Q4 2024 Surgery Partners Inc Earnings Call
Speaker Change: Greetings. Welcome to Surgery Partners, Inc. fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Dave Doherty, CFO. Thank you. You may begin.
Speaker Change: Starting with our fourth quarter results I am pleased to report that our team continues to deliver on our mission to enhance patient quality of life through partnership.
Speaker Change: 2024 financial results that we announced this morning, Alright Testament to the focus of our colleagues and physician partners, who serve our communities with valuable high quality and convenient care.
Speaker Change: This morning, we reported full year adjusted EBITDA growth of 16% and net revenue growth of 13.5%, resulting in margin expansion of 30 basis points, each consistent with or exceeding our growth algorithm.
Speaker Change: This is the first time surgery partners has recorded revenue over $3 billion.
Speaker Change: EBITDA over half a billion dollars.
Speaker Change: Our growth in 2024 is attributed to continued strong organic results, including same facility revenue growth of 8% with eco conscious equal contribution from both case volume and rate improvements as well as meaningful contributions from our recent acquisitions.
Speaker Change: Dave will elaborate on our financial results next.
Dave Doherty: Across our 161 surgical facilities, we partner with top notch surgeons, who consistently provide high quality clinical care.
Dave Doherty: Our partnership model uniquely positions the company for sustained success, because we partner with talented physicians to create a safe convenient and cost efficient environment that patients and payers prefer.
Dave Doherty: Increasingly we are experiencing above average volume growth at higher acuity levels, because we are focused on providing exceptional care and service and recruiting the right future physician partners.
Dave Doherty: We continue to invest in surgery partners grow through acquisitions facility expansions de Novo's and service line expansion as well as better more efficient operations.
Dave Doherty: The investments we made in 2024 will contribute to reliable and consistent growth as we enter 2025.
Dave Doherty: Let me touch on some of these initiatives starting with our continued robust organic growth activities.
Dave Doherty: And the facilities that we consolidate we performed over 656000 and surgical cases in 2024 compared to 605000 cases in 2023.
Dave Doherty: We experienced growth in each of our core specialties that exceeded our growth algorithm expectations.
Dave Doherty: Importantly, we performed over 117000 orthopedic cases in 2024, 11% more than 2023, reflecting our focus on growing this high acuity specialty through targeted recruiting acquisitions and de novo's.
Dave Doherty: Most of the growth in orthopedic procedures is driven by total joint procedures, which grew 50% in 2024.
Dave Doherty: Notably over 70% of our surgical facilities had the capability to perform higher acuity orthopedic procedures and 41% of our ASC is currently performed total joint procedures.
Dave Doherty: This capability provides significant additional growth opportunity as we continue to position our assets to meet the expanding orthopedic demand, we have been experiencing with targeted recruitment and investments in additional equipment, including robotics.
Dave Doherty: In 2024, we added 14 surgical robots to our portfolio to enable our physician partners to perform increasingly more complex and higher acuity procedures.
Dave Doherty: These investments also help support our strong position recruiting process we.
Dave Doherty: We were pleased to conclude the year, having added over 750, new physicians many of which will eventually become partners.
Dave Doherty: This recruiting class includes all of our specialties, but skews towards orthopedic focus physicians base.
Dave Doherty: Based on our experience with prior recruiting classes, we fully expect our 2024 recruits to more than double their impact in 2025.
Dave Doherty: I also want to highlight our growing to novo capabilities in 'twenty 'twenty four we opened eight de novo facilities, and we had 12 facilities in various stages in our pipeline many of which we expect to open in 2025.
Dave Doherty: As we have said before we expect to have at least 10 to know those in development or under construction annually.
Dave Doherty: These de Novo investments, our syndicated with well established and high quality physician partners that specialize in high growth areas, such as total joints spine and other high acuity services.
Dave Doherty: We expect to see meaningful long term organic growth from our de Novo ASC starting two years after they open.
Dave Doherty: Next I wanted to touch briefly on the second leg of our growth algorithm our margin improvement efforts.
Dave Doherty: Our 2024, adjusted EBITDA margins improved by 30 basis points over the prior year to 16, 3%.
This improvement reflects our procurement and operating efficiency initiatives that continue to improve from our increasing scale along with synergies achieved on our previously acquired facilities.
Dave Doherty: Given our structure most of our revenue is generated by commercial payers in 2020 for approximately 90% of our revenue was commercial and Medicare.
Dave Doherty: Our managed care team, which actively partners in negotiating with our health plans has already secured over 99% of our expected contracts will rates for 2025.
Dave Doherty: When combined with Medicare rate increases, which were approximately 3% for 2025, we have high confidence in and significant visibility to our expected 2025 rate growth.
Dave Doherty: As we enter 2025, our teams are effectively executing on our key initiatives across business development recruiting managed care procurement revenue cycle and operations as such we continue to expect margin expansion in 2025 and beyond.
Dave Doherty: The third and final leg of our long term growth algorithm is acquiring and integrating accretive surgical facilities into our platform.
Dave Doherty: I'm immensely proud of our dedicated.
Dave Doherty: All of the team that manages it maintains a robust pipeline of attractive partnership opportunities.
Dave Doherty: 24, we added seven surgical facilities focused on physician owned specialty surgical care and affiliated services.
Dave Doherty: We deployed just under $400 million of capital primarily on facilities that specialized in higher acuity specialties like orthopedics and spine.
Dave Doherty: This level of acquisition activity was higher than normal, but reflects our disciplined approach to managing our pipeline too.
Dave Doherty: 2024, we seize the opportunity to add strong and immediately accretive orthopedic assets to our portfolio.
Dave Doherty: Acquisitions are an important part of our growth algorithm not only because of the immediate earnings they contribute but also the margin expansion, we experienced as we integrate these facilities into our platform.
Dave Doherty: As previously shared we expect to effectively take at least one turn off the acquisition multiple within the first 18 months of ownership.
Dave Doherty: Our record of successfully executing intentional disciplined acquisitions gives us confidence that we can continue to generate the same level of margin expansion for.
Dave Doherty: For example, the average multiple on acquisitions completed in the period from 2021 through 2023 was less than eight times adjusted EBITDA.
Dave Doherty: After integrating these acquisitions the average multiple decreased by 1.5 churns.
Dave Doherty: As we look at our projections for 2025, we expect the annualized nation of the net partnerships. We acquired in 2024 will contribute at least 3% of our projected growth.
Dave Doherty: We also expect acquisitions will continue at a more normalized basis, our guidance assumes approximately $200 million of capital deployment.
Dave Doherty: So far in 2025, we have deployed $53 million buying three ASC in California, and Texas with an average purchase price multiple of approximately eight times.
