Q1 2025 Surgery Partners Inc Earnings Call

Speaker Change: Greetings and welcome to Surgery Partners' first quarter of 2025 earnings call. At this time our participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you want to require operator assistance during the conference please press star zero on your telephone keypad.

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 that are described in this morning's press release and the reports we filed with the SEC each of which are available on our corporate website.

Speaker Change: The company does not undertake any duty to update these forward looking statements.

Speaker Change: In addition, we reference certain financial measures that are non-GAAP, which we believe can be useful in evaluating our performance we.

Speaker Change: We've reconciled these measures to the most applicable GAAP measure in this morning's press release.

Eric Evans: With that I will turn the call over to Eric Evans, our CEO Eric.

Eric Evans: Thank you Dave.

Eric Evans: And thank you all for joining US today my opening comments will briefly highlight our first quarter results and the consistency of our long term growth algorithm, then I will provide additional color on the strong business execution and underpinning of each of the three pillars of our growth algorithm organic growth margin improvement and deploying capital for M&A I will also provide our views on <unk>.

Eric Evans: Our business is positioned in the current regulatory environment as well as our outlook for the remainder of the year.

Eric Evans: We are pleased to report surgery Partners' first quarter net revenue of $776 million and adjusted EBITDA of $103 $9 million both in line with our expectations.

Eric Evans: The financial results announced this morning are a testament to the focus of our colleagues and physician partners, who serve our communities with valuable high quality and convenient care. Our team continues to deliver on our mission to enhance patient quality of life through partnership.

Eric Evans: Compared to the prior year's first quarter adjusted EBITDA grew nearly 7% and net revenue grew 8% with contributions from each pillar of our long term algorithm.

Eric Evans: Our growth in 2025 is attributed to continued strong organic results, including same facility revenue growth of over 5%.

Eric Evans: Revenue growth was comprised of six 5% surgical case growth offset by a decline in rates of approximately 1% driven primarily by robust growth in lower acuity specialties in the quarter, including growth from recently opened de novo as well as a very strong prior year comp.

Eric Evans: These components of our same facility revenue growth are consistent with our internal expectations that we shared on our fourth quarter earnings call. In March we continue to expect full year 2025 same facility growth to be at or above the high end of our growth algorithm target of 6% with a more balanced growth between volume and rate as the year progresses.

Eric Evans: Dave will elaborate on our financial results next but these results give us increased confidence about the company's growth trajectory and in a more near term basis, our guidance for 2025.

Eric Evans: Let me touch on some of the initiatives that are critical to our sustained long term growth starting with our organic growth activities.

Eric Evans: And the facilities that we consolidate we performed over 160000 surgical cases in the first quarter of 2025 compared to 153000 in 2024.

Eric Evans: In the first quarter, we experienced growth across all of our core specialties.

Eric Evans: Volume growth in Gi procedures is relatively higher and because these procedures bill at a relatively lower reimbursement rates when compared to the blended company average that slight shift in business mix mathematically resulted in rate pressure in our same facility rate metric.

Eric Evans: Having said that we are still experiencing growth in our orthopedic cases, driven by an increase in total joint surgeries to illustrate this we performed over 29000 orthopedic cases in the first quarter of 2020, 534% more than 2020 for most of this growth in orthopedic procedures is driven by total joint procedures, which.

Eric Evans: <unk> grew 22% in the first quarter compared to the prior year.

Eric Evans: As a reminder, 80% of our surgical facilities had the capability to perform higher acuity orthopedic procedures and currently 48% of our facilities performed total joint procedures.

Eric Evans: This capability provides significant additional growth as we continue to position our assets to meet the expanding orthopedic demand with targeted recruitment and investments in additional equipment, including robotics.

Eric Evans: Within our portfolio, we have invested in 68 surgical robots it enable our physician partners to perform increasingly more complex and higher acuity procedures. These.

Eric Evans: These investments also help support our strong position recruitment process.

Eric Evans: In the first quarter, we added nearly 150, new physicians to our facilities many of which we expect to eventually become partners.

Eric Evans: This recruiting class includes all of our specialties, what skews towards orthopedics dispositions.

Eric Evans: It's early in the year, but so far these newly recruited physicians are bringing surgical cases with higher overall acuity compared to the 2024 cohort based on our experience with prior recruiting classes. We fully expect 2025 recruits to continue to grow have a meaningful impact in 2025 and beyond.

Eric Evans: As I mentioned on our last call in 2024, we opened eight de Novo facilities. Since 2022, we've opened 20 de novo facilities and we currently have 10 under construction as well as a robust pipeline of future de Novo as we expect to begin development soon.

Speaker Change: <unk> represents an exciting growth prospects for surgery partners, given the low cost of entry and opportunity to bring the scale of our operations to growth oriented partners.

Speaker Change: As a reminder, those underdevelopment are heavily weighted towards higher acuity specialties, such as orthopedics.

Speaker Change: Although they take time to develop and construct the effective multiples on these assets are a fraction of traditional acquisition multiples.

Speaker Change: Moving to our second pillar margin expansion.

Speaker Change: During the quarter, we saw slight margin pressure, primarily due to the mix of business that will improve throughout the year. When we consider our continued growth ongoing procurement operating efficiency initiatives and synergy achieved on previously acquired facilities, we have high confidence to deliver margin expansion annually as our guidance implies for 2025.

