Earnings Call: Q2 2019

Aug 7, 2019

Greetings and welcome to the Surgery Partners, Inc. 2nd Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Cowhey, Chief Financial Officer. Please go ahead. Please wait for the tone and the recording will begin. And welcome to Surgery Partners' 2nd Quarter Earnings Call. This is Tom Cowhey, Chief Financial Officer. Joining me today is Wayne DeVite, our Chief Executive Officer and Eric Evans, our Chief Operating Officer. As a reminder, during this call, we will make forward 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 file with the SEC. The company does not undertake any duty to update such forward looking statements. Additionally, during today's call, the company 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 partners. Partners.com and in our most recent interim report on Form 10 Q when filed. With that, I'll turn the call over to Wayne. Good morning. Thank you, Tom, and thank you all for joining us today. Let me first apologize for the technical difficulties that we had right at the beginning, but we look forward to this morning's call with you. For our call this morning, I would like to review some highlights from our Q2 results. I'll then provide an update on several of our strategic initiatives supporting our organic growth and margin expansion as we drive sustainable double digit adjusted EBITDA growth. And finally, I'll turn the call over to Tom to provide further details on the quarter. Starting with the quarter, I'm pleased to report 2nd quarter 19 adjusted revenues of $452,800,000 and adjusted EBITDA of $61,200,000 reflecting continued traction from our 2018, consistent with our previous guidance and our targeted full year growth. Same facility revenue increased by 7.9% from the prior year quarter, driven by strong net revenue per case and volume growth. And while we're excited by the significant growth over the prior year, we also like to highlight that this represents our 4th consecutive quarter of same facility revenue and case volume growth, which we believe is a testament to our efforts. And finally, adjusted EBITDA margins were 13.5%, a 100 basis point improvement versus the prior year quarter, which is especially encouraging when considering our government payer mix increased by approximately 200 basis points as compared to the same period in the last year. We are encouraged by our results for the quarter, which as we crossed the halfway mark in 2019, affirms our confidence and our ability to grow adjusted EBITDA at a double digit rate in 2019 and beyond. Turning to our strategic initiatives supporting organic growth and margin expansion. This morning, I'd like to focus on 3 topics of interest to investors. 1st, I'd like to highlight the strength of our physician recruitment efforts, which are not only help us grow our top line organically, but are also helping us outperform the broader ambulatory sector. 2nd, I would like to comment on our capacity to continue to accelerate this top line growth through through the expansion of our existing facility footprint and continued appetite for innovative end market partnerships. And finally, I'd like to provide an update on the near term and longer term tailwinds we see for our industry resulting from the proposed 2020 Medicare fee schedule that was recently published. Starting with top line with topline organic growth through physician recruitment. As you may recall, we rebuilt our physician recruitment team last year and made additional investments to empower them with proprietary data and tracking systems, improving our ability to identify and partner with high quality and high value physicians. We continue to outpace new physician additions year to date in 2019 over the accelerated pace at which we were adding physicians in 2018. As we seek to measure the value of our physician recruiting efforts during the 2019 calendar year, we are tracking 3 specific cohorts of doctors. Those that were recruited in 2017 prior to the implementation of our data driven approach versus those that were recruited in 2018 and the 1st 6 months of 2019 and how each of those cohorts contribute to our 2019 growth. Some data points to anchor on as we think about the composition of our first half twenty nineteen growth. Our 2018 cohort has already contributed 20% greater case volume in 2019 as compared to the class of 2017 cohort. More importantly, our 20 18 cohort of doctors have already produced more cases at higher net revenue per case and contribution margins in the first half of twenty nineteen than they did in all of 2018. Early data points are telling us that the class of 2019 is already delivering strong growth, which is on pace to accelerate throughout the year as they become more familiar with our facilities and supporting medical staff. These results give us increased confidence that our efforts in physician recruiting will have a compounding impact on volume and revenue growth that should allow us to outperform the broader industry for years to come. As you can see in our reported results, our physician recruitment efforts coupled with our targeted net revenue per case improvement initiatives have enabled us to exceed our previously discussed long