Dave Doherty: The pipeline of attractive assets is robust and supportive of our 2025 guidance as Dave will discuss we have sufficient liquidity to fund its growth in the short and long term without having to tap the capital markets.
Dave Doherty: The level of activity supporting a comprehensive M&A strategy requires incremental variable cost in terms of due diligence transaction costs integration costs and de Novo working capital investment.
Dave Doherty: In 2024, our transaction and integration efforts were higher than typical which is directly correlated to the increased number of acquisitions and de Novo investments that took place in late 2023 and throughout 2024.
Dave Doherty: It is important to note that we expect these costs to be significantly lower in 2025 based on a more normalized volume of expecting M&A.
Dave Doherty: Moving onto our 2025 guidance based on the recently completed 2025 budgeting process. We expect net revenue adjusted EBITDA and margin growth in line with our long term growth algorithm.
Dave Doherty: Specifically, we provided initial guidance for net revenue in the range of $3 3 billion to $3.45 billion and adjusted EBITDA in the range of 555 million to $565 million.
Dave Doherty: These ranges reflect our confidence in the core tenets of our business and strategy within the context of the current markets.
Dave Doherty: With that in mind I would like to provide a perspective on how surgery partners is positioned relative to today's legislative environment.
Dave Doherty: The vast majority of our surgical volumes are elective and I referred from a physician office rather than originating from an emergency room, we see very few Medicaid patients and have virtually no uncovered uncompensated or charity care.
Dave Doherty: This business model stands in Stark contrast to traditional acute care hospitals, which provide inpatient and outpatient medical care.
Dave Doherty: Treatment of a wide variety of medical conditions injuries, and illnesses with significantly higher levels of Medicaid state based and self pay reimbursements due to their inherent higher emergent patient patient mix finish.
Dave Doherty: Traditional acute care hospitals also typically own and equipped facilities that are multiple times larger than our surgical facilities and provide care across nearly all medical and surgical specialties.
Dave Doherty: Our surgical facilities in general are small and focus solely on delivering outstanding surgical care for a handful of service lines.
Dave Doherty: This distinction is important to appreciate as our portfolio has significantly less exposure to policy shifts such as changes to Medicaid programs at the federal or state level or legislative considerations for Medicare site neutral payment policies.
Dave Doherty: To put a fine point on this less than 5% of our revenue is from Medicaid and associated state based programs.
Dave Doherty: With respect to site neutrality policy as there are several frameworks that had been discussed including the lower cost more transparency Act beside act any legislative framework released by Senators Bill Cassidy and Maggie has them as.
Dave Doherty: As a company we are deeply committed to providing quality and capacity of care in the most cost effective environment.
Dave Doherty: Such we support efforts to encourage procedures to move to the best site of care.
Such as our short stay surgical facilities.
Dave Doherty: Based on detailed reviews of all of the frameworks. We're tracking we believe none individually or collectively will have a material impact on the company's net revenue or earnings.
Dave Doherty: More specifically there are very few procedures performed in our facilities that should be done in a lower cost site as contemplated in any of the current frameworks.
Dave Doherty: Evaluating all the procedures, we performed that could be impacted the worst case scenario would be limited to 1% of our net revenue.
Dave Doherty: It is more likely that a site neutrality legislation moves forward our facilities will be the net beneficiary as procedures may transition faster from acute care health systems and their outpatient departments the facilities that we own and manage.
Dave Doherty: You put it another way we believe our facilities are the solution to the problem. Our government is trying to solve.
Dave Doherty: Of course, the legislative processes are still in initial stages, but at this point, we do not see a material risk to our revenue or earnings from Medicaid policy changes or site neutrality legislation.
Dave Doherty: Before I turn it over to Dave I would like to briefly address the non binding acquisition proposal that Bain capital send to our board of directors in late January.
Dave Doherty: I mean, it's been a long standing investor in surgery partners and a valued partner to us over the years with representation on our board.
Dave Doherty: As we noted in our press release on January 28, our board formed a special committee comprised of independent directors that are not affiliated with Bain capital to consider this proposal with help from leading independent financial and legal advisors.
Dave Doherty: Out of respect for the process underway with a special Committee, our executive Chairman Wayne device serves as managing director at Bain has removed himself from many of his normal activities with surgery partners and as you may have noticed that includes this call today.
Dave Doherty: We will not be commenting further on this matter unless or until there's a material update.
Dave Doherty: Overall, I am pleased with the consistent growth and progress our business recognized in 2024, because of our continued focus and execution against surgery partner strategic growth goals are.
Dave Doherty: Our continued focus on maximizing the performance of our portfolio robust M&A pipeline steady improvements in enabling greater operational efficiencies and bullish outlook on surgical trends and the regulatory landscape have us positioned to continue delivering industry, leading growth in 2025 and beyond.
With that I will now turn the call over to Dave to provide more color on our financial results as well as the 2025 outlook.
Dave Doherty: Thanks, Eric starting with the top line, we performed over 174000 surgical cases in our consolidated facilities in the fourth quarter, bringing our full year case count to 657008, 4% higher than 2020 through these.
Dave Doherty: These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double digit growth in EMS K related surgical cases.
Dave Doherty: The combined pace growth in higher acuity specialties specific managed care actions and the continued impact of acquisition supported our fourth quarter revenue growth of 17, 5% over last year to $864 million.
For the full year revenue grew 13, 5% to $3 $1 billion.
Dave Doherty: Our same facility total revenue increased five 6% in the fourth quarter and 8% in the full year exceeding our growth algorithm target of 46%.
Dave Doherty: Adjusted EBITDA was $163 $8 million from the fourth quarter, giving us a margin of 18, 9%.
Dave Doherty: For the full year, we reported $508 $2 million and adjusted EBITDA, 16% over 2023 and in line with our expectations.
Dave Doherty: We ended the quarter with $270 million in cash when combined with the available revolver capacity, we have over $770 million in total liquidity.
Dave Doherty: We reported operating cash flows of $300 million in 2020 for distributed $171 million to our physician partners and incurred $45 million in maintenance related capital expenditures.
Dave Doherty: The increase in distributions and capital spend are correlated to the growth in our facilities and underlying earnings.
Dave Doherty: Operating cash flows in 2024 were higher than 2023.
Dave Doherty: But lower than originally estimated due to the increased variable costs associated with acquisitions completed in 2024.
Dave Doherty: Incremental interest costs on our revolver alone.
Dave Doherty: Working capital needed for our recently opened de Novo investments costs related to our strategic alternatives process undertaken by our board.
Dave Doherty: Restructuring cost, we incurred related to key growth initiatives and operational efficiency.
