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AmSurg (NASDAQ:AMSG)

Q2 2014 Earnings Call

July 31, 2014 5:00 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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Joanna Gajuk - BofA Merrill Lynch, Research Division

Operator

Good day, everyone, and welcome to today's AmSurg Corp. second quarter conference call. Today's call is being recorded, and a replay will be available starting today through August 9, 2014. The number for the replay is (719) 457-0820 and the code is 8928376.

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

Christopher A. Holden

Thanks, Tom. Welcome, everyone, who's joining either on the call or via the webcast today. As always, with me, here on the call is Claire Gulmi, our Chief Financial Officer. And I'll turn it over to her to get us through the disclaimer.

Claire M. Gulmi

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 31, 2013 and other filings with the SEC. Copies of these filings are available from AmSurg upon request.

And I'll now turn it over to Chris for opening comments.

Christopher A. Holden

Well, thanks, Claire. Well, as you're all aware, we announced the completion of our transaction with Sheridan Healthcare just a few short weeks ago, and just for the record it took about 47 days from the signing of the agreement to the closing, during which time we raised approximately $2.5 billion and completed a very complex, transformational transaction, and it was certainly a Herculean team effort by everyone, and we think it's a testimonial to our collective enthusiasm for this next step in our evolution.

We're now focused on the integration of these 2 market leaders into a new and innovative national platform, offering a broader suite of solutions to support physicians, health systems and payers in the pursuit of quality, access and efficiency of care. Since the announcement, we've had positive feedback from the customers and physicians of both Sheridan and AmSurg. The announcement has also been catalytic for lead generation. So as a result, I know I'll be spending much of my time over the coming months meeting with health systems CEOs and physician leaders to identify and prioritize opportunities for growth and innovation.

Now to the gate, we're focused on the operational integration of these 2 great organizations, and I'm pleased to announce that all 4 of the key Sheridan management team members that we'd hoped to retain are in place and have signed new employment agreements with AmSurg. The CEO and CFO remain engaged and have transitioned to consulting agreements that run through the end of the year. And Bob Coward is now serving as President of Sheridan. He's very engaged and enthusiastic about helping shape the future of the new AmSurg. And there was no change in our board composition.

Our highest priority is integrating the development efforts. Specifically, we're leveraging our collective resources to, number one, identify acquisition opportunities for anesthesia, emergency, radiology and neonatology services to – number two, to identify new ASC acquisition opportunities; number three, to develop more health system partnerships; four, to drive new contract growth by introducing Sheridan physician solutions to health systems operating in the over 100 markets currently served by our AmSurg surgery centers; and last to -- fifth, to collaborate with our physicians to integrate the Sheridan anesthesia capabilities into the AmSurg's ASCs, where it make sense and our physician partners are in agreement. And I will say we are off to a great start on each of these objectives. And as we've said, since we've begun this transaction, we believe that the combination will be 15% accretive in 2015 and continue to be accretive in the years following.

Our goal for this call today is merely to report on the performance of AmSurg through the end of Q2 2014, which is obviously prior to the closing of the Sheridan transaction. However, we have prepared guidance for the remainder of 2014 for the combined company, and Claire will share that in her comments.

Before we get to that, let me move quickly through the performance highlights for AmSurg, for Q2 and for the first 6 months of 2014. Revenues for the second quarter were $281.5 million, increasing 5% versus the first quarter of 2013. Adjusted net earnings per diluted share were $0.63 for the second quarter, in line with guidance, up 9% as compared to $0.58 for the second quarter of 2013. Same-center revenue increased by 1%, and note that same-center revenue was 3% if you adjust for having 1 less day in the quarter. For the 6 months of 2014, revenues were $544 million, increasing 4% for the same period in 2013. Adjusted net earnings per diluted share were $1.16 compared with $1.10 for the first half of 2013.

For the quarter, we acquired one multi-specialty center, bringing our total acquisitions to 2 year-to-date. We have 6 letters of intent pending and 1 de novo development, and our pipeline is very solid and our multiples remain constant at 6 to 7x. We also developed 2 new hospital system joint ventures in the quarter. One with our friend in the Banner Health system in Phoenix, Arizona, where we combined 2 centers, and also with our friends in Centura Health and their hospital in Canon City, Colorado, bringing our total health system joint ventures to the year to 3 including the Torrance Memorial combination in Q1.

