AmSurg's CEO Presents at Barclays Global Healthcare Conference (Transcript)

| About: Amsurg Corp. (AMSG)

Amsurg Corp. (NASDAQ:AMSG)

March 13, 2013 8:30 am ET

Executives

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

Analysts

Brendan Strong - Barclays Capital, Research Division

Brendan Strong - Barclays Capital, Research Division

All right. Good morning, everybody. It's a real pleasure to be here this morning with AmSurg. With us today are the company's President and CEO, Chris Holden; company CFO, Claire Gulmi. We're actually going to kick it off this morning with a quick ARS questions, and then we'll move in to the company's presentation. So with that -- and we're waiting.

All right. So the first question is, do you believe healthcare reform will be a positive or negative for the company? 1, very negative, 5, very positive. 6 is...

[Voting]

Brendan Strong - Barclays Capital, Research Division

All right. Yes. 60% positive, but there's some 20% very negative in there, so that's interesting. Next. Do you expect the company will be able to contract the rates on exchanges that will be closer to, number one, Medicaid rates, all the way up to five, for commercial rates?

[Voting]

Brendan Strong - Barclays Capital, Research Division

All right. All over the map, so we'll see. We're hoping for something closer to commercial.

Christopher A. Holden

[indiscernible]

Brendan Strong - Barclays Capital, Research Division

Next question. What will utilization trends look like in 2013 for the company? Significant increase, number one, all the way down to five, for significant decrease?

[Voting]

Brendan Strong - Barclays Capital, Research Division

All right. Everybody says an increase. How would you like to see the company deploy capital in 2013? Ranging from one to M&A, all the way down to five, invest in the core business. This is the one that's usually all over the map.

[Voting]

Brendan Strong - Barclays Capital, Research Division

All right. Next. Here we go. Do you think the company will grow earnings in 2014? Yes or no?

[Voting]

Brendan Strong - Barclays Capital, Research Division

So everybody seems to think the answer is yes. And I think the last question, do you currently own the shares?

[Voting]

Brendan Strong - Barclays Capital, Research Division

And most people don't. So with that -- I'm sorry, last one. What is your current bias on the stock? 1, positive, 3, negative.

[Voting]

Brendan Strong - Barclays Capital, Research Division

80% are neutral. All right, with that, let me turn it over to Chris to convince everyone that they shouldn't be neutral and that they should be on [indiscernible].

Christopher A. Holden

Hey, good morning, everyone. It's a pleasure to be here with you today. That was fun. That's a good way to start here. If I can make this thing -- should I be able to advance? Struggling with the -- there we go. There we go. It sounds like the room is very -- actually fairly familiar with the story. Just by a quick show of hands, how many are new to the story? Ever heard of the company? I'll just do a really quick overview of the market and kind of give you a snapshot of where we fit into the big picture. And talk a little bit about the strategy and outlook for the company.

For those of you that are not medical in background, just a quick note that outpatient surgery, in particular, freestanding ambulatory surgery centers, which is our core business, is really a fairly new modality in the scheme of things. It's a little less than 40 years old. It's not that many years ago. And of course, in my lifetime, almost all surgery was done on an inpatient basis. And over the last, particularly in the last 3 decades, there's really been a complete paradigm shift where now the vast majority of all surgery is performed on an outpatient basis. And that's a trend that continues.

And if you look at where we are today, of the procedures that are performed on the outpatient basis, there are really 3 modalities: the freestanding ambulatory surgery center; the hospital outpatient department; and physicians' offices. And what's most interesting is that today, about 1/2 of the market share, roughly a little less than 1/2, is done in the hospital outpatient department setting versus the freestanding ASC. However, there's a very significant difference in price between the 2, particularly for Medicare, where the price of the services is nearly double in the hospital outpatient department. For that reason, we think there's a strong thesis in support of continued growth and utilization of the freestanding outpatient modality, partly to be part of the solution to help this country control costs and be more efficient in the delivery of healthcare.