Dave Doherty: More specifically, we completed a higher volume of acquisitions that were also comparably higher and complexity of diligence and integration and prior year acquisitions. For example, some of the acquisitions included small separate physician practices that needed separate integration efforts.
Dave Doherty: In addition in 2024, we assumed management rights for four Afcs and launched Fortinet goes with our health system partners, which required separate and intensive integration efforts to complete.
Dave Doherty: This increased complexity combined with the higher overall volume of activity contributed to the higher costs, we incurred in 2024.
Dave Doherty: We expect those costs to significantly abate in 2025, as we complete the integrations from 2024 acquisitions in the first half of 2025.
Dave Doherty: We incurred approximately $11 million in costs to support strategic alternatives considered by the board in the second half of 2024.
Dave Doherty: And expect more costs in 2025 related to the special Committee process Eric discussed.
Dave Doherty: But we cannot provide an estimate for these costs at this point.
Dave Doherty: Finally, as we continue to invest in improved corporate management support services for our facilities, we incurred restructuring costs in 2024 and expect to incur more such cost in 2025.
Dave Doherty: We are comfortable with the company's underlying cash flow generation and its continued growth.
Dave Doherty: Moving to the balance sheet.
Dave Doherty: We have $2 2 billion in outstanding corporate debt with no maturity dates until 2030.
Dave Doherty: The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025, and after that we have interest rate caps in place that limit the variable rent component of our $1 $4 billion term loan to 5%.
Dave Doherty: That floating rate is currently four 3%, but that could change throughout the year.
Dave Doherty: Our fourth quarter ratio of total net debt to EBITDA as calculated under our credit agreement was three seven times 10 basis points lower than the third quarter.
Dave Doherty: We believe this is an appropriate metric to evaluate leverage as the impact of joint venture accounting could lead to incorrect conclusions, having said that this internal metric difference from leverage calculated using consolidated debt from our balance sheet divided by EBITDA, which results in a debt leverage of four five times.
Dave Doherty: Based on our annual operating budget and five year financial models, we expect leverage to decrease based on sustained double digit earnings growth. In addition, these models highlight that we will have sufficient liquidity from our cash on hand, a revolver capacity and cash generated from operations to support future M&A at la.
Dave Doherty: <unk> that support our long term growth algorithm without having to access incremental capital from the debt or equity markets over the next five years.
Dave Doherty: We are carrying the momentum of the strong finish to 2024 into 2025 with all our growth engines working effectively.
Dave Doherty: As a result, our initial guidance for 2025 adjusted EBITDA is a range of 555 million to $565 million, which reflects double digit growth over 2024 at the midpoint.
Dave Doherty: Additionally, our 2025 revenue guidance is a range of $3 3 billion to $3 four of $5 billion.
Dave Doherty: Organic growth from our same facilities is expected to provide growth at or near the top end of our long term growth algorithm targets.
Dave Doherty: We expect to deploy at least $200 million of capital on M&A. We expect cash flows from operations to increase in 2025 based on our forecasted adjusted EBITDA growth, but we are not providing a specific range given the inherent variability in costs related to acquisitions continuing to restructuring activities.
Dave Doherty: The pace of growth in our de Novo investments and the current strategic process underway with the special Committee.
Dave Doherty: We expect capital expenditures related to maintenance activities to be between 40 and $50 million consistent with our historical run rate.
Dave Doherty: Distributions to our partners should grow in line with the underlying earnings growth.
Dave Doherty: We feel that we have built a conservative outlook for 2025 subject to the timing of our capital deployment.
Dave Doherty: Our guidance implies continued margin expansion in line with our long term growth algorithm, reflecting our ongoing and accretive progress in supply chain and revenue cycle as well as the integration benefits from recent acquisitions and contributions from de Novo as we expect to open this year.
Dave Doherty: We have high confidence in these growth areas based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting in managed care contracting.
Dave Doherty: Once again, our well established and proven growth algorithm is firing on all cylinders and enables the company to confidently guide to double digit adjusted EBITDA growth and margin expansion in 2025 and beyond.
Dave Doherty: With that I would like to turn the call back over to the operator for questions.
Dave Doherty: Operator.
Speaker Change: Thank you.
Speaker Change: We'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Speaker Change: We ask that you limit to one question and one follow up question one moment, while we poll for questions.
Brian Tranquil: Our first question is from Brian tranquil It with Jefferies. Please proceed.
Brian Tranquil: Hey, good morning, maybe Dave just to follow up on the color that you provided you guys provided on the impact of <unk>.
Brian Tranquil: Alleged potential legislation specifically a site neutrality just curious if.
Speaker Change: If you can give us any more granularity on how you get to that 1% number maybe.
Brian Tranquil: Or maybe asked differently how are you thinking about.
Speaker Change: The difference is an impact between the ASC side, which is probably benign versus your short stay.
Brian Tranquil: Specialty facilities.
Brian Tranquil: Hey, Brian Let me just kick that off and then I'll, let David get into some of the specifics.
Brian Tranquil: As I said in my comments high level, our companies based on this idea of getting care to the right site and it's our mission to do that we think it's the right answer for the health care system.
Brian Tranquil: When we look at this you know I want to reiterate in my comments, we gave the risks number on revenue, which is approximately 1%. If you look at the worst case, but the reality of it is there's a lot of upside for us gaining cases that will move out of the traditional acute care system and so you know.
Brian Tranquil: More than likely we do expect this to be a net tailwind.
Dave Doherty: Just from our business standpoint, but I'll, let David get into the specifics. We obviously spent a lot of time going into the details of what's been proposed so far so Dave yeah. Thanks, and thanks for the question Brian.
Brian Tranquil: So I'll.
Dave Doherty: I'll reiterate what Eric.
Dave Doherty: Said this site neutrality is kind of core to our business supporting shifting procedures to the right side of care is our business model. So we're in favor of largely of site neutrality pricing transparency and the current legislation and regulatory actions that are kind of out there.
Dave Doherty: We think it best this is even though we looked at the downside risk at 1%.
Dave Doherty: We think it best this is this is probably positive to the results and worst likely it's neutral to us for a number of reasons.
Dave Doherty: But the way we calculate it just too.
Dave Doherty: <unk> fully transparent.
Dave Doherty: The way we calculated this is looking at those procedures that are in scope and there are some very specific procedures and scope in the legislation that has been drafted are being discussed the most.
Dave Doherty: Most detailed of which is the medpac proposal that forms the basis of the current act that those two senators are evaluating.
Dave Doherty: The.
Dave Doherty: The procedures that we have kind of in place debt.
