because this is a frequent topic of discussion right now in healthcare, which is the leverage of healthcare service companies. You can see we've cut our leverage in half over the past several years. I'm proud of that.
We also, for those of you who saw late last year, we closed a very successful refinancing of our term loan. We actually got two upgrades before we went out with that term loan. Because we were so strongly oversubscribed, we managed to actually cut our pricing versus our prior pricing. So we have real interest savings on our refi'd term loan that was pushed out to 2030. Much better terms. We also have a higher revolver going forward of over $700 million, and we continue our deliberate multiyear hedging strategy. So for those of you who know our effective interest rate, we've been entirely hedged.
We are through early 25, is less than 6%, and we have adequate liquidity to do everything I talked about in our growth algorithm. So we are continuing to execute on that. I'd point out two things at the bottom. Number one, we have a track record of really reducing that leverage. We expect to be in the mid-threes by the end of 2025, and in 2025, we will be notably at $200 million free cash flow, which can fully fund our planned M&A. So with that, a recap. Fast and growing TAM. Super excited about the opportunity for us to take advantage of that. We are well positioned within that TAM. You can see year-to-date, 10.6% same store growth. We have a superior product.
We've got a great team delivering excellent care every day that differentiated. Number four, with Jennifer's help, we have a consistent track record on M&A with an unbelievably fragmented market and opportunities in front of us. We've got a great team, and lastly, we've got a track record of doing what we say we're going to do. So with that, I will end, and you can ask questions.
Great. Thanks, Eric. Thank you so much for all the detail. Let me start first with utilization in the fourth quarter. Can you talk about any notable shifts in utilization, cancellation rates? And I think also just kind of piggybacking off of that, I think there's still this debate of, is there pent-up demand in the marketplace?
We're gonna let Dave start off this question. I might add a little bit.
Yeah, thanks. He does that because we haven't closed the books fully yet. So, what we have, obviously this morning, we felt confident enough from what we saw inside the fourth quarter to be able to reaffirm our guidance, going through results through November, but obviously, we have good visibility into the cases that come through our business. I can say, we had no unusual events that occurred to us inside the fourth quarter. In fact, we've saw that for most of the year this past year, so no ice storms or anything kind of crazy that otherwise might happen inside the...
Inside the fourth quarter sometimes, and the trajectory that we have been seeing all year in terms of, case growth across all of our core specialties, continuing that strong momentum that Eric was presenting earlier on, that long-term, that four-year CAGR that we've seen, each one of those things continuing to produce where we want them to produce. So the utilizations remains consistent. Nothing unusual on the upside or on the downside, but good, strong, continued momentum.
Yeah, and on the second part of your question, kind of all year long, we've been dealing with every quarter, it feels like somebody stepping out and saying, "Oh, my gosh, there's this huge push into, into outpatient." And, I guess what I, what I would say is this: We have seen strong growth. I mentioned earlier we have a 95% CAGR on total joints. So yeah, it's dramatic, but it's the same. So we, we've struggled with this a bit because from quarter to quarter, from various different angles, we hear this, "Hey, pent-up demand." What's great about our business is we do have these deep relationships with our partners and our surgeons in our markets. They have deep community relationships. They know if there's pent-up demand. They are seeing nice growth, but there is nothing out there that's different than it has been historically.
Strong growth, consistent growth. We absolutely agree there's a big transition happening. It's just, at least in our portfolio, it's been consistent, and we don't see the ups and downs that seem to kind of gyrate through quarter by quarter. And in general, in healthcare services, I think you know this, like, when any, when any data point moves too, too big, I always say the first thing I check is, is there something off the data? Because things just don't move that quickly in our business.
Then as we think about 2024, right, and we think about utilization in 2024, you, you talked about the different service lines, as we go into 2024. Just given the acquisitions that, that you've made, should we see anything different in utilization of those service lines in 2024 versus what we've seen, say, in 2023?
