Q2 2024 Surgery Partners Inc Earnings Call

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Speaker Change: Please stand by your program is about to begin if you need assistance on today's program. Please press star zero.

Operator: Please stand by. Your program is about to begin. If you need assistance on today's program, please press star zero. Good day, everyone, and welcome to today's program Surgery Partners Inc. 2nd quarter 2024 earnings call. At this time, all participants are in any listenily mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star in one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note, this call may be recorded. I'll be standing by.

Speaker Change: Good day, everyone and welcome to today's program surgery partners incorporated second quarter 2024 earnings call.

Speaker Change: At this time all participants are in a listen only mode.

Speaker Change: Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star and one on your telephone keypad you may withdraw yourself from the queue by pressing star. Two. Please note. This call may be recorded I'll be standing by should you need any assistance. It is now my pleasure.

Operator: Should you need any assistance?

David Doherty: It is now my pleasure to turn the conference over to CFO Dave Doherty. Good morning. My name is Dave Doherty. CFO of Surgery Partners. I am joined today by Eric Evans, our CEO, and Wayne DeVeyt, our Executive Chairman.

Speaker Change: To turn the conference over to CFO, Dave Doherty.

Dave Doherty: Good morning, My name is Dave Doherty CFO of surgery partners.

Wayne <unk>: And today by Eric Evans, our CEO and Wayne <unk>, our executive Chairman.

David Doherty: During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements. These risk factors are described in this morning's press release and the reports we file with the SEC, each of which are available on our website, SurgeryPartners.com.

Speaker Change: During this call we will make forward looking statements there are risk factors that could cause future results to be materially different from these statements.

David Doherty: The company does not undertake any duty to update these forward-looking statements.

David Doherty: In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this morning's press release.

Wayne DeVeydt: With that, I will turn the call over to Wayne. Wayne?

Wayne DeVeydt: Thank you, Dave. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated second quarter results and the consistency of our long-term growth algorithm. I'll then provide a brief update on our recent acquisition activity and refreshed outlook for the balance of the year.

Wayne DeVeydt: Eric and Dave will provide additional insights with their remarks. Turning to our second quarter results, we reported net revenue of $762 million, representing growth of 14.2% over the prior year quarter. On a same facility basis, net revenues grew just under 10%, with surgical case volume growth in the quarter just under 4%. Adjusted EBITDA grew 18% to $118.3 million, generating adjusted EBITDA margins of 15.5%, expanding 50 basis points as compared to the prior year quarter. Our efforts to pursue higher acuity procedures continue to produce strong results, with total joint replacements in our ASEs increasing 46% in the first half of 2024 over the comparable period in 2023.

Wayne DeVeydt: Eric will provide additional insights into our physician recruitment and expansion of our total joint programs, including our success in targeting orthopedic surgeons, specializing in total shoulder procedures, which were moved to the ASE covered list starting January 1st of this year. We continue to be extremely pleased with our same facility growth and the expected long-term sustainability of our organic top line and margin expansion growth goals. As previously stated, our short-state surgical facilities have been purpose-built to capture the macro tailwinds of both an aging population and the increased shift in sight of care for higher acuity procedures into our lower cost, high clinical quality outpatient settings.

Wayne DeVeydt: We believe our results reflect the strength and durability of our business model as we pursue this highly fragmented market, which currently consists of over 6,000 CMS-certified ASEs and an estimated $150 billion total addressable market representing both current and expected surgical procedures to be formed in an outpatient setting in the coming years. Moving to our capital deployment activities, we maintained our disciplined approach to sourcing and executing us strategically important acquisitions at attractive multiples. Through the end of the second quarter, we deployed nearly $280 million, which includes a $60 million transaction in early January that we had initially targeted closing in the fourth quarter of 2023.

Speaker Change: Which includes a $60 million transaction in early January that we had initially targeted closing in the fourth quarter of 2023.

Wayne DeVeydt: This level of deployment reflects both our annual targeted goal of at least $200 million, along with the redeployment of the remaining net proceeds from access to vested in 2023. Our business development team continues to source a robust pipeline of acquisitions and de novo investment opportunities, and we believe the capital deployment aspects of our growth algorithm remain achievable.