Dave Doherty: To your point, a large majority of those procedures are occurring inside the larger surgical facilities. However, there are some of the some of those procedures that are occurring inside the ASC. So if you were to believe only the worst case scenario and assume no upside from.
Dave Doherty: The procedures that are shifting out of the much higher cost acute care and their related outpatient business.
Dave Doherty: And then youre going to see the exposure that we have at 1% about two thirds of that would be in our larger facilities and about one third of that is going to be in our in our.
Dave Doherty: Our ASC, so thats really when you look at procedures that could be performed inside a physician office.
Speaker Change: Got it and then maybe as we think about the guidance I appreciate all the color there but.
Speaker Change: We're hearing a lot of noise around weather and the flu season impact in Q1, just curious if there's any color you want us to consider as we model Q1.
At this point Brian.
Speaker Change: Brian again, thank you for the question on <unk>.
Speaker Change: At this point, we're not seeing anything major of course, we did see.
Speaker Change: Oh, it was freezing conditions in some unusual weather patterns in January.
Speaker Change: For the most part of our business just gets rescheduled. So when there are cases like that there might be a little bit of fixed cost that will create some burden for us but that has been factored into our guidance and as you look at guidance for.
Speaker Change: For the year the way we are.
Speaker Change: <unk>.
Speaker Change: Revenue and adjusted earnings guidance throughout the year, the quarterly pattern will look roughly consistent.
Speaker Change: What we've seen in the past, perhaps a little bit.
Speaker Change: You know were conservative bunch here, so I would suggest maybe 23% of our midpoint of our guide inside the first quarter about 18, 5% for adjusted earnings.
Speaker Change: Awesome. Thank you.
Speaker Change: You got it.
Speaker Change: Our next question is from Benjamin Rossi with Jpmorgan Chase. Please proceed.
Speaker Change: Hey, Thanks for the question. So just on M&A cadence you did over $400 million in M&A in 'twenty 'twenty four and you mentioned the $53 million spent so far in 2025.
Speaker Change: Just thinking with the offer letter in the public sphere has this changed your approach to your M&A pipeline during 2025, and maybe the timeline of any of your conversations at this process sorts itself out.
Speaker Change: Yeah, Benjamin Thanks for the question.
Speaker Change: No actually I would say that really hasn't been an impact we tried.
We've done a good job of just focusing on the business.
Speaker Change: So there's obviously any time, there's a process there is a little bit of noise, but as far as the pipeline goes you can see we executed we were very opportunistic last year. We've got some great assets that are highly orthopedic high acuity fast growth kind of facilities. We're proud of the team's work there as I mentioned as far as this year goes nothing really has changed really strong pipeline Youll note we closed.
Speaker Change: Three facilities in Q1 already between California, and Texas spent about $53 million, so kind of on pace with a really really attractive pipeline. So no.
Speaker Change: No I don't think Thats had any impact on kind of how we're approaching that we're just approaching it consistent with our long term growth algorithm.
Speaker Change: Great. Thanks for the color and then just on the de Novo's. It sounds like those have been progressing nicely you've.
Speaker Change: Are you seeing any acceleration in ramp up under a more elevated demand set up and more normalized labor backdrop, and then how you're thinking about startup costs here in 2025 compared to inflation, we've seen in recent years.
Speaker Change: Yeah. Thanks for the question, we are really excited about our de Novo pipeline and continue to gain additional traction there.
Speaker Change: It's hard to say, whether that's because physicians now see less inflationary backdrop, unless labor pressures I don't know it could be part of it but the reality of it is it's as strong as it's been since I've been here, we've actually built out more capabilities in that space and what we're seeing is they're incredibly accretive right. So if we can do all de novo's and put that to work and get them go faster I mean, we'd love that.
Speaker Change: So you're going to see us continue to expand that as we've mentioned we've committed to 10.
We're committed to 10, a year as far as specific costs costs related to that was I'll, let Dave kind of dive into some of those details. Thanks, Thanks, Joe and Youre right the costs associated with those on an upfront basis is relatively marginal.
Speaker Change: As Eric was just mentioning there.
Speaker Change: But the return on those things is remarkable the working capital needs.
Speaker Change: That sit inside there you see that.
Speaker Change: We pull those out we disclose them and are in our press release.
Speaker Change: As we continue to ramp up to get to 10 in process every single year Youll start to see that get to run rate.
Speaker Change: Again, assuming that we keep that pace at 10 times, but but we will keep pace with the demand and our capabilities. So I would expect that number to be roughly equivalent year over year.
Speaker Change: It'll start to get offset as facilities open up and they reach breakeven they generally reach breakeven within the first year of ownership, sometimes within the first six months.
Speaker Change: So you'll see that start to normalize probably in 2026, just completely predictable on a year over year basis, you'll see you should see a little bit.
Speaker Change: Of that ramp up in this year, but not material to add to your demand point, though I would I just mentioned for total joints. Since we're really really focused on orthopedics at least de novo's, it's still three to one procedures in <unk> versus the ASC world. So there's a long way to run there. So I do think if you think about high acuity new facilities, while we're well positioned to be part of that answer on that.
Speaker Change: <unk> side.
Speaker Change: Great. Thanks for the commentary there.
Speaker Change: Our next question is from Joanna Cat like with Bank of America. Please proceed.
Joe: Hi, Good morning. This is Joe and I got you. Okay. Thanks for taking the question. Please I guess, one first a follow up.
Joe: In the press release, you talk about 11 million EBITDA from assets divested.
Speaker Change: In late Q4, so how much revenues I guess.
Speaker Change: Are those assets.
Speaker Change: Contributing to 'twenty four annually and then likely thank you.
Speaker Change: So I need some more.
Speaker Change: Yeah, So I'll, let I'll, let Dave talk about specifics on the revenue side, what I would say is on those facilities. We're constantly doing in our portfolio analysis right in a business like this you want to make sure that you're always the best natural owner, we had a few more this year than we would expect as a run rate we do expect to grow our facility count quite rapidly over the next several years, but when we find them.
Speaker Change: <unk>, where we're not as well positioned and we're not the best natural owner, we do try to find ways to move.
Speaker Change: Moving out of those markets and enter markets, where we think there's better growth prospects, so a little bit unusually as far as the number of facilities. Although they were small not as well positioned as we'd like them to be and we've reinvested that into places where we think the growth prospects are stronger Dave I don't know that I comment on her specific question yes.
Speaker Change: Revenue impact of our divestitures is included in our in our guide. So if you look at the $3 3 billion to $3 45 billion.
Speaker Change: Less than 2% of that growth is going to be trying to jump over our divestiture related activity. The reason why we've kind of pulled out the $11 million is to help folks kind of understand how our growth is consistent with our long term growth algorithm yet again this year.