term organic growth targets. Now I'd like to discuss how we further leverage our existing footprint. Our ability to leverage our infrastructure and investments with our geographic footprint should provide for accelerated organic growth and margin expansion over time. These initiatives range from expansion of existing facilities in terms of number of operating and procedural rooms, the relocation of existing facilities to establish a more attractive physician recruiting space, while enhancing the patient experience and our ability to enter into attractive innovative partnerships with existing provider systems. While we have a number of in flight expansion activities within our existing facilities, I would like to highlight one specific innovative partnership that we recently completed, which leverages our current relationship and infrastructure in in Orthopedic Institute, here referred to as SCOE, a transaction that we agreed to in late 2018. As you know, UCLA is one of the most prestigious academic medical centers in the country and SCOE is the largest orthopedic in the state of California with nearly 40 practicing physicians. We successfully leveraged our existing ASC relationship with UCLA to establish a three way joint venture that will drive accelerated organic growth for all parties and cement our position as the facility management company of choice for this prestigious academic institute. At a time when many of our competitors are conflicted, Surgery Partners' partnership with UCLA and SCOE is further validation of our increasingly unique value proposition. Furthermore, this expansion of our Southern California footprint fits perfectly with our long term growth strategy and we could not be more pleased to welcome these new centers into the growing Surgery Partners family. Finally, last Monday, CMS introduced the proposed calendar 2020 fee schedule updates for Medicare's hospital outpatient prospective payment system muscular skeletal procedures at approximately 2%, ophthalmology at approximately 3% and gastrointestinal codes at approximately 1%. Based on our case mix, we estimate that we will net at least a 2% increase if finalized, a solid increase that we believe recognizes the quality and value that we provide in the marketplace. Importantly, CMS also proposed adding multiple high acuity procedures, including total knee replacement procedures to the ASC covered procedure list. Confident that we can provide a high quality result on these procedures in our facilities as we do them routinely for our commercial and other patients. As an example, in the Q2 of 2019, we conducted nearly 300 total joint procedures in our ASCs alone, which was more than double the amount we did in Q2 of 2018. CMS also proposed moving total hip replacements from the inpatient only list in their recent proposal, step they took with total knees for the 2018 payment year. Hip and knee replacements are the most common inpatient surgery for Medicare beneficiaries with more than 400,000 procedures in 2014, costing more than $7,000,000,000 for the hospitalizations alone. We look forward to seeing the development of the final fee schedule for 2020 and remain optimistic that our ability to access this exciting new market opportunity remains just around the corner. Before I turn the call over to Tom, I wanted to take moment to discuss the ongoing public debate over how best to overhaul the U. S. Healthcare system to continue to provide access to quality care while addressing the issue of affordability. This is a topic that continues to receive much focus and wide variations in opinion as to how best to proceed legislatively. More importantly, it raises a number of questions for investors as to how Surgery Partners is positioned for the variation of outcomes. Let me start by saying that we are an in network business model that focus on planned procedures. We partner with over 4 1000 physicians that share our goal of offering high quality at affordable prices, a goal shared with the payer community. Our business model is uniquely built to address these challenges, is why we support any legislation that continues to expand access to quality care at lower costs. We believe we are aligned with regulators, payers and patients and our distinctive business model should prove to be quite resilient in the wide spectrum outcomes that may evolve in the U. S. Healthcare debate. With that, let me hand the call back over to Tom for an overview of our Q2 financial results and 2019 outlook. Tom? Thank you, Wayne. Today, I'll spend a few minutes on our Q2 2019 financial performance, starting with some of our key revenue drivers, then moving on to adjusted EBITDA, cash flows and our 2019 outlook. Starting with the top line, we ended quarter with approximately $452,800,000 in adjusted revenue, up approximately 2% as compared to the prior year quarter, a result that positions us well to achieve our full year revenue guidance of low single digit growth or high single digit growth excluding divested revenues from the 2018 baseline. Surgical cases were just over 133,000 in the quarter, up 1.2% from the prior year period, despite the loss of cases from closed or divested facilities. On a same facility