Speaker Change: The third and final leg of our long term growth algorithm is acquiring and integrating accretive surgical facilities into our platform.

Speaker Change: Immensely proud of our dedicated development team that manages that maintains a robust pipeline of attractive partnership opportunities too.

Speaker Change: To date in 2025, we deployed $55 million and have added five surgical facilities had an effective multiple under eight times adjusted EBITDA.

Speaker Change: Acquisitions are an important part of our growth algorithm not only because of the immediate earnings. They may contribute but also the margin expansion we experience as we integrate these facilities into our platform.

Speaker Change: The pipeline of attractive assets is robust and supportive of our 2025 guidance and as Dave will discuss we have sufficient liquidity to fund this growth in the short and long term without having to tap the capital markets.

Speaker Change: The level of activity supporting our comprehensive M&A strategy requires incremental variable cost in terms of due diligence transaction costs integration costs and de Novo working capital investment.

Speaker Change: As we discussed on our last call transaction and integration efforts were higher than typical given the level and complexity of acquisitions completed in 2024, but we expect this level of spend significantly diminish in the second half of 2025 based on a more normalized volume as expected M&A.

Speaker Change: Next I would like to briefly comment on how surgery partners is positioned given the current significant regulatory uncertainty I'll.

Speaker Change: I'll start with tariffs and their potential impact on surgery partners like.

Speaker Change: Like many of our peers are primary purchasing organization has helped trust nearly 70% of our purchase goods go through this GPO.

Speaker Change: Helped us has been a great partner for several reasons, but in this case the significant contracting transparency. They provide gives us confidence in estimating our exposure to global trade.

Speaker Change: For example, working with Health Trust, we know the country of origin for our spend our contract renewal risks as well as our mitigation options available.

Speaker Change: Similarly through our dedicated professional supply chain team, we have visibility to where we have tariff exposure. We can confidently report that we don't have material exposure in the near to midterm to any tariff related price increases nor do we believe there is a substantial risk to our supply chain.

Speaker Change: Regarding potential legislative changes to Medicaid and exchange based reimbursement programs I would like to remind listeners that our exposure to these payer groups is less than 5% of our revenue and we do not consider perspective changes to either program as a risk to our short or long term growth prospects we.

Speaker Change: We will continue to closely monitor ongoing regulatory developments and remain prepared to adjust our approach as needed to ensure continued growth.

Speaker Change: Before I turn it over to Dave I would like to briefly update you on the non binding acquisition proposal that Bain capital into our board of directors in late January.

Speaker Change: Dave it's been a long standing investor in surgery partners, and a valued partner to us over the years with representation on our board.

Speaker Change: As we noted in our press release on January 28 in our fourth quarter earnings call. Our board formed a special committee comprised of independent directors that are not affiliated with Bain capital to consider this proposal with the help of leading independent financial and legal advisors.

Speaker Change: With respect to the process underway with the special Committee, our executive Chair Wayne Devine, who serves as a managing director at Bain continues to remove himself from many of his normal activities with surgery partners, including this call we will not be commenting further on this matter unless or until there is a material update.

Speaker Change: Overall I am pleased with the start of 2025 as the company continues to deliver growth that is consistent with our long term algorithm. Our continued focus on maximizing the performance of our portfolio robust M&A pipeline steady improvements in enabling greater operating efficiencies and bullish outlook on surgical trends and the regulatory landscape has positioned us to.

Speaker Change: Continue to deliver industry, leading earnings growth in 2025 and beyond.

Speaker Change: With that I will now turn the call over to Dave to provide more color on our financial results.

Speaker Change: Dave.

Dave: Thanks, Eric.

Speaker Change: Starting with the top line, we performed over a 160000 surgical cases in our consolidated facilities in the first quarter for.

Speaker Change: Four 5% higher in 2024.

Speaker Change: These cases spanned across all our specialties with higher relative growth in gastrointestinal and MSA procedures, including continued growth in orthopedic cases.

Speaker Change: Case growth drove our first quarter revenue to $776 million eight 2% higher than the first quarter of 2024.

Speaker Change: Our same facility total revenue increased five 2% in the first quarter consistent with our growth algorithm target of 4% to 6% and in line with our expectations for the quarter.

Speaker Change: Adjusted EBITDA was $103 9 million for the first quarter, giving us a margin of 13, 4%.

Speaker Change: We ended the quarter with $229 million in cash.

Speaker Change: Combined with the available revolver capacity, we have over $615 million in total liquidity.

Speaker Change: We reported operating cash flow of $6 million in the first quarter of 2025.

Speaker Change: <unk> added $62 million to our physician partners and incurred $6 million in maintenance related capital expenditures.

Speaker Change: As a reminder, operating cash flows are typically lower in the first quarter of the year due primarily to quarterly earnings pattern.

Speaker Change: But these results can also be impacted by the timing of working capital activity.

Speaker Change: For example, our accounts payable were processed at a significantly faster clip in the first quarter first liens at year end as a result of payment schedules related to the holidays at the end of December.

Speaker Change: Also we are pleased that our first quarter distributions to our partners were higher than the prior year based on facility level timing of certain distribution, then effectively double the impact in the first quarter as well as higher distributions related to stronger results in the fourth quarter.

Speaker Change: We are committed to providing transparency into the drivers of our cash flow generation, we are seeing incremental improvements in the cash conversion of our revenue with the metric of days sales outstanding decreasing two days from the fourth quarter.

