Q2 2025 Surgery Partners Inc Earnings Call

Good day and welcome to the surgery. Partners Inc. Second quarter 2025 earnings conference call.

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I would now like to turn the conference over to Day of Dory, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining surgery. Partners second quarter 2025 earnings call. I am joined today by Eric Evans, our CEO?

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 file with the OCC Each of which are available on our corporate website.

The company does not undertake any duty to update these forward-looking statements. In addition we reference certain Financial measures that are non-gaap which we believe can be useful. In evaluating our performance. We reconciled these measures to the most applicable Gap measure in this morning's press release with that. I will turn the call over to Eric Eric.

Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our second quarter results and the consistency in delivering on our long-term growth algorithm

then I will provide additional color on the strong business execution. Underpinning. Each of our 3 Groth pillars, organic growth, margin Improvement, and deploying capital for m&a. I will also provide some initial Reflections on our business coming out of the recent conclusion of our strategic review process.

Finally, I will share our views on how our businesses positioned in the current regulatory environment, as well as our outlook for the remainder of the year.

We are pleased to report surgery Partners second quarter, net revenue of 826 million and adjusted ebit of 129 million both in line with our expectations.

Our colleagues and physician Partners continue to deliver on our mission to enhance patient quality of life through partnership. And the strong results. We share this morning are a testament to their unwavering dedication and tireless efforts. We are deeply grateful for their commitment and proud of their achievements.

Compared to the prior year, second quarter, adjusted ebit agru 9%, and net revenue, grew, just under 8 and a half percent with contributions from each pillar of our long-term growth algorithm.

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

Same facility. Revenue growth was comprised of 3.4% surgical case growth and 1.6% rate growth.

These components of our same facility revenue growth are consistent with the expectations that we shared on our prior earnings call.

We continue to expect the full year. 20125 same facility growth to be near the high end of our growth algorithm Target of 6% with balanced growth between volume and rate as the year progresses.

Dave will elaborate on our financial results next, but the results of the first half of 2025 underscore the consistency of the company's core operating platform.

Let me touch on some of the initiatives that are critical to our sustained. Long-term growth starting with our organic growth activities.

In our Consolidated facilities, we perform nearly 173,000 surgical cases in the second quarter of 2025 compared to approximately 167,000 in 2024.

In the second quarter. We experienced higher growth in ghee and msk procedures. Including continued, strong growth. In Orthopedics driven by an increase in joint related. Surgeries total joint procedures grew 26% in the second quarter compared to the prior year.

This increase in higher Acuity, Orthopedic procedures is expected to be a continued Trend that we are, well, positioned to capture.

As a reminder Approximately 80% of our surgical facilities have the capability to perform higher Acuity Orthopedic procedures and currently nearly half of our facilities, perform total joint procedures.

This capability provides significant additional growth opportunity, as we continue to position our assets, to meet the expanding Orthopedic. Demand with targeted Recruitment and investments in additional equipment, including robotics.

Within our portfolio. We have invested in 69 surgical robots that enable, our physician Partners to perform increasingly more complex and higher Acuity procedures.

These Investments also help support our strong position recruitment process.

through the first half of 2025, we've added nearly 300, new positions to our facilities, many of which we expect to eventually become partners

This recruiting class includes all our Specialties but skews toward Orthopedic Focus positions.

Based on our experience with prior recruiting classes. We fully expect 2025 recruits to continue to grow and have a meaningful impact in 2025 and Beyond.

As I mentioned on our last call, we opened 8 to Novo facilities in 2024.

As well as a robust pipeline of future. Denovos, we expect to begin development soon.

The denovo's underdevelopment are heavily weighted towards higher Acuity, Specialties such as Orthopedics.

Although they take time to develop and construct the effective multiples on these assets are a fraction of traditional acquisition multiples. Typically it takes 6 to 12 months, after opening to reach break, even and another year or so to get to full run rate, earnings

of the 20 that have opened since 2022, 12 have turned profitable

Dinovas are a key component of our growth strategy.

Moving to our second pillar margin expansion during the quarter. We saw light margin expansion from continued growth and cost management discipline as our cost of revenues including swb and supplies and GNA expenses. As a percentage of Revenue all improved in the second quarter of 2025 versus 2024.

when we consider our continued growth ongoing procurement and operating efficiency, initiatives and synergies achieved on our previously, acquired facilities, we have high confidence, we will continue to deliver margin expansion as our 2025 guidance implies

the third and final leg of our long-term growth. Algorithm is acquiring and integrating a creative surgical facilities into our platform.

We have a highly talented experienced development team that manages and maintains a robust pipeline of attractive partnership opportunities.

This dedicated team remains highly disciplined in its approach to diligence, to ensure we invest in Partnerships that bring sustained long-term accretive value to our portfolio.

To date in 2025, we have deployed 66 million and have added 8, surgical facilities, at an effective multiple under 8 times adjusted IBA.

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 upon integration, we expect to lower the purchase price multiple by, at least 1, turn in the first 18 months in our portfolio.

Our pipeline of attractive Investments is robust and we continue to Target the point $200 million in Acquisitions this year which we now see as weighted toward the back half of the Year versus the mid-year convention, our initial guidance would imply.