basis, total company surgical revenues were up 7.9% from the prior year quarter, driven primarily by net revenue per case, but also by higher same stores volumes. Turning to operating earnings, our Q2 2019 adjusted EBITDA was $61,200,000 a 10.5% increase over comparable period in 2018. This strong result is consistent with our expected quarterly cadence and positions us well to achieve full year double digit adjusted EBITDA growth. Our 2nd quarter adjusted EBITDA margin also improved to 13.5%, a 100 basis point increase as compared to the prior year period, primarily driven by higher gross margins and our cost containment efforts. During the quarter, we recorded approximately $8,000,000 of transaction integration costs, bringing our year to date total to $11,500,000 a greater than 50% decline from our first half twenty eighteen costs and consistent with our guidance that integration related costs would subside. Of note, the Q2 2019 transaction integration and acquisition costs included continue to expect to record these costs outside of adjusted EBITDA for at least the remainder of 2019. While net revenues in our ancillary and Optical segments were up slightly on a combined basis versus the prior year period, combined adjusted EBITDA from these two segments was relatively stable versus the prior year quarter and consistent with previous comments about our outlook for these businesses. Moving on to cash flow and liquidity. At the end of the second quarter, the company had cash balances approximately $117,000,000 and our revolving credit facility remains undrawn with nearly $116,000,000 worth of availability. Of note, during the Q2, Surgery Partners had net operating cash flows defined as operating cash flow less distribution to non controlling interests of $400,000 We deployed approximately $20,800,000 primarily related to the acquisition of a minority stake in 4 ASCs in Southern California. We used approximately $9,900,000 for payments on our long term debt. And as previously discussed, in April of 2019, we issued a new $430,000,000 senior unsecured note, the proceeds of which were primarily used to retire our existing 2021 notes. The ratio of total net debt to EBITDA at the end of the Q2 of 2019, as calculated under the company's credit agreement, was up slightly at approximately 7.8 times, primarily as a result of higher debt from the April refinancing transaction, partially offset by higher trailing 12 month adjusted EBITDA. The company has an appropriately flexible capital structure with no financial covenant on the term loan or our senior unsecured notes. We continue to project that the company's total net debt to EBITDA ratio should naturally decline over time as our business excited by excited by our progress this quarter on a variety of fronts and remain committed to double digit adjusted EBITDA growth this year. While we do not provide quarterly guidance, we will remind investors that we are projecting that roughly 1 third of our full year adjusted EBITDA will occur in the 4th quarter, we believe the first half of twenty nineteen demonstrates the power of our model, our strategic initiatives and our potential. We are pleased to see continued same facility growth in both volumes and rate with strong margin improvement as our initiatives take hold. We continue to invest to expand existing facilities and enter new markets that will support organic growth, while the introduction of Medicare total joints to our ASCs appears to be on the horizon. Untapped opportunities in rate, procurement and revenue cycle optimization give us conviction in our 20 19 outlook with additional benefits that will drive growth in 2020 beyond. With that, we will open the call for Q and A. Operator? Thank you. Your first question comes from Kevin Fischbeck, Bank of America Merrill Lynch. Go ahead please. Great, thanks. I guess a couple of questions. First, appreciate the comments on seasonality heading into Q4. I guess, when we think about that, 1 third of the earnings coming in the Q4 number, how much of that is just kind of normal seasonality in volumes and I guess commercial mix heading into Q4 versus some of the cost items and initiatives that you have in place? Hey, Kevin, it's Tom. Thanks for the question. As you think about the Q4, I'd encourage you to take a look at last year because it's the 1st year where we've got a full year of both businesses inside the 4 walls and inside the calendar year. So we're using that as we think that that's a reasonable proxy. As you look at that, it's probably 31%, 32% of the adjusted EBITDA was sitting inside that 4th quarter. And as you think about that 4th quarter in particular, we also were bearing some losses from some of our divested facilities. And so as we think about the seasonality plus the ramp associated with some of our initiatives, in particular our health benefit plan initiatives where we believe that we'll have better visibility into what our costs are for the full year based on the claims lag in the Q4 and therefore thought about where that benefit will come through will be weighted towards the Q4. We think that a third of the earnings plus or minus is a good proxy and a good way to think about the seasonality