Speaker Change: It is critical to convert the Companys growing earnings.

Speaker Change: We remain pleased with the disciplined management of capital deployed for maintenance related purchases.

Speaker Change: Moving to the balance sheet.

Speaker Change: $2 2 billion in outstanding corporate debt with no maturity date until 2030.

Speaker Change: Conventional trade on our corporate debt was fixed at approximately 6% through March 31 2025.

Speaker Change: Our $1 $4 billion term loan is now protected by interest rate cap that limit the variable rate of the interest rate to 5%.

Speaker Change: That floating rate is currently four 3%, but that could change throughout the year.

Speaker Change: Our first quarter ratio of total net debt to EBITDA as calculated under our credit agreement was four one times consistent with our expectations given recent acquisitions.

Speaker Change: Leverage calculated using consolidated debt from our balance sheet divided by EBITDA was four eight times.

Speaker Change: Leverage will decrease based on our continued earnings growth as we've discussed previously our short and long term financial model to highlight that we will have sufficient liquidity from our cash on hand or revolver capacity and cash generated from operations.

Speaker Change: Future M&A at levels that support our long term growth algorithm without having to access incremental capital from the debt or equity markets over the next five years.

Speaker Change: The results, we reported today and all metrics are very much aligned with our internal expectations that support our guidance that we are reiterating this morning.

Speaker Change: Specifically, we are reaffirming full year 2025 revenue and adjusted EBITDA guidance to be in the range of three three to 345 billion.

Speaker Change: And $555 million to $565 million respectively.

Speaker Change: 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's, We opened last year.

Speaker Change: 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 and managed care contracting.

Speaker Change: With that I would like to turn the call back over to the operator for questions.

Speaker Change: Operator.

Speaker Change: Thank you we will now conduct a question and answer session.

Speaker Change: We would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: Confirmation tone will indicate your line is in the question queue.

Speaker Change: If you would like to remove yourself from the queue. Please press star two for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Once again Thats star one to ask a question at this time, one moment, while we poll for our first question.

Brian: The first question comes from Brian <unk> with Jefferies. Please proceed.

Brian: Hey, good morning, guys.

Speaker Change: Eric Congrats on the strong volume quarter. So just curious how youre thinking about.

Speaker Change: Utilization trends and the sustainability of that and then maybe the other side of this question would just be the same store revenue per procedure, obviously, a little softer. This last quarter. I mean is that just the tough comp or is there anything we should be thinking about as we model out same store going forward. Thank you.

Speaker Change: Yes, Hey, Brian Thank you and good morning to you as well I appreciate the question.

Speaker Change: I would say, obviously, it's a tough comp associated with the pricing, but let me give you a little bit more detail I think first quarter same store revenue growth was very much in line with where we thought it would be.

Speaker Change: Case growth.

Speaker Change: A reflection of some stronger de novo's that are coming online.

Speaker Change: Some MCA growth that I think is pushing that up because you think about this as I mentioned in my comments it was.

Speaker Change: Higher volume lower revenue its really just a mix and a little bit of a comp as you pointed out.

Speaker Change: As a reminder, our same facility metric is based on the number of operating days per quarter, which was <unk> 63 in the first quarter.

And in our business the days of the week matter for certain volumes.

Speaker Change: As we've talked about in the past, we don't place a lot of.

Speaker Change: Stock and kind of any given quarter, we talked about this metric we would expect by the end of the year to be at the high end or above our long term range with balance between volume and growth and so we this is very much in line with where we thought we'd be we did have very strong.

Speaker Change: Growth across all of our core service lines, particularly in Gi and <unk>, both of which were kind of growing at rates that are above our long term assumptions.

Speaker Change: In addition to the typical growth expected in our portfolio. We also experienced as I mentioned this growth and de Novo that opened in late 'twenty three.

Speaker Change: De Novo is ramp up the full run rate typically over a couple of years and that time to breakeven is what the initial six months to 12 months. So these de novo is performing very well out of the gate.

They're kind of on their way to their full run rate and that is having an effect on this mix, what you're seeing show up in rate.

Speaker Change: Again, <unk> really really happy with the GI grew up in the first quarter as a lot through the calendar. The way these cases tend to fall.

Speaker Change: But the rate pressure really is just a matter of the underlying commercial and government mix nothing there to really read into and I would just point you back to we expect to be kind of more balance between rate and volume much like we finished last year over the course of the year.

Speaker Change: No that makes sense and then maybe Dave as a follow up as I think about your comments on free cash flow generation, obviously Q1 is.

Speaker Change: The only weak or it sounds like there were a few timing issues there, but curious how we should be thinking about the seasonality of free cash flow generation over the course of the year.

Speaker Change: Yes.

Speaker Change: For sure the.

Speaker Change: The view that we have on forward looking operating cash flows as we should see some overall improvement as the earnings growth manifested as you look at our earnings growth guidance that we have out there should be translating nicely over the course of the year and much like we've seen in the past.

Speaker Change: Tends to skew better as the year progresses second quarter being relatively strong in the fourth quarter being our strongest quarter.

Speaker Change: From a cash flow generation perspective.

Speaker Change: So we do believe as we think and as we've talked about I think on the call are a little bit earlier and as we've talked about in the fourth quarter.

Speaker Change: Distributions, which is an offset to cash as you kind of look at this from a free cash flow perspective distributions.

