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AmSurg (NASDAQ:AMSG)

Q4 2012 Earnings Call

February 25, 2013 4:30 pm ET

Executives

Christopher A. Holden - Chief Executive Officer, President and Director

Claire M. Gulmi - Chief Financial Officer, Executive Vice President, Secretary and Director

Analysts

Joanna Gajuk - BofA Merrill Lynch, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Operator

Good day, and welcome to this Fourth Quarter 2012 AmSurg Corporation Conference Call. Today's call is being recorded and will be available for replay today beginning at 7:30 p.m. Eastern time this evening and will run through midnight on March 9 by dialing (719) 457-0820 and using replay passcode 6453017.

At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Chris Holden. Please go ahead, sir.

Christopher A. Holden

Thanks, Albert. I appreciate it. Welcome, everyone, to our fourth quarter 2012 summary for AmSurg on this investor call today. Have joining me is Claire Gulmi, our Executive Vice President and Chief Financial Officer. Due to a scheduling conflict, she and I are actually in different locations today, which is not our normal process. So there might be a slight delay in the coordination of our responses. So just bear with us through that. We also want to welcome everyone that's participating via the webcast.

With that, I'm going to turn it over to Claire and have her read the Safe Harbor.

Claire M. Gulmi

Thanks, Chris. Certain statements in the conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect management expectations and are based upon currently available information.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of AmSurg to differ materially from those that are expressed in or implied by the forward-looking statements.

To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's news release, which is posted on the company's website.

These factors are discussed in more detail in the company's reports that are filed with the Securities and Exchange Commission, including without limitation, AmSurg's annual report on Form 10-K for the year ended December 2011 and other filings with the SEC. Copies of these filings are available from AmSurg upon request.

I will now turn it over to Chris for opening comments.

Christopher A. Holden

Thanks, Claire. Let me just begin by talking about the year as a whole. Several highlights that I'd like to point out, beginning with the fact that just a reminder to everyone that we did celebrate our 20th anniversary as a company last year, including our 15th year as a publicly traded company. We're very proud of that longevity and that accomplishment, particularly in the AFC space. We also faced a number of political milestones. I think we all remember the Supreme Court decision on the Obamacare ruling. We also made it through an election and we all continue to watch the lingering battle over sequestration. Hopefully, get a resolution to that sometime in the near end, but busy year on the political front.

Even Mother Nature chimed in as we enjoyed great weather in the first quarter of last year and then saw end with Hurricane Isaac and Hurricane Sandy here in the fourth quarter. So that all sort of neutralized by the end of the year.

But through it all, AmSurg produced solid results for the year on many fronts, including revenue growth, cash flow and EPS growth. We were also able through the midst of all that to take advantage of a unique capital market and low interest rates and able to enhance our long-term capital structure, and I'll provide a bit more color as I'm sure Claire will as well. We were able to execute on 18 acquisitions and with spending nearly $300 million in CapEx for the year. And probably most importantly, we continued to produce very strong clinical outcomes, patient satisfaction and physician satisfaction.

So for the full year, our revenues increased by 19% to $929 million. EPS ended the year at $1.98 per share, which was within our guidance and included a $0.07 dilution from the NSC transaction and a $0.01 negative impact from Hurricane Sandy in the fourth quarter.

Same-store revenue for the year grew by 3%, driven primarily by volume and 1% by pricing. And generally, revenue growth was consistent across all clinical service lines.

Our net cash flow increased 27% to $132.7 million after noncontrolling interest distributions. We did increase our leverage by year end at 3.2x, which was due obviously to the bolus of year-end transaction closings. And we even -- despite that bolus of closings, we still have $195 million available on our revolving credit facility.

We will be giving 2013 guidance and I'll turn it over to Claire in just a moment to provide that, but I will highlight specifically for the fourth quarter. Again, the company much like the full year produced solid revenue, cash flow and EPS growth. As I mentioned, we enhanced our capital structure by -- through a $250 million offering of 5.625% senior notes. We executed on 14 of the 18 acquisitions in the quarter that will generate $60 million in operating revenue. And we continued, as I said before, to maintain our healthy balance sheet with the significant and adequate borrowing capacity.

On the organizational front, we announced the appointment of Phillip Clendenin as our new EV -- Executive Vice President of Operations. He's promoted from the position of Senior Vice President of Corporate Services and is replacing Billie Payne, who retired this year. We also announced the addition of Shawn Strash as our new Senior Vice President of Corporate Services, who will fill the void created by the promotion of Mr. Clendenin.

And most recently, we announced plans to consolidate our corporate headquarter in Nashville to a new building located in the same office complex we currently occupy.

For the fourth quarter, on a more granular level, our revenues increased 10%. Net earnings were $15.7 million or $0.49 per share within guidance and included a $0.02 dilution from transaction costs related to the NSC transaction and a $0.01 impact from Hurricane Sandy.

