Surgical Care Affiliates' (SCAI) CEO Andrew Hayek on Q4 2015 Results - Earnings Call Transcript

| About: Surgical Care (SCAI)

Surgical Care Affiliates, Inc. (NASDAQ:SCAI)

Q4 2015 Earnings Conference Call

February 16, 2016 8:00 AM ET

Executives

Tom De Weerdt - Executive Vice President and Chief Financial Officer

Andrew Hayek - Chairman and Chief Executive Officer

Analysts

Joshua Raskin - Barclays Capital

Brian Tanquilut - Jefferies & Company, Inc.

Tejus Ujjani - Goldman Sachs

David MacDonald - SunTrust Robinson Humphrey

Vikram Ashoka - Morgan Stanley

Gary Taylor - JPMorgan Chase & Co.

Stephen Baxter - Bank of America Merrill Lynch

Tom De Weerdt

Good morning. This is Tom De Weerdt, Executive Vice President and Chief Financial Officer of Surgical Care Affiliates. Welcome to our Fourth Quarter 2015 Earnings Conference Call.

After our prepared remarks we will open up the call for your questions. And you can press star 1 to enter the question-and-answer queue at any time during this call. This call is being recorded and a replay will be available for the next 30 days. You can find a link to the replay on our website at www.investor.scasurgery.com.

And before I turn the call over to Andrew Hayek, Chairman and Chief Executive Officer, I will read our customary disclosures.

During today’s call, we may make statements relating to our future operating plans, expectations and performance that constitute forward-looking statements within the meaning of the federal securities laws. Any such forward-looking statements only reflect management expectations based upon currently available information are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our documents filed with the Securities and Exchange Commission.

Our actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

During today’s call, we will discuss financial measures derived from our financial statements that are not determined in accordance with U.S. Generally Accepted Accounting Principles or GAAP, including earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA less non-controlling interest or NCI, adjusted net income, adjusted operating cash flow, adjusted operating cash flow less distributions to NCI, and adjusted net debt leverage.

We will also discuss on today’s call certain non-GAAP systemwide operating metrics, such as systemwide net patient revenue growth which treat our nonconsolidated facilities as if they were consolidated and which management uses to analyze our results of operations. A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparable GAAP measure is presented in our earnings release.

Andrew, I will now turn the call over to you.

Andrew Hayek

Thanks, Tom. We continue to make great progress in building our community. And we are pleased with our 2015 results, clinically, strategically and financially.

Patient care is our first priority, and our physicians and teammates, who provided care for more than 800,000 patients last year, continue to achieve outstanding results based on our clinical and patient experience metrics. Our clinical quality outcomes, our patient satisfaction and our accreditation survey results remain very strong.

Great teams deliver great care and we continue to achieve strong results from a teammate and physician satisfaction standpoint. Our teammate engagement is well-above healthcare industry benchmarks. And our physician satisfaction, based on Net Promoter Score, rivals some of the leading brands in customer service like Amazon, Zappos and Southwest Airlines.

From a strategic standpoint, we continue to partner with physician groups, health plans and health systems that are committed to improving the quality and cost efficiency of healthcare. Surgery represents approximately 30% of total healthcare spending. And our strategic partnerships can materially improve the patient experience, quality outcomes and cost-effectiveness of surgical care, which benefits patients, employers and the government.

These strategic partnerships help us to enter new markets, to acquire interests in existing facilities, to build new facilities and to achieve stronger organic growth in existing facilities. Recent examples include, first, our recent acquisitions in Austin, Texas. In the fourth quarter of last year, we acquired Arise Healthcare’s interest in a surgical hospital and three surgery centers, which allowed us to align more than 100 high-quality physicians with leading health plans in the Austin market.

Second our recent acquisition of an interest in the Center for Minimally Invasive Surgery or CMIS, a multi-specialty surgery center in the Chicago area that specializes in complex spine and total joint procedures. This transaction creates a partnership between 17 leading independent surgeons and SCA, with access to a 72-hour recovery care center and a strategy to position the partnership with major health plans and medical groups seeking access to high-quality lower-cost options for complex spine and orthopedic care.

And third, the acquisition of an interest in the Surgery Center of Athens, a multi-specialty center in Athens, Georgia. This is our third facility in a growing network in Georgia, where we have a collaborative relationship with a major health plan. In total, we added 22 new facilities to our portfolio last year. And our pipeline for 2016 continues to be strong.