for the remainder of the year. All right. That's helpful. And then I guess, when we think about the volume growth in the quarter, it sounds like you're doing a lot on the physician recruiting side, but you're still talking about kind of like 2%, again, I guess you saw 2% volume growth in the quarter, which I think is kind of the low end of what you might think of 2% to 3% long term. So why are we at the low end of that long term volume number if the business experience coming in? And it sounds like you're really optimistic about this. Should we expect it to be at 3% at some point in the next year or 2? Yes, Kevin, this is Wayne. I really appreciate the question. The thing to keep mind is that there's a compounding effect that kind of snowballs over time. And so if you were to look at last year, take Q1 of last year, the case volume down roughly 4%, and then what you'll see of course then is it went to roughly down 2% to then basically flat to then up 1% and then of course we're migrating up. So here we are now at the 2% threshold. And so I would anticipate that that will continue to ramp up relative to our targeted 2% to 3% and we'll be at the higher end. But I would say, we're still working through what I would call kind of the recruitment history here and the things that where we had a lot of doctors that were disengaging, which is why there was negative same store growth when we joined versus now actually moving the volume in the right trajectory. Second thing I would highlight is very interesting fact we shared with our Board just last week was, if you look at the compounding effect of how this ramps up, as I mentioned, we know already that the 18 cohort of doctors have all exceeded what they did in all of 'eighteen and just the 1st 6 months of this year and the trajectory would imply they will more than double than where they were at last year. That same phenomenon we expect with the 19 cohorts. And so and then of course, we actually think you still get an additive year even after that. So we think you get kind of a 3 year period. So there's a multi year period that we feel before we get to what I would call run rate organic growth that should not be above average. So we think we're still 2 to 3 years out just on that. So I think you'll see that continue to ramp up over time. And the other thing I would highlight, just keep in mind on case volume, we have changed our focus from a year ago, where the focus was broadly around recruiting doctors without necessarily a focus on those specialties drive the highest DCM per minute for us. And so our specialty focus is much heavier on MSK, which will be fewer procedures, but much higher dollar contribution margin per minute. And while we're still recruiting other procedures such as GI and ophthalmology, which generate a lot of case volume, they don't necessarily generate a lot of revenue. And so again, I highlight that for you as well that our growth is into areas that have smaller case volume, but higher DCM per minute. Just as a point of reference, our MSK procedures in the 1st 6 months of this year were 2,200 more than we did all of last year in the 1st 6 months. So it gives you kind of a feeling on kind of same store what we're trying to drive towards and that does not include the impacts of the Southern California Orthopedic Institute that we just spoke to as that transaction we finalized late in the quarter. And when you say that that's very helpful, when you say that 2018 is doing 20% more than the 2017 was, and that's your is that how much of that is because of the number of docs versus the amount of volume that each doc is doing? It's more of the volume per doctor. Because if you actually look at the number of doctors, we're not talking about huge variations year over year. You may be looking at, if you were to look at 1st 6 months of 'seventeen, for example, versus the 1st 6 months of recruited doctors in 'eighteen, that variation is only around 20 doctors, right. Now the difference is the doctors we focus on, the procedures we focus on and what we believe they'll drive. And so the other thing to keep in mind is that a doctor is a doctor, meaning 2 years ago, if that doctor did one procedure, it was counted as a recruited doctor in 2017. And while that's factually accurate, to us, that may be a new doctor, but if they're not doing volume and they're not doing a number of procedures, it doesn't really move the needle for our company. And so I would say it's the volume of doctors. The other data point I would give you is that we are averaging almost $500 more per procedure on our newly recruited doctors that came into 2018 2019 than we did the year before. So another data point for you that shows that we're creating that to more MSK, as well as spine and kind of these higher acuity procedures. And then just last question. I think most of the commentary has been focused on recruiting a number of doctors recruited. Can you talk a little bit about retention and what you're seeing there? Yes, that's actually a really good question. So one of the things we did change with our recruiters though because at the end of the day kind of filling the bathtub water only to have a leak at the bottom of the tub