Surgery Partners Q2 2024 Earnings Report

Surgery Partners EPS Results

• Actual EPS: $0.21
• Consensus EPS: $0.20
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.25

Surgery Partners Revenue Results

• Actual Revenue: $762.10 million
• Expected Revenue: $735.94 million
• Beat/Miss: Beat by +$26.16 million
• YoY Revenue Growth: +14.20%

Surgery Partners Announcement Details

• Quarter: Q2 2024
• Date: 8/6/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 8:30AM ET

Surgery Partners (NASDAQ:SGRY) operates as a healthcare services provider specializing in the management and ownership of ambulatory surgery centers, surgical hospitals and multispecialty rehabilitation hospitals across the United States. Through its network of facilities, the company coordinates and delivers a broad range of outpatient surgical procedures in specialties such as orthopedics, ophthalmology, otolaryngology, gastroenterology, pain management and general surgery. Its integrated platform offers ancillary services including on-site imaging, laboratory testing, infusion therapy and physical, occupational and speech rehabilitation.

Since its establishment in 2010 and subsequent public listing in 2015, Surgery Partners has focused on strategic partnerships with physicians and health systems to expand access to cost-effective outpatient care. The company deploys a capital-light management services model as well as joint-venture ownership structures to develop and acquire facilities in mid-sized and underserved markets. As of the most recent disclosures, Surgery Partners maintains operations in more than 25 states, serving patients through over 200 ambulatory surgery centers and multiple inpatient surgical and rehabilitation hospitals.

Headquartered in Nashville, Tennessee, Surgery Partners emphasizes clinical governance and regulatory compliance, leveraging standardized protocols to drive quality outcomes and operational efficiency. The leadership team is led by President and Chief Executive Officer Douglas Coltharp, who brings extensive experience in healthcare strategy, capital markets and operations. Under Coltharp’s guidance, the company continues to pursue selective growth opportunities while maintaining collaborative relationships with physician partners and payors to address the evolving demands of value-based care.

Surgery Partners Q2 2024 Earnings Call Transcript

Key Takeaways

• Q2 financial results: Net revenue of $762 million (+14.2% yoy), same-facility net revenue growth of 9.9%, surgical case volume +3.9%, adjusted EBITDA of $118.3 million (+18%) and a 15.5% margin (+50 bps).
• Rapid expansion in higher-acuity services with total joint replacements in ASCs up 46% in H1 2024 versus 2023 and over 400 new physicians recruited year-to-date, nearly half in orthopedics, spine and cardiology.
• Aggressive capital deployment of $280 million through Q2 (including $220 million in Q2), meeting the $200 million annual acquisition target and maintaining a robust pipeline of strategic ASC acquisitions and de novos.
• Management raised full-year 2024 guidance to net revenue >$3.075 billion (≥13% growth) and adjusted EBITDA >$508 million (≥16% growth), reflecting strong organic performance and timely acquisitions.
• Strong liquidity with $214 million in cash, $860 million available revolver capacity, $2.2 billion debt with no maturities until 2030, and an effective interest rate of ~6% (capped at 5% post-Q1 2025).

Presentation

[Operator]

Good day, everyone, and welcome to today's program, Surgery Partners Incorporated second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note, this call may be recorded. I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to CFO, Dave Doherty.

[Dave Doherty, CFO at Surgery Partners]

Good morning. My name is Dave Doherty, CFO of Surgery Partners. I am joined today by Eric Evans, our CEO, and Wayne DeVeydt, our Executive Chairman. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements. These risk factors are described in this morning's press release and the reports we filed with the SEC, each of which are available on our website, surgerypartners.com. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this morning's press release.

[Dave Doherty, CFO at Surgery Partners]

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

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

Thank you, Dave. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated second quarter results and the consistency of our long-term growth algorithm. I'll then provide a brief update on our recent acquisition activity and refreshed outlook for the balance of the year. Eric and Dave will provide additional insights with their remarks. Turning to our second quarter results, we reported net revenue of $762 million, representing growth of 14.2% over the prior year quarter. On a same-facility basis, net revenues grew just under 10%, with surgical case volume growth in the quarter just under 4%. Adjusted EBITDA grew 18% to $118.3 million, generating adjusted EBITDA margins of 15.5%, expanding 50 basis points as compared to the prior year quarter.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

Our efforts to pursue higher acuity procedures continue to produce strong results, with total joint replacements in our ASCs increasing 46% in the first half of 2024 over the comparable period in 2023. Eric will provide additional insights into our physician recruitment and expansion of our total joint programs, including our success in targeting orthopedic surgeons specializing in total shoulder procedures, which were moved to the ASC covered list starting January first of this year. We continue to be extremely pleased with our same facility growth and the expected long-term sustainability of our organic top line and margin expansion growth goals. As previously stated, our short-stay surgical facilities have been purpose-built to capture the macro tailwinds of both an aging population and the increased shift in site of care for higher acuity procedures into our lower-cost, high clinical quality outpatient settings.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