We remain confident in the in the Strategic value of these Investments long term.

As a reminder, the 2025 contributions from these Acquisitions will be directly correlated to timing which remains variable

the level of activity supporting our comprehensive m&a. Strategy requires incremental variable costs in terms of due diligence transaction costs and integration costs.

As we discussed on our last call transaction and integration efforts were higher than typical in 2024. But we said that we expected this level of spending to be significantly lower in 2025.

the second quarter, we recorded 18 million in transaction and integration costs representing a 27%, sequential decrease in spending

This level of spending should continue to decline in the second half of 2025 based on a more normalized volume of m&a, integration efforts and continuous improvements in our operating system.

Next, I would like to briefly comment on how surgery Partners is positioned in the current regulatory environment.

I will start with tariffs.

We can confidently reiterate that we do not have material exposure to any tariff related price increases in the near to mid-term nor do we believe there's a substantial risk to our supply chains.

The immediate impact of the 1, big beautiful, bill act will be minimal for surgery Partners. Given our small participation in Medicaid and exchange based reimbursement, programs changes to eligibility requirements, state directed payment programs and provider. Taxes are unlikely to have a noticeable impact on our business. I would like to remind investors that our exposure to Medicaid, pair groups, is less than 5% of our revenue, and we do not consider prospective changes to either program as a risk to our short or long-term growth prospects.

Last month, CMS issued their proposed 2026 rate and potential policy changes.

The proposed outpatient rates that would affect our facilities were approximately 2.4%, but the rates will vary based on specialty. CMS proposed, adding 276 procedures to the ASC covered list in 271 more procedures to come off, the inpatient only list in 2026

This underscores our advantageous position as a leading owner and operator of Shores, day surgical facilities, as CMS and other payers drive, more procedures to this site of care.

They also propose facing out the inpatient only list. Over 3 years, we are currently performing several of these procedures in our facilities for commercial based patients, albeit in very small amounts. Plus 2 related predictive potential opportunity that this change represents for our business. We are encouraged by the agency's trust in the physician's clinical experience in making safe decisions, around the most appropriate sites to deliver high quality, surgical care, and know that removing barriers for our surgeons to perform their full book of business in our facilities has a compounding positive impact.

CMS is also evaluating specific rules on site neutrality and price transparency. Their current request for comments are based on proposals. We have previously, evaluated, and discussed

Back on the company. We expect the final rules to come out in November at which time, we will share a forward-looking view of the impact of these changes.

We will continue to closely monitor all ongoing regulatory developments and remain prepared, to adjust to our approach as needed. Given the fluid regulatory environment.

Before I turn it over to Dave, I would like to take a moment to update you on a couple of key takeaways from the company's extended review of strategic Alternatives that concluded in June and comment briefly on our executive chairman Wayne divides, recent announcements.

Starting with our process learning.

First, and as previously shared, the special committee of independent directors made the decision not to proceed with the proposed acquisition of the company by Bain Capital. Highlights include their belief in the significant value creation opportunity we have in front of us as a publicly traded company. That belief is wholeheartedly shared by management and Bain Capital, who remains an active, engaged, and highly supportive investor.

Second, I'm excited about, both the operational player, this decision is provided as well as the insights, we gained through the entirety of our process.

These insights include a reaffirmation that surgery Partners as the leading independent short. Stay surgical provider is incredibly well positioned in the highly attractive short. Stay surgical Market. Our facilities are preferred by patients Physicians and payers and deliver on value-based care objectives within the fee for service system.

Our Market size is estimated to be over 40 billion dollars today. And our total addressable Market is projected to grow to over 150 billion dollars in the near to medium-term.

As I alluded to in my earlier remarks, our business is already capturing momentum posed. By key trends unfolding across the surgical landscape, and we will continue to benefit from demographic technology and price transparency Tailwind.

As part of our commitment, to continuing to deliver long-term value to our shareholders, we will continue to strategically evaluate and look for opportunities for asset portfolio optimization. We plan to selectively partner, or sell facilities that can expedite, leverage reduction, accelerate cash flow generation increased. Focus on our core ASC service lines and providing increased flexibility to execute on and sell fund our growth algorithm. We have already begun the work to execute on this opportunity.

Finally, we recognize that the Strategic process represented a period of extended uncertainty, for our investment community. And we appreciate everyone's patience as we carefully evaluated our options.

As we Forge ahead with clarity as a public company, we know that many of you are eager to hear from us on our vision for positioning surgery, partners for long-term sustainable growth.

As such we will be holding an investor day later this year and look forward to the opportunity to provide additional information on our company's long-term Outlook discuss our detailed organic and inorganic growth strategy, and introduce our investment Community to our broader leadership team.

As announced on July 31st, my friend and colleague in our current executive chairman Wayne dawid will be joining United Health Group, as CFO effective, September 2nd in his 8 years, with the company, Wayne has left an incredibly positive Mark, helping transform the company into the fast growth market leader. It is today in a time of incredible transition in the healthcare industry. I'm excited that Wayne's deep experience and Visionary leadership will continue to shape the future of Healthcare in his new role and wish him nothing. But continued success in the coming days, we will be announcing our board, chairman transition plan,

Overall, I am pleased with our performance in the first half of 2025, as the company continues to deliver growth. That is consistent with surgery Partners. Long-term growth algorithm and is well positioned to continue doing so over the rest of 2025 and Beyond.