Speaker Change: Distributions should also grow as we go throughout the course of the year that we did effectively double up on our distributions inside the first quarter, which did create that little bit of a pressure point that should normalize as we go throughout the year. The only watch out on cash flows as we look at the year that is kind of unrelated to the underlying strength of our operating performance.

Speaker Change: Vince and better working capital management would be related to our interest costs as.

Speaker Change: As you know we were protected by an interest rate swap on our $1 $4 billion term loan that swap expired at the end of the first quarter is being replaced by an interest rate cap.

Speaker Change: It caps, our interest rate exposure at 5%, we feel really good about that over the life of the term loan however that will create a headwind for us as we go into the balance of this year.

Speaker Change: The the math that we look at this does create some exposure.

Speaker Change: <unk>.

Speaker Change: Where we think so for rates currently are which is at roughly four 4%.

Speaker Change: That would be compared to effectively a two 2% interest rate cap that we had through the swap that just expired. So you have about a $2 220 basis point exposure that will be a headwind on cash flows for the last nine months of the year.

Speaker Change: Yes, Brian I might add to that though just big picture stepping back a little bit.

Speaker Change: The business continues to produce a lot of strong cash flow right. We know it's a big focus of investors when we reiterate our long term growth algorithm, we do rely on investing in M&A. So.

Speaker Change: So we appreciate the sensitivity of equity holders on leverage, but I would just reiterate that we have no concerns with the generation of sufficient free cash flow.

Speaker Change: Given our current liquidity to fund our short and long term growth without needing to go back to the equity or the <unk>.

Speaker Change: Equity or debt market. So we feel good about where it's going we do expect that to strengthen throughout the year and to continue to grow with the company.

Speaker Change: As we move forward.

Speaker Change: Thank you.

Speaker Change: Yes, Thanks, Brian.

Speaker Change: The next question comes from Joanna <unk> with Bank of America. Please proceed.

Joanna: Hi, good morning, Thanks, so much for taking the question.

So I guess, a little bit of a follow up on the pricing discussion. So on the Q4 call I think you alluded to a slight pressure on payer mix. So have you actually seen that in 25. So essentially you are alluding to the idea of.

Joanna: Medicare case is growing faster.

Joanna: Hey, Julien I am not sure I don't recall us talking about that but I would say that theres been no change in payer mix actually it's been quite strong commercially we continue to feel good about our growth in Medicare and commercial but but no no real mix changes other than what might happen with a given acquisition timing, but in general no pressure on impairment.

Joanna: Okay.

Joanna: But I would clarify that and then I guess related to that my question on commercial rates.

Joanna: For this year, I guess, where you're tracking I guess for this year and I guess, how are the negotiations for the upcoming cycle and have you seen any change in contracting with these commercial payers, so maybe and they pay us for that matter because obviously, there's a lot of pressure on these guys Hyatt for instance.

Check out and you think that's changing and maybe I can throw in there.

Joanna: Any change to denials and things like that thank you.

Joanna: Joanna Thanks for the questions.

Joanna: I'll just start with it's always nice to be in a business, where you have three major constituents are.

Joanna: Prefer you right so patients prefer us because of their experience their outcomes.

Joanna: Doctors prefer us because of our efficiency and they can be at the table and of course payers prefer us because we are the low cost alternatives. They continue to be very constructive with us I think we continue to find ways to try to work with them to move patients to the right side of care, but theres nothing thats really changed in those negotiations I think there is again, a pretty pretty warm reception for <unk>.

Joanna: Just trying to work together to create value for those companies and move patients to the right side of care. So I think the trends you've seen over the last couple of years are still holding true as we've mentioned we're pretty much fully contracted for this year. If you think about where we start the year. So those we have really good visibility in our outlook and guidance as far as rate goes.

Joanna: And with M&A I mean.

Joanna: Obviously, there is some challenges have you heard about the charges that they may we we obviously have great relationships.

Joanna: Value provider don't see don't see that changing and then I think you had one other question at the end.

Joanna: Dave answer that the Rev cycle question, and it's a good one because in the third quarter last year, we did talk about some changing dynamic in the in a way payers, we're processing medical necessity in denial charges. We did see it we talked a little bit about that pressure in the fourth quarter call. You may recall, Joanna we did talk about the adjustments that we put in.

On our website call as part of our standardization journey that were taking inside that world.

Joanna: I am pleased to say inside the first quarter that continued so we did not see any adverse.

Joanna: The change in our denial patterns.

Joanna: To the contrary, rather we're now seeing a little bit more on the positive side again, the nature of our business almost entirely across the platform is scheduled procedures that enables us to do a lot of work on a pre service basis to get in front of many medical necessity or any changing requirements from the from the payer community and I am pleased to say that.

Joanna: Yes implemented that and you can see that in our days sales outstanding that metric continues to improve I think we improved two days inside the quarter. So a really positive trend for us.

Joanna: Great. Thank you so much for the color.

Speaker Change: The next question comes from Ben Rossi with J P. Morgan. Please proceed.

Speaker Change: Great. Thanks for the question. So just turning to expenses on professional fees that came in a little high here versus expectations, just given some of the broader industry pressure here. How would you describe current labor dynamics for specialty areas like anesthesia during <unk>.

Speaker Change: And then are there any particular specialties or geographies, where this growth has been noticeably accelerating.

Speaker Change: For the quarter. Thanks.

Ben Rossi: Yeah, Ben Thanks for the question.