Speaker Change: This level of deployment reflects both our annual targeted goal of at least $200 million.

Speaker Change: Along with the redeployment of the remaining net proceeds from assets divested in 2023.

Speaker Change: Our business development team continues to source, a robust pipeline of acquisitions and de Novo investment opportunities and we believe the capital deployment aspects of our growth algorithm remain achievable.

Wayne DeVeydt: Before I turn the call over to Eric, let me provide a brief update on our outlook for the remainder of 2024. Based on our strong organic performance in the first half of 2024 and the timing of our recently completed acquisitions, we are increasing full-year net revenue and adjusted EBITDA outlook to greater than $3.075 billion and $508 million, respectively. This refreshed outlook represents at least 13% and 16% growth in net revenue and adjusted EBITDA, respectively, as compared to the prior year and balances our optimism for the company's growth with an appropriate amount of conservatism. We look forward to updating you on our progress as the remainder of the year unfolds with that.

Speaker Change: Before I turn the call over to Eric Let me provide a brief update on our outlook for the remainder of 2024.

Based on our strong organic performance in the first half of 2024 and the timing of our recently completed acquisitions, we are increasing full year net revenue and adjusted EBITDA outlook to greater than $3 $75 billion and $508 million respectively.

Speaker Change: This refreshed outlook represents at least 13% and 16% growth in net revenue and adjusted EBITDA, respectively as compared to the prior year and balances our optimism for the company's growth with an appropriate amount of conservatism.

Speaker Change: We look forward to updating you on our progress as the remainder of the year unfolds with that let me turn the call over to Eric to provide additional highlights for the quarter Eric.

Eric Evans: Let me turn the call over to Eric to provide additional highlights for the quarter. Eric? Thanks, Wayne, and good morning everyone. On behalf of the entire management team, we are proud to release second quarter results that demonstrate our continued and consistent organic growth and the addition of five facilities to our portfolio of purpose-built, short-stay surgical facilities. Once again, all elements of our and bottom line growth, diving deeper into our results. Same facility net revenue growth was 9.9% in the second quarter, comprised of 3.9% growth in our surgical case volume and 5.7% rate improvement. We continue to put increased focus on both position recruitment activities and higher acuity procedures that would benefit from an enhanced patient and physician experience associated with our purpose-built, short-stay surgical facilities.

Eric Evans: Thanks, Dwayne and good morning, everyone on behalf of the entire management team. We are proud to release second quarter results that demonstrate our continued and consistent organic growth and the addition of five facilities to our portfolio of purpose built short stay surgical facilities.

Eric Evans: On a consolidated basis, our specialty case mix and volumes were in line with our expectations, with 166,500 consolidated surgical cases in the quarter, with particular focus in our higher acuity business lines. Continuing the wave of positive recruiting, over 200 new positions have started utilizing our facilities in the second quarter, with just under half specializing in high acuity areas such as orthopedics, spine, and cardiology. This brings our total recruits for the first half of the year to just over 400. The initial volume and average rate per case performed by these newly recruited physicians exceed the volume and rates from last year's recruiting coer.

Unnamed Speaker: Continuing the wave of positive recruiting, over 200 new physicians have started using our facilities in the second quarter, with just under half specializing in high-acuity areas such as orthopedics, spine, and cardiology.

Eric Evans: As a reminder, each of our recruiting cohorts continues to drive strong compounding year-over-year growth, with our 2023 class generating 164% more revenue in the first half of 2024, as compared to the first half of 2023. More importantly, total joint cases in our ASEs continue to grow at a disproportionate rate, which saw a 46% increase in case volume in the first half of this year compared to the prior year and a 90% compound annual growth rate since 2019. We do not see this growth slowing in the mid to long term, as hip and knee replacements continue to transition into the ASE setting, as well as our early successes in effectively recruiting surgeons specializing in total shoulder procedures.