Another interesting observation about the space is that because of its rapid growth and because of its fairly young tenure, it is still a mom-and-pop business. The vast majority of surgery centers today are still independent. Corporate owner managers have a less than 30% market share today. It might be creeping up a little bit now in the last few years, as there's been a little bit more consolidation, and then hospitals, of course, have weighed in a little bit more over the last few years, but it's still very much a micro business out there and still corporatizing and consolidating at a fairly rapid rate. I think another interesting observation, it's more relevant when you think about AmSurg, is the types of centers that are out there. Generally, people try to characterize the freestanding space into single specialty and multi-specialty. Obviously, the single specialty is where you try to do one -- focus on one clinical line, whether it's a GI, gastroenterology or ophthalmology surgery center, or the multi-specialties, where various multiple types of clinical services are performed in the same type of center. And here you see the distribution of those types of centers across the U.S., and as you'll see in just a second, AmSurg's has a little bit of a different way, mostly because of the evolution of the company.

Here you see our revenue distribution. In contrast to the whole space, we're more heavily weighted in GI. That percentage has changed dramatically in the last 5 years. It was nearly 80%, not that long ago, and now has been reduced down to 56%. The multi-specialty line of business is something that we added about 5 years ago to the portfolio, and it's quickly grown to be a fairly large and substantial part of our overall portfolio base. Ophthalmology stayed roughly the same and is in line with what you'd see on a national basis. But our company, I'm proud to say, is celebrating its 21st anniversary this year. The company began with its focus on GI, and for that reason, you see the differentiation here in the GI space.

Today, we perform over 1.5 million procedures and over 1 million of those are in the GI arena. We have really an uncatchable market position there. We're partnered with 1 in 9, 1 out of every 9 private practicing GIs in the United States. We perform somewhere between 10% and 15% of all the colon cancer screens in the U.S. And it's really a remarkable evolution hit there on behalf of the company, over that 21-year history. But even as we've gone through that process, we continue to evolve organically, to look more and more like the overall space and again, you see the dramatic shift in our portfolio in just the last 5 years. Our foray into multi-specialty now is, we now have over 55 multi-specialty centers, which makes us the fourth largest multi-specialty provider in the U.S. And you also see our -- some of our financials here, and as we'll talk about just a second, it's very strong. And again, we'll highlight some of those differentiating, aiding characteristics in just a second.

Just a quick look at our national footprint. We're in 35 states today, and our distribution mirrors, in large part, the distribution of surgery centers across the U.S. Some of the states where we don't have a presence, they have regulatory barriers or they're just small states and not a lot of evolution of surgery centers in some of those.

But here at the -- a quick summary. On the GI service line, we're the market leader in the freestanding ASC space with about a 10% or maybe a little bit higher than that market share now. Ophthalmology, we're at 5%. There's really only one other company that has a position there, Surgery Partners, which recently merged 2 companies, NovaMed and Surgery Partners under HIG. And between the 2 of us, we have about a 9% or 10% market share. And then after that, there's not really a #3 that stands out. And then on the multi-specialty line, as I mentioned before, we've gone from really not having that in the portfolio, to being a top 5 in the U.S., really close to top 4 now.

For those of you that aren't as familiar with the space, here are the -- really, 5 of the top players in the space. All great companies. The differentiating characteristics here that you'll see is, amongst our pure play are -- or primarily focused on surgery center competitors, USPI out of Dallas, SCA out of Birmingham and Symbion in Nashville. We are the only publicly traded pure-play, ASC company. And I mean, of course, you have HCA, which everyone is familiar with, and ASC is a small portion of their portfolio. But if you dive under the hood to compare and contrast the different players, we tend to focus more on -- we have a different model, we really try to differentiate our company first and foremost on our physician-centric culture. Most of our competitors have pivoted their strategy over the last few years into hospital ownership and in some cases, into hospital joint venture strategies. And we feel like that those were a good play for those companies, and not something that we have ruled out in any way, shape or form, but we wanted to make sure as we made any sort of transition into hospital relationships, that we don't lose track of the fact that the physician is the key driver of our relationship and the core of our differentiation as we think about our ASC growth strategy over the long haul.