We also continue to strategically rationalize our portfolio, which we have done for the past eight years and which has contributed positively to our overall growth. We exited nine facilities in the fourth quarter. Four of these were managed-only, two were facility mergers to create better operating efficiency, and three were marginal economic contributors.

We are also pleased with our financial results. For the full-year 2015, we generated consolidated operating revenue of more than $1 billion. And systemwide net operating revenues grew 20%. We grew our adjusted EBITDA less NCI in the fourth quarter by 13% over the prior-year fourth quarter, driven by strong organic growth, including 9% same site systemwide net patient revenue growth and a strong pace of acquisitions.

We grew adjusted EBITDA less NCI for the full-year 2015 by 12%, which was at the high-end of our most recent guidance range, which we raised at the end of the third quarter. The 12% growth was above our original guidance range of 8% to 11% growth, which we provided at the beginning of last year.

2015 is our seventh consecutive year of approximately 10% or higher growth in adjusted EBITDA less NCI. Over the past seven years, we have generated an adjusted EBITDA less NCI compound annual growth rate of 12%. And we anticipate that 2016 will be an eighth consecutive year of strong growth.

From an organic perspective, our full-year 2015 same site systemwide net patient revenue grew 8%. Our strong organic growth continues to be driven by a number of factors, including our strategic partnerships with physician groups, health plans and health systems, which strengthen our ability to recruit new physicians, launch new service lines and drive ongoing organic growth; investments in growing our physician recruitment team, which helped us recruit more than 200 new surgeons to our facilities last year; in addition, investments in launching and growing new service lines.

For example, we continue to see the migration of total joint replacements and complex spine surgeries to our facilities, which drives our growth while lowering the total cost of care for these procedures. In addition, we are investing to develop our cardiovascular service line.

For 2016, we anticipate growth in adjusted EBITDA less NCI of 13% to 16%. This outlook is based on continued strong organic growth and the continued strong pace of acquisitions. Our overall expected growth in 2016 is higher than our historical average and our long-term guidance, in part due to the Arise multi-site acquisition we mentioned earlier.

Our 2016 guidance of 13% to 16% growth in adjusted EBITDA less NCI takes into account this multi-site transaction. Our continued progress is due to the commitment and dedication of our physicians and teammates. We are grateful and proud of their hard-work to provide outstanding patient care and to build our SCA community.

Nearly 8 years after joining SCA, it continues to be an honor and a privilege to serve with such an outstanding team. Tom will now share more details on our financial results.

Tom De Weerdt

Thank you, Andrew. We will focus first on the highlights of our fourth quarter and full-year 2015 performance, and then provide some additional color around our 2016 guidance. Our fourth quarter consolidated net operating revenue grew 23.8% year-over-year to $305.9 million. And systemwide net operating revenue grew 20% from the last quarter of last year.

Full-year 2015 consolidated net operating revenue was $1.051 billion, up 21.6% compared to 2014. And systemwide net operating revenue grew 18.3% compared to last year.

Same site systemwide net patient revenue during the fourth quarter was up 9.1% year-over-year based on strong same site volume growth of 4.4% and net patient revenue per case growth of 4.5%, thanks to continued growth in the number of high acuity cases. Full-year same site systemwide net patient revenue was up 8.3%, driven by 3.6% volume growth and 4.5% net patient revenue per case growth.

Our adjusted EBITDA less NCI was $54.2 million for the quarter and $175.3 million for the year up 12.9% and 11.9% respectively from the prior year. Adjusted net income was $27.8 million for the quarter and $81.6 million for the year, down 0.5% and flat respectively from the prior year, primarily as a result of an increase in interest expense.

The higher interest expense was driven by the debt refinancing we completed early in 2015 to provide greater access to capital to continue our strategic acquisition program.

In early 2015, we increased our revolving credit facility to $250 million, we refinanced our debt and we extended our maturities by creating two tranches of credit: first, $450 million term loan that matures in 2022; and second, $250 million in senior notes maturing in 2023.

This new debt structure increased our ability to access capital and also increased interest expense by approximately $9 million, negatively impacting our adjusted net income.

Turning to the balance sheet, our financial condition remains strong. And as of December 31, 2015, we had $79.3 million in cash on hand. In the fourth quarter of 2015, we drew $15 million on our revolver facility, due to the timing of acquisition activity and quarterly distributions to our physician partners. We decided to not to repay the $15 million at year-end, in anticipation of several new acquisitions that were expected to closer around year-end.