Eric Evans: That shift in side of care is that in the very early innings, and we are well positioned with our recruiting team and our portfolio facilities to capture total shoulder procedures in our setting. Moving to operating margins, which improved in the quarter by 50 basis points over the prior year quarter to 15.5%. This improvement reflects both our ongoing procurement and revenue cycle initiatives that continue to benefit from our increasing scale, along with synergies achieved on our previously acquired facilities. We expect margins to improve throughout the remainder of the year, consistent with historical earnings patterns.

Eric Evans: Finally, diving deeper into our capital deployment activities. In the second quarter, we deployed nearly $220 million acquiring five facilities. These acquisitions are heavily weighted towards multi-specialty and higher acuity orthopedic facilities and are expected to yield further earnings from our operating system synergies in the first 12 to 18 months post-closing. In the second quarter, we opened one de novo ASE that we developed in partnership with Ohio Health. There are 10 fully syndicated de novo under construction, slated to open in 2024 and early 2025. These facilities include consolidated and minority interest partnerships and are primarily multi-specialty with a concentration in orthopedics.

Eric Evans: We remain optimistic about our de novo process and pipeline and look forward to providing additional detail as these become meaningful additions to our portfolio. In closing, I'm proud of our management team and our many talented position partners and colleagues for their relentless focus on delivering a superior patient experience with high clinical quality. Our teams work collaboratively to execute on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations, giving us increased confidence that we will achieve our updated 2024 goals.

David Doherty: But that said, I will now turn the call over to Dave to provide additional color on our financial results, as well as our updated outlook for 2024. Dave, thanks, Eric. Starting with the top line, we performed 166,500 consolidated surgical cases and 194,000 total surgical cases in the second quarter. These cases span across all our specialties, with an increasing focus on higher acuity procedures, which is reflected in our near double-digit same facility revenue growth. that combined case growth and higher acuity specialties, specific managed care actions, and the continued impact of acquisitions supported revenue growth of 14.2% over last year to $762.1 million.

Eric Evans: It'll surgical cases in the second quarter. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our near double digit same facility revenue growth this quarter.

Eric Evans: The combined case growth in higher acuity specialties specific managed care actions and the continued impact of acquisitions supported revenue growth of 14, 2% over last year to $762 1 million.

David Doherty: On a same facility basis, total revenue increased 9.9% in the second quarter. Same facility surgical case growth was 3.9% with higher rates of growth in our orthopedic and other higher acuity procedures, which also contributed to rate growth of 5.7%. We continue to forecast our same facility net revenue growth to exceed our growth algorithm target of 4% to 6% in 2024, with full year same facility revenue finishing in the high single-digit range. Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing in a smaller role and volume playing a larger role in the second half of the year.

Eric Evans: On a same facility basis total revenue increased nine 9% in the second quarter same.

Eric Evans: Same facility surgical case growth was three 9% with higher rates of growth in our orthopedic and other higher acuity procedures, which also contributed to rate growth of five 7%.

Eric Evans: We continue to forecast our same facility net revenue growth to exceed our growth algorithm target of 4% to 6% in 2024 with full year same facility revenue, finishing in the high single digit range.

Eric Evans: Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis with rate playing a smaller role in volume playing a larger role in the second half of the year.

David Doherty: Adjusted EBIDA was $118.3 million for the second quarter, giving us a margin of 15.5%. In line with our expectations of continued margin expansion. Inflationary pressures related to labor and supply costs continued to evade as we return to a more normalized run rate that provides natural margin expansion as we grow revenue. We will remain vigilant in monitoring these factors across our portfolio and expect margins to continue to improve throughout the year, with annualized margins improving by at least 50 basis points over full year 2023. We ended the quarter with $214 million in cash. When combined with the available revolver capacity, we had over $860 million in total liquidity.

David Doherty: We reported operating cash flows of $83 million in the second quarter. This amount is in line with our expectations and supports our continued believes that we will achieve our previously disclosed free cash flow goals in 2024.