Now as I mentioned earlier, we are a little more heavily weighted in GI, although that's changing substantially. And then of course, we are the largest with over 240 centers today in our portfolio. And lastly, I'd point out that most of the competition privatized back in '07 and '08, left themselves with some -- a little bit more of a challenging debt structure, more highly levered. And meanwhile, we've been able to maintain a low leverage between 2x and 3x of despite having grown the company, almost double in the last 5 years.

As I mentioned before, that physician centricity is very important to us. We measure and compare ourselves to the other companies. And we've had very high physician satisfaction, both with the centers and also with the AmSurg partnership. We have around 400 basis-point differential in the net promoter score, which we use as our key metric. And much of that is driven by the type of support that we provide to the centers and the support that we provide to the physicians, particularly as we help them think strategically about how to improve adapting growth through all the challenging and changing times that we face today.

And we believe that that physician-centric culture has helped us differentiate the company. On the development pace, we really had an unmatched growth curve compared to our competitors over the last 21 years, and in particular in the last 5 years. As we work our pipeline, first of all, we've really called on every surgery center in the marketplace over the last 21 years and we really have a relationship there. But we also give them a list of all the centers that we have and invite them to call any physician and to really learn more about the company. And I think our reputation, in the way that we handle that relationship, has been a key driver in this success.

And as we think about the M&A outlook over the long haul, as you saw on the earlier slide, there are about 5,300, 5,400 Medicare-certified ASCs out there in the marketplace. Again, most are still independent. Today, we say there's roughly 2,000 ASCs in the target pipeline. And as you saw, we closed 18 deals last year. We've averaged about that for this period of time. We still see a long runway on the consolidation and corporatization of the space over many years to come.

Our CapEx, as we show here, has been accelerating. Last year -- over the last 2 years, really, a lot of this fueled by fear around tax changes and healthcare reform, and a lot of different -- increasing regulation, but it's really put us in a position with our balance sheet with even more improvement in the types of assets that are available, to put the money to work and to continue to grow the company. And of course in 2012, we had a record closing in the fourth quarter.

Here's a quick overview of our balance sheet. Again, you see the low leverage there. And you see our -- the key metrics there. And then, if we could then turn to the organic growth rate, you see we've had a fairly strong turnaround in the last 3 years as we battled through the recession, beginning in late '08 through '09 and '10. A lot of that driven by a long list of initiatives and actions that we've taken on behalf of -- in our core overhead and support to the centers and to the process, and has generated some good results here.

When we think about the organic growth rate and what it should be, I'd just point out, there are a lot of very strong tailwinds that we think warrant a bullish outlook on the future of the space. Obviously, healthcare reform, which we saw the answer to a moment ago, did a couple of things. Obviously, it expands coverage to the 30 million uninsured, but it also provided incentives, particularly for colon cancer screening where it waived the co-pay and the deductible obligations, for not only Medicare patients but also for commercial patients going forward. So it was really a positive momentum there. We think a net positive over the long haul. As I also mentioned early in my remarks, we think that the affordability, the price point and the access and the quality, also put us in a strong position. And we believe any healthcare service today that's on the right side of the cost curve is well-positioned and we feel like we fit that particular thesis. I think if you're in healthcare, you study healthcare companies, you're tired of hearing about the demographic trends, but they are there and they are favorable and probably enough said on that.

A couple of things that are less obvious though. When we think about population management, remember today that 1/2 the people that should have colon cancer screenings do not. That number's probably improving, it's probably down to 40%, but it's still a big number. And we also have issues with, for instance, cataract care. People are waiting anywhere from 4 to 8 years too long to get their cataracts treated. There's a lot of opportunity to increase the ability to serve those populations.

The last 2 are probably a little more on the negative side, but unfortunately the country's not getting healthier. Obesity and other issues, which tend to drive GI problems, ophthalmology problems, orthopedic problems, continue to worsen, so again, another driver. And then lastly, over the last 2 to 3 years, there really has been no growth in capacity in the space, partly because of capital constraints, partly because of fear of the unknown, but really hasn't been a lot of growth there. And also remember, there are about 5,400 surgery centers and roughly 4,800 acute care hospitals. There is a rational relationship between those 2, and so I think it's fair to say that the space is maturing at the same time that demand is increasing. So we think that, again, that positions those of us who are in the space currently, well for the long haul.