We believe our results reflect the strength and durability of our business model as we pursue this highly fragmented market, which currently consists of over 6,000 CMS-certified ASCs and an estimated $150 billion total addressable market, representing both current and expected surgical procedures to be formed in an outpatient setting in the coming years. Moving to our capital deployment activities, we maintained our disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples. Through the end of the second quarter, we deployed nearly $280 million, which includes a $60 million transaction in early January that we had initially targeted closing in the fourth quarter of 2023. This level of deployment reflects both our annual targeted goal of at least $200 million, along with the redeployment of the remaining net proceeds from assets divested in 2023.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

Our business development team continues to source a robust pipeline of acquisitions and de novo investment opportunities, and we believe the capital deployment aspects of our growth algorithm remain achievable. Before I turn the call over to Eric, let me provide a brief update on our outlook for the remainder of 2024. Based on our strong organic performance in the first half of 2024 and the timing of our recently completed acquisitions, we are increasing full-year net revenue and Adjusted EBITDA outlook to greater than $3.075 billion and $508 million, respectively. This refreshed outlook represents at least 13% and 16% growth in net revenue and Adjusted EBITDA, respectively, as compared to the prior year, and balances our optimism for the company's growth with an appropriate amount of conservatism.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

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

[Eric Evans, CEO at Surgery Partners]

Thanks, Wayne, and good morning, everyone. On behalf of the entire management team, we are proud to release second quarter results that demonstrate our continued and consistent organic growth and the addition of five facilities to our portfolio of purpose-built, short-stay surgical facilities. Once again, all elements of our long-term growth algorithm contributed to double-digit top line and bottom line growth. Diving deeper into our results. Same-facility net revenue growth was 9.9% in the second quarter, comprised of 3.9% growth in our surgical case volume and 5.7% rate improvement. We continue to put increased focus on both physician recruitment activities and higher acuity procedures that would benefit from an enhanced patient and physician experience associated with our purpose-built, short-stay surgical facilities....

[Eric Evans, CEO at Surgery Partners]

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

[Eric Evans, CEO at Surgery Partners]

As a reminder, each of our recruiting cohorts continue to drive strong compounding year-over-year growth, with our 2023 class generating 164% more revenue in the first half of 2024, as compared to the first half of 2023. Our recruitment activities and growth in recent de novos and acquisitions have continued to fuel our growth, especially in musculoskeletal, with nearly 128,000 MSK-related procedures performed in the first half of 2024, representing 19% growth over last year. More importantly, total joint cases in our ASCs continue to grow at a disproportionate rate, which saw a 46% increase in case volume in the first half of this year compared to the prior year, and a 90% compound annual growth rate since 2019.

[Eric Evans, CEO at Surgery Partners]

We do not see this growth slowing in the mid to long term, as hip and knee replacements continue to transition into the ASC setting, as well as our early successes in effectively recruiting surgeons specializing in total shoulder procedures. That shift in site of care is in the very early innings, and we are well positioned with our recruiting team and our portfolio of facilities to capture total shoulder procedures in our setting. Moving to operating margins, which improved in the quarter by 50 basis points over the prior year quarter to 15.5%. This improvement reflects both our ongoing procurement and revenue cycle initiatives that continue to benefit from our increasing scale, along with synergies achieved on our previously acquired facilities. We expect margins to improve throughout the remainder of the year, consistent with historical earnings patterns. Finally, diving deeper into our capital deployment activities.

[Eric Evans, CEO at Surgery Partners]

In the second quarter, we deployed nearly $220 million acquiring 5 facilities. These acquisitions are heavily weighted towards multi-specialty and higher acuity orthopedic facilities, and are expected to yield further earnings from our operating system synergies in the first 12-18 months post-closing. In the second quarter, we opened 1 de novo ASC that we developed in partnership with OhioHealth. There are 10 fully syndicated de novos under construction, slated to open in 2024 and early 2025. These facilities include consolidated and minority interest partnerships, and are primarily multi-specialty, with a concentration in orthopedics. We remain optimistic about our de novo process and pipeline, and look forward to providing additional detail as these become meaningful additions to our portfolio.

[Eric Evans, CEO at Surgery Partners]

In closing, I'm proud of our management team and our many talented physician partners and colleagues for their relentless focus on delivering a superior patient experience with high clinical quality. Our teams work collaboratively to execute on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations, giving us increased confidence that we will achieve our updated 2024 goals. With that said, I will now turn the call over to Dave to provide additional color on our financial results, as well as our updated outlook for 2024. Dave?