We have a solid -- again, we have a solid pipeline of joint venture opportunities with other health systems and a lot of activity in that area ongoing. We ended the quarter with 243 centers, 151 GI, 36 ophthalmology and 56 multi-specialty.

So with that high level overview, I'm now going to turn it over to Claire for some additional color.

Claire M. Gulmi

Thanks, Chris. Good afternoon, everyone. Highlights of the second quarter include the following: Our revenues increased 5% to $281 million; our net revenue per procedure increased 4% to $668; we recognized a gain of one point -- $1,366,000 related to the deconsolidation of the 3 centers; our operating expenses were negatively impacted by $3.6 million or 130 basis points of transaction costs related to the Sheridan acquisition.

Adjusted earnings per share increased 9% to $0.63. Our adjusted EBITDA, which now includes add-backs for transaction costs and share-based compensation and subtracts gains on deconsolidation for all periods presented was $52 million for the quarter. Our adjusted gross EBITDA margin for the quarter was 36% versus 35.8% in the prior year, and our adjusted net EBITDA margin was 18.5% versus 18.2% in the prior year. Capital expenditures totaled $29.1 million, which included $19.4 million for acquisitions and $9.7 million in maintenance CapEx. Our net operating cash flow, less distributions to noncontrolling interest, was $35 million for the quarter.

In July, CMS announced the proposed updates to the ASC rates for 2015. They are proposing a net 1.2% increase, so GI will receive a higher increase than the other specialties. Our preliminary calculations that -- are that if these rates hold as proposed, and based upon our specialty mix, we will receive an increase of $7 million in revenue in 2015. Now of course, the most significant subsequent event since the end of the second quarter was the financing and closing of the Sheridan transaction on July 16. We raised $588 million in common and mandatory convertible preferred equity, and raised approximately $2 billion in the combination of a senior secured credit facility and the issuance of senior unsecured notes. Total debt after the financing is $2.25 billion.

Diluted shares outstanding for the third quarter will be approximately 50.4 million, and for the fourth quarter will be 51.5 million. These shares count, apply and -- excuse me, these share count, apply and if converted methodology for the mandatory convertible preferred stock.

I also wanted to give you a little color on Sheridan's results for the second quarter. They had a strong second quarter, with revenue of $266.3 million, an increase of 17.6% over the prior year. This 17.6% revenue growth was comprised of 4.3% from same-contract revenue, 3.4% from new contracts and 9.9% from acquisitions. The company experienced same-contract revenue growth of 5.8% in this quarter versus the first quarter, which saw 3.4% growth. Volumes increased 2.8% and revenue per patient encounter grew 2.9%. New contract revenues increased 3.2%, resulting in total organic revenue growth for the second quarter of 10%. Adjusted EBITDA was $46.6 million for the quarter.

Today, we are adjusting our full year guidance to reflect the closing of the Sheridan transaction and establishing third quarter guidance as follows: Revenues of $1.61 billion to $1.63 billion; same-center revenue increase of 1% to 2% for ASCs and 6% to 8% for physician services; net cash flow provided by operating activities, less distributions to noncontrolling interests, in a range of $170 million to $180 million, excluding transaction costs; adjusted EPS for 2014 in a range of $2.61 to $2.66; adjusted EPS for the third quarter in a range of $0.63 to $0.65.

And at this time, operator, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Kevin Ellich with Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Chris, I guess, just wanted to start off with Sheridan. You guys closed the deal pretty quickly. Just wondering what your puts and takes have been so far. And kind of as you've gone through the process over the last, I think you called out 47 days to complete, what were some of the positive things that surprised you about Sheridan? And what do you think you guys can improve upon?

Christopher A. Holden

That's a great question, Kevin. First, I think the biggest takeaway, so far, there really haven't been any surprises. It's been as build. I think we did a good job on the diligence. They were incredibly cooperative and professional. You can't get a transaction like that done in that period of time unless everyone's working together. So I think that, that spoke volumes on that level. But we've had completely positive reaction from particularly their key customers. It's generated some new leads. We've been in even areas where we were in system joint venture discussions. It's led to some new opportunities there that we're already acting on. So I would say that the catalytic effect was probably slightly better than I expected. We've really experienced no channel conflict. It's been very well-received on every level.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

That's fantastic to hear. I guess, could you expand upon the conversations with the key customers and kind of the lead generation? What's embedded in your guidance for lead generation or new customers or whatever you guys can derive from this new relationship?