Speaker Change: Yeah.
Speaker Change: Great. That's very helpful. Thank you for the 2% there and if I may I have another follow up on the.
Speaker Change: Comments, you were making about the psych neutral influence in your estimate there I appreciate that's sort of 1% of revenue like.
Speaker Change: For I guess, a what's the scenario one of the versions that we know right now.
Speaker Change: How should we think about the impact to the bottom line is that first of all there's some losses because of the.
Speaker Change: Ownership structure, but if there's something else to think about you know kind of a walk walk down the.
The P&L habits would impact the EBITDA line.
Speaker Change: Yeah sure let me, let me address that.
Speaker Change: So first off.
Speaker Change: I appreciate why we're continuing to focus on this but hopefully the point that we're making that 1% of revenue is not material to the company and there is upside to it but it just I just want to make sure we're not over indexing on this even if you were to look at 1% and somehow say that's material you're absolutely right. It would it would be.
Speaker Change: Adjusted by our ownership level, plus any cost actions that we've taken in order to kind of react to any type of reimbursement change. So it's going to be negligible, if anything and I would argue the revenue piece is negligible as well so I am hopeful Joanna that's what you take away from our call. This morning, Yeah. Joanna the one thing I would add on procedures. As you think about this too is that we are.
Speaker Change: Constantly working to have the most appropriate procedures in the right places within our portfolio. So higher acuity in the highest acuity facilities, we have lower acuity and the appropriate ASC, so where we're actively mitigating that number all the time. So we expect that number to strength as every month goes by.
Speaker Change: Okay. Thanks for that I appreciate it.
Speaker Change: Of course.
Speaker Change: Our next question is from a J rice with credit Suisse. Please proceed.
Speaker Change: Hi, everybody.
Speaker Change: I don't know, whether there's anything to be said here or not but I understand you don't want to comment on the specifics of the ongoing Special Committee review, but is there any way to put a timeframe on when you might.
Speaker Change: Not a specific month or day necessarily but are we talking about something over the next.
Mid year by year in.
Speaker Change: Any way to put parameters around that.
Speaker Change: Hey, Jay I appreciate the question. Unfortunately, there's no more I can comment on that it is one of those things where the independent Committee will play this out and I can't I can't comment further than what we've said so far.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: I know that this year.
Speaker Change: In the past year.
Speaker Change: Back half of the year the revenue per case moderated in case growth was strong if you look at the full year number you were more balanced on that as you think about your buildup for guidance for.
Speaker Change: We're 25 can you just comment on those two metrics in any inputs to those two metrics and how do you think it will play out I know you said you've got a lot of your 95% of your managed care.
Speaker Change: Contracts done do you have any sense of what the rate of increase on averages on those contracts.
Adrian: Yeah. Thanks for the question Adrian Let me start high level and just say we talked about this a lot that we try not to we don't look at the business quarterly just because of all the various inputs and puts and takes of things rolling in in year.
Adrian: The seasonality, there's a whole bunch of things that happen and that's why we do think the balanced year look is the right way to think about it so last year very balanced between cases and growth, but it does move around quite a bit from quarter to quarter and.
Adrian: And so you know we we urge everyone to think about this business not on a quarterly basis. When you look at those metrics because there's a lot of moving parts. There I'll, let Dave talk a little bit about kind of how he sees as seasonality playing out this year.
Adrian: And just.
Adrian: Just to kind of pile onto that comment.
Speaker Change: Over indexing on one quarter over another the impact that Eric was referring to is at prior year acquisitions or any divestitures and if you have an acquisition that is focused on high number of cases that are at low acuity for example.
Speaker Change: Our ophthalmology acquisitions that we've done in the past or it's a heavy focus on orthopedic that would be lower case volume.
Speaker Change: And higher rates as those matriculate into the same store calculation. They create some unusual variances and the second part is of course, the number of days in a quarter. We only operate 60 business days and so one day difference because of holidays, where Mondays kind of fall you could have some unusual variances since so thats why we really do.
Speaker Change: And again looking at that on a quarterly basis, having said that a J. We do look at that to try to explain it just to make sure that theres no underlying trend that's actually occurring to impact the organization.
Speaker Change: So to answer your specific question as we look at the quarters, Yes, we are going to say for the full year, we're going to be at or above our long term range. We think it's going to be relatively balanced between case growth and rate growth.
Speaker Change: But the rate pressure that we saw in the second half of the year only due to mathematics will continue to occur for perhaps to a more muted extent in the first half of this year.
Speaker Change: And we will balance out in.
Speaker Change: In the second half of the year and I hope that's helpful.
Speaker Change: Yeah, great. Thanks, a lot.
Speaker Change: Our next question is from <unk>.
Speaker Change: Macquarie. Please proceed.
Speaker Change: Hey, Thank you good morning.
Speaker Change: Just trying to go back to the outlook that you gave.
Speaker Change: On the top line you are forecasting 6% to 11% revenue growth.
Speaker Change: Based on the earlier comments, we get 3% incremental from acquisitions, there's a 2% drag from divestitures and a little bit of a headwind from a leap year impacting 'twenty 'twenty four.
Speaker Change: Still missing.
Dave Doherty: Some parse regarding to kind of the organic long term growth outlook like 46% I think Dave you mentioned, it would be a little bit higher than that but I think I'm still missing like 1% to 2% could you comment on where that's coming from.
Speaker Change: Yeah, So first off.
Speaker Change: Our range is a pretty big range.
Speaker Change: Which would imply a growth year over year of 6% to 11% is a pretty big range and as you can look at that.
Speaker Change: And so elements of that are going to be the conservatism that yeah.
Speaker Change: We should look at it it's still very early in the year, there's a lot of the year to kind of go.
Speaker Change: We've only closed the books on one month.
Speaker Change: So youre going to see elements of their and their as you pointed out we do have some.
Speaker Change: Some pressure point, although it's marginal related to prior year divestiture activity.
Speaker Change: The most challenging part for you is not going to be the number of days and said they are in fact, I think the number of surgical days inside of the years is the same year over year or within one day. So that's not going to be a pressure point for us. The biggest thing that's going to drive that is.
The type and the timing of acquisitions again, we've only completed.
Speaker Change: Three ASC transactions this year for a total of $50 million or so we have another 150 to hit our annual target timing of that and the nature of those is going to depict where ultimately revenue is going to turn out. So we do look forward to updating that guidance as we get into our first quarter call. As a reminder, that's only ish.
Speaker Change: A short number of weeks away from where we are today. So we should be able to give you a better update as we go towards that.
Got you and just a follow up I think the recruiting numbers are pretty strong this quarter could you comment on the general SWM be trend.