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

Thanks Eric, starting with the Top Line. We performed nearly 173,000 surgical cases in our Consolidated facilities in the second quarter 3.8% higher than 2024,

These cases spanned across all our Specialties with higher relative growth and gastrointestinal and msk procedures, including continued growth in Orthopedic cases.

This case, growth drove our second quarter Revenue to 826 million 8.4% higher than the second quarter of 2024.

Our same facility, total revenue. Increased 5.1% for the second quarter, consistent with our growth algorithm Target of 4 to 6%. And in line with our expectations, for the quarter,

In the quarter, same facility case growth was 3.4% and rate growth was 1.6%.

Adjusted ibida was 129 million for the second quarter. Giving us a margin of 15.6% 10 basis points higher than the prior year.

We ended the quarter with $250 million in cash. When combined with the available revolver capacity, we have $645 million in total liquidity.

In maintenance related, Capital expenditures.

We are seeing incremental improvements in the cash conversion of our Revenue, with the metric of Day. Sales outstanding, decreasing 3 days from the first quarter which is critical to convert the company's growing earnings.

There were no unusual matters. That affected operating cash flows in the quarter other than the change in interest rates on our corporate debt portfolio, which I will address shortly.

We remain pleased with the disciplined management of our capital deployed for maintenance-related purchases.

Moving to the balance sheet, we have 2.2 billion dollars in outstanding corporate debt with no maturity dates until 2030.

The effective interest rate on our corporate debt was approximately 7.4% in the quarter, approximately 140 basis points, higher than in the first quarter.

as we have noted in Prior conversations, the fixed interest rate swaps that hedged, the variable component of our 1.4 billion Term Loan expired, in the first quarter,

this interest rate exposure is now protected by interest rate caps, that limit the variable component of the interest rate to 5%

That floating rate is currently 4.35%, but that could change throughout the year.

Given these factors along with making our bi-annual interest payment on the 7.2 senior notes. In April, we saw an increase of 23 million dollars in interest payments. In the second quarter of 2025 over the same period in 2024.

Which is reflected in our operating cash flows.

Our second quarter ratio of total net debt, to EA as calculated under our credit agreement was 4.1 times consistent with our expectations, given recent acquisitions.

Leverage. Calculated using consolidated debt from our balance sheet divided by adjusted EPA. Before reducing it for NCI was 4.7 times.

We continue to have high conviction that our leverage will decrease based on our continued earnings growth. As Eric mentioned, as we continue to drive towards long-term growth. We are assessing our asset portfolio with the goal of optimizing. Our portfolio to maximize exposure to our industry's key, Tailwind expedite, leverage reduction, and accelerate earnings and cash flow growth.

Regardless of any portfolio actions are short and long-term Financial models highlight that we will have sufficient liquidity from our cash on hand, our revolver capacity and cash generated from operations to support future m&a levels that support our long-term growth algorithm without having to access incremental capital from the debt or Equity, markets over the next 5 years.

Further on an ongoing basis we evaluate, whether market conditions allow for opportunistic, enhancements to our current capital structure.

The results we reported today and all metrics are aligned with our internal expectations that support our guidance that we are reiterating this morning.

Specifically, we are reaffirming full year 2025 revenue, and adjusted ebit guidance to be in the range of 3.3 to 3.45 billion dollars and 5555 to 565 million. But given the timing of m&a, we may be at the lower end of this range.

Our initial guidance was built on the expectation that we would deploy at least 200 million dollars of capital on m&a at acquisition multiples, consistent with our historical experience of approximately 8 times using a mid-year convention

So far in 2025, we have deployed 66 million. As Eric noted we enjoy a robust pipeline of future acquisition opportunities. But we will remain disciplined about acquiring the right asset for our portfolio and will not Chase growth at the expense of this core discipline.

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 denovo's recently opened

We have high confidence in these growth areas based on our historical experience and the compounding effect of activity that is already occurred in areas like physician recruiting and Managed Care Contracting.

Coming out of the Strategic review process that Eric touched on. We have renewed conviction in the strength of our financial profile as a publicly traded company and we remain focused on driving growth across our portfolio. While maintaining fiscal and operational discipline to continue delivering long-term value to shareholders.

Finally, I would like to Echo. Eric's gratitude and congratulations to Wayne. He is a great leader, mentor and friend and I wish him continued success in his new role.

With that, I would like to turn the call back over to the operator for questions.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

Our first question comes from Brian tanil with Jeffrey. Please go ahead.