As of December 31, we had approximately $230 million of additional capacity available under the revolving credit facility. For the full-year 2015, our capital outlay for new acquisitions was $148.4 million, slightly below the range of $150 million to $200 million, which we provided during our third quarter earnings call.

This was driven by the timing of some of the acquisitions, which we expected to close in December of last year, and which ended up closing in January. And as a result of this change in deal closure timing, a total of $44.8 million acquisition capital has shifted from December 2015 into January 2016.

Our adjusted net debt leverage, taking into account the first 12 months of earnings of our newly acquired facilities was 4.2 times adjusted EBITDA less NCI, which is at the lower-end of our comfort range of four to five times adjusted EBITDA less NCI.

We are pleased with our adjusted operating cash flow performance for the full year of 2015, generating $270.1 million, up 28% compared to 2014. And adjusted operating cash flow less distributions to noncontrolling interest was $119.5 million, up 22.5% from 2014.

Let us now provide a little bit more color on the 13% to 16% adjusted EBITDA less NCI growth rate guidance, which we provided for 2016. Going into 2016, our acquisition pipeline remains strong. And the almost $45 million of investments capital that shifted from late 2015 into early 2016 does not change our 2016 adjusted EBITDA less NCI growth guidance.

As a result, we now expect that we will invest between $150 million and $200 million in acquisition capital during 2016. The benefit from the Arise multi-site transaction we recently completed is the main driver for lifting our 2016 adjusted EBITDA less NCI growth forecast above our long-term growth target of approximately 10% plus.

Longer-term, we continue to expect that approximately two-thirds of our growth will be generated from acquisitions and the development of the de novo facilities and approximately one-third will come from organic growth.

Given where we are today, we remain confident in our full-year 2016 outlook for adjusted EBITDA less NCI growth to be in the range of 13% to 16%. Andrew, I will now turn the call back over to you.

Andrew Hayek

Thanks, Tom. As always, on behalf of our teammates, our physicians and our strategic partners, we appreciate your interest and support. Kaley, please open the line for our first question.

Question-and-Answer Session

Operator

Our first question comes from the line of Josh Raskin with Barclays. Your line is open.

Joshua Raskin

Hi, thanks. Good morning. Andrew, just this portfolio optimization, seems like last year was a pretty strong year for divestitures, et cetera. So is there any way to size - I know I’ve asked this in the past, but is there any way to size sort of how many of these centers are currently not optimal and is there a percentage that are marginally profitable as you describe them?

Andrew Hayek

Sure, Josh. A couple of notes upfront, so as you know we’ve been strategically rationalizing for the past eight years and that’s been a positive contributor to our overall growth. And in terms of the nine, four of those were management only; two, were in a geography, where we’re pivoting to an equity investment model, which should provide better returns over time; and the other two of those management-only centers were really as a result of us aligning with a large medical group in the area, which again we think will provide long-term growth.

Two of the nine were facility mergers. And in those cases, we’re able to take the same physicians, the same case-volume and drive them through half the number of facilities, which of course increases profitability. And then, the last three were marginal economic contributors.

Stepping back from that, six of the nine really in many ways position us more strongly long-term for growth, and really three were marginal contributors. At any time, Josh, that there will be a subset of the portfolio, that’s a marginal contributor. But I think it’s just as important that we were developing a strategy to partner with the payor or a medical group. We are going to be looking at changing our facility footprint in that geography.

This point, Josh, I think the only thing we’d say is, we’ll continue to rationalize over time where it makes sense, and yields us a stronger portfolio. I don’t think we really have a specific number or a percent of the portfolio that would be a target. And that’s only because it changes and evolves over time.

Joshua Raskin

Got you. I mean…

Andrew Hayek

Did that answer, Josh?

Joshua Raskin

Yes. No, that’s helpful. I guess, in terms of these divestitures, I guess, on the merger you don’t get anything. But I’m just trying to think are there are any sort of net proceeds on any of these sales. And, I guess, I’m curious also on the buy side, what the multiples look like for recent ASC acquisitions.

Andrew Hayek

Sure. So in some cases, yes, where we’re selling a facility, there would be proceeds. And that obviously is cash inflow, and then we redeploy that capital into the new investments.