David Doherty: Moving to the balance sheet. We have $2.2 billion in outstanding corporate debt with no maturity until 2030. In June, we reprised our $1.4 billion term loan, reducing the credit spread by 75 basis points. This loan now carries an interest rate of so far plus 275 basis points. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025. After that, we have interest rate caps in place that limits the variable rate component of our $1.4 billion term loan to 5%. In the event, the interest rate environment becomes more favorable in the future.

David Doherty: We will capitalize on such improvements. Our second quarter ratio of total net debt to EBITDA, as calculated under our credit agreement, was 3.8 times as a result of the acquisitions completed in the second quarter. As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but over time we project this leverage ratio will be below 3.0 times. Garying the momentum of our second quarter results, we remain optimistic and confident about the company's growth and are raising our outlook for 2024 net revenue to be greater than $3.05 billion and adjusted even up to greater than $508 million.

David Doherty: This guidance implies continued year-over-year margin expansion consistent with our long-term guidance. This updated outlook represents mid-teens growth, emphasizing the resiliency and consistency of the business model and demonstrating the power of our long-term growth algorithm.

Operator: With that, I'd like to turn the call back over to the operator for questions. Operator? Thank you.

Operator: At this time, if you would like to ask a question, please press star one now on your telephone keypad to withdraw yourself. From the queue, you may press star two. Again, that is star one to ask a question.

Brian Tanquilut: We'll take our first question from Brian Tankwellett of Jeffries. Your line is open. Hey, good morning, guys, and congrats on the quarter. Maybe Dave, just curious, you know, you talked about how the rate and the volume contribution to same-store should be more balanced in the back half of the year. Obviously, a rate has been strong with acuity levels driving that. So just curious, what do you see or what do you think in the back half that would shift that balance to more even between the two? Thanks, Brian. Appreciate the question.

David Doherty: The math is the math that sits behind the same-store calculation is probably going to be your biggest driver of your same facility case growth that we're going to see in the second half of the year, and just a reminder, the way we look at our same-store calculation tends to go beyond just one quarter of a evaluation. It's only because there's only 60 to 62 days, business operating days inside any given quarter. So you can see those being affected by the days of the week that sit inside there. So when we look at year over year, third quarter and fourth quarter, the surgical days that we have in both of those quarters are more favorable.

Unnamed Speaker: The math that sits behind the same-store calculation is probably going to be your biggest driver of your same-facility case growth that we're going to see in the second half of the year. And just a reminder, the way we look at our same-store calculation tends to go beyond just one quarter of an evaluation. It's only because there's only 60 to 62 business operating days inside any given quarter. So you can see those being affected by the days of the week that sit inside there.

Unnamed Speaker: So when we look at year over year, third quarter and fourth quarter, the surgical days that we have in both of those quarters are more favorable as when you look at our portfolio of surgical cases and where we think they should be, and the best example I can kind of give for that is the timing of when the 4th of July happened for us inside the third quarter of last year and inside the third quarter of this year for us.

David Doherty: When you look at our portfolio surgical cases and where we're thinking, in the best example I can kind of give, that is the timing of when the Fourth of July happened for us inside the third quarter last year and inside the third quarter of this year for us. But what we do anticipate, as we've been talking about all year, Brian, is getting back to our growth algorithm as we sit through both case side and rate side of our same facility calculation. And at that balance of the year, we expect it to add up to be somewhat greater than our long-term growth algorithm would suggest, which has been consistent that we've been reporting over the past couple of years.

David Doherty: God, and then maybe Dave just to follow from that is I think about seasonality. I mean, I understand obviously, like I said, we're a Fourth of July filed, but just curious, how should we be thinking about the seasonality pattern for even though for the back half? I think our seasonality has been largely predictable in that the fourth quarter tends to be our biggest quarter, and that's the result of the deductible swing that happens as commercial patients tend to rush to use their deductible balance by the end of the year. So our fourth quarter always is our strongest quarter from an EBITDA perspective, as well as from a revenue perspective.

David Doherty: We don't see that pattern changing this year.