doesn't really accomplish our goals. And so we've actually as part of the recruitment not only with those doctors, but the existing physicians within the facility that support us. And so we've actually seen our retention improve as well. I would still say though that we're in the early innings, we're in the early innings, we're in the early to refine where our strategy was, refocus on who we recruited and how we recruited and start building more of a relationship that really stands the test of time versus just the one off recruitment of a procedure into the facility. So again, another reason why I think over time, Kevin, you'll see really pushing closer to that higher end on the case volume as we continue to ramp that up. Thank you. Your next question comes from Chad Vanacore, Stifel. Go ahead please. Thanks a lot and good morning. So just thinking about the total knee opportunity, what would you have to change in terms of structure recruiting to take full advantage of the opportunity? Maybe you could quantify what you think the total long term opportunity there is? Yes, Chad, it's a very good question. Interesting enough, because we've been building our model for where this opportunity is coming, a couple of things that structurally you have to if you really want to be successful, 1st and foremost, still being in network is an important aspect of our business model, right? While a big chunk of the Medicare opportunity is Medicare Direct, an even bigger chunk we know is really with managed care companies. And so our model is already built to be in network. The second thing is, I would say structurally our facilities are already very well positioned to take on this new opportunity. We have a number of OR expansions though that we are doing on existing facilities this year to basically bring in the next wave of opportunity. And in the case of our St. Charles in Chicago, which is just a suburb just outside of the Greater Chicago area, we actually have a brand new facility that will be opening in the Q3 of this year. So we're moving to more procedural rooms and more ORs. And so we have been building for kind of this opportunity to come. And then finally, what I would tell you is, we have been putting our recruiters in this space already. While I won't provide the physician's name, it's just one of many examples where I know today one of our leaders is actually meeting with a physician that does over 1200 total knees a year in the Medicare population. So just an insane number, right? And the idea is nurturing these relationships throughout 'eighteen, continuing to build on them in 'nineteen, so that when we get to 2020, we're in a position that if these rules were to stay as proposed, we really can start catching as many of these procedures as quickly as possible. So I would say no major structural shifts, they're all underway as we operate our business, recognizing that if the proposal doesn't hold, the opportunity doesn't go away though, it just may have been deferred. And so we're going to continue to ramp up as if it's going into play next year. All right. Then one of the things I noticed on the balance sheet, income statement, interest expense jumped up pretty significantly from 1Q to 2Q. That's $4,400,000 on what looks to be only about $13,000,000 change in incremental debt. Anything unusual there and absent any changes that should we expect that around $46,000,000 interest expense per quarter? No, I think as you look at Chad, this is Tom. Thanks for the question. Interest expense is going to go up, just because we replaced $400,000,000 worth of 8 and 7 eighths paper with $430,000,000 worth of 10% paper. And I think what's going what you're seeing there and capturing might be a little bit of noise relative to just the transactions themselves and how the accounting on that works. As I think about what the payments will be on an annualized basis, I think we're looking at about $175,000,000 worth of principal and interest payments annually, because we do have to amortize about 1% of the term loan per year. And that's probably a reasonable proxy for about where you should be modeling and thinking about the full year interest expense and or cash use for interest opportunity now that interest rates have moved fairly significantly in a short period of time or at least by the end of the year maybe take advantage of any kind of refinancing? Would that make any sense? I'm not sure about refinancing. We did take the opportunity of being converted yield curve to actually hedge out another 3 swap out another 300,000,000 at rates that are LIBOR rates that are sub-two which we will how that ultimately works over time. But for us, this has always been about trying to stabilize the capital structure, stabilize the interest expense so that we have a set bogey that we can climb over as we grow the EBITDA of the business. All right. And then just one more. You talked about expanding facilities in markets and then you gave us a UCLA example. Is there any other markets that we should consider that would be attractive to you or think about either geographically or specialty wise? Yes. So Chad, a couple of things I would highlight. Let me start with the geographic