In terms of multiples, we haven’t seen a material change. I think, we’ve been saying for last year or two, we thought the average multiple that we are realizing, effective year-one multiple would be going up half-a-turn to a full-turn. That still remains the case.

And I think the seller multiples have remained fairly steady. Sometimes it’s in the lower end of a 6-ish and higher-end of mid-to-high 7-ish range for seller multiple.

Joshua Raskin

Okay. Got you. And then, just last question for me. On the health plan relationships, I know you guys have talked about the Blue’s plan in the Midwest, any movement on any big health plan initiatives?

Andrew Hayek

So, yes, to your point we’ve talked about the Mountain State Blue’s plan. And from a result standpoint we enrolled - and just a step back for a moment - in this market, we created a clinical network, in partnership with the Blue Cross plan where physicians you qualify based on quality outcomes and patient experience as well as following efficiency protocols, qualify for an enhanced professional fee.

And there, we’ve enrolled 67 surgeons and we’ve saved $4 million net, that’s net of all program expense to-date. And so that exceeds Blue Cross’s expectations in that market. So they’re very happy with how that partnership is working, and frankly serve as a great reference account for us.

The Arise transaction, which we mentioned the multi-site, really is part of a very collaborative relationship with major health plans in that market. And then, we recently signed an LOI for an additional Blue Cross partnership in a market that in some ways is similar to the Mountain State one that we’ve been referencing.

Joshua Raskin

Okay, perfect. Thanks, Andrew.

Andrew Hayek

You bet. Take care, Josh.

Operator

Our next question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut

Hey, good morning, guys. Congratulations. So just a question on organic growth, given the guidance you’ve given for this year, it seems like organic, it’s forecasted in 4% to 6% range. So as we think going forward, you just mentioned two-thirds of growth will be more de novo driven.

So should we be thinking of that as after 2016, we are back to kind of like 9%, 10%-ish kind of total growth rate, is that the right way of thinking about that?

Andrew Hayek

So, Brian, I’d come at it from the following. Over the last seven years our adjusted EBITDA less NCI CAGR has been 12%. And we’ve been given our long-term growth outlook of 10% plus, and we’ve been quite consistent delivering that. The breakdown of that total adjusted EBITDA less NCI growth has been fairly steady and that breakdown is one-third pure same site growth of existing facilities contributing one-third of the total adjusted EBITDA less NCI growth.

Then the other two-thirds are either acquisitions of existing physician-owned facilities or de novo or new-builds that contribute to that two-thirds. And that ratio of one-third to two-thirds has been fairly steady for us, and our outlook is for it to stay steady.

And that ratio roughly applies for 2016 as well, even though the total growth is higher. So our outlook long-term really hasn’t changed. And to your point, yes, we are - 2015 was a strong organic growth year from a same site revenue standpoint. Our 2016 guidance really takes into account continued strong organic growth, stronger acquisition performance, and then this multi-site transaction, Arise, that really helped contribute to higher than usual growth rate for the year.

Brian Tanquilut

Got it. And then, Andrew, as we think about the exchanges and the volume drivers, pushing the same store numbers higher, I mean, what’s your view on ACA benefits carrying over into 2015 for ASC’s like yourself.

Andrew Hayek

Yes, so when the ACA passed and we were getting questions around the impact to us, we forecasted that it would be a marginal positive impact. And that’s really played out.

If you look at our volume growth about 1.5% of our volume today is from exchange products. And it depends on the study you read. But Rand, for example, estimates about half of that exchange; product population is incrementally newly insured people. So that might be 75 basis points of our volumes coming from exchange - new exchange members, who are not previously insured.

So that’s a marginal positive and going forward there will be marginal growth in that number tied to the growth of the exchange enrollment. So again I - let’s say…

Brian Tanquilut

Just so, I guess…

Andrew Hayek

Go ahead.

Brian Tanquilut

To follow up on that, so would you say that the driver of your organic performances has been more employment or just the expansion into joint replacement and spine, for example, I mean, just any color you can share with us in terms of what’s driving organic growth.

Andrew Hayek

Sure. So we’ve been investing for several years in a handful of things that we believe help drive organic growth. First is partnering with the right parties in each market. So that might be a health system, that might be a health plan; that might be a very large multispecialty physician group that is carrying Medicare Advantage or commercial risk.

And when we partner with them, and in some cases and in equity relationship, they are utilizing our facilities as a mechanism to improve quality, improve the patient experience and lower cost. So the right strategic partnerships make a big difference, and that’s been a multi-year ongoing effort.