Tao Qiu: We'll take our next question from Tao, Q, of McWari. Hey, good morning. I'd like to break down a little bit. The revenue and margin increase in terms of the guidance. You know, how much of that is from organic growth and the baseline of strong volume this quarter, and how much of that is from acquisitions and to know us as human turkeys. Thanks. Yeah, thanks, Tao. Here we have a little bit of a nice background music coming through on our side here from the line this morning. But let me attempt to answer our revenue beat. Like our revenue calculations for the quarter, or revenue, I'm sorry, did come in at our expectations, perhaps slightly above the expectations of the street.

Eric Evans: It would be like our revenue calculations.

Eric Evans: For the quarter, our revenue I'm sorry.

Speaker Change: Did come in at our expectations, perhaps slightly above the expectations of the street.

David Doherty: And we did get contributions from our worst recent acquisitions. As you know, we talked about on our last call, we completed sizable acquisitions inside the second quarter and on a year-to-date basis, we've met our capital deployment goals for the year. So we're definitely getting some benefit from those acquisitions as well as the contributions from last year. But I will say, and I would have you focus on the same facility rate growth or revenue total growth at close to 10%. Lead you to the conclusion, or should lead you to the conclusion that a majority of our beat is coming from the organic side of the business.

Speaker Change: And we did get contributions from our most recent acquisitions as you know we talked about.

On our last call we completed.

Speaker Change: Sizable acquisitions inside the second quarter.

Speaker Change: On a year to date basis, we've met our capital deployment goals for the year.

Speaker Change: So we're definitely getting some benefit from those acquisitions as well as the contributions from last year, but I will say and I would have you focus on the same facility right growth revenue total growth.

Speaker Change: At close to 10%.

Speaker Change: Lead you to the conclusion or it should lead to the conclusion that a majority of our beat is coming from the organic side of the business.

David Doherty: Yeah, it's more interesting on the in terms of the guidance raised, how much of the additional revenue and margin upside is from organic versus the no-woven acquisitions. Thanks. Yeah, Tao, the answer I'd say it's very consistent with what we've done over the past several years. Our algorithm is majority. Majority, same-store organic. It continues to be that. It continues to be that going forward. Certainly, our timing's a little bit head on M&A this year, but in general, like we're right on expectations of how we expect to grow per our algorithm, which is majority coming from organic, supplemented by strong M&A performance.

Speaker Change: Yes, I was more interested on the in terms of the guidance raise how much of the additional revenue and margin upside is from organic versus.

Speaker Change: The nobles acquisition thanks.

The answer I would say, it's very consistent with what we've done over the past several years.

David Doherty: It may be just emphasized that if you go back to how we've talked about the same facility revenue growth for the year, it has been at just about 10% hour in a year-to-day basis. And we expect revenue to end the year in the high single digits.

Tao Qiu: Gotcha.

Tao Qiu: And my second question is, I don't know whether you guys talk about the cash collection trend during the quarter. What was the DSL during the second quarter? Any updated view on the free cash flow generation for 24 and maybe early read for 2025? Thank you. Yeah, so cash flow has been positive for us. I think you saw what we reported for the second quarter. It's again consistent with where we expected it to be. We are seeing continued benefit from our investment on the revenue cycle side of the equation. We're not changing our guidance for the year in terms of cash flow generation.

David Doherty: We still feel confident in our ability to deliver on that.

Tao Qiu: And at this point, we are not giving 2025 guidance. Got it. Thank you.

Kevin Fischbeck: We'll take our next question from Kevin Fischbeck of Bank of America. Thanks. I just wanted to focus on the volume number. I think after Q1 there was kind of a little surprised by how some of the volumes were for you and your competitor, and then this quarter seems to be a whole lot stronger. Is it just as simple as kind of a calendar, or do you see like kind of firming fundamental domain? And, you know, from Q1 into Q2.

Eric Evans: Hey, Kevin, thanks for the question.

Eric Evans: This is Eric. I just the answer that in a couple of ways. First of all, we really try not to focus on case counts by a quarterly basis. It really is not that meaningful. We do focus on that net revenue, same store growth number, but it is very affected by the calendar. You know, we've said even, even at the end of last year coming into this year when we had a little bit of a print that came out slightly below our algorithm that by the end of the year, we expected to be at the upper range or exceed our algorithm.