Speaker Change: The labor environment looking like out there. Thanks.
Speaker Change: Thanks.
Speaker Change: Yeah, let me start with physician recruiting obviously it was a really strong year for us again, and that's been a strength of our company. It's a huge part of our organic growth story and what we know is the physicians that we recruited this year a record number.
Speaker Change: Heavily orthopedic and we also know that they tend to double they almost always double in the next year. So we expect to gain the benefits of that recruiting class maturing, we don't see that slowing down we've got a really strong pipeline of physicians that will continue to bring into our facilities. So yes. It's been quite good there now that's separate and apart from our SW be on the books and I'll, let Dave maybe talk a little bit about that.
Speaker Change: WP trends.
And again, great question I do I do agree with that victory lap on recruiting that has an incredible team an incredible momentum. If you look at the past three years just year after year.
Speaker Change: Getting better in terms of the number of physicians brought into our fold and the revenue contributions from those so very very encouraging and as you know they have a compounding effect. So the good news for <unk>.
Speaker Change: 2025, as many of those stocks will just add more and more volume and more complexity into our business. So great great outcome on S. W. B.
Speaker Change: To put that point on that Eric was just mentioning.
Speaker Change: We believe we completely moderated the inflationary impacts of underlying salary costs and you can see that.
Speaker Change: In our results sequentially 180 basis points better.
Speaker Change: We look at SW be compared to revenue, we think that's the right way of kind of looking at that because our business is such a growth oriented business with new acquisitions coming into the fold and when you look at that we think were in line with where we have historically been which we believe is an illustration of how well we have managed that.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Our next question is from Andrew Mok with Barclays. Please proceed.
Speaker Change: Hi, Good morning, maybe just a follow up on that.
Speaker Change: Question around expenses revenue beat by more than 4% in the quarter, but EBITDA was in line. So we didn't see a lot of operating leverage in the business at least in the fourth quarter.
Speaker Change: You talked about the higher level of integration costs, but most of those are adjusted out but can you help us understand what drove the higher level of operating costs across several.
Speaker Change: Expense lines, including the salaries, but also other opex and G&A are any of those increases temporary in nature. Thanks.
Yeah, a little bit inside our and we talked about this on a quarterly basis. It becomes a particular challenge for us in the second half of the error rates in the third quarter and the fourth quarter and that relates to the accounting for the company's performance management incentive plans.
Speaker Change: In other words, the corporate bonus so last year, if you may recall in 2023.
Speaker Change: We had a we had to take some pressure off of that corporate bonus.
Speaker Change: But I'm pleased to say that we were able to kind of do much better this year. So.
Speaker Change: That is acute inside the fourth quarter it is fair.
Speaker Change: Fair again, if you take a longer view of that so between third and fourth quarter, you would have seen some slip but for the balance of the year.
Speaker Change: That's a good run rate for you to use on a go forward basis.
Speaker Change: Yeah.
Speaker Change: Our reported youre going to have swings like this but for the most part it's there I would say the other thing is.
Speaker Change: As a slight pre.
Speaker Change: Pressure that exists just on payer mix, it's difficult to predict kind of how that ultimately turns out we don't see anything unusual in terms of trend from that perspective, but that would be the only other.
Speaker Change: As you're kind of looking at.
Speaker Change: EBITDA pressure inside the quarter.
Speaker Change: Great and transaction and integration costs more than doubled from Q1 to Q4 and finished the year at $100 million.
Speaker Change: Clearly that's weighing on free cash flow and now Youre talking about a significant abatement in 2025, one what level of visibility do you have into reducing those expenses at this point and is it fair to think that free cash flow should improve by $50 million to $100 million as those cost to date. Thanks.
Speaker Change: So great question, let me start with we have great visibility into it and obviously, if you think about kind of where we expect that number to go because it was directly tied to.
Speaker Change: Our increase in M&A, plus some transactions or some.
Speaker Change: Project or process related cost that Dave mentioned that will obviously naturally abate to hopefully this year. So we look at that and we would say that.
Speaker Change: We expect that our run rate of below the line kind of M&A expenses will be similar to what 2023, our expectation is we're going to manage that very very closely.
Speaker Change: That will have a natural impact of improvements on free cash flow, but I would also say that ultimately you know free cash was a little hard to predict because because of timing of M&A and everything else that goes in there, but youre right in your thesis and we absolutely expect to drive that number.
Speaker Change: Now on to more normalized levels, so with that I'll, let Dave maybe add a little bit more color, yes, so and again, it's a great question. Its obviously very visible that we've we have incurred more expense in 2020.
Dave Doherty: Four than what is typical for transactions and I would I would provide us perhaps a little bit more color on what happened inside 'twenty 'twenty four.
Speaker Change: We couldnt talk about this before but clearly with the with Bain's letter that came in you could see that there was a process that we went through last year that did burden that that cost below the line.
Speaker Change: That's the that's one of the difficult things, it's difficult to predict because as you now know we're going through a similar process that's going to have some cost it's unclear.
Speaker Change: How much of those costs will be and kind of when that process will end, but that will that's an uncertainty that makes it difficult for you to kind of say definitively if we're going to be able to take out $50 million. So not a lot of visibility that we can kind of see to that at this point sufficient to provide you with that guidance on the.
Speaker Change: Transaction and integration costs clearly, we spent twice as much in M&A last year $400 million out the door.
Speaker Change: It is a heavier due diligence burden heavier transaction costs legal fees. The advisory fees that we used to kind of evaluate those managing our pipeline those costs or are always going to be there. So youre going to see a direct correlation to how we manage the pipeline and when it comes to that.
Speaker Change: At this point, we're not looking at anything major in the pipeline. So much so that where we're saying $200 million is our target for the year, so that should abate.
Speaker Change: And again youre going to see a direct correlation to that the integration side.
Speaker Change: <unk> is where we probably saw a little bit more pressure inside the year and thats.
Speaker Change: That's correlated to not only the number of facilities that we acquired but also the relative complexity of dose. So as you can imagine and we use a lot of external resources, where that we're very intentional about integrating these facilities as fast as possible it's difficult for us to avoid and for me in particular to avoid the.
Speaker Change: We are taking a turn to a turn and a half off of that asset. So I want to do that as fast as possible. So we deploy a lot of resources to make sure that we can kind of do that.
Speaker Change: In 2024, if you look at the construct of our acquisitions. They did include some things that are unusually complex key Whitman at the beginning of the year includes several physician practice offices to support the afcs that form the nucleus of that deal a physician practice each individual physician practice.
Speaker Change: Requires its own separate integration there was a similar construct of our asset that we acquired up in Milwaukee that had several physician offices that also required separate integration efforts and as you might recall in 2023.