footprint. Obviously, when you think about not only the tailwinds of what we anticipate with the Medicare transition over time of total knees and then hopefully total hips and other high acuity procedures. It's hard not to focus on some of the more populous states with aging populations and that's a combination of both Florida where we have a very large footprint, as well as Southern California. And then of course, when you look at the Sunbelt in general, it really just kind of like slaps you in the face as a market that you should continue to expand in. And so we continue to have ongoing meetings, including meetings with payers and providers in the broader Sunbelt around partnership opportunities for both de novos, as well as opportunities to potentially do JVs. I think that's probably becoming an even more attractive opportunity to us of ways for us to accelerate our expansion is through these JV models, recognizing that many individuals really don't know how to run and operate these entities or how to recruit into these facilities, and yet they recognize that the shift is moving to the outpatient setting over time. And so I would say that we're focusing a lot on JV opportunities to kind of accelerate those investments into those new markets. Thank you. Your next call comes from Whit Mayo, UBS. Go ahead, please. Hey, maybe just to stick on the UCLA partnership for a second. I mean, I think it's a pretty interesting transaction. Any color on how long you've been in conversation with them? And I'm really more curious on the economics of the transaction. Is this an accretive trade for you this year? Do you get their contracted rates? Any color would be helpful. Yes. So with this was one of many, what I'll call, long digestive journeys, right? This was one that we kicked off with our Board early last year explaining where we thought this could go and where we could take this thing. It's important to recognize that we actually had existing partnerships in partnerships in one center with UCLA already that we thought we really could leverage. We thought that we had executed well in that partnership. We had driven a lot of value not only for us but for them. And so in approaching them, the idea was, you know, for us, but for them. And so in approaching them, the idea was we would bring this independence for the SCOE physicians, but we could also bring kind of the trust that UCLA had in us, along with UCLA's rates though in that market. And so in essence, these will be accretive. They'll be accretive out of the gate for us on day 1, very attractive multiples for us. But more importantly, what we showed UCLA and the SCOE partners with what we thought we could do with this three way combination over time, similar to what we did on the other partnership that we have with UCLA. I would tell you that it's our goal to continue to look at these three way JVs in a much more unique and innovative way. We did a similar transaction, which we didn't call out recently with Vanderbilt here in Tennessee, where we expanded an existing relationship and actually partnered with them to open up another facility about another 30 miles south of downtown Nashville, if you will. And so we are continuing these kind of academic relationships with these kind of what we'll call those that get it about moving costs into an outpatient setting and in a high quality setting. And so those are really easy examples, I would say, of what we have in the pipeline. So those are just two examples of ones we've closed. I will tell you we have many in the pipeline. And we are really optimistic about getting more of these done either later this year or early next year based on the current pipeline. And then the only other comment I would make Whit is, I would say our existing footprint in many markets really warrants a market by market assessment of whether a JV is a good thing with a large health system. Our preference to be clear is always to partner and remain independent with the payers. We believe that if the payers believe in taking cost out of the system, if they truly believe in driving long term value, we are an excellent choice for that because as you know, we are a discount to what the broader market is in terms of what is being charged in an patient setting and we really know that we can really create physician excitement around moving their procedures to the ASC. That being said, we also recognize that there's real value creation for our shareholders in the right JV partnerships with health systems. And so we have many other partnerships in existing markets as well, outside of academic that we are pursuing as well. That's helpful. My second question, just wanted to focus on cash flow for a second. Obviously, excuse me, down year over year, but does have the higher borrowing cost. Do you have, Tom, the cash interest payments this year on a 3 month 6 month basis, just trying to compare this? And if there are any other factors that are negatively impacting the 6 month numbers that would be helpful and just maybe just any guidance on cash flow for this year? I mean it's $1,450,000,000 worth of term loan that we pay 1% on, right. And so 175 minuteus that, you're looking at 150 of cash interest on