Same-store revenue growth was 3%, net cash flows increased 22% after noncontrolling interest distributions. And again, we'll get to guidance shortly.

On the development front, we completed 18 acquisitions for the year and 6 dispositions and consolidations for a net of 12 incremental centers to our portfolio. Through that growth, we added 8 GI centers, 1 ophthalmology center and 9 multi-specialty centers. What's a little bit unique in this cycle is the revenue of the acquired centers was 2 to 2.5x greater than the size of our historical average, just a lot larger offerings this cycle, probably driven in large part by the tax issues that we're all aware of that went into effect for early 2013.

We ended the quarter with 149 GI centers, 36 ophthalmology centers and 55 multi-specialty centers again for a total of 240 centers.

We currently have 2 letters of intent signed and -- or we continue to work those transactions. I'd also add that our pipeline continues to be regenerating very nicely and feel like that will be once again be a robust pipeline in the near future, feel confident about our ability to execute on that in 2013.

I will also add that we have had a significant amount of interest and conversation from hospital systems, who would like to partner and/or joint venture to expand their outpatient footprint and improve their overall efficiency. And we believe these relationships make some sense in certain markets and as long as you're working with committed partners and we continue to pursue those conversations. There is activity in the chains, in the space and we expect to see that probably be a little bit more exciting here in 2013 as well.

We continue to make progress on our international exploration and we're in the final negotiations with the King's Health Partners Trust to develop a small network of community-based surgery centers in London in the U.K.

And with that, I will turn it over to Claire for additional color on the year and the quarter.

Claire M. Gulmi

Okay, great. Thanks, Chris, and good afternoon, everyone. As Chris said, we're pleased to report earnings per share for the fourth quarter of $0.49. The fourth quarter results included a negative impact of $0.01 from center closings due to Hurricane Sandy and about $0.005 from the sale of the 2 centers that are now classified as discontinued ops. I wanted to clarify one thing Chris said earlier. He talked about $0.02 negative impact from transaction costs related to NSC and that was in the fourth quarter of 2011. So you can look at that and understand that as you compare the 2 quarters.

Highlights of the fourth quarter include the following. Same-center revenues increased 3%. Our net revenue per procedure increased to $623, driven by a combination of mix change due to the increase in the number of multi-specialty centers and by rate increases. Our interest expense increased 20% to $5 million reflecting the higher interest cost from the fixed-rate bond financing completed during the fourth quarter. This $250 million financing improved our capital structure by increasing proportion of fixed rate to floating rate debt and increasing the tenure of our debt and frees up our revolving credit facility to fund our future growth opportunities.

Our EBITDA increased 11% over the prior year to $38.9 million. Gross EBITDA margin for the quarter was 33.1% and net EBITDA margin was 15.9%. As Chris said, we completed a second record year of acquisitions [indiscernible] centers during the quarter. We disposed of 2 GI centers, both were sold to third parties and generated $7.3 million in proceeds. We recognized a gain of $0.04 in discontinued operations from these sales.

Capital expenditures totaled $270 million which included $261 million for acquisitions and $9 million for maintenance CapEx. Our long-term debt increased by $235 million in the quarter to $621 million at year end, yet we maintained a moderate debt-to-EBITDA ratio as calculated in our credit agreement of 3.2.

We continued to have strong operating cash flow in the fourth quarter. Net operating cash flow, less distribution to noncontrolling interest, was $39.7 million.

Our full year 2012 results showed substantial growth across all categories. Revenues increased 19%. Same-center revenues increased 3% for the year. The number of centers in operation increased to 240. EBITDA increased 17% to $152 million and net operating cash flows, excluding distributions, increased to 23% to $133 million.

Earnings per share increased 19% to $1.98. And again, the full year EPS of $1.98 included a negative impact of $0.01 from Hurricane Sandy and $0.02 from centers that were discontinued. These calculations are adjusted for the $3.5 million in 2011 transaction costs related to the acquisition of the 15 national surgical centers.

As we look to 2013, the earnings from our record year of acquisitions will be partially offset by the higher interest cost of $0.20 per share due to our revised capital structure. In addition, as we've mentioned our earnings per share will be negatively impacted by $0.06 due to the reduction [indiscernible].

Despite these 2 headwinds, we are projecting double-digit growth in revenues, earnings per share, operating cash flow and most significantly, EBITDA for 2013.

Our guidance for the year is as follows: revenues at a range of $1.06 billion to $1.09 billion; same-center revenue increase of 0% to 2%; same-center revenue growth will vary quarter-to-quarter due to an unequal number of days in the quarters year-over-year. The first quarter of 2013 has 2 less days than the first quarter of 2012.