Hey, good morning, Dave. Maybe just your comment on the pace of Acquisitions. Um, and and the fact that you have a good pipeline there, how should we be thinking about, you know, maybe the Cadence going forward for that for this year or should we also think about, you know, any residual that's not deployed out of your typical goal for this year. Getting carried over into next year as we think about modeling that,

Yeah, Brian, it's a great question. Um, you know, we've been really consistent on m&a and obviously we we have this target out there of at least a hundred million dollars, and we still believe that, you know, we can execute to that this year. You're clearly, the pace has been a little slower, you'll recall last year. The pace is a little faster. Uh, it's always a little bit, uh, difficult to predict the timing of that and we we obviously aren't going to rush deals, just just to meet a guidance Target. So you know, we're going to find the best deals possible. I do think as you think about m&a, you know that

And um, certainly slide forward or backward in any given year, uh, from a timing perspective. You know, you can imagine during the Strategic process too. In the first half of the Year, there were a lot of things happening and could could have been some, you know, delays associated with that. So we look at the pipeline. It's very, very strong. Uh we're excited about it. We continue to believe that $200 million is the right target every year. And as you know, many years, we found more than that. Um, it it really just comes down to timing, um, but couldn't be more pleased with the amount of opportunities that remain out there for us.

Appreciate that. And then Eric uh you talked a little bit about ramping up your denovo pace. So maybe I'm just curious what that looks like in terms of how the economics ramp for denovos and what that does to the margins of the business going forward as you do more of these.

Yeah, no, I appreciate the question. Yeah. We, you know, look, we're excited about the novos being a new lover of growth for us. Obviously, it takes a bit of time, uh, to get the full kind of run rate going there. We've talked about, you know, having at any given time, you know, double digits in development and, and we continue to execute to that, uh, excited about those economics. I'll maybe let Dave, what kind of walk you through kind of the timing of how that happens, but we do see it as an important part of our growth lever. Our growth opportunity. Yeah. Did denovos are very exciting part of the company's uh, growth and we've started to lay this ground uh, work a couple years ago. Um, as we started to kind of make these statements out there just so just a reminder Brian

Probably from the moment that you signed the papers with the uh with your physician Partners, it's up to 18 months to get the facility open within the first 12 months. Or so you're getting all of the um uh appropriate approvals from CMS. And from commercial carriers, uh, bringing that business in and within the first 18 months after ownership, you're probably at run rate. So you say from the beginning to the end 3 years to get to full run rate and as we as I think, Eric talked about in his remarks earlier, uh, We've, uh, we've opened up quite a few this past year, um, and they're starting to turn profitable. So you've you can see, the way they come through our p&l. We show a little bit of this, in our press release. Um, uh, exhibits, um, a majority of these right now are unconsolidated, so we have a minority ownership position in those denovos not all of them, but for the most part, they are an unconsolidated position. So the economics for us come through

Partly as management fee Revenue, which is included as other Revenue, um, in our p&l and the other part would come through Equity earnings of Affiliates. So you could see those 2 components again, we break those details out in the tables. In our press release and Brian. I just add 1 thing, we really like about these, they tend to be higher Acuity. So these are very focused on Orthopedics and maybe occasionally Cardiology. So we like, we like the fact that these are kind of purpose-built higher Acuity facilities. Also, it gives us a chance in all these cases

Cases, uh, to um, negotiate initial rates with payers based on the fact that this stuff's usually coming out of the hospitals, right? So we have a real opportunity to start these facilities off, kind of, you know, getting a better portion of that value from the get-go.

Awesome. Thank you.

Our next question comes from Matthew Gilmour. With keybanc capital markets, please go ahead.

The portfolio. Are there any service lines that you see as less core or any color in the areas of growth that you guys are targeting through this optimization? Thanks.

Yeah, great question. I mean, look, we as we think about trying to maximize long-term value for our shareholders, um, we will in our evaluating those opportunities where there's a particular facility, um, or Market that can accelerate the reduction in leverage and increase our cash flow conversion, right? So we think there are opportunities to do that, we're actively exploring those, they could improve include sales or just expanded Partnerships with local Health Systems to bring greater scale to some markets. Um, you know, again we as we think about our our growth algorithm and our plans, um, regardless of portfolio optimization show that we can sell fund our growth over the foreseeable future, but we also understand and think there are opportunities to even accelerate that further, and we're going to be, you know, working on those in the coming months. And we'll, we'll continue to update. Uh, uh, the investors.

Great. And then just in terms of Leverage, um, with that optimization, is there a Target that you guys have in mind?

No, I leverage our leverage Target, uh, continues uh, to be in the 3s. Um, and we should be at or close to the, um, before the upper 3s at the end of this year and continue to kind of go down as, um, as we go forward. So our our current Target remains at 3 but we'll get there faster with some of these optimization opportunities that may sit in front of us, uh, and that'll definitely be 1 of our key considerations

As we look to um, uh, to those opportunities. Yeah, and to your service line question, the only thing I would reiterate is look, there's a lot of great Tailwind in the ASC space. We're going to really be focused on growing faster. And so, you know, clearly that will be where we. We focus our efforts service line was

Great. Thank you.

Our next question comes from Sarah James with Cantor Fitzgerald, please go ahead.

Thank you. I understand it's early to size for the company. What a removal of impatient only list could look like, but is there any way you can give us some examples and some color of maybe what Revenue per case would look like on things not currently on your list? That may um, be able to

Happen in your facilities, or even for the surgeons that are credentials with you. Now, how much of their, um, time and their books have to be done outside of your facility that could potentially be done in your facilities in the future.