Eric Evans: We're still very confident in that. It's a consistent business; our models consistent. And so I think from quarter to quarter, there's a lot of reaction sometimes to those numbers, but it's calendar-based, it's timing-based. And quite honestly, we think about that on annual terms. We continue to believe we're going to exceed our algorithm again this year.

Eric Evans: Okay, that's great. And then I guess, you know, we think about the ability to exceed that this year, is that driven by an office you can separate easily. Again, why am I called Quarter Demand? Versus some of the company's specific thing that you're doing around the physician recruiting, etc. Any color there? Yeah, so I think it's, first of all, we're obviously constantly working to grow the business on higher acuity procedures. You see that flowing through on physician recruitment, really, really proud of the start to the year. Our strongest start on physician recruitment. So all that continues to work well.

Eric Evans: But what I would point to is, over the last five years, we've had really consistent case growth. It might bounce around quarter to quarter. We continue to see that strong demand this year. And it's not different than past years. It's just part of our model. And we do expect it to end up in the very much the same place.

Eric Evans: Alright, great.

Eric Evans: Thanks.

Andrew Mok: Our next question is from Andrew Mock of Barclays. Hi, good morning. Looks like there was a pretty meaningful increase in professional fees in the quarter. I think it was up 10% per case and over 100 basis points here every year. So just want to get a little bit more color on what's driving that increase. Thanks.

David Doherty: Yeah, I actually, Andrew, like I'll have to give you a follow-up on what sits behind that increase in that. But I think it's going to be partly. Yeah, the mix of business that kind of comes through from our acquisitions and the vestitures from last year. So our devastatures, as a reminder for last year, had high revenue kind of associated with a higher medical cost on the supply chain side. But as a result of that mix in in business, you're going to see kind of a slightly different margin profile on that book of business. And I suspect that must be coming to on the professional medical seaside.

Andrew Mok: But I'll give you a follow up when we talk later. Okay, great. That's helpful.

David Doherty: And then on the free cash flow, I just want to follow up there. It sounds like you guys are confident around the annual targets. For this year, I think your today free cash flow is tracking around $22 million. So just what's driving that confidence in the full year? And what's driving that second half acceleration? Thanks. Yes, the free cash loan over is in line with where we expected it to be. It is a bit; it's wonky, as we've talked about last year because of the timing of collections. But what we've seen inside the second quarter is directly in line with what our internal expectations were.

David Doherty: So that gives us increased confidence in our ability to kind of hit there. The Book of Businesses seasonally adjusted first half of the year is going to be affected by distributions that come from last year. So the strong earnings inside the fourth quarter of last year do increase distributions for the first half of the year. That trend goes down a little bit, and of course the Book of Business generates a lot more cash flow in the second half of the year.

David Doherty: Great, thanks for the call.

Jason Cassorla: We'll take our next question from Jason Cassorla of City. Great, thanks. Good morning.

Jason Cassorla: I just wanted to go back to your commentary around capital deployment. It sounds like you've met your capital deployment goals this year.

Jason Cassorla: Should we be reading into that in terms of your remaining deployment for the year being a bit more muted, or are you keeping optionality open for incremental capital deployment? Just any incremental color around capital deployment, how you're thinking about the back half and the go forward would be helpful. Hey Jason, much appreciated. While we've achieved our full year goals for the year, I would remind you that over 280, 60 of that did relate to the prior year of fourth quarter. We closed it in the first week of January. So you're looking around 220, which was deploying our targeted goal of 200 plus remaining cash proceeds from disasters from last year.

Speaker Change: 60 of that did relate to the prior year fourth quarter, we closed it in the first week of January so you're looking at around $2 20, which was deploying our targeted goal of 200 plus remaining cash proceeds from divestitures from last year. So at this point anything we do in the back half of the year is clearly going to be icing. We continue to have a strong pipeline.