[Dave Doherty, CFO at Surgery Partners]

Thanks, Eric. Starting with the top line, we performed 166,500 consolidated surgical cases and 194,000 total surgical cases in the second quarter. These cases spanned across all our specialties, with an increasing focus on higher acuity procedures, which is reflected in our near double-digit same-facility revenue growth this quarter. The combined case growth in higher acuity specialties, specific managed care actions, and the continued impact of acquisitions supported revenue growth of 14.2% over last year to $762.1 million. On a same-facility basis, total revenue increased 9.9% in the second quarter. Same-facility surgical case growth was 3.9%, with higher rates of growth in our orthopedic and other higher acuity procedures, which also contributed to rate growth of 5.7%.

[Dave Doherty, CFO at Surgery Partners]

We continue to forecast our same-facility net revenue growth to exceed our growth algorithm target of 4%-6% in 2024, with full-year same-facility revenue finishing in the high single-digit range. Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the second half of the year. Adjusted EBITDA was $118.3 million for the second quarter, giving us a margin of 15.5%, in line with our expectations of continued margin expansion. Inflationary pressures related to labor and supply costs continue to abate as we return to a more normalized run rate that provides natural margin expansion as we grow revenue.

[Dave Doherty, CFO at Surgery Partners]

We will remain vigilant in monitoring these factors across our portfolio and expect margins to continue to improve throughout the year, with annualized margins improving by at least 50 basis points over full year 2023. We ended the quarter with $214 million in cash. When combined with the available revolver capacity, we had over $860 million in total liquidity. We reported operating cash flows of $83 million in the second quarter. This amount is in line with our expectations and supports our continued belief that we will achieve our previously disclosed free cash flow goals in 2024. Moving to the balance sheet. We have $2.2 billion in outstanding corporate debt, with no maturities until 2030.

[Dave Doherty, CFO at Surgery Partners]

In June, we repriced our $1.4 billion term loan, reducing the credit spread by 75 basis points. This loan now carries an interest rate of SOFR plus 275 basis points. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025, and after that, we have interest rate caps in place that limit the variable rate component of our $1.4 billion term loan to 5%. In the event the interest rate environment becomes more favorable in the future, we will capitalize on such improvements. Our second quarter ratio of total net debt to EBITDA, as calculated under our credit agreement, was 3.8 times as a result of the acquisitions completed in the second quarter.

[Dave Doherty, CFO at Surgery Partners]

As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but over time, we project this leverage ratio will be below 3.0 times. Carrying the momentum of our second quarter results, we remain optimistic and confident about the company's growth and are raising our outlook for 2024 net revenue to be greater than $3.075 billion, and Adjusted EBITDA to greater than $508 million. This guidance implies continued year-over-year margin expansion consistent with our long-term guidance. This updated outlook represents mid-teens growth, emphasizing the resiliency and consistency of the business model and demonstrating the power of our long-term growth algorithm. With that, I'd like to turn the call back over to the operator for questions. Operator?

[Operator]

Thank you. At this time, if you would like to ask a question, please press star one now on your telephone keypad. To withdraw yourself from the queue, you may press star two. Again, that is star one to ask a question. We'll take our first question from Brian Tanquilut of Jefferies. Your line is open.

[Brian Tanquilut, Senior Equity Analyst at Jefferies]

Hey, good morning, guys, and congrats on the quarter. Maybe, Dave, just curious, you know, you talked, you talked about how the rate and the volume contribution to same store should be more balanced in the back half of the year. Obviously, your rate has been strong with acuity levels driving that. So just curious, what are you seeing or what are you thinking in the back half that would shift that balance to more even between the two?

[Dave Doherty, CFO at Surgery Partners]

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

[Dave Doherty, CFO at Surgery Partners]

So when we look at year-over-year, third quarter and fourth quarter, the surgical days that we have in both of those quarters are more favorable, as, when you look at our portfolio of surgical cases and where we think. And the best example I can kind of give for that is the timing of when the Fourth of July happened for us inside the third quarter of last year and inside the third quarter of this year for us. But what we do anticipate, as we've been talking about all year, Brian, is getting back to our growth algorithm as we sit through both, case side and rate side of our same facility, calculations.

[Dave Doherty, CFO at Surgery Partners]

At that balance of the year, we expect it to add up to be somewhat greater than our long-term growth algorithm would suggest, which has been consistent with what we've been reporting over the past couple of years.

[Brian Tanquilut, Senior Equity Analyst at Jefferies]

Got it. And then maybe, Dave, just to follow up on that, as I think about seasonality, I mean, I understand, obviously, like you said, we're Fourth of July lull, but just curious, how should we be thinking about the seasonality pattern even now for the back half?