Christopher A. Holden

Well, I think we said for 2014, our focus is -- or the -- I think we held out $30 million to $40 million in synergies over 3 years, a very small piece of that between now and year end, really de minimis in the total picture. So it gives us a little runway to get those pipelines started and work on execution there.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then just wondering on the financial side, Claire, what are you guys going to provide us going forward? Will you cover all of the metrics that you just gave us? So, yes, how should we think about that?

Claire M. Gulmi

Yes, I think we will do that and I'm sure we'll even expand it and -- to be more comparable to others in that industry. So we will try to include both AmSurg metrics and Sheridan metrics.

Christopher A. Holden

No, we just -- there's -- the competition does a great job on their calls and it laid out the groundwork for the metrics. And we will try to mirror that as best we can.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay, okay. And then just lastly, the hospital joint ventures, I guess, how big's that pipeline? And have those conversations changed much since you announced the deal?

Christopher A. Holden

We probably got health system conversations going on in just under half of the markets. And we're in over 100 markets today, so it's, like I said, it's a very active pipeline. We have some that are much further along. One thing that's been interesting is that we've come across -- the same people in C-suite, who are making decisions about how they -- how the systems expand their ambulatory footprint, are the same people that generally make the decisions about the hospital-based physician services solutions. And it has not been uncommon for them to be familiar with Sheridan, or to have had experience in a past life and to -- in every instance, so far, it's been very positive. So once they've discovered that we're linked, they're excited to have them there. And where Sheridan has relationships and provided introductions for us, the health systems have been quick to point out that they realize that they're underweighted in ambulatory services as a percentage of total and we look forward to sitting down and talking strategically about how we might work together to improve that.

Operator

And we'll take our next question from Darren Lehrich with Deutsche Bank.

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

I wanted to ask a few more questions just around the guidance aspects of Sheridan. And Claire, just be curious to get your thoughts on what's embedded into the outlook for Sheridan in terms of just second half EBITDA? And I know you gave us the Q2 number, I wasn't writing fast enough. Can you just repeat that number? So I'll start there, and then [indiscernible] to Q1.

Claire M. Gulmi

Sure. Sure, yes. Their Q2 EBITDA was $46.6 million. As far as assumptions for Sheridan and for the remaining 6 months, we really have very little baked in from new contract revenue or acquisitions. We've guided 6% to 8% on same-contract revenue growth, and we're expecting their EBITDA to be a little north of $100 million in the last -- past year.

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Great. Okay, so that answers part of the question. I just -- I guess, just stepping back from the second half and the shorter-term guidance that, I guess, Chris, maybe curious to hear from you, as you think about Sheridan and the growth profile of the business and how that feeds into your guidance really going forward, do you think some bit of M&A plays into how you want to guide to this? And then when you think about the organic, is it like we hear from the other companies that the same contract plus the net new contract, or are you dialing down the net new?

Christopher A. Holden

I have to think about that question there. I mean, we -- let me break it into parts, I guess. On the M&A, we do have an assumption about our spend on the M&A and what that would drive in the guidance. I think we've articulated that through the financing process. And then on the -- I'm not sure I understood your second part of the question about...

Claire M. Gulmi

Are you asking whether in our organic revenue growth that we are including net new contracts? Is that what you're...

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Yes, exactly. Yes, that's what I'm asking. Yes.

Claire M. Gulmi

Yes. Yes, and we -- absolutely, that will be a -- that's a high focus for the company and for us, and we will certainly include that in our organic revenue growth.

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Okay. So and then just as we think about the 9.9% contribution from acquisition in Q2 that you described to us, I guess I'd be curious to know how much of the M&A element carries over into the second half? Do you want to frame that for us? I know you're giving us the organic, but just given what they've acquired and how that's flowing into the second half, curious to get the M&A piece as well.

Claire M. Gulmi

I don't want to get into too much discussion since this is really about results that we've -- of a company we didn't own at June 30, but I -- but they had a large acquisition in February, so I would think that the acquisition growth will continue through the end of the year.

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Great. Okay, and then just the last question in terms of the adjusted EPS guidance format you're on, what's the basis that you have for Q1 and Q2, just adding back the transaction costs that we'll be seeing now going forward?

Claire M. Gulmi

Again, I'm kind of -- sorry, I'm -- are you asking what the adjusted EPS was for the first and second quarter?