Yeah, no, I think what's great about our business is it is very, very consistent, right? So I'm going to go back to that slide that showed our CAGR and our core service lines. The lowest CAGR we had was 3.7% case growth since 2019, with orthopedics being more like 7%. I think you'll see more of the same. You know, we've got very clear visibility into the type of recruiting we're doing. We know what specialties we're adding. That transition is still happening from HOPD and from acute. So more of the same. Now, I will say we're going to continue to focus on cardiology being an opportunity.
Right.
Fairly spine and total joints. But the good news about our story is it's relatively simple to explain, and it's very, very consistent.
I appreciate that, and I appreciated the pre-announcement this morning, even though it was very early for me. You know, at least $495 of Adjusted EBITDA growth in 2024. What are the key items that are going to drive that growth next year? When we think about that, it's roughly 13% off of what consensus numbers are today.
It is, yeah. It. And it is, we'll give a lot more detail when we get to our fourth quarter in scope. Since you invited us this morning, we decided to give at least this much.
I appreciate that.
But, getting there is really that simple growth algorithm that Eric was talking about earlier. As we've seen throughout all of this year, all of those growth levers have been contributing to us in a meaningful way. So we've seen top line growth coming to us from both case and from rate. And on the rate side, it's been a little bit heavier as the acuity has shifted for us, as we've seen. That nothing, again, as Eric just said, nothing is going to change that quickly. So you're going to see that trend continue. So we're probably going to be feeling pretty good on the top line growth story. Our M&A of 4%-6%-
Mm-hmm.
... is on our commitment to spend $200 million. As you just saw, we completed $225 million-
Right.
... through today, and another 200 in the pipeline. So, that feels pretty good, with one exception: timing. The timing on M&A is fickle, and we are not a company that is going to execute M&A just to simply meet a number. So we're going to do it when the time is right. We keep referencing Jennifer. She holds us to a very deliberate approach and discipline before we execute on a deal. And we'll let that process kind of go through. As a result, that will affect your timing, right?
Right.
That is why we start off with the guidance range that we have. And the margin expansion that comes from both last year's acquisitions-
Mm-hmm.
... rolling into our flywheel, will start to spin up some margin for us, and there's still plenty of room for us to grow on the procurement, on the rev cycle side, on the managed care team side. So all of those growth algorithms for which we have teams that are held accountable-
Right.
... both at the corporate level, all the way down to our facility levels, should all be providing meaningful contributions as we get into this year.
As we think about contributions from things like de novo facilities, right? You talked about 17 de novo facilities. How do I think about the margin on de novo facilities and the impact that that will have? Because I would think that those margins are going to be lower, right, than your core book of business, and it'll improve over time.
Yeah. So great question. First of all, we're super excited about our de novo opportunities. It's really picked up in the industry again. And all of those, what makes it exciting, all of those are really the higher acuity specialties, right?
Mm-hmm.
So these are primarily ortho-driven, larger rooms. By the time we tell you about a JV de novo, we have every doctor we know who's invested, we have their checks, we know what that looks like, right? So these are syndicated opportunities with really great groups. The timing on this is, so you think about, from the time that we get it syndicated, there's 12-18 months, more like 18 months, because of construction today, right? So you figure 18 months to get the facility open, 3 months to get it licensed, and then you're probably 3-6 months to kind of get it to break even and really starting to produce.
Right.
So you're right. Early on, it's not going to be a margin additive. However, these are really accretive investments, cheaper than M&A, take a lot longer, right? And they're with really top-notch, high acuity docs. So I think when you think about from an investor standpoint, you'll start to see some of these coming into the model at the end of this year. Really, 2025, you're going to see more of an impact. And as these ramp, there's roughly half of these where we'll have the opportunity to buy up over time to a majority position. So there is a multiyear contribution-
Mm-hmm.
... they'll make to margin. But you're right, early on, this is really a bunch of seeds we've planted that add a whole new level of growth for us that's going to be quite meaningful in the next, you know, 2-4 years.
Eric, you mentioned construction, right?
Yeah.
Construction costs, inflation, have all increased. Does that change the trajectory of profitability on these?
Yeah. So fortunately for us, I mean, we've actually, you know, these-- Because we know so much about what-- who the doctors are, what the procedures are, we de-risk these a lot. Even with a little higher interest rates and a little longer construction, these are still really, really accretive, projects. And so, on the margin.