Jason Cassorla: So, at this point, anything we do in the back half of the year is clearly going to be icing. We continue to have a strong pipeline. We like the optionality of that pipeline. We have LOIs on a number of items and a number of items that are under LOI. So I don't think we're going to postpone acquisitions if the timing is right and the quality of the asset is there. But I would also say these acquisitions can be very fickle, and so it's always about having a robust pipeline so that you can respond accordingly. But I would just read it as we continue to be a partner of choice, and we like what we stand relative to the current pipeline. And if opportunities present themselves, we'll take advantage of them in the back half of the year.

Speaker Change: We like the Optionality of that pipeline, we have LOI on a number of items in a number of items that are under LOI.

Speaker Change: Don't think we're going to postpone acquisitions, if the timing is right and the quality of the asset is there, but I would also say as you know these.

Speaker Change: These acquisitions are can be very fickle, and so it's always about having a robust pipeline. So that you can respond accordingly.

Speaker Change: I'd just read it as we continue to be.

Speaker Change: Partner of choice, and we like where we stand relative to the current pipeline.

Speaker Change: Opportunities present themselves, we'll take advantage of them in the back half of the year.

Jason Cassorla: Okay, great, thanks, helpful. And then I just wanted to ask around total shoulders. They've been, you know, pretty sizable benefit this year.

Speaker Change: Okay. Great. Thanks helpful. And then I just wanted to ask around total shoulders have been pretty sizable benefit. This year can you just remind us opportunity set on the shoulder side and then just kind of given the complexity of total shoulders. How we should think about kind of like the margin considerations as those continue to be.

Jason Cassorla: Can you just remind us the opportunity set on the shoulder side and then just kind of given the complexity of total shoulders, how we should think about kind of like the margin considerations as though it's continued to move into the SVA, just any more color around the shoulder opportunity set and kind of how we should think about margins for that service line. Thanks.

Speaker Change: Moving to the ASC.

Speaker Change: Any more color around the shoulder option, our opportunity set and kind of how we should think about margins for that service line.

Eric Evans: Hey there, thanks for the question. You know, the total opportunity is quite large. I mean, even amongst the current doctors on our staff, it's in thousands of procedures, right? And that's not accounting the recruitment team's focus on finding total shoulder docs that maybe weren't using us in the past. So, you know, we feel really, really good about our opportunity there to continue to grow it. You are right; higher acuity procedures, especially when we first get into them. You know, it takes us a little time to get the shoulder prices down. The margin profile will grow over time as we grow our volume and as we use our scale to really drive efficiencies on those procedures.

Eric Evans: So, you know, at the beginning, that that pass-through cost is a little bit higher than you would have over time. But as we grow with market share in that, I expect that you're going to see that the margin is going to grow and that we actually think that, again, we're early innings there of moving procedures over, starting with our existing docs who had procedures they could bring and then follow it up. I, of course, really dedicated recruitment on those particular procedures in our market. Okay, great, thank you.

Bill Sutherland: And once again, to ask a question that is star one on your telephone keypad, we'll move next to Bill Sutherland of Benchmark Company. Hey, thanks.

Eric Evans: Good morning, everybody. Wayne, I think you mentioned about the procedures coming off the impatient-only list, or maybe it was Eric, I'm not sure. Can you just give us a little more color on what's coming off and kind of how you think about the potential work for you guys? Hey, Bill, it's Eric. There's not a lot of news right now about stuff coming off the impatient-only list for this year. As you know, last year, the early read was, there wasn't much coming off, and then we got total shoulders added at the end. We continue to be; we had so much room on the stuff they've added over the last few years.

Eric Evans: We feel good about what's out there. Certainly, we're always pushing every year as technology gets better. There's more opportunities for us to move procedures out. We talk a lot about our $150 billion TAM, $110 billion of that stuff that's still going to move out of the traditional acute care setting. And a lot of that has to do with technology changes in higher-acuity procedures every year. So look, we expect that March to continue. Sometimes incremental, sometimes it's got big jumps, like it did during COVID when we got all the cardiology procedures and the rest of orthopedics.