Eric Evans: I'll just take one exception to the way you got the preamble to your question. There. This was actually in line with our expectations from a propane perspective.

Eric Evans: Proceeds the driver behind that is primarily associated with two of the significant acquisitions that we did last year at the beginning of the year. We acquired the key Whitman that came with several practices that's in ophthalmology book of business.

Eric Evans: Several practices and in the middle of the year as well.

Eric Evans: We talked about we did an acquisition a pretty significant acquisition up in Milwaukee that <unk> came with associated physician practices, which carry some cost to kind of sit inside there.

Eric Evans: Seizure pressure for us although.

Eric Evans: We have seen that anesthesia cost marginally being affected is across some of our facilities most of our facilities still.

Eric Evans: Not being affected by adversity in either the availability of anesthesia or the revenue guarantees required for them and I think that goes that speaks to the nature of our business.

Eric Evans: I think as Eric and I have talked about in prior meetings.

Eric Evans: So we see no notable change inside the first quarter and at this point, we're not seeing that being a major headwind for us in 2025 or beyond.

Eric Evans: Great No I appreciate the clarification, there I guess.

Speaker Change: As a follow up just on the physician recruiting it sounds like this year is 150 person cohort coming together nicely across specialties and you're getting some maybe some of the compounding growth potential from last year's class I guess, what is the percentage of doctors from this class coming from higher acuity service lines is it north of 50%.

Speaker Change: Yeah, I don't know if we've disclosed that away here I'll start off and say, we're certainly proud of but it's another strong start for the year for recruiting but definitely in line with our historical run rate and our expectations. We have a very very diverse recruiting class. It spans all of our specialties I don't know that I have that percentage breakdown as far as whether it's mostly.

Speaker Change: Mostly high acuity, although I think the mix of what could be the continues to grow.

Speaker Change: Relative to 'twenty, four which was a record setting year. This class really skews higher and revenue generated per doctor.

Speaker Change: Net revenue per position is up about 14% versus what we saw last year, we remain optimistic in our ability to recruit the $5 to 600 docs that we had built into our plan. We have been doing that consistently and I think become a lot more targeted.

Speaker Change: Reminder, we've seen strong multiyear gains in our recruiting cohorts for example, the doctors we recruited in Q1 of last year. They brought in an additional 160% more cases in the first quarter of 2025 with a 182% more revenue. So it's a compounding effect you guys have heard us talk about this in that first year, usually expect to see the second year of double for each cut.

Speaker Change: And so certainly a big focus area for US we spent a lot of time on it and we're constantly trying to refine the way we target the right doctors for our facilities.

Speaker Change: Great. Thanks for the commentary there.

Sarah James: The next question comes from Sarah James with Cantor Fitzgerald. Please proceed.

Sarah James: Thank you.

Speaker Change: Guys have been talking for a while about the outlook and I think the last data point that we have thought it was going up about 1% a.

Sarah James: 24% in 2020, so what does it look like now.

Speaker Change: Give us a little context for every Christoph.

Speaker Change: What type of headwind impact on your revenue per case.

Speaker Change: Yeah. So so we did experience growth in the Gi portfolio and I think it had a marginal impact on the relative share of Gi cases in our in our mix. The total mix that we have so I think that 24%.

Speaker Change: Check your numbers there Sarah just because they don't have them handy in front of me.

Speaker Change: So if we did see some benefit that kind of sat inside theres going to be relatively minor I would think in terms of basis points.

Speaker Change: Your year over year.

Eric Evans: However, as Eric mentioned.

Speaker Change: The nature of kind of the calendar and.

Speaker Change: You've heard me say this before I really just like a quarterly view of the same store metrics because of the influence of the calendar that sits inside there are 63 days and depending on the day of the week.

Speaker Change: The days that that happened inside any particular facility you could have a large number.

Speaker Change: <unk> that does adversely or in this case positively affect the same store case metrics, which cases look great and the rate then will suffer just because on a relative basis, you have relatively low acuity Gi procedures sit in a great new story for us.

Speaker Change: We are experiencing I will say this we are experiencing Gi case volume over the last six months that is slightly higher than our long term growth algorithm, we're really pleased about that.

Speaker Change: We do expect that to be a continuation as we go throughout the year nothing significantly out of the norm, but if that that volume increase again, primarily related to the calendar inside the quarter did affect that rate pressure and I'll remind you what Eric mentioned about therefore.

Speaker Change: Therefore, we'd look on same facility rate any given quarter is going to have some unusual variance just because of that calendar that normalizes and as we project out we do budget and our budget process does look at every single day of the week. So we have some pretty good visibility to it we predicted that we were going to see rate pressure relative to case growth inside the first.

Speaker Change: You might recall that from our.

Speaker Change: Fourth quarter, Paul a few weeks ago, we will see this kind of return to somewhat more balanced growth, but still end the year at the same facility revenue number that's above.

Speaker Change: Our growth algorithm of 4% to 6% so.

Speaker Change: I think it will look at the end of the year somewhat consistent with what we saw last year, yes, sorry, I would just reiterate the GI growth. We're really pleased with that service line. You know we have three businesses that make up the majority of our business all three of them ophthalmology Gi M. SK growing at a nice clip we talk a lot about orthopedics because it's the one that drives tremendous value for payers and patients and is moving so quickly, but we really.

Speaker Change: Like our Gi and ophthalmology business and they continue to grow nicely.