an annual basis, plus or minus is kind of the new run rate you should be thinking about with kind of the fixes that we've done on the swaps and the new 10% debt, that's probably a that's probably $149,000,000 $150,000,000 is the numbers that I've got in the balance of the the balance of the year, I mean, are there any other factors that are depressing cash other than the obvious? And then looking at the second half, any help on kind of modeling that number? Yes, we don't provide specific guidance on that. As you think about the Q3, we are anticipating that we will reach final settlement with the department, which will come with a cash use. It's likely that we believe that that will happen in the Q3. And so and certainly by the end of this year, and so that will be a use of cash as you think about the short term flows. But first half, other than some of the specific transactional related stuff, some of the specific builds that we've been doing, you got to think about Idaho Falls, there's clearly a little bit of cash drain there, that would accelerate the new community hospital as you get into the back half. Those are kind of the main things that I would keep a watch out on. Last one for me real quick, just senior secured ratio. Thanks. I'll have to get back to you on that. It's fine. Thanks guys. Thank you, Whit. Thank you. Your next question comes from Frank Morgan, RBC Capital Markets. Go ahead please. Good morning. A lot of discussion around the volume opportunity. Just curious on that really strong pricing you saw in the quarter, the same store pricing. Could you parse that out just a little bit more color between shifts in payer mix versus acuity? That would be my first question. The second question would just be on your goal of pursuing this 10% EBITDA growth. What type of same store top line growth do you have to achieve that? And then what is your long term target margin? Thanks. Hey, Frank. Thanks for the question. Let me start with the same store top line growth. Look, as we said before, generally speaking, in a broader industry, at a minimum, you should average the average of averages, right, which is you ought to be able to get 2% to 3% in volume and you ought to be able to get 2% to 3% rate. And so if you want to be at the upper echelon, you would be in that 4% to 6% range with a push closer to the 6%. That's been our long term guidance. That's kind of our long term targeted range. That being said, we fully believe that this asset has the ability to outperform that for not only the near term, but really for the longer term as we look out to the foreseeable future around both our ability to recruit physicians, but also our ability to get a better value prop and cases that are coming in this year that on an acuity basis is a big driver that we're recruiting the right acuities in the right space, we're generating about $500 more per case. And of course, that then translates to more margin for us as well as we're improving margins concurrently. So acuity is a big driver because we're focused on the right procedures, not necessarily the procedures that drive the highest case volume, but the ones that drive the highest DCM per minute, and we can see that in our underlying data. So pretty meaningful improvement on specialty mix. And then the last question was around margins. And look, as we did our modeling and as we've shared with our Board, we are still, I would say, meaningfully far away of what we believe we can accomplish over the next 3 to 5 years. The 100 basis point improvement that you see year over year is really a reflection of scratching the surface. And if you just consider our ability to continue to replicate what we're doing and you consider our ability to continue to leverage then our size and scale, which is the benefit of scale is the ability to leverage the G and A efficiently over that base as you grow into it. We think realistically that we can grow margins in the 50 basis point a year range over next 3 to 5 years and with a pretty high degree of confidence in that based on our own modeling. And so margins clearly get up to that higher in range of industry averages between now and say 20, 24. Tom, anything you'd like to add? Yes. No, I mean, I think that as you think about the what we've talked about in the past, we kind of said, if you can do the 4% to 6%, if you can do 2% to 3% on volume and 2% to 3% on rate that we think we can get to double digit just by looking at some of the places where we have rate opportunity, some of the places that we have procurement opportunity and some of the places where we have RCM opportunity. And as we try to model that out, I think 50 basis points a year, as Wayne said, in terms of just margin expansion, just based on where some of those things will hit and some of the leverage, that's our longer term goal. And in many ways, it could be a floor. We'll have to see, some years could be a little bit more, some years could be a little bit less, but that's kind of a reasonable benchmark for what we're striving towards over the next few years to drive that margin back up to where we think it should be. Okay. Thank you. Thanks, Frank. Thank you. Your next question comes from Bill Sutherland, The