Speaker Change: We took over some of the management of the ASC is owned by inner Mountain health.
Speaker Change: Through that health system partnership deal and we did some additional integrations with them in partnership as we acquired new <unk> in joint ownership with them.
Speaker Change: Those represented some unique complexity for us as well all of that complexity. We believe is going to go away this year.
Speaker Change: And we will revert back to a traditional pipeline of traditional ASC and traditional de Novo built that's where we see.
Speaker Change: The more significant reduction in integration costs, it's going to take us the first quarter going into the second quarter to complete all of those integrations that roughly takes nine.
Speaker Change: Six to nine months for us to fully integrate.
Speaker Change: Those and Thats, how we see the abatement happening more in the second half of the year, but again.
Speaker Change: The reason why we have difficulty predicting what this is is because the M&A spend and the type of acquisitions can make that fluctuate. Our commitment to you is to always talk about those to talk about what drove those costs and to predict with as much as we can how thats going to.
Speaker Change: So we do expect an abatement, it's just difficult to kind of give a specific number that sits behind it we have a lot of visibility to this as you can imagine.
Speaker Change: There's very few internal folks that we kind of look at this most of that is going to be contract spend for which we have great relationships with our external vendors and theres a direct variability associated with those yeah, and so maybe you could get to your underlying question to look we're growing the business. We're growing we're generating strong cash flow regardless of timing of M&A the expectations.
Speaker Change: We're going to grow cash flow with the business, we're going to be delevering in all circumstances over the next several years and we don't need any external help for funding our M&A, so but I appreciate the question.
Speaker Change: Thanks.
Speaker Change: Thanks for all the color if I could sneak in one more if there was a change in the valuation allowance for deferred tax assets of $100 million in the quarter, which exceeds the total DTA on the balance sheet at <unk> can you help us understand what's going on there and the drivers of the change in the valuation allowance.
Speaker Change: Yes, so first off.
Speaker Change: Question I'm glad that you brought that up because it can be easily misinterpreted. This we're falling into the trap of a very technical accounting standard that requires us to recognize this but I want to be very clear nothing has changed in our underlying growth story and our cash tax position.
Speaker Change: Means unchanged and where we think we're going to utilize the Nols that sit on our balance sheet.
Speaker Change: <unk> Nols, we predict will be used to help offset cash tax payments until we get to the end of the decade.
The.
Speaker Change: As a way of kind of evidenced that over the past two years, we have averaged $2 million a year in cash taxes, we have no federal cash tax payments in those periods. Those are all related to very specific state tax utilization issues. The technical accounting I won't bore you with it but it has something to do with.
Speaker Change: How GAAP accounting trick.
Speaker Change: Triggers losses, and what that does to our requirement to recognize evaluation allowance.
Speaker Change: Something that occurs if you have a trended.
Speaker Change: GAAP loss and the GAAP loss that you would see on a income tax valuation basis would have been impacted by some we somewhat unique items, the divestitures and the losses associated with those the debt extinguishment as we did a lot too right.
Speaker Change: Right size, our financing, which I'm very proud of and our derivatives.
And the way the.
Speaker Change: The way the accounting for those works through that.
Speaker Change: Kind of innocuous statement of accumulated losses in our consolidated results you can get pretty sleepy kind of going through this example, but the big takeaway behind this is it's a pure accounting.
Speaker Change: Regulation that was required to be reported inside the fourth quarter, just because we tripped that accounting standard, but nothing changes in our underlying business.
Speaker Change: Great. Thanks for all that.
Speaker Change: Yes.
Speaker Change: Our next question is from Matthew Gillmor with Keybanc capital markets. Please proceed.
Speaker Change: Hey, Thanks for the question I wanted to circle back on the site neutral topic and I. Appreciate the analysis you shared today. That's really helpful. I was curious if you thought there'd be any positive downstream impact on your development efforts I guess I was thinking of more hospitals looking for JV partners or even just physicians.
Speaker Change: Looking for ASC partners to make sure they get or time as hospitals have to shift around their priorities, but just any any curious or any thoughts on how development could be impacted by site neutral.
Speaker Change: Yeah. Thanks, It's a great question and look I would say regardless of site neutral we haven't really extensive pipeline and continue to see great opportunities, but I would agree with you that anything that puts pressure on getting patients to the right place and actually drives that is going to drive interest from health systems. We do get a lot of calls from health systems, We're very picky on the ones, we partner with because we want to move.
Speaker Change: And we want to make sure that they are fully committed to this kind of movement, but we have seen certainly a lot of interest from them I think that will only grow with site neutrality and from a physician perspective, you know I think this will force more discussions of docs that are going to you know be open and looking to find a surgery center home. So yeah. No I think it helps what's already a very strong pipeline. So we think that is.
Speaker Change: All good and again it comes down to it is the core of what we do part of what we believe in as a company as we can say, we're part of the solution for the health care system, we can save a tremendous amount of money, while providing a great product by moving patients to where they need to be for care right place right cost right time.
Speaker Change: That's great I'll leave it there thank you.
Speaker Change: Great. Thank you.
Whit Mayo: Our next question is from Whit Mayo with SDB Leerink. Please proceed.
Speaker Change: Oh, Hey, good morning, Eric just a quick clarification, you said Medicaid 5% of revenue not supplemental payments are 5% correct.
Speaker Change: No I said all of Medicaid and state funding is for less than 5%. So in total everything including any state based funding that comes yep.
Speaker Change: Would you be willing to size the state base fundings.
Speaker Change: Within that less than 5% what I, what I would say is in total it's not that material, but I don't know that we've ever size that.
Speaker Change: I think the majority is probably straight Medicaid, yes, clearly the majority is going to be straight Medicaid.
Speaker Change: Yes.
Speaker Change: Thank you guys know enough about what state based reimbursement kind of looks like.
Speaker Change: It is for us fairly predictable and not material, especially as you kind of think about how that revenue flows through to the bottom line state based reimbursements can be affected by timing clearly.
Speaker Change: But it is neutralized to some extent by the provider taxes at some states kind of put on this as well as our noncontrolling interest piece of that so as you kind of flow through the risk that you are alluding to with.
Speaker Change: It's really marginal on the bottom on the Bottomline perspective overall, we do not consider state based reimbursements changes in there or changes in the Medicaid to be a material headwind or even a significant headwind for us to be very clear, we're tracking everything that happens on a state basis as well as at the federal.
Speaker Change: <unk> level.
Speaker Change: This is not a headwind for us because of the nature of our business being primarily elective and primarily referred to from physician office.
Speaker Change: No that's perfect obviously, we've gotten a lot of questions on that and for the last few days. So that's helpful and maybe just my follow up.