Speaker Change: Thank you.

Speaker Change: The next question comes from Andrew Mok with Barclays. Please proceed.

Andrew Mok: Hi, good morning.

Andrew Mok: Projected confidence in the near to midterm tariff exposure in your prepared remarks can you elaborate on what's driving that confidence is that driven more by pricing protections built into your supply contracts or total exposure to countries with tariffs any detail there would be helpful. Thanks.

Andrew Mok: Yeah, I can't provide a whole lot more than what we talked about earlier.

Andrew Mok: Earlier, 70% of our spend right now goes to help trust and as you probably have heard from several of our peer group that relationship with Healthtrust is remarkable.

Andrew Mok: In terms of the contract protection that sits underneath it but also good visibility as to where you could have tariff exposure going forward. This is what we like about that.

Andrew Mok: That increased visibility to it.

Andrew Mok: No wind contracts will expire and we know alternatives.

Andrew Mok: We can start to talk to our physician partners about well in advance of any potential impact if the tariffs were to survive.

Andrew Mok: But inside of the year, we see very little exposure to any contract renewals that could ultimately take any tariff exposure that kind of sits inside there. We don't really see any material change in that in the even in the midterm forward looking view.

Andrew Mok: The remaining <unk>.

Andrew Mok: And so you can look at 70% of our spend going to help trust. The remaining amount majority a large majority of that is also under contract. This is just what our professional procurement team does and likewise, we have good visibility too for the future state. When you may be exposed by looking at the country of origin that sits there.

Andrew Mok: As well as.

Andrew Mok: When that.

Andrew Mok: When that could occur and what alternatives. We may have available to us. So we feel pretty good. This is what a professional procurement team is responsible for doing this is certainly our expectations are both that team as well as our relationship with healthtrust and they have helped us significantly.

Andrew Mok: If you look back all the way back to Covid.

Andrew Mok: Just a way for us to navigate through disruptions that could occur either from a pricing perspective or from an availability perspective at this point, we see no major headwinds that sit out there, but it's definitely something that we're paying very close attention to.

Andrew Mok: Yeah.

Andrew Mok: Great and then maybe a follow up on the cash flow you talked about the timing impact on operating cash flows, but it also looks like the <unk> NCI payout is up meaningfully both year over year and relative to the <unk> NCI expense is there anything impacting the timing or payout to NCI partners in the quarter. Thanks.

Andrew Mok: It's really just timing I'll remind everybody about how the calendar look that hey, it's kind of always talking about the calendar, but the calendar at the end of the year.

Andrew Mok: Had holidays kind of awkwardly in the middle of the weeks.

Speaker Change: Our distributions to our physician partners and to surgery partners.

Speaker Change: Happens at a facility level, it's not essentially controlled process, although the formulas that sit behind that are largely the same those those checks are cut at the facility level. So what we experienced at the end of the fourth quarter.

Speaker Change: Lately lower distribution some of those in many cases some of the larger ones occurred in the first week of January normally they will happen at the end of any given month. So you saw basically a double up I think we were at 62 or $63 million of distributions that's about 20.

Speaker Change: $22 million more than kind of what's typical that's an unusual number for any given quarter and again, we believe that's going to normalize back to traditional levels and relative to earnings growth should grow as the course of the year and a macro annual number.

Speaker Change: Great. Thank you.

Speaker Change: The next question comes from a J rice with UBS. Please proceed.

Speaker Change: Hi, everybody.

Speaker Change: Just first maybe on the comments about the balance.

Speaker Change: Balance sheet and leverage.

Speaker Change: Hello.

Speaker Change: I know you say that on your growth targets you can do what you wanted to do an M&A and development with internal cash flow just to remind us what what are the parameters as we think out over the next few years on what would be a normal year for M&A and development for you do you have an ultimate goal is to where you'd like to see those leverage.

Speaker Change: Levels get too.

Yeah, Great question, a J. Thank you so much for asking that again, so leverage well.

Speaker Change: Well, we've talked about from a leverage perspective is really a factor of the growth the substantial growth and outsized growth that this company has experienced double digit mid teens has been this company story for the.

Speaker Change: The history for at least the past eight years, it's something that we do expect to see going forward and a key element to that of course is deploying capital for M&A and de Novo activities.

Speaker Change: We target around $200 million of M&A.

Mid year convention, we assume kind of relatively stable pricing on that we've experienced roughly eight times for our core earnings.

Speaker Change: You know again for the past eight years I think we've averaged something just slightly below that eight times, but for modeling purposes, we assume a times going forward.

Speaker Change: And at that level of spend every single year with immediate accretion that comes from there. We do think it converts to cash flow quite nicely. So our models do suggest continued conversion of cash on both existing assets as well as newly acquired ones.

Speaker Change: Coupled with that growth in the mid teens level will spit off cash sufficient for us to keep that.

Speaker Change: Overall leverage number going downwards. So.

Speaker Change: Whether you look at this on a credit agreement basis, who use the face of the balance sheet you see the slope of the line going going down using credit agreement leverage what we have talked about as we target a sub three.

Speaker Change: Leverage number I think we were at four one at the end of the first quarter. We do expect that number is going to come down to roughly around in the three range at the end of this year and we will continue to go down over the next few years, so if you're modeling.

Speaker Change: Anything different in that it's a relatively simple model.

Speaker Change: Then let's talk to the team about that because we do and every model that we've looked at we do see that coming down over time.