Darren Perkin Lehrich - Deutsche Bank AG, Research Division

Yes. Is it equivalent to what you reported AmSurg standalone in the first and second quarter? And then the second half is just on the new format? Or is there increase to the first and the second quarter on the screen format?

Claire M. Gulmi

Yes, there will be an increase to the first quarter. So the first quarter adjusted EPS should be $0.53. We'll be at $0.60 -- well, obviously, we're at $0.63 for the second quarter. And then all of the guidance that I've given you for the rest of the year includes all of those adjustments.

Operator

And we'll take our next question from Whit Mayo with Robert W. Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Sorry, just another guidance question while we're on the topic. But the old range was $2.41 to $2.45, but that didn't exclude stock comp, correct?

Claire M. Gulmi

That's correct.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And so it looks like your stock comp has been running around, let's call it, $0.19, $0.20 a year. So just adding that back, that seems to get you to your range already maybe $2.60, $2.65. So I guess...

Claire M. Gulmi

You're going to have to adjust for the additional shares in the second half. So really, in total, the stock comp is adding back $0.13 -- $0.12 to $0.13.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. Okay. So I guess, is there just a good apples-to-apples comparison for how much you're raising the back half of the year in terms of dollars of accretion?

Claire M. Gulmi

Dollars. As opposed...

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Or really pennies is what we're talking about.

Claire M. Gulmi

Yes, yes, yes. In the range, we're raising it $0.05 to $0.10.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

$0.05 to $0.10. Okay, that helps. And do you happen to have the prior year revenue numbers for Sheridan in the third and fourth quarter, just as we think about that business growing 6% to 8%.

Claire M. Gulmi

I do. If you'll give me just a second. So Sheridan -- I think I do. Let me see if I've got that quarter. What was the -- which quarters were you asking for, Whit?

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

The third and fourth of 2013.

Claire M. Gulmi

Yes, I do have that. Net revenue for the third quarter of '13 was $232,500 and for the fourth quarter $243,592.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And the acquisitions were probably in that $30 million plus range, correct, in terms of their quarterly contribution?

Claire M. Gulmi

To revenue?

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes.

Claire M. Gulmi

No, it was -- in the third quarter it was $2.5 million and in the fourth quarter it was $11 million.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay, maybe we should talk about that one offline. And I guess just on that same topic, I just was hoping to get maybe an update, Chris, on how the integration of those large acquisitions are going that Sheridan closed prior to the sale and how you would kind of compare those to the internal plan.

Christopher A. Holden

They're fairly complete for the most part, Whit. And I think that would be fair to say that's one of Sheridan's core competencies is the on-boarding of acquisitions and implementation of new contracts. So that was one of the areas that, back to Kevin's original question, that really stood out as a positive for Sheridan.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And I guess just one last one and I'll hop off, just, Claire, the $7 million increase you anticipate in Medicare rates for next year. I mean, back of the envelope that looks like nearly a 2.5% pricing increase. Is that level enough to hold margins? Can you grow margins? I mean, we just haven't seen a rate update that favorable for you in some time. So just kind of curious on your perspective for how we should think about margins next year.

Claire M. Gulmi

It's certainly helpful. Whit, what we've always said on the ASC business is that if we can exceed 2% revenue growth, then we certainly can begin to see improvement in margins. So that's only on 25% of our business is that Medicare increase, but certainly it will help.

Operator

And we'll take our next question from John Ransom with Robert James (sic) [Raymond James].

John W. Ransom - Raymond James & Associates, Inc., Research Division

So just to make sure our calculator is not broken, can you do the math for the implied fourth quarter guidance, both in terms of EBITDA and adjusted EPS, what the range would work out to be? I know you mentioned we have to reset the first quarter to $0.53, but I just want to make sure we're thinking about fourth quarter correctly because that's the first full quarter with Sheridan in for the full time.

Claire M. Gulmi

Okay. John, ask that question again. I want to be sure I'm answering the right question.

John W. Ransom - Raymond James & Associates, Inc., Research Division

So if we take your guidance, I mean, we now have annual guidance, and you've given third quarter guidance. So if we do the math, what that implies for fourth quarter, could you just confirm that in terms of EBITDA and adjusted EPS? To make sure I'm not missing something, which is always possible.

Claire M. Gulmi

Yes, adjusted EPS for the back half of the year will be -- well, $1.36 to $1.41 for the back half of the year. And I have not -- I don't have EBITDA numbers for you for the back half of the year. I have Sheridan's guidance, but I don't have ours.