Benchmark Company. Go ahead, please. My operational and financial questions all been asked, but I was curious, Wayne, on the CMS rule, you mentioned 3 cardiac codes approved for ASCs. Does that have any impact to you guys? It actually does. We have a very large surgical facility in Lubbock, Texas. And what I will simply say is that it would be obviously very positive for us in terms of the ability to move even further procedures in. But I would also add that we are currently working with a number of potential partners in that market right now on both the payer and the health system side around opportunities because I think many people are recognizing that this shift is coming and that particular facility is cardiologist related specialties. And so we really feel like that's the next wave of high acuity procedures that will continue to move down. So early innings for us, but the nice thing is we have a very large facility to learn in and grow in and see how this evolves and we're looking at that as being kind of the next round of MSK, if you will, of how we start expanding our OR rooms for that next wave as that starts to evolve. And what did you say about the update on hips, Wayne? For hips, they've been removed from the inpatient only list, which in the proposal, right, which is the same step that they took with TKA a couple of years ago. It's essentially the if they continue through with it, it would be probably a data gathering phase for them to understand whether or not they believe that into ASCs over into ASCs over time. So it's kind of a preliminary step, but it's exactly the same step that they took 2 years ago for the Thanks Bill. Thank you. Your last question comes from Brian Tanquilut, Jefferies. Go ahead please. Hey, good morning guys. Wayne, just wanted to ask for an update on the initiative that you've put through to drive commercial reimbursement higher where especially in markets where you are below market. How does that where does that stand right now? Brian, thanks for the question and good morning. I would say that in my opinion, we are in early innings, but the opportunity is far more greater than I had anticipated when we started this process over a year ago. So what do I mean by that? As we look at markets where we thought we were underpaid, we are putting forward a multi pronged strategy where we start first the payers, right. Our goal is we would like to remain independent. We think there's massive value creation for us and for them. And we have got a number of markets where we are having direct dialogue with the CEOs of large payers around what it would require for us to remain independent and not JV with a health system. And we're going to continue to pursue that. But concurrent with that, I would tell you, Brian, we are talking with health systems because we don't mind being a discount play in the market. We know we offer high quality product with exceptional patient satisfaction and that's the value prop of us is that if you can offer those 2 at a more affordable price, you win in the long term. But we don't need to be deep discount, we need to get paid for the value we bring. And so our goal is to continue to show payers market by market what we think that value creation is. Maybe in a future meeting, especially we're considering an IR day early next year, we'll put a little more size around what this might look like. But what I would tell you is, the opportunity to outperform that higher end of that 4% to 6% long term same store growth target. I think the number of levers we have to pull, not only for the immediate term, but for the next several years are so meaningful that we should consistently be at that high end for same store, if not outperforming it over time. So, but when I say early innings, remember the 125 locations and you got to tackle them one location at a time. And so in essence, that's what we're doing 1 at a time as we kind of move down that path. Got it. Makes sense. Just a quick follow-up, Tom, I don't know if I just missed this, but is there any call outs for the elevated CapEx during the quarter? No, shouldn't be. I mean, there's obviously a lot of activity that's happening as we think about some of our expansions, you think about Idaho Falls Community Hospital, you think about the relocation and the new facilities that Wayne talked about, but I don't think that as you think about the ordinary way CapEx has actually been pretty well managed this year and very consistent with our historical norms. Well, thanks everyone for your questions and for participating on this morning's call. Before we conclude our call, I do want to take a moment to say thank you to our 10,000 plus associates and our 4,000 plus physicians for their contributions. I know I feel privileged to be able to participate in this journey of improving healthcare and making it more affordable for Americans. And as we execute against our goal to become the preferred partner for operating short stay surgical facilities across the United States. It is really the daily efforts of each and every one of these surgery partners, employees and physicians that will get us there. Thanks again for joining our call this morning and have a great day.