There are a few headwinds, and honestly, the physician supply, regulation, maturity of the space, I think are headwinds to the space, but in some ways, they also help fuel what we do at AmSurg and put us in a good position to help deal with those on behalf of our surgery centers. The only real wildcard is the economy. What will it do for jobs, what will it do for expanded coverage, and that's the one to watch and harder once it gets a really strong visibility on for the long haul. At the end of the day, when we net-net everything together, I say here -- I said here before, we remain very bullish on the long-term outlook for the space.

Just a few highlights on the financials. You see our solid revenue growth, strong operating cash flow and our very strong growth in EBITDA. And you see our performance on EPS in 2012. And then lastly, an outlook for 2013, we just recently gave guidance. 2012 is impacted slightly by the tail of our recent high-yield refinancing and also in California's workers comp, there's a $0.06 to $0.07 hit that took for a change in their fee structure.

So in summary. Our strategies are fairly well-known and articulated. Again, it's to differentiate our relationship with our physicians, to differentiate freestanding ASC on the basis of the value proposition. Whether we like it or not, we are a key consolidator in this space and continue to grow through consolidation. And lastly, we do continue to always morph and expand and diversify the company, and when I talk about diversification, I mean, into new markets, I mean, into new models. And we've even kept our eyes open towards new lines of business. We're particularly interested in other outpatient lines of business that are consistent with being on the right side of the cost curve and match up with our core competencies. But we have -- overall, have a lot of flexibility there, as we think about strategically where we head for the long haul.

There's a long list of why I think AmSurg is very differentiated in the space and I won't go over all of these. You've heard me hit several again and again, but again, it's our physician-centric focus, the value quality. I think when people think about AmSurg, particularly investors, we've been called a lot of things, the tan minivan and the tortoise. And we're very -- we're known for being very transparent, very deliberate and very cautious in the way we handle things, and very -- try to be very thoughtful as we think about our growth. That's why this company has been around for 21 years, that's why it's emerged as the market leader, and it's why it's been able to sustain itself and really build, I think a really marquee group of investors that do own the stock today and have held it for the long haul. And at the end of the day, I think what we appreciate most about the company is our reputation for integrity and for consistency, which is now over our 21-year history. We have a lot of momentum and a good track record as we head into '13. Just -- I feel like we can put all the pieces in place that we need to battle through and just need to see where the economy takes us and see if we can manage through the healthcare reform.

And with that, Brendan, I'll stop and answer any questions the group might have.

Question-and-Answer Session

Brendan Strong - Barclays Capital, Research Division

[indiscernible]

Christopher A. Holden

Do I have to answer it on this tricky tool here?

Brendan Strong - Barclays Capital, Research Division

I'm sure as this -- go back to the 21% features on the hospitals, what do you think the right number is [indiscernible] what do you think is good [indiscernible]?

Christopher A. Holden

Well, you could migrate. You don't have to migrate or shift a lot of it to make a big difference to what it means in the freestanding space. But just if Medicare were to move half of its procedures to the lower cost setting or pay the same as, the country would save over $10 billion over 5 years. So it's not an insignificant amount of money.

Brendan Strong - Barclays Capital, Research Division

And as you mentioned on the economy, [indiscernible] a little bit more optimistic [indiscernible] and a little more optimistic [indiscernible] long term?

Christopher A. Holden

No. I would say I'm confused about the economy. I think everyone is. The stock market doesn't mirror a lot of what we're seeing on the day-to-day basis. So it's very hard to triangulate right now to figure out where it's headed. We always try to remain optimistic and see where it's headed. But no -- there's a lot of -- there seems there'd still be a lot of dislocation on some of the data points.

Brendan Strong - Barclays Capital, Research Division

That's it. Thank you very much.

Christopher A. Holden

Thank you.

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