Second, we developed and grown, a team that is focused on recruiting new physicians. And this is a team we created about four years ago, and have been growing every year since then. And in 2015, they recruited more than 200 incremental new physicians to our existing facilities. So investing behind that team is a long cycle growth investment.

And then, the third thing to your point is really investing behind new service lines, and we’ve given the examples of total joint replacements and complex spine and we continue to see strong double-digit growth in those two areas. We are investing now behind cardiovascular. And our hope is, over the coming years that’ll be another contributor.

So it’s a culmination of a number of things and those would be a few of the most important.

Brian Tanquilut

Got it. Thank you.

Andrew Hayek

You bet. Take care, Brian.

Operator

And next question comes from the line of Matthew Borsch with Goldman Sachs. Your line is open.

Tejus Ujjani

Hi, this is Tejus Ujjani on for Matthew Borsch. As you get more involved with the complex spine and joint replacement case-mix as well as cardiovascular, can you give us a sense of how that affects kind of your cost structure from like supply costs or kind of implant costs those sorts of things?

Andrew Hayek

Sure. So the cost is higher, of course, and you could imagine, you get a higher revenue number per case. You also have a higher supply cost, often driven by the implantable device, especially which is a very material cost. And then, the margin though is still very attractive.

And we look at profitability both on a per case basis, but then also on a per operating room minute basis. And on both of those dimensions these case types are quite attractive, in the context of pricing at a significant discount to the hospital - acute care hospital setting. So we can price at very significant discount to the acute care hospital setting and still have an attractive return.

So to answer your question specifically both of those case types drive supply costs higher and it is well worth it.

Tejus Ujjani

And is that - I guess, the procurement of those supplies, is that kind of centralized, or is that by ASC, like is it by centre-by-centre or how does that work?

Andrew Hayek

I’d take them into two buckets. For the implantable device, we’re quite strategic and very rational in our approach. And that is driven at a center- or facility-by-facility basis, because it’s such a deep physician preference item. So the process would be to deeply engage the physician partners and run a process. And that process could be let’s set a fixed price and any vendor that can come in below that price works.

It could be selecting one or two vendors. So it’s really depends on the culture and the leanings of the particular physician partnership. That said, we are able to leverage national knowledge that we have in best practice.

The second bucket is everything other than the implantable device, so all the med/surg. In that case, we aggregate $0.25 billion spend. We run our own GPO. We have software that guides our purchasers to the lowest cost item. And then, if they don’t buy, the lowest cost item still helps them understand the best price, even if they’re buying off of our spec. So we very tightly manage the med/surg.

Tejus Ujjani

Great. Thanks very much.

Andrew Hayek

Yes, take care.

Operator

Our next question comes from the line of David MacDonald with SunTrust. Your line is open.

David MacDonald

Hey, guys. Good morning. Just a couple of questions, Andrew, just wondering, when you’re entering markets now, are you seeing an increase or an uptick in the number of conversations that are actually starting with the payor as your potential partner as opposed to the health system, and just kind of how that’s changed or not changed over the last, say, 12 to 24 months?

Andrew Hayek

Yes. The short answer is, yes. So we really began investing to work more strategically with payors 24 months ago, maybe two, two-and-a-half years ago. It’s a long cycle investment much like our health system partnership strategy, which we started six or seven years ago, took time to mature.

We’ve had Mountain State Blue’s plan example, which we’ve shared a couple of times now. And that’s worked well. So we have a reference account. And then we shared earlier here in the Q&A that we signed an additional LOI in another market. And the Arise transaction was in many ways a result of working collaboratively with health plans.

So really when we look at the market, we’re thinking about the structure of the market, we’re thinking about how the physicians are aligned. And then, we really think through is this a great market for health system partnership, or a health plan or medical group partnership.

And in some cases, you can combine two of those three items. And in one market, we actually combine all three of those different types of partnerships, but as you can imagine working with independent risk bearing medical group and a payor is a common way to combine two of those three partnership structures.

So a short answer to your question is, yes. In more instances, we’re looking at that payor partnership today. And it’s really as a result of being two, two-and-a-half years into it, having some more experience and having a reference account.

David MacDonald

I would assume, it’s fair to say that, when you look at the pipeline of opportunities, that’s also the case, where more of these will potentially centre-around a relationship with a health plan?