Eric Evans: But look, I think you're going to continue to see it grow. What comes off that list just because the math is too compelling. We save a ton of money for procedures. They're safely done in our setting. And so we're going to continue to push on that every year.

Eric Evans: There's nothing specific this year that's as meaningful as total shoulders at this point. But, you know, we're always watching that list.

Wayne DeVeydt: And then, Wayne, back to your capital deployment comment. As your platform gets bigger and bigger, do you think we should think about something? I mean, are you guys thinking about maybe a manual target that's greater than 200 million? Hey, Bill, it's a really good question. I think we would continue to target the 200, though, for the next three to five. I mean, to be fair, could we do a little more in any one year and create some lumpiness? Yes. But we're committed to the sub-three times leverage goal that we've laid out to our shareholder base.

Unnamed Speaker: Uh, hey, Bill, I-

Wayne DeVeydt: And so to ultimately accomplish that goal, you know, we're going to be in that 200 range. Again, could we go up in any one year? Yes. But long-term, over time, that's where I think we would anticipate continuing to target.

Wayne DeVeydt: Great.

Whit Mayo: Thanks, everybody. Thank you. We'll take our next question from Whit Mayo of LeeRank Partners. Your line is open. Hey, thanks. Dave, I may have missed this.

David Doherty: I know you don't have the formal target this year around free cash flow, but just any thoughts around how we should maybe think about the cash flow this year. Yeah, good morning, Whit. Yeah, you did miss it. We are talking about our same target of 148 to 160 as we in the year. Okay, great.

Unnamed Speaker: Yeah, good morning, Whit. Yeah, you did miss it. We are talking about the same target at 140 to 160.

David Doherty: On state supplemental programs last year, Idaho was a benefit. That's kind of a little bit of attention, just any anything in the quarter or anything for the year that we should be aware of. No, nothing material. I mean, those programs, as you probably know, so very, very low percentage of our businesses Medicaid, so we're not that impacted by it. So I think our total mix is around around 5%. So like those programs are very rarely material for us, but in this year, that's holding true.

Ryan Langston: And we'll take our final question from Ryan Langston of TD Cowan.

Ryan Langston: Hey, this is Will. See if I found for Ryan. Just kind of warning about stock op in the quarter. It was a little bit higher than quarterly averages. Was I related to the acquisitions on the quarter?

David Doherty: And as well, if you could maybe just let us know what the revenue divestiture had been was in the quarter. And I think that was going to drop to zero in the back half of the years. That's all accurate.

David Doherty: Thank you. Yeah, well, I just take those in order to stock comp pieces. Really, just is really just timing of. Vesting activity as well as just kind of the normal role rate that would happen with us, nothing unusual inside the stock copies. The revenue that we overcame from divestitures was minimal inside the quarter. Most of our divestitures were completed within the first half of last year. So there was a marginal impact inside the second quarter. But not material in our first to kind of call out, and you're right that's not considered a headwind force as we look at the back half of the year.

Unnamed Speaker: Yeah, well, he did it.

Operator: Thank you.

Eric Evans: This does conclude our question and answer session.

Eric Evans: I'd be happy to return the call to Eric Evans for closing comments. Thank you.

Eric Evans: Before we conclude today and on behalf of the entire management team, I'd like to thank our 13,500 plus teammates that partner with our position owners every day, delivering on our mission to enhance patient quality of life through partnership. Thank you for joining our call this morning, and have a great day.

Operator: This does conclude today's Surgery Partners Incorporated second quarter 2024 earnings call. You may now disconnect, and everyone have a great day.

Operator: This does conclude today's Surgery Partners Incorporated second quarter 2024 earnings call. You may now disconnect, and everyone have a great day.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: [music].

William Sutherland: William Sutherland, Brian Tanquilut, Lisa Gill, Ann Hynes, Sarah James, Wayne DeVeydt. William Sutherland, Brian Tanquilut, Lisa Gill, Ann Hynes, Sarah James, Wayne DeVeydt. William Sutherland, Brian Tanquilut, Lisa Gill, Ann Hynes, Sarah James.