Yes, sir. Thanks for the question. I, I would just say I'd start by saying, we're really pleased um, that, uh, CMS is leaning in on, you know, supporting ASC growth. They see the opportunity for cost savings. They see the opportunity for efficiency and they're leaving that choice to the position. So, you know, high level, as I said, in my opening comments, putting this decision back in the hands of the, of the physician to make the right choice for where a patient goes and removing obstacles for any of our physicians to bring their

Whole book of business, uh, is incredibly powerful. We saw that when the total joints, uh, were brought on it was, you know, we always had done commercial but we got more commercial after they removed that because they could do their Medicare cases along with that. So there's a lot of power and just simplifying where a physician doesn't have to stop. And think about okay, can I do this in the ASC or not? Um, they can make that choice. So I think that's number 1. We just say that's powerful as far as the, the initial list. Um, you know, it's these are higher Acuity procedures. So certainly would be higher Revenue in general than the, the population. But right now we're doing a limited number of commercial, uh, patients in those procedures again. When you allow Medicare and Commercial, there should be some opportunity. But right now, the the in is pretty small. Uh, what I would say with all of these things, as you, as you remove the inpatient only list, there are technology changes and there are, um, safety changes that have happened over time, that allow more and more things to be done safely in our in our facilities. And you know, we see that as a really nice Tailwind going forward and we think that list only, you know, expands over time. And so if you take away the inpatient only like,

Lists and you leave it to the position. Uh, there's a lot of things that can be done safely with a great service and and a way more effective and way in our space, uh, in the coming years. And we think CMS leaning in is the absolute right answer.

Thank you.

Our next question comes from with mayo with Ling Partners. Please go ahead.

Um,

Yeah, my first question just on the recruiting efforts of you made any changes in any of the Specialties that you're focused on. I don't think so but maybe also how much of the same store case growth? Do you think you can attribute to those efforts? Um, in the last 2 years?

Power of our recruitment efforts are kind of that. It's a, it's a multi-year return on that. So if you look at our, for example, our doctors, we recruited in the first half of 24. Um, in the first half of 25, they brought 68% more cases and 121% more Revenue. So it's a compounding effect continues to be a big part of our growth algorithm we have not changed. Uh the Specialties we we focus on certainly there's a there's a real focus on Orthopedics but all of our key service lines are there and we're opportunistic. I mean every Market has different service line opportunities that make sense for a given the facility and what capacity they have available. Um, as far as what percentage of our same store growth, I don't think we've ever kind of covered that or release that publicly, but it's obviously a meaningful

To how we organically grow the business to add new docs, add new service lines. Add new capabilities at all times for our facilities. Yeah. And just as a, a reminder what I know, you know this. But the, you know, recruiting is both strategic to reposition the company and take advantage of these Tailwinds and operational to make sure that the facilities are kind of appropriately cared for as um, doctors retire, uh, out of the system. So the goal for us here on recruiting is to be net positive, um, after all of, um, uh, the kind of the natural life cycle of, um, uh, the ASC,

Great. And then maybe my follow-up just any changes with payer Behavior specifically ma plans and really the correlated to this is just some revenue cycle and an update as to where you are and that initiative and standardization across the facilities things.

Yeah. Appreciate you bringing that uh bringing that up. You know last year we did talk about some of the payer pressures that we saw uh in certain markets related to pre-authorization medical necessity requirements. Um, which were not an excuse for us. It was just something that we had to keep Pace with, um, as we were addressing the standardization of our website across the entire Enterprise, um, as we, uh, turned into the new year and you may recall this from our first quarter call, um we felt we got in front of that. Um and now we're just knee deep in the uh the appropriate pacing of our web cycle changes. So about um in the middle of our 3 year Journey right now in that um in that approach, you can see that coming through. I talked a little bit about that in our DSO Improvement sequential Improvement of 3 days um uh this quarter. Uh so we are seeing the team kind of staying really closely aligned with um with commercial carriers and making sure that we're, you know, doing the right things on the front end and chasing

Claims on the back end. If there are any any issues that come through with payments,

Yeah, wait, I would just add that, you know, payers payers, appreciate, obviously our value position and to the extent that we can remove obstacles together, we're having those conversations because ultimately, you know, in almost all markets, we're driving dramatic savings for them. So I think that's 1 where, you know, we're going to continue to work on both sides of it getting better on the revenue cycle, which Dave is absolutely driving. And then also having conversations about how do you take advantage of our position by removing obstacles?

Okay, thanks.

Our next question comes from. Benjamin Rossi with JP Morgan. Please go ahead.

Hey, good morning. Thanks for taking my question.

Just as a follow-up to your comments on the potential impatient only list phase out. So just think about the total addressable Market here.

I think you've previously described your all-in Market at about 150 billion dollars with maybe 60 billion of that encompassing. These inpatient surgical cases that are capable of being shifted to the outpatient setting.

Is that still a a reasonable ballpark when thinking about the total Market of cases that could open up here to the outpatient setting? And if so, is there any way to think about how much of that market to 270 plus new procedures set to come out in 2026 would represent?