Andrew Hayek

Yes. I think it’s fair to say more, because two years ago it would have been very small. So it will still be a combination. We have very strong health system markets. We continue to add some health system markets. But to your point, it will really be a mix, a healthy mix of all three versions.

David MacDonald

And then, just a couple of questions on investment; one, can you give us a sense of how big your doc recruiting team is now, relative to where it was a year or two ago. And then secondly, can you give us a sense of what percentage of your facilities you would potentially want to incrementally invest, maybe they don’t have capabilities on things like total joint, complex spine et cetera?

How many of your existing facilities is there an opportunity to further expand the service line into some of the higher end, higher acuity procedures?

Andrew Hayek

Sure. So in terms of physician recruitment team, Tom, correct me here, approximately 30, in the low-30s?

Tom De Weerdt

Yes, correct. And by the end of 2016 we expect to have around 35, where two years ago we started that recruiting.

Andrew Hayek

So about a year ago, instead of being at the 30, we probably we were in the low-20s, David. And we really created this team three-and-a-half, four years ago. And so, it’s up from zero more or less three or four years ago, so again low-20s, today about 30 and then to Tom’s point and the year around 35.

In terms of the percent of facilities, where we want to grow or incrementally invest, this is going to be a very rough guess, but I’d say at least a quarter would be on the list for expand into total joint or spine or cochlear implants or retinal procedures which are a high acuity form of eye surgery. So that quarter would be inclusive of multiple different types of in these service lines.

But I’d say that’s a rough number. We’ll reflect on that, and be ready to be more specific in our future calls. But I’d say, that’s a rough guess.

David MacDonald

Okay. And then, just last question, you talked a little bit, Andrew, about investing in to develop cardio. Can you give us a sense of what particular type of cardio procedures you are either starting to see or you see an opportunity to start migrating towards the freestanding setting over, say, the next 12 to 24 months?

Andrew Hayek

Yes. So, as with changes in technology in total joints, for example, the anterior approach to a total joint, which really unlocked a lot more ability to do things on an outpatient basis. And then, in ASC we’re seeing that radial access that is accessing through basically the wrist is opening up more of the peripheral vascular and diagnostic cath procedures to be done outpatient. And a portion of those can be done in an office setting or a surgery-center setting.

And so we’re really focused on peripheral vascular and the diagnostic cath and especially kind of below the waist procedures. And we are in the very early stages, but we see opportunity. And there’s an opportunity to generate great patient experience, great quality and significant cost savings.

And that for us is attractive. And this is a very much on the radar of health plans or risk-bearing medical groups. So it’s with the strategy we’ve been pursuing with the health plans and medical groups.

David MacDonald

Is there anything that you are looking at on the pipeline, where you see a group or two with particular expertise in this area that could potentially jumpstart that a little bit?

Andrew Hayek

We certainly look at all options, be it facilities on an individual basis or things we might consider a platform. So we are looking at a broad range. You can’t predict how things play out, but we’d certainly look at all options.

David MacDonald

Okay. Thanks, guys.

Andrew Hayek

Yes, you bet. Take care.

Operator

Our next question comes from the line of Andrew Schenker with Morgan Stanley. Your line is open.

Vikram Ashoka

Hi, this is Vikram in for Andrew. I’m just looking for a little more color on outlook on the consolidated versus equity method, volume and the rate performance. I guess, in previous years there has been some divergence in your outlook between the three-way and two-way partnerships with three-way outperforming. The growth seems to be a little bit more broad-based, so can you just provide a little bit more on your growth outlook for each of the portfolios?

Tom De Weerdt

Yes. So this is Tom. So you are right, this year we’ve had a pretty strong growth in our consolidated facilities. We have actually added disproportionately a higher number of facilities that we consolidated compared to our equity. It’s going to vary over time, right, in the past couple of years with a lot of our acquisitions were related in partnership with some of the health systems, which more often led to equity type investment.

But on a-go forward basis, you’ll see both, because we still have a lot of runway in a number of our strategic partnerships with the health systems. But you will also continue to see as do two-way consolidated deals as we go forward. So it will fluctuate obviously.

Vikram Ashoka

Great. Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Gary Taylor with JPMorgan. Your line is open.

Gary Taylor

Hi, good morning. Just a question, I wanted little help understanding is - you’ve had really solid and accelerating organic growth. You had very nice adjusted EBITDA less NCI growth. But for the quarter and for the year the pre-tax earnings, the adjusted earnings are essentially flat, because depreciation and interest expense have been higher.