John W. Ransom - Raymond James & Associates, Inc., Research Division

So Sheridan did $46 million, right, in the second quarter?

Claire M. Gulmi

Right. And they should do...

John W. Ransom - Raymond James & Associates, Inc., Research Division

We've been more focused, I guess, on '15, but are you assuming any synergies for the back half of the year or are all the synergies flowing through, really, in 2015?

Christopher A. Holden

So we are assuming some synergies. I think we said $5 million in -- by the end of the year.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. Is that a run rate or is that what would be for the year?

Christopher A. Holden

That's achievable in the year.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And is that -- Chris, is that from the cost side or does that include the revenue synergies you talked about?

Christopher A. Holden

That's the cost side.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And then on the revenue synergy, which involve moving some of those contracts to Sheridan anesthesiologists, could you give any color on how those talks are progressing in...?

Christopher A. Holden

Early-stage, 2 weeks into it.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Right. Any -- I mean, what's a reasonable expectation for '15 in terms of progress there in terms of moving some of that business?

Christopher A. Holden

So our goal is $5 million in revenue synergies in the first full year.

Claire M. Gulmi

Which will be a combination of several different things.

Christopher A. Holden

Right. And it could come from any of those buckets, John.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And when would you think the earliest expect some real numbers on some of the conversations, explain the conversations you're having with health centers?

Christopher A. Holden

We'll do our best to start to incorporate those kind of updates in our future calls as we go through -- give some color around that because it is key to the strategy.

John W. Ransom - Raymond James & Associates, Inc., Research Division

And is this -- just to make sure we understand that fully, what capabilities do you think you might still need to add to more -- or do think you're in pretty good shape with a core position in anesthesiology and surgery center? Are there other areas that you think you need to build out to more fully offer things to not-for-profits?

Christopher A. Holden

No, it's premature for me to answer that because I'm just now starting my cycle through all the health system CEOs. I want to -- let me aggregate sort of the feedback from those conversations. We've already had some requests along those lines, but I'm not ready to call it a pattern yet.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Well, what's the early read?

Christopher A. Holden

I'm sorry?

John W. Ransom - Raymond James & Associates, Inc., Research Division

What's the early read on what they're looking for you to do for them? What's the highest been -- what's the biggest problem they want you to solve?

Christopher A. Holden

The biggest problem is the ability to shift more of their care into the outpatient setting, into the lower-cost modalities, because they just don't -- they either have capacity issues or they're under pressure from the health plans or they own their own health plans and trying to control MLR, and there's a lot of different causation factors that are driving the need for these new solutions.

Operator

And we'll take our next question from Gary Taylor with Citi.

Gary P. Taylor - Citigroup Inc, Research Division

A couple of questions. One, Claire, when you had just walked through what the adjusted EPS looks like. I just want to make sure I understand. The new guidance excludes transaction costs, deal amortization, which looks like it's almost entirely related to Sheridan, and then stock comp. But if we look at the first quarter, for example, just AmSurg alone, I think you reported $0.53 and you site the adjusted EPS as $0.53. Wouldn't it be a little higher if that $0.53 now excluded stock comp? Wouldn't the adjusted number that's kind of embedded in guidance be a little higher than $0.53?

Claire M. Gulmi

We had a gain on deconsolidation. I think that just offsets the stock comp.

Gary P. Taylor - Citigroup Inc, Research Division

Right, okay. So that gain wasn't -- I guess I thought that gain would be excluded. Okay.

Claire M. Gulmi

It was not in the reported EPS, right.

Gary P. Taylor - Citigroup Inc, Research Division

Right, right. And then my other question, I just wanted to understand, so the same-store revenues were up 1%. Was that -- was same-store case growth roughly up 1, is that pattern...?

Claire M. Gulmi

Case growth was flat and revenue was up 1. Case growth on a day-adjusted basis would have been up about 1%.

Gary P. Taylor - Citigroup Inc, Research Division

Okay. And I didn't run vector my accounting, but the one business day, is that Good Friday that you're excluding?

Claire M. Gulmi

Yes.

Gary P. Taylor - Citigroup Inc, Research Division

And then I think my last question is, can you just -- Chris, maybe just talk a little bit about how you anticipate having the business development teams at AmSurg and Sheridan collaborate? What does that look like? There are sort of this cross-sell and joint pitch. So are those teams remaining under separate umbrellas? Are those teams coming together? How does that look like going forward?