Guidance for center acquisitions will generate approximately operating -- generate annualized operating income in a range of $25 million to $29 million; net cash flow, provided by operating activities less distributions to noncontrolling interest in a range of $140 million $150 million; net earnings per diluted share of $2.18 to $2.23 for the full year; and net earnings per diluted share for the first quarter of $0.50 to $0.52.

And at this time, operator, I will turn it back over to you and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Kevin Fischbeck of Bank of America.

Joanna Gajuk - BofA Merrill Lynch, Research Division

This is actually Joanna Gajuk in for Kevin today. The question I have is on the outlook for same-store revenues, which I guess given the 3% same-store revenue growth this quarter with the hurricane impact seems to be conservative. And also you talking about 1 percentage point of headwind of -- from the workers' comp cost in California. So can you just explain why the, I guess, strong performance in the fourth quarter is not falling through to 2013 outlook?

Claire M. Gulmi

Sure. And I think that, that 0% to 2% really equates to 1% to 3% if you include the workers' comp adjustment, and we felt like that the 1% to 3% was the right range based on what we've seen through the years. We've had choppy [indiscernible] a little bit less than 3% and then we continued to feel that the economic environment is not conducive to anything -- to projecting anything stronger than that. But I think the big difference is really the workers' comp.

Joanna Gajuk - BofA Merrill Lynch, Research Division

All right. So then can you talk about mainly the more details in terms of the performance in the quarter? Which part of your business was stronger? Which were weaker? And then any color on the impact of the reform provisions for [indiscernible] for screenings?

Christopher A. Holden

Well, as I mentioned in my comments, we generally had a pretty consistent performance across geographies, across clinical service lines, really fairly steady state. We did see a slight bump on the GI side from the colon cancer screening. And that's really the only noteworthy trend that bubbled up out of the same-store operating performance.

Operator

And we will take our next question from Kevin Ellich with Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

I guess first, starting off on supply costs were a little bit higher. Claire, was there anything specific that kind of jumped out why it was a little bit -- why we saw the uptick sequentially and year-over-year?

Claire M. Gulmi

No. Really, I think you can see it bounce around quarter to quarter. This was the higher quarter at 14.5%, but average 14.2% for the year and that's really being driven again by the mix change to multi-specialty. But I don't think we feel -- supply cost is under control. We don't -- we're not feeling like we have any big impacts from any issues in that area.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. Okay, that's helpful. Then just going back to the number of procedures performed this quarter. When we look at it on a year-over-year basis, up 4.4%. That seems to be -- I think that's the slowest we've seen it in the last 7 quarters or so. Was there anything specific, I mean, I guess, the hurricane was an impact and we could adjust back from that. But was there anything else that you guys noticed?

Claire M. Gulmi

Not really. We did -- most of the acquisitions that we did in the fourth quarter were at the end of the year. So they were not really accretive to the number of procedures during the fourth quarter. So I don't think there was really anything else going on that I would highlight there.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then Chris, kind of big picture. Have you noticed any changes in the competitive landscape? Or is everything pretty much status quo?

Christopher A. Holden

That's a good question, Kevin. I don't know that I've seen a dramatic change. I think there -- we had so much, so many milestones on the political front last year. It was probably a little bit of paralysis, generally. And I think now that there's a little more visibility, we're starting to see more action. But I still think the people aren't exactly sure which way to turn at this point, to tell you the truth. I think the big, if you ask the trends, ask most of the leaders in the space, they would say that you're hearing more hospital activity. We haven't really seen that to any large degree other than systems reaching out to talk to us and being a little more proactive. That's about the only difference.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And when you say they're reaching out, are you talking to -- are they trying to partner with you for the ACO relationships or integrated care? I guess, what are they trying to accomplish?

Christopher A. Holden

Generally, they're trying to find a partner who can help them improve their outpatient footprint in the marketplace. Most of them find themselves heavily underweighted in that area. And particularly, where we have significant market share or I think, good market position or relationships there, that's when they find us and it's really that simple.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it, got it. And then just quick update on how things are going over in the U.K. Any development or update there you can provide?

Christopher A. Holden

Well, we're just -- we're trying to be very deliberate in our process and it just takes a while. I would say that's probably the big lesson learned. So far, these transactions takes longer to do the first one.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it, okay. And then lastly just a housekeeping. Claire, could you give us the procedure mix by revenue and the actual number of procedures?

Claire M. Gulmi

Sure, I'll give you. During the fourth quarter, if you'd look at it by revenue, we were 53% GI, 12% eye, 34% orthopedic and multi. On the procedure basis, 70% GI, 9% eye and 21% multi. I think you'll see that number because we bought so many multi-specialty centers in the fourth quarter. I think you'll see our GI revenue dropped to the 50% or maybe even slightly below that as we move into the first quarter of 2013.