Yeah, so let me start a high level. It's still the right way to think about the market size, we certainly believe. I mean it's a combination of things. So let's just start with Orthopedics as an example. Um you know, it's still a very heavily acute care hospital, hopd, um, provided service. So you think about total needs total hips while much of it has moved, the majority has moved to the outpatient setting, much of it is still done in the in the traditional acute care hopd setting. And so it's like, 3 and a half to 1. I think is roughly the statistic. You still see a ton of movement so there's there's there's there's, there's the, uh, market share. That's still sits in the wrong side of care, which is pretty massive out of that 150, right? So we've got this, just natural work. We have to do to continue to move, the patient to the right side of care, for the right price at the right outcome, right? Uh, so that's a big part of it and then the other part of it is, are these new things that can come into our setting of care? Now, I would say in these initial, you know, couple hundred. I don't want to say that. There's a huge volume. Um, I think again they remove obstacles when it comes to being able to bring a doctor's full book of business. But over the longer term, higher Acuity or

Do there. There's a fair amount of business that are tied into some core service lines that you think about all the time, general surgery, OBGYN Urology that are still in, in hospitals, due to a piece of technology. Again, those are things that we're going to solve over time. So I think there's a lot of ways to break it up, but I wouldn't over-index on these couple hundred procedures being like, a huge, massive movement. I think it's just part of the general Trend, uh, that's happening with technology. And as you start to remove that inpatient only list, I do think you're going to see that there's a bunch of stuff that Physicians are going to be more comfortable bringing to our side of care for all the reasons. You can imagine more efficient, patient has a great experience, great quality outcomes, very focused Factory like um and we're excited about that. But it's it's I wouldn't over index to just this list because I think that is premature.

Got it, appreciate the color there, I guess just follow up. And following up here for your robotics Investments. You know, you've been mentioning the increase Investments here over the past 7 or quarters.

How would you characterize the benefit here in terms of maybe rates and volumes? Is it fair to say that? You're getting more on the rate side here on presumably, higher Acuity case, mix Focus or do you also see some improved volume throughput from some of your decks? Yeah, so the great question, so they're about the robotics for us is, it's it's, it's an enabler, right? So we have a lot of, um, and what we found early on. When I first came here is, we had a lot of Physicians who might be partners in our facilities, who weren't bringing their highest Acuity procedures, just due to a piece of technology and we've worked really hard to address those things. Understand why they would split business, bring the technology that's appropriate into our setting to allow them to come.

Certainly does bring higher Acuity cases. Uh, it also creates a ton of value for the health system because you know again the total joints where they're often coming from hospitals, especially whether it's technology involved and so we're driving. Dramatic savings while giving the physician more control over their schedule and letting them be an owner in growing that business. So we we have a lot of a lot of levers there that we think over time continue to be powerful. And as I mentioned earlier, there's a bunch of those joints that still remain in that hopd setting uh, where we believe, we can create value for both The Physician and the health system.

Great, thanks for your time.

Our next question comes from Joanna, Gadget with Bank of America, please go ahead. Hi good morning.

For taking the question. So I guess a couple of follow-ups on your comments about the portfolio optimization. Um, so you said something about Partnerships with systems so you're referring to or maybe, um, selling mistakes, um, in your asset, to a hospital system that how we should think about it.

Yeah, so good. Great question. I mean, I do think there's going to be opportunities where the best natural owner the best natural partnership for a particular Market may not be us alone, right? And so, we're open to those ideas again with the, with the caveat, we're going to be very thoughtful on. Where can we use opportunities to accelerate our leverage reduction, accelerate our free cash flow growth? Um, to you know, get closer, uh, faster to self-fund our growth, right? So, uh, yes, the answer is yes on that. Um, we'll be selective on those things but, you know, in some markets that very well might be the right answer for us and the health.

Well and to that point, also on the flip side, when you said, you know, you you have I guess some plans already maybe emotion or partially emotion or you, you kind of uh, review some of these months. But uh as part of this optimization strategy, are you also considering uh, the resting some of your Surgical Hospitals or this is across the board,

Yeah, I mean we're going to look at the whole portfolio, so I'm certainly not going to talk about individual assets or things we would sell, but I would say you should expect that across the portfolio. We're going to look at where those opportunities arise, and I'm sure some of that could be in the surgical hospital setting.

Okay, and then my question. So thanks for the follow up.

Um, on your same store revenues, right? So you're tracking around 5% of the first half of the year and, um, I want to say last time you talked about 6% for the year, so I don't know whether I missed it. Did you, um, say that you still on track and I guess how do you want to, uh, how do you expect to get to that number? Um you know, second half I assume its Q4 is the busiest quarter so maybe that's the answer there.

Yeah, great question. Look where we are? We are pleased with our growth expectations. Uh or go through the first part of the year. It's it's just right on our expectations and you're correct. We do expect that number to be at the upper end of our range of 4 to 6% by the end of the year. Um, that's that's based on a lot of things. A lot of growth initiatives, things we have in the pipeline, uh, timing of, you know, uh, denovos, there's a whole bunch of things that go into that, but by the end of the year, we expect to have balanced growth volume and rate, uh, that's at the upper end.