Speaker Change: Eric just wondering sort of where we are on the revenue cycle the implementation, where we earn the standardization of those processes and maybe also just procurement.
Speaker Change: Heard you talk about this for a couple of years and so I'm. Just wondering if these are still incremental opportunities I'm sure plenty.
Speaker Change: Probably plenty of variation down at the performance at the center level. So just any.
Speaker Change: Any color would be helpful. Thanks.
Dave Doherty: That's a great question, but I'll add I'll start I'll start off high level and I'll, let David get into some of the specifics says he's over those areas. I think you think about revenue cycle, it's always I think for everyone and ongoing.
Dave Doherty: Opportunity to mature those processes, we are still in the early innings. There, we see lots of opportunity in our revenue cycle and so if you think about our growth algorithm that middle of 3% to 5% of just making our operating system better long way to run it and revenue cycle <unk>.
Dave Doherty: Why chain look we haven't and.
Dave Doherty: An excellent supply chain group here that works closely with our GPO.
Dave Doherty: Continue to find opportunities there and continue to see that places a place that's maturing and then we have other opportunities as we go forward around clinical variation that we're excited to get started on but there's a bunch of things that make us give us a lot of confidence that we're going to be able to continue to drive those kind of benefits to our business, but I'll, let David go into some specifics on revenue cycle and procurement, yes. Thank you.
Speaker Change: So let me just start kind of with the.
Dave Doherty: Kind of the why the.
Dave Doherty: Underlying your question is like how long can you continue to get their benefits to kind of sit behind there.
Speaker Change: And if you've talked about that so much for the past couple of years is drying up it is not and I'll tell you the reason why.
Dave Doherty: It starts with the companies kind of history of.
Dave Doherty: All of the roll ups that we've done we've spent the first several years at the latter part of last decade.
Dave Doherty: Rolling up all of those into common systems that were behind the scenes behind the scenes gives us better data now.
Dave Doherty: Now we've moved into a cycle of moving to common processes and aligning all of our people that takes a while with 180 facilities across our portfolio to make sure that we hit that the right way that cycle. We're in early innings on for both procurement and for revenue cycle, but as Eric mentioned very very pleased I'm going to give you a couple of data.
Points revenue cycle.
Dave Doherty: Dsos improved three days quarter over quarter, and as you might remember in the third quarter, we talked about a little bit of pressure coming from managed care. We have seen increased denials and increase aggressive policies being implemented by the payers that are out there. It's our job to react to those and as you can tell on the fourth quarter with those types of numbers we did.
Dave Doherty: As a primary elective company, we have a lot of visibility to schedule cases, as plenty of time for us to kind of navigate through any.
Dave Doherty: Any medical necessity requirements and make sure we get the Documentations. There. We've also seen denials kind of pickup and denials at lower dollar cost levels, which perhaps the payors thought that youre not going to chase. After those we chase after every dollar.
Dave Doherty: So you see investments on the front end on the backend that will continue as we continue to bring more of our facilities under one common process and on the procurement I'll give you just one other data point that hasnt come up today, which kind of surprises me, but the.
Dave Doherty: Tariffs that have been discussed and threatens kind of out there.
Dave Doherty: On a global scale and then more specifically on a couple of the countries that we source from we believe the procurement team couldn't.
Dave Doherty: Couldn't be more proud of them they have navigated through.
Dave Doherty: And given us great visibility as to where those specific exposure areas are those have been factored into the worst case scenario has been factored into our guidance for 2025, we believe the exposure that we have there is around 1% I mean, that's simply incredible for the types of tariffs that theyre talking about out there.
Dave Doherty: But that's a.
Dave Doherty: From a cost basis, we think we're in control there and we have greater flexibility because we operate this business in partnership with physicians, who have an economic interest in <unk> and navigating through so we're change can be necessary. We can deploy those I think we've got a long runway several more years and that benefit will always be there.
Dave Doherty: Because we're acquiring companies that are largely less mature or don't benefit from the scale at which we provide so there'll be an ongoing source of margin enhancement for the for the length of time, that's covered by our long term growth algorithm. Thanks for the question.
Dave Doherty: Thanks.
Speaker Change: Our last question is from Sarah James with Cantor Fitzgerald. Please proceed.
Speaker Change: Thank you a few years ago, you kind of call a net debt to EBITDA and <unk>.
And tonnage from five and Nathan just above that range in 'twenty, how should we think about how that.
Speaker Change: Temporarily stretch.
Speaker Change: Congrats.
Speaker Change: Our goal.
Speaker Change: In 2025 and beyond they are valid.
Speaker Change: Hey, Sarah Thanks for the question, obviously, we've talked a lot about being focused on deleveraging the company and we see that in our five year model very specifically as we continue to grow youre right that there could be pressures. When you have kind of like last year, we had $400 million of M&A could be short term pressures on that number but we do expect in our in our planning.
Speaker Change: Horizon TR goal is three we're going to continue to March towards that Delever as we grow.
Speaker Change: We do expect two to hit that but I'll, let Dave talk about kind of short term pressures that you could see in the interim just based on timing of M&A. Yeah. Yeah. Great question. Thanks, sorry, I know that there is an area of focus on leverage. So you know again, the big takeaway that everybody should hear when we talk about leverage and.
Speaker Change: And cash flows is that there is no.
Speaker Change: Headwind that sits in front of us that suggests that our long term growth algorithm has to change we will always.
Speaker Change: Anticipate 4% to 6% of our growth will come from M&A.
Speaker Change: This implies a $200 million deployed a year and then again the takeaway is during this five year window, which we beat up our five year model. There is no need for us to enter the capital markets and since we've done everything that we've done on our balance sheet too.
Speaker Change: To avoid exposure to interest rates.
Speaker Change: We do not believe that we have any such exposure in.
Speaker Change: In our <unk>.
Speaker Change: Capital markets decision or in our cash flow generation.
Speaker Change: As we go throughout the year specific to 2025, we do anticipate.
Speaker Change: The credit agreement leverage or any leverage that you kind of look at where we will continue to show downward trajectories.
Speaker Change: We made may tick up just inside the first quarter related to the group's recent acquisitions.
Speaker Change: Unusual pressure that kind of fits inside that number.
Speaker Change: But we will continue its downward trajectory as we go through 'twenty five and.
Speaker Change: Well, you know mid threes and better as we continue to go down during that five year window.
Speaker Change: Thanks for that questions here.
Speaker Change: Alright, so before I conclude today I want to say, thank you to my colleagues and our physician partners, who collaborate each and every day to deliver on our mission to enhance patient quality of life through partnership. Thank you for joining our call. This morning and have a great day.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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