Mm-hmm.
I t might make them a little bit more expensive upfront, but really, it doesn't change our outlook on these at all based on the types of partnerships we're putting together.
You talked about your capital structure.
Yeah.
You know, Bain Capital, your largest shareholder, recently completed a private secondary offering. Recognizing, you know, this was Bain's decision.
Yes.
Can you maybe just talk through the understanding and the rationale of, of doing a transaction in this way?
Sure. So I've got Bain colleagues in the room, but we'll, I'll go ahead and answer. So what I'd say is this: Bain's been a fantastic partner. We're in year seven with Bain. They're a long-term, kind of build great company, focused partner. They did have a secondary transaction they made. But if you look at the history of how Bain thinks about these kind of companies, where they've got a public company that's really had great growth, I'll use two examples, HCA and IQVIA. Those two companies, they had a very measured plan over time. They're not in a hurry. Certainly, if they were selling the whole company, it wouldn't be at this price.
Right.
But when they think about, you know, our growth profile and what they wanna do over time, we're in year 7. To me, it's a natural maturation process, and, you know, they're still a 39% owner. They're still very active. We talk with them often. They're a great partner. They're still very, very confident in the business. And what I can promise you is they're not gonna be in a hurry. They see the upside. They're gonna ride with this investment, and, you know, they've been a fantastic partner, and I expect they will continue to be.
You also, in December, you refinanced $1.4 billion of a term loan. I think you brought that up in the presentation as well. Can you speak to the process, the outcome, and what you have left to address when we think about any kind of refinancing risk? I think you said there's nothing until 2025.
Yeah. So before I turn this to Dave, let me first of all just say, I'm gonna take a victory lap for him. We went to market, we went to market with refining our term loan, in a time where interest rates are higher. We just got two upgrades coming off our third quarter results, and, you know, quite honestly, I think if you would've told me, interest rate neutral would be a win, the fact that we actually brought down our cash interest rates for next year is fantastic. So I'd really... Kudos to Dave and the team. That doesn't even count all the better things that are about that refi through 2030. But, I'll let Dave walk through the process. I do think, you know, we've got opportunities.
You're right, t he next thing we have to do is in 2025. It's not that big of amount, so it could easily be coverable by our revolver if we needed to. And then, we also have opportunities in some higher interest notes that are coming up later this year. So I'll let Dave kind of walk into those specifics.
Thanks. I could take the rest of the time. It was such a fun exercise to go through. Took years off my life. But you're right. We had a $1.4 billion term loan that was due in August 2026 that we took advantage of the momentum that we had out in the street.
Mm-hmm.
Really, the story behind that is about the company story, right? If the company hadn't been performing on that consistent track record-
Right.
That Eric was just kind of showing up on the screen, this story would've been much more difficult to do. So we had that story and really good proof points from the third quarter call, to continue to evidence that really strong support from, the banking syndicate that supports a revolver. They agreed to increase their commitment for us in there, and really, when you looked at what we were trying to do in that term loan, was not only extend the maturity date, so we didn't have to worry about an August 2026, issue, but we had, we had a piece of term loan that was some old technology, right? It was, it was originally drafted back in 2015, when this company was far less than a billion-dollar company.
We are now three times, more than three times that size, and, a term loan is expected to kind of help us grow-
Right.
This company. And so underneath that document, we, we refreshed it for what we call new technology, as it kind of sits in there. The document itself, and the, the terms that we wanted to kind of put out there, oversubscribed, right?
Mm-hmm.
In a good place, which allowed us to tighten the price range a little bit, as Eric mentioned, getting us about 25 basis points better than we were before. Actually, 37 basis points better than we were before, which is meaningful on $1.4 billion for us, but it's also 90 basis points better than we thought it was gonna be-
Right.
Kind of going into it. So we were, I get a chance to kind of talk about it, but really, the entire company is very proud of being recognized by some very astute investors to provide their support behind it. So it does put us in a really good place, 'cause that's one big piece of our balance sheet that we needed to address. We have hedges on that. The hedges from our prior term loan remain in place, so giving us protection for another year and a half until we have to address those. So we are looking actively in the market-
Mm-hmm.