Of our, of our 4 to 6% and, you know, we haven't changed that at all. Uh, we still have good visibility to how we're going to get there.

Great, thank you so much for taking the question.

Jonathan, thanks.

We have our next question from Andrew Marc with barklay, please. Go ahead.

Sequentially. Can you help us understand what drove the increase and why there's so much variability on the other Opex line that is typically more fixed in nature. Thanks.

Yeah, happy to uh, Andrew. I don't know if I uh, if I agree that um other is always going to be a relatively fixed cost because other bites nature includes a number of miscellaneous items.

So I think that would be included in there, would be things like provider taxes, um, other fees that are incurred, and they, they do fluctuate from time to time. Um, but the annual cost for 2024, if you were to try to anchor on something is how we look at that. So from quarter to quarter, you may experience some of those pressure points related to things. I just mentioned. Uh but 2024 I think is inappropriate uh run rate uh for that on the professional fees. Uh, professional and medical fees. Yes, there is an increase, uh um a 10 million dollars on a hard cost basis but on a relative to

Uh Revenue basis, you're only up 30 uh, basis points. So 12.1% to 12.4%. So just as a reminder, so Professional Medical fees includes cost for our medical directors, medical service, contracts marketing legal accounting vendor collections laundry linen, medical waste other things like that. Um, the increase if you were to focus on it, I don't Focus too hard on that because I'm not alarmed by 30 basis points, but that increase is directly correlated to the 7 surgical facilities. We acquired in 2024, several of them were supported by

Physician practices that employs some Physicians and clinicians and those costs would be reflected in that profile line.

Great. And then I heard you talk about uh, the interest expense impacting cash flow in the quarter. Can you talk through some of the other working capital items and considerations for the balance of the year? Thanks?

Yeah, the I think the Big Driver for the year is going to be that interest cost piece of it is we have to um uh lapse the um a expiration of our interest rates swap. So remember that interest rates swap did close out.

In the first quarter as we replaced with a, um, a cap that puts us at 5%. Which means we're floating from where we were before, where we were before was basically that. So for rate was capped at 2.2%. Um, so it's created some pressure obviously, um, on that interest rate, that'll that'll still be there in the third and the fourth quarter of this year. Those are the 2 big items or the 1 item really that I would call out um as a a headwind for us of course the underlying growth of the organization is coming through that cash flow from operations line item you can see it when you adjust out for that 20 23 million, I think pressure point that we've called out for interest costs. Um

Uh, so that should continue to uh benefit us as we go throughout the year and assuming that we continue to um, EK out the benefits of our working capital efforts which include the biggest 1 being revenue cycle but includes all aspects, Capital Management. Uh, so capital expenditure deployment. Uh, control processes and, uh, accounts payable and really just making sure cash out and cash in are, are hedged as much as possible. Um, so no major headwinds other than the interest costs, Andrew.

Great. Thank you.

The next question comes from. Tau Chi with McQuarrie, please go ahead.

Hey, good morning. Um in terms of the same store uh case. Volume Trend. I think your strength is still in contrast with um the outpatient performance from some of the hospital peers. Could you remind us what other contributing factors there? You know either geography portfolio case makes or anything else. You would uh point you

Hey T. I appreciate the question. Um, you know, look, I I we obviously can't comment on our peers. I would say that, you know, this growth has been pretty consistent for us. We focus on lots of levers to drive that as we talked about earlier. We have a, a robust recruitment engine. Uh, we do a lot of things to add new service lines and so we're constantly focused on that. Um, clearly, uh, right now, it does seem differentiate from the peers, but we think about this and we talked about this in our core growth algorithm 2 to 3% is where we expect this Market to be on, kind of just a normal organic basis. And we continue to

Be within that or above that. And so, our key there is just continue to execute. Um, we feel good about our, our growth. We and then again, it's based on a lot of things but it's crossed all service lines with particular strengths and um uh uh, ghee and msk. So um, can't comment on the others but it's been pretty consistent for us as far as how we approach it and how we expect to execute on it.

Got it.

uh and second question, um, what percentage of your

Exchange. I mean given the potential decline in exchange membership next year. What is your view on the potential income tax on surgery partners?

Exchange appears to go through the ER, uh, when you look at the kind of a qare world, we have relatively limited exposure to health exchange. It's not a big portion of our business in material, uh, really to the, to the core business because it's such an elective business. Our business is not typically, you know, coming through an, ER, or coming through other avenues like that. And so, our core doctors don't see a ton of exchange business. We don't have a ton of exposure to it. Um, it's a place where probably, you know, maybe we'd like to pick up market share over time, but in this case, uh, is not an exposure for us going forward.

Great. Thank you.

Of course.

Our next question is from AJ Rice with UBS.

Please go ahead.

If I heard, uh, the comments prepared remarks, uh, right. It sound like Dave was saying, uh, give you more comfortable in the lower half of your, um, 10 million guidance range, um, for even. Uh, and it sound like that was primarily because of the pace of, uh, Acquisitions and development this year, I know you're algorithm is to have 4 to 6%, uh, even doc growth. Um,

On an ongoing basis from deals, but I wouldn't have thought that the deals in year contribute that much to um parties grow, can you maybe flush out what? What you're thinking, uh, in that comment, uh, a little more.