Speaker Change: Okay, and if I could just maybe have a follow up.

Speaker Change: Talking about the same store metrics are pricing in our case volumes.

Speaker Change: You're just coming off a year of above average M&A and development activity.

Speaker Change: Can you just remind us when those get into the same store mix.

Speaker Change: Those acquisitions and development would be enough to skew either more positively or negatively.

Speaker Change: Or likely to see on same store pricing and same store volumes.

Speaker Change: Sure again, great question because these companies.

Speaker Change: Right as we've talked about can be significantly affected by the mix of business that you see if you look at last year's acquisitions at the beginning of the year key Whitman was in ophthalmology, our book of business.

Speaker Change: Middle of the year and for the most part the acquisitions that we completed in the balance for more orthopedic and MSA related focus which do tend to have a higher net revenue per case. So when they do come into our calculations you should see you should see some change that happens we include them in our same facility.

Speaker Change: <unk> calculation when they are in there.

Speaker Change: The beginning and the end of the period, so if you're doing a year over year comparison any acquisition that we completed inside the second quarter last year would start to come into our same facility calculation in the third quarter of 2025.

Speaker Change: Okay, great. Thanks, so much.

Speaker Change: Thanks, David.

Speaker Change: The next question comes from William Spivak with TD Cowen. Please proceed.

William Spivak: Hey, there.

William Spivak: Just a quick one any impact from weather in the first quarter.

Speaker Change: And if so would you mind quantifying it and then the second thing is I know you don't guide to free cash flow anymore, but given the puts and takes on better RCM.

Speaker Change: Proved earnings offset by higher interest expense and transaction fees.

Speaker Change: You think free cash flow in 'twenty 'twenty four it will be.

Speaker Change: Higher lower or similar.

Speaker Change: Sorry.

Speaker Change: This year versus prior year.

Speaker Change: Probably I can knock those out I think pretty quickly so on the weather side, we did have weather in the first quarter.

Speaker Change: We never really fully recaptured but honestly, we don't talk about it just because it's it was immaterial in the Grand scheme of things certainly that has some impact but not worth talking about still had really strong case growth and as you can see we outran any kind of major impacts there as far as free cash flow goes.

Speaker Change: We do expect and we talked about this we expect the business to grow free cash flow with the business and I think you should expect that this year, even with timing.

Speaker Change: But more or less free cash flow to us is a metric we understand everybody's focused on it we have the liquidity, we need and we expect to continue to grow that as we grow our business.

Speaker Change: Got it thanks very much.

Matthew Gilmore: The next question comes from Matthew Gilmore with Keybanc. Please proceed.

Matthew Gilmore: Alright. Thanks for the question maybe following up on some of the margin comments in the press release, there was a comment about ongoing operating system improvements that will help drive margin expansion, maybe that was in reference to Rev cycle, but just wanted to get a sense for what those efforts are focused on to drive margins higher.

Matthew Gilmore: Yes, so I'd say, there's several had to go into operating system, obviously, a big part of that is recycle and Dave can talk about some specifics on that also supply chain, it's scheduling efficiency.

Matthew Gilmore: All those things impact costs with the more efficient we are in scheduling the better utilization, we drive out of a given facility the lower anesthesia cost because they're more efficient. There's just a bunch of things that are part of our operating system, but I think in relation to what was mentioned in the <unk>.

Matthew Gilmore: Certainly revenue cycle is a big part of that and Dave can talk a little bit about that journey. So.

Matthew Gilmore: So Rev cycle.

Matthew Gilmore: For us.

And as we've talked about this a lot last year, we embarked upon a multiyear journey to come up with one standardized rep cycle approach across the organization. This is after years of underlying integration building a data warehouse that enables us to look across the platform and drive directly into billing systems. So.

Matthew Gilmore: We've made a lot of that investment in the early years positioned ourselves nicely to start. This journey last year that focuses not only on process by using better data to make informed decisions, which ultimately will turn right back around to higher revenue generation and greater use of the scale of the company. So.

Matthew Gilmore: So we're awfully proud of that it's a multiyear journey as I mentioned and as we go through that process. Much like you saw in the fourth quarter and the first quarter, we should begin to see some benefits coming through how we manage receivables and the overall net revenue.

Matthew Gilmore: Through that we get from that that will continue for a period of time, we'll talk about that as we go throughout the year and perhaps into 2026 I'll say this.

Matthew Gilmore: Work that we do too.

Matthew Gilmore: Integrate companies and the maintenance of that kind of process is critical to us. So for example over the past several years, we've leaving we've included some relatively larger acquisitions, including the one we did in the second quarter of last year that do require us to.

Matthew Gilmore: Hum.

Matthew Gilmore: Plug and play.

Matthew Gilmore: Data from the revenue or billing systems from some of our facilities.

Matthew Gilmore: The larger the facility the more deliberate we have to be in terms of integrating.

Matthew Gilmore: Or migrating to a common platform over the at the end of the year last year and as we go into this year. We are completing three of those migrations those migrations much like every other integration that we do will turn into an enhanced margin generation again for the same reasons that we talked about having common data platform enables.

Matthew Gilmore: As to bring the scale of the company not only from a revenue cycle perspective, but also managed care clinical variation.

Matthew Gilmore: Apply chain all of that so we're very excited about that does require some investment ongoing focus in that space and thats, what youre seeing kind of happened.

Matthew Gilmore: This year. Thank you for the question.