So, I guess, the question is, I know you don’t guide for earnings, but as we move into 2016, 2017, what causes the earnings leverage to start to appear and shouldn’t we be anticipating that there is earnings growth?

Tom De Weerdt

Yes. Thank you. This is Tom. So, first of all, let me take a step back in saying longer-term 2016, 2017, as you say, and beyond, we do expect that adjusted net income will grow at a similar or higher rate than our adjusted EBITDA less NCI. And also if you take step back over to last seven years, we’ve realized a compound annual growth rate of around 36%.

The fact that 2015 is lower is primarily to your point, driven by the higher interest expense. And you will also see a little bit of that in the first quarter of 2016, because that is one - ultimately, it’s going to be one-year when we did our debt refinancing, which we did early in 2015. As you know that debt refinancing is something we very consciously did in order to create more capacity for us to continue our strategic acquisition program.

So that is really the main driver. And, as I said at the beginning, longer-term, you should expect to see some leverage on the adjusted EBITDA less NCI line compared to our adjusted net income.

Gary Taylor

Okay. And also just want to think about NOLs for a second. So I know in the Qs and Ks you disclosed total NOLs and would appear that those would be sufficient not be paying cash taxes for a number of years yet. But we don’t - I guess, you don’t disclose or we’re not able to see any annual limits on those. So considering what those might be, is there any expectation that you are paying cash taxes in 2016, 2017, 2018?

Andrew Hayek

No. So we do not expect to become a cash taxpayer until - yeah, ultimately, it’s going to be approximately 2019 based on our current projection. So for 2016, 2017, 2018, you should not expect us to be a cash taxpayer yet.

Gary Taylor

Okay, great. Thank you.

Tom De Weerdt

Thanks, Gary.

Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open.

Stephen Baxter

Hi, this is Steve Baxter on for Kevin. I wanted to come back to Brian’s question about organic growth. It sounds like based on your answer, you’d say that maybe company initiatives around service line expansions are the primary driver of your strong organic growth. But, I guess, can you provide some color on what you’re seeing in terms of fundamental demand and to what degree you feel like an improving economy is helping your results?

Andrew Hayek

Sure, this is Andrew. Certainly an improving economy does help. On the other hand, an expanding number of insured that are in high deductible plans has a natural dampening effect. It’s hard for us to put an exact estimate on the net growth in the overall market, and it varies by city, by state.

So I’d say it’s a combination of the things we’re doing, and to some degree, the macro environment. But it’s difficult to put an exact percent growth in the overall market or a specific reference. And we are very cognizant that the expansion high deductable plans is an offsetting force to some of the economic recovery tailwind that you referenced as well. So there are some puts and takes.

Stephen Baxter

Okay. I guess can you talk about a little bit, since you mentioned high deductible plans? I guess, maybe what that has changed in terms of your ability to collect just maybe over the past year or two? And what are you expecting in terms of your guidance for 2016, I guess, whether there’s continued material change factored into that guidance?

Andrew Hayek

We haven’t seen a material change in our bad debt. So that remains fairly steady. Our facilities and or revenue cycle team are very good at, before the procedure, letting the patient know that the patient cost share obligation and collecting often at the point of service. So we haven’t seen a change in the bad debt. I think really it’s just a macro change in the privately insured market, where more and more Americans are on a high deductible plan.

And that has two effects. I mean, the first effect would be just an overall dampening of healthcare utilization. Now, the second effect though is people being more conscious of price and cost and really thinking about value. That, of course, is a good thing for us, because the quality outcomes, the patient experience and then the cost, including the patient coinsurance, which is usually a function of the overall cost of procedure, looks really good for our facilities.

So there are some puts and takes with the high deductible plan structure.

Stephen Baxter

Okay. Thank you very much.

Andrew Hayek

You bet. Take care.

Operator

Thank you. And I’m showing further questions at this time. I’d like to turn the call back to Mr. Hayek for closing remarks.

Andrew Hayek

Kaley, let’s give it 20 more seconds to see if anyone else wants to enter the question line.

Operator

[Operator Instructions]

Andrew Hayek

Anyone entering the question line, Kaley?

Operator

And I’m showing no questions, sir.

Andrew Hayek

Okay. Well, once again, thank you for your interest and support. We look forward to talking with you next quarter. And please don’t hesitate to call us with any questions in the interim. Take care.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

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