Christopher A. Holden

Well, the shortest answer, Gary, is that I pulled the team together. They were -- I'm driving that integration process myself and working with each of the different functional aspects. And along with -- and John Carlyle's still supporting in that area as well. We are -- we've got a standing meetings. We built -- rebuilt our intelligence gathering and building of the strategy books around either key customers or key markets. We're very -- we've already launched a very intensive effort to rethink and reengineer how we're going about approaching the customers we're working on, bringing everyone up to speed on how to tell the story, what to look for, how to make the pitch, how to hand it off, doing all those different types of things. So you've hit the nail on the head. That's kind of the key process right now that we have to get, make sure that everyone is in sync on to -- so we can maximize the ability to introduce Sheridan and also to -- for Sheridan to incorporate their relationships into the AmSurg possibilities. So that's what we're doing.

Operator

[Operator Instructions] And we do have a final question today. It comes from Kevin Fischbeck with Bank of America Merrill Lynch.

Joanna Gajuk - BofA Merrill Lynch, Research Division

This is actually Joanna Gajuk filling in for Kevin. A question on the priorities for capital deployment that you talked about in terms of post-transaction, what kind of split you're thinking about in terms of the 30% versus the traditional staffing?

Christopher A. Holden

Well, to refer back to Gary's question, we've actually rebuilt the pipeline tracking device that were used or tools that we use. And it's not really about which line of business it's in, it's about the strategic fit. It's about -- partially about the economics, and it's really probably more heavily weighted at about, to some extent, the opportunism of it so -- because you can't always control when certain opportunities are going to come on to make it onto the pipeline. So right now, we have probably the puzzle everyone would like to have is that we have an incredibly robust pipeline and we're trying to prioritize the best way to deploy that capital. It's not really an issue about whether we can deploy it. It's an issue about doing it in the most optimized way. So that's driving our conversation.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Okay. And the question just, I guess, is based on this idea that if the staffing business is growing faster organically, we would think that it seems like it's a better sort of long-term investment to go after physician staffing versus surgical centers, that's the reason for the question. So I just want to see if that's the way you think about that as well.

Christopher A. Holden

We're still bullish on all the lines of business. We think they'll stand the test of time. And the effective multiples are very competitive across both lines of business, particularly where we can join the anesthesia with the surgery center. Those are very competitive deals for when we think about our pipeline. So I think the -- it makes for some lively conversations in our development meeting about which one should take precedent.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Right. And then just on the comments from you in terms of the guidance for Sheridan business for the second half at least for now, of the 6% to 8% organic revenue growth, can you give us a little bit more color in terms of the breakdown, what you think the volume versus pricing, versus net new sales, the breakdown, what would it be? Because I'm just looking at some of the data points that were in the prospectus, which obviously are not same-store, but like the revenue per encounter was up 10% in first quarter 2014. So it feels that maybe that's just, because of the transactions that were completed, but -- if you can talk about that same-store volume, same-store pricing kind of a breakdown that you will get to 6% to 8% organic growth.

Claire M. Gulmi

Their revenue per encounter was not 10% in the first quarter. I'm not -- and I think that included new contract revenue and maybe even some acquisitions, because their same-contract revenue was 2.6% in the first quarter. And so if you look, they had improving results in the second quarter, which I understand many in this industry did. And we're trying to be a little conservative as we go into the third and fourth quarter. The split between volumes and revenue were essentially 50/50 in the second quarter. And I wouldn't know how to project anything different than that going into the third or fourth.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Great. And also the last question now. So are you also including any, I guess, a benefit from health care reform in any of your projections there for Sheridan?

Claire M. Gulmi

Because of their mix of business, there's very little improvement from health care reform, other than really not from health care reform. I think what they believe, most of their improvement is really just from the economy and better employment.

Christopher A. Holden

I think there's might be a little bit of momentum in the emergency department line of business. I think some of the competition has seen some lift there and I think it would be fair to say we feel there's a little bit of that in that line of business.

Operator

And Mr. Holden, there are no further questions at this time. I'll turn the call back over to you for any closing comments.

Christopher A. Holden

All right, Tom. Thank you very much. I appreciate everyone being on the call today. And I'd say we are very excited about this next chapter in the evolution of AmSurg and Sheridan. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.

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Source: AmSurg's (AMSG) CEO Christopher Holden on Q2 2014 Results - Earnings Call Transcript

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