Matthew Gilmore: Got it thanks, and then one quick follow up and anything to call out in terms of how fluid impacted volumes or even a case mix in the quarter.

Matthew Gilmore: Yeah, No I honestly for US scheduled surgical cases really doesn't have an impact I mean actually the only impact that could have for us is a negative one which we didn't really see from an impact on staffing or canceled cases.

Matthew Gilmore: Got it thank you.

Matthew Gilmore: Yes.

Matthew Gilmore: The next question comes from Whit Mayo with Leerink partners. Please proceed.

Whit Mayo: Hey, thanks.

Speaker Change: Thank you said that you've closed five acquisitions or five facilities this year, where those consolidated or unconsolidated, Dave and then just remind me on the de Novo targets for this year.

Whit Mayo: Yeah.

Whit Mayo: The five acquisitions that we did for inside the first part I think one slipped into the beginning of the second quarter.

Whit Mayo: All consolidating assets all ASC.

Whit Mayo: That will provide immediate benefit to us the de novo's.

Whit Mayo: We opened 10 last year they were in various stages of development as soon as they flipped to breakeven we will start to see that benefit come through to our EBITDA line item I think we have.

Whit Mayo: So close to that number currently in development or under construction that we expect the number of them to open up in 2025 some of them slipping into 2026.

Whit Mayo: And we have a handful I think north of or close toward our annual target of 10 in the pipeline and under syndication opportunities right. Now. So we're really pleased and thank you for asking that question that de Novo track for US is a is a very intentional focus for us as an organization, where we target.

Whit Mayo: To have 10 underdevelopment every single year.

Whit Mayo: So last year, a great year for us this year is shaping up to be very good and the pipeline looks good from an ongoing perspective going forward.

Whit Mayo: And on the de Novo's are those are those consolidated or mostly on consolidated and then really my follow up is just more around the portfolio refresh that you went through.

Whit Mayo: Last year, just wanted to get any more thoughts on additional activity.

Whit Mayo: Yeah. Thanks, Louise So most of those are going to be de Novo is there going to be anchored on consolidated at least the beginning probably we expect that maybe half of those will end up being consolidated at some point in future, but they start out as.

Whit Mayo: Minority investments and quite honestly, the one thing that I would just add on the de Novo side. These are beneficial to us for lots of reasons one of the big reasons is that they typically are set up in a place where you're pulling directly out of the traditional acute care system and so it's a really opportunity to work with payers in a way that's different because youre, creating a ton of value. So it gives us a reset there.

Whit Mayo: And they tend to be really higher acuity as well so theres. So many angles to the de novo's that we're excited about as far as the refresh as you know we did do a fair amount of divestitures at the end of last year.

Whit Mayo: We don't expect that any kind of near that size. This year as far as kind of all divestitures. So.

Whit Mayo: Won't be as ongoing play, yes, having said that with managing.

Whit Mayo: <unk> a portfolio of over 168 facilities.

Whit Mayo: We'll always have some some degree of activity, but as Eric mentioned last year was an unusually high year relatively small impact to the company. That's why we're not talking about that as a major headwind this year.

Whit Mayo: But we will constantly refresh that portfolio, we've got a team that's dedicated to making sure that we're maximizing those the value of that kind of sits inside there for the communities that they serve.

Whit Mayo: Thanks.

Speaker Change: Thank you. The last question will come from Ben Hydrick with RBC capital. Please proceed.

Ben Hydrick: Great. Thank you for squeezing me in just wanted to follow up on your gross commentary around G. I N. S. K I just wanted to see kind of where cardio procedures are fitting in on that I know in the past you've talked about that being a longer ramp, but just wanted to see kind of how growth there is progressing and how that's fitting into your recruiting.

Speaker Change: And development efforts.

Speaker Change: Hey, Ben Thanks for the question, Yeah definitely talked about this in the past over the long run we're quite excited about this moving over but in the near term you are still a lot of things that make it a slow growth kind of service line just number of states that still haven't actually.

Speaker Change: Got up with Medicare on this but.

Speaker Change: But I will say, we have a number of facilities that are adding cardiac CRM cardiac rhythm management procedures.

Speaker Change: We did just that was just had a grand opening for our first cardiac Cath lab based ASC recently, so we're seeing those come into the platform, but I would just tell you that.

Speaker Change: The nbn growth should be quite strong I think over the next few years, but again, it's a small and we are excited about that though because I do think long term, it's much like ortho. It's one of those procedures, where our savings and are on our site of care is five figures plus per case, and so I definitely think as you look at the cost pressures in the health system I think it's one of them.

Speaker Change: Areas that we do expect over time, if it whatsoever does slow down which it is not anywhere near slowing down at this point lots left to convert but that one is a huge.

Speaker Change: Part of that kind of let's call it $100 billion, that's going to transition out of the traditional acute care system into our site of care over the next several years.

Speaker Change: Great. Thank you very much.

Speaker Change: Of course.

Speaker Change: Thank you at this time I would like to turn the floor back to Eric Evans for closing remarks.

Speaker Change: Great. Thank you I just wanted to before we conclude I did want to just say thank you to my colleagues and physician partners, who collaborate each and every day to deliver on our mission, which is to enhance patient quality of life through partnership. Thank you for joining our call. This morning and have a nice day.

Speaker Change: Yeah.

Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Speaker Change: Yeah.

Speaker Change: [music].