As we evaluate the interest rate environment, and it continues to get-
Right.
Better for us as we look forward in the future, particularly-
Right.
As we get into a better rating perspective. It also puts us in a position of strength to deal with the 25s and the 27-
Mm-hmm.
Senior notes that have come due for us. The 25s carry a coupon of 6.75%. It's really attractive. Very difficult for me to be able to kind of do something with that, but it's a relatively small number that we have in front of us.
Mm-hmm.
Causes us absolutely no concern about refinancing that. We have a note that is due in 2027, that carries a 10% coupon note. That is the one that I really don't like. It is callable at par in April of this year.
Okay.
Again, looking opportunistically at the market when the right time to take that out and refinance that to improve our position. Feel really good taking that term loan out. It puts us in a really strong place to take a lot of that balance sheet risk off the table.
When we first started talking 2.5 years ago, we talked a lot about your managed care contracting and where you are in managed care contracting, and I think on the last quarter's call, you talked about 90% of 2024 is locked in on managed care contracting. But when I think about the relationships longer term, can you maybe talk about where you are today, on that trajectory from, you know, getting the managed care contracts to where you really want them to be?
Sure. So we've made a lot of progress over the past five years, but we still have probably pockets of places where I think we're probably below fair market value. In general, we have a very payer-first kind of approach, meaning our goal is to, first, we're never going to be a price leader. You know, we're going to be a value player. That's. We are a value-based player in the fee-for-service world. So I go back to, we could take a risk, but why don't we say 40%-60% to start? It's kind of always where I start when I think about talking about these conversations. But with payers, what we first try to do is say, "Hey, meet us halfway.
We want to get paid fairly, but we want to work with you to create incentives for our surgeons. Maybe it's professional fee bumps to go to the right sort of care. We want to figure out theories, methodologies, to move stuff to places where everyone wins. So we are very focused on those win-win partnerships with payers. We've made a lot of progress on those. I think we have great payer relationships with some of the largest players in the country. They appreciate our overall independent nature. One thing that's been quite interesting, as we've built more de novos, we've been able to change that conversation. So when we build a de novo in a city, I'll give you an example. We built one this year in Wichita Falls, Texas.
When we build those de novos, that save money because everything's getting pulled out of hospitals, we're not having a discussion on trend. We're having a discussion on, "Wow, that's a lot of savings." And we're doing that in more and more communities. That kind of resets the conversation. So it's not about, "Hey, you, the last year you paid me X, and I want 3% more." It's, "Hey, look at this tremendous savings we're going to create. Here's the rate we want." So I think those relationships, when we show so much value, when we add high acuity stuff, we add new de novos, we have a natural opportunity to partner with them where we both can win.
I know we don't have a lot of time left together, but if I think about the opportunity and the shift of procedures to ambulatory surgery from inpatient only-
Yeah.
I know you talked a little bit about that today in the presentation, but is there something that you expect to see a shift in 2024?
Look, I, I think cardiology is one that I think you are going to see continuing to shift. I, I would make the argument, it's funny, even things like TAVRs, when you think about getting a new valve percutaneously through the cath lab, those procedures, they're often going home same day. There's a bunch of stuff that has historically been sitting in inpatient that is going to be moving out. So cardiology with technology, there's a lot of da Vinci cases that are only in a hospital because of a piece of equipment that could be easily done in a different setting at a lower dollar. So I think there's a bunch of things that on the edges, are going to start moving.
Some of it's going to take more time, but clearly, there's a large chunk of what's today in that setting that's going to be allowed to be safely done in an outpatient setting with higher patient satisfaction scores and much lower cost point, and really great physician buy-in and partnership.
Great. I loved your comment of, you know, value-based care in the fee-for-service world. I couldn't agree more. You know, this idea of shifting to the lower site care, cost of care. But thanks very much, everyone, for joining us.
Thanks, everyone. Appreciate it.
Thank you so much. I've got my next one at 3:00 P.M.? That's great.