Yeah, happy to AJ in your your conclusion is right. Let me see if I can give you uh data points that can support your reasoning. Um the um the reason why we're kind of steering a little bit towards uh that lower half is because of the pace of m&a. Um, so when we provide initial guidance,

At the beginning of the year, as we do every year, we assume that 46% comes from deploying 200 million dollars on Capital um on m&a rather at consistent historical multiples. So around 8 times and if you were and you assume on midyear convention that's going to contribute around 12 and a half million dollars or so of earnings. That's how the math would imply if you were to use that. Um and it again, timing is the risk that you have there. We're not going to move things around just to hit. We're going to do it when it makes sense. We maintain a pipeline that can support that hundred million dollar statement on an ongoing basis. But the fact of the matter is we've only done 66 million dollars as we sit here today. Um, so that does put us behind that pace, uh, 200 million out of mid-year convention. Now we still have line of sight to 200 million dollars, um, but when that comes through naturally, um, at this point, it's the math won't support you getting to that. Um, that initial assumption

So you have to lower that um uh lower that point. It's a timing issue. Um there'll be uh some pressure on that earnings contribution in the year but not earnings on a long-term basis.

Okay. Thanks and uh as mentioned earlier, your volumes have been stronger in the first half than a lot of the peers that report uh outpatient surgery volumes and your rates have been more modest. Uh I think there were some transactions, maybe a Texas deal or something. Um that was having some impact on that. I wonder when you say more balanced in the back half of the year, do you think that's just going to

Somewhat reverse and Q3 Q4, do you think it'll reverse enough that you'll end up balanced for the whole year? Give us a little bit of flavor for how you expect, um, uh, bias versus rates to Trend in the back half of the year.

Yeah, thanks AJ. I appreciate the question. Um and there's always some timing of transactions, you're right trying to transactions when the Nobles come in all affect this number. We we've talked a lot about on these calls like quarter to quarter that same store metric moves around a lot and they can move around for a lot of things. If you look over the year, we've been really accurate to kind of forecasting where we're going, uh so your question is right in Direction but it won't be quite that. Um extreme, you know, we still expect case growth in the second half of the year. But at the end of the year, when you think about that roughly 6%, we we expect it to kind of be balanced between the 2 3 and 3 somewhere in that range. Um, and so, you know, we still expect to have nice positive case growth in the second half of the year. But

It will be moderated in how it contributes and um, still within our within our um algorithm of 2 to 3%.

Okay. All right. Thanks a lot.

Thanks AJ.

Thank you. Our last question comes from Ben Hendricks with RBC. Please go ahead.

Partnership strategies uh, or or other uh, facets of the uh the business management going forward. That that's, uh, that's changing or, uh, expanding Contracting. Otherwise, thanks.

Hey, Ben, I see the question a good way to wrap up. I mean, I think in my comments, I I rated the key takeaways but maybe, I'll maybe I'll just quickly State them again and make sure that I add any clear thing clarifying comments, I can. So first of all, um, you know, going through this process, the 1 thing that as we looked at all the data as we looked at where we're going part of why we're still a public company, is that the data is really really clear on the opportunity in our space. So you think about Healthcare Services today we've kind of talked about how different we are relative to regulatory risk because really everything happening to us is neutral to a Tailwind. Uh we think about the size of the marketplace, we think about our value proposition which is you know supported by the government and payers again I go back to this fundamental thing. This very few places in healthcare services where the physician the patient and the payer all have a strong preference for your site of care and you've got a great position to be in. So we we reaffirm kind of, you know, our excitement about where this business can go and how how fast it can grow and how important it can be for the health system. So, you know, that was a, a big takeaway from us. I as, as we talked about, I do think that

Um, well, we will naturally de-lever and increase cash flow. I do think there's opportunities to accelerate that and we we reiterated that in the in the portfolio optimization. I think that is something we're going to be focused on and we'll, we'll come back to you on. Um, as far as changes in how we think about other things. I I you know, look Health System Partnerships, we've done a few of those over the last few years. Um, I do think we're open under the circumstances that it can help us accelerate where we want to go, uh, to those, uh, Partnerships and perhaps, perhaps, maybe we'll, we'll be more open to that than historical but I am, I don't think it's a huge change. We've already been directly heading that way, uh, for a while and, you know, again a mini markets that can be the right answer. Uh, your other question around Surgical Hospitals, look, I would say that they're going to be part of this portfolio. We still, I mean like Surgical Hospitals play an amazing role for us this company and many of them are just they give us the opportunity to be focused factories in our core service lines, right? And they are very much matched with an ASC portfolio around them. Uh, with that said, uh, you know, we certainly are focused on the core ASC service lines that have the biggest part of that.

Tam. And so as we think through this, when we can, when we can accelerate free cash flow when we can deliver and when we can uh, find a a place where it allows us more flexibility and self-funding our go forward on those ASC Investments, you know, we'll do that.

Thank you.

Of course, thanks Ben.

Thank you.

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