Christopher A. Holden

Kevin, we do -- I think it's important to note we do cross over 2 thresholds here, I think, in 2013. One is the $1 billion mark revenues. And secondly, I think for the first time, soon, we'll see that GI is less than 50% of the portfolio, starting, I think, when I started it was near 80%. So it's been a pretty significant shift in the portfolio over a [indiscernible] period of time.

Operator

[Operator Instructions] We'll take our next question from Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes, just I wanted to follow up on the hospital point that you were making. And I guess I'm just curious to hear from you how you're thinking about the economics potentially of deals like that. I mean, typically, they're 3-way deals. So I don't remember, did NSC have any of those? And is that a template for how you might approach the market? Just wanted to hear from you, Chris, how you think you're going to approach the market to the extent you get a lot of hospitals reaching out to you now?

Christopher A. Holden

They had one in NSC and we've got, I think, a double-digit number of hospital owners in our current portfolio. But not -- you're thinking more of the 1/3-1/3-1/3 model as what's most common in the marketplace. And I think our approach is going to be more flexible to see what makes sense in a particular market. I think they need to be market-driven. I think they need to be accretive and I think they need to be with partners who are truly want to be partners. And the cornerstone of what's made -- what's built AmSurg as a successful company is we've never lost touch with the fact that the physicians are the key and that we are physician-centric culture. And I don't want to fall into a model that dilutes that because I think that would be inconsistent with who we are. So we kind of put those, as a long answer to your question, Darren, but those are probably the major tests that we apply when we look at potential relationships. We try to stay away from financial engineering relationships. We see that quite a bit. We don't think that's sustainable over the long haul.

Darren Lehrich - Deutsche Bank AG, Research Division

That's helpful. And just with the comment around with more flexibility to the approach, does that mean we might see to the extent you do a few of these, this year, situations where you're not consolidating? Does that -- you think that's a possibility?

Christopher A. Holden

Yes, I think that's a possibility.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. All right. Then I guess, I wanted to just focus in on the 14 transactions in the quarter. We knew you're going to be that busy. I guess, I'd just be curious to get your thoughts on how the organization is assimilating 14 at once and whether you'll take a little bit of a pause here over the short run or do you think -- do you think this is just sort of normal for you guys at this point?

Christopher A. Holden

I think it's pretty normal. This 2 years in a row of this -- actually, more than that, we've put up several years where we've done high double-digit or high teens in new centers. And historically, we do them all in the fourth quarter of the mass majority. I would tell you that the integration of the ones that we acquired in the fourth quarter is far along, if not complete already. We worked so long on the transactions that it takes months and months. We sort of know them when we start into the process early on. But that's -- the integration risk is low because of our track record and this is something we have a core competency in.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. That's great. And then my last question just you've given us your outlook on same store and certainly understand your stance on that. I guess I'm curious just to get your thoughts around pricing, if you put workers' comp aside and put the potential for sequestration aside, just more around the managed care book of business, can you talk about what kind of pricing power, if at all, you think you have and maybe size that for us?

Christopher A. Holden

I didn't bake anything in beyond our historical trend of 1%. We really get about 3% on a renegotiated book, which is about 1/3 of the total book each year. Darren, really, the struggle is the visibility on the impact of health care reform and the macroeconomy at this point, with the new payroll taxes and Medicaid changes, which doesn't really affect us mix-wise, but could affect how who qualifies for what. So there's just a lot of open-ended questions right now which impair visibility. And part of the reason why I think Claire articulated that we have some concerns when we forecast same store out of the gate this year, we're really not forecasting a big change over our run rate through the last 4 quarters. That's all we can see at this point. And in the past, as the quarters have come in, if it's better, we've had no problem adjusting up.

Operator

And at this time, there are no further questions in the queue. I'll turn the call back to Chris Holden for any closing remarks.

Christopher A. Holden

Thank you, operator. I'd just -- I think I'd reiterate the key message that around health care reform and all the things that we're -- will drive a lot of the strategic behavior and the focus of the company. We do think that we're -- again, we're bullish on what that means for the ASC space and we still believe that ASCs are a source of innovation and cost control and really an underutilized asset in the system. And that overall, health care reform, although it lacks some visibility on the details at this point, it still has a potential to be a net positive going forward and would be to make us part of the solution as the country tries to fix its cost-control issues.

So with that, we -- again, we remain bullish on our prospects for 2013. And for all of the AmSurg team that's listening in on the call, I want to thank you for your hard work in 2012. It was a very good year. I'm very privileged to serve with you and thanks for -- again, for all your hard work. And thanks to everyone else on the call. Thanks for being with us.

Operator

This does conclude today's conference call. Once again, we would like to thank everyone for your participation and have a wonderful day.

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