[Dave Doherty, CFO at Surgery Partners]

I think our seasonality has been largely predictable in that, the fourth quarter tends to be our biggest quarter, and that's the result of the deductible swing that happens as commercial patients tend to, rush to use their deductible balance by the end of the year. So our fourth quarter always is our strongest quarter from an EBITDA perspective, as well as from a revenue perspective. We don't see that pattern changing this year.

[Brian Tanquilut, Senior Equity Analyst at Jefferies]

Awesome. Thank you.

[Operator]

We'll take our next question from Tao Qiu of Macquarie.

[Tao Qiu, Senior Healthcare Equity Research Analyst at Macquarie Research]

Hey, good morning. I'd like to break down a little bit the revenue and margin increase in terms of the guidance. You know, how much of that is from organic growth, you know, based on the strong volume this quarter, and how much of that is from acquisitions and de novos as you mature these? Thanks.

[Dave Doherty, CFO at Surgery Partners]

Yeah, thanks, Tao. We have a little bit of nice background music coming through on our side here from the line this morning. But let me attempt to answer our revenue beat. Like, our revenue calculations for the quarter, our revenue actually, I'm sorry, did come in at our expectations, perhaps slightly above the expectations of the street. And we did get contributions from our most recent acquisitions. As you know, we talked about on our last call, we completed sizable acquisitions inside the second quarter. And on the year-to-date basis, we've met our capital deployment goals for the year. So we're definitely getting some benefit from those acquisitions as well as the contributions from last year.

[Dave Doherty, CFO at Surgery Partners]

But I will say, I would have you focus on the same-facility rate growth, revenue total growth, at close to 10%, leads you to the conclusion or should lead you to the conclusion that a majority of our beat is coming from the organic side of the business.

[Tao Qiu, Senior Healthcare Equity Research Analyst at Macquarie Research]

Yeah, I was more interested on the, in terms of the guidance rates, how much of the additional revenue and margin upside is from organic versus the novel acquisitions? Thanks.

[Eric Evans, CEO at Surgery Partners]

Yeah, to answer that, I'd say it's very consistent with what we've done over the past several years. You know, our algorithm is majority same-store organic. It continues to be that, it continues to be that going forward. Certainly, our timing's a little bit ahead on M&A this year, but in general, like, we're right on expectations of how we expect to grow per our algorithm, which is majority coming from organic, supplemented by, you know, strong M&A performance.

[Dave Doherty, CFO at Surgery Partners]

Maybe just to emphasize that, if you go back to how we've talked about same-facility revenue growth for the year, it has been at just about 10% now on a year-to-date basis, and we expect revenue to end the year in the high single digits.

[Tao Qiu, Senior Healthcare Equity Research Analyst at Macquarie Research]

Got you. And my second question is, and you—I don't know whether you guys talk about the cash collection trend during the quarter. What was the DSO during the second quarter? Any updated view on the free cash flow generation for 2024 and maybe an early read for 2025? Thank you.

[Dave Doherty, CFO at Surgery Partners]

Yeah. So, cash flow has been positive for us. I think you saw what we reported for the second quarter. It's, again, consistent with where we expected it to be. We are seeing, continued benefit from our investment on the revenue cycle side, of the equation. We're not changing our guidance for the year in terms of, cash flow generation. We still feel confident in our ability to deliver on that, and at this point, we are not giving 2025 guidance.

[Tao Qiu, Senior Healthcare Equity Research Analyst at Macquarie Research]

Got it. Thank you.

[Dave Doherty, CFO at Surgery Partners]

You're welcome.

[Operator]

We'll take our next question from Kevin Fischbeck of Bank of America.

[Kevin Fischbeck, Vice President, Director and Senior Equity Research Analyst at Bank of America]

Thanks. Just wanted to kind of focus on the volume number. I think after Q1, there was kind of a little surprised by how weak some of the volumes were for you and your competitor. And then this quarter seems to be a whole lot stronger. Is it just as simple as kind of a calendar, or do you see like kind of firming fundamental demand, you know, from Q1 into Q2?

[Eric Evans, CEO at Surgery Partners]

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

[Eric Evans, CEO at Surgery Partners]

It's a consistent business, our model is consistent, and so, I think from quarter to quarter, there's a lot of reaction sometimes to those numbers, but it's, it's calendar-based, it's timing-based, and quite honestly, we think about that on annual terms. We continue to believe we're going to exceed our algorithm again this year.

[Kevin Fischbeck, Vice President, Director and Senior Equity Research Analyst at Bank of America]

Okay, that's great. And then, I guess, you know, when you think about the ability to exceed that this year, is that driven by... I don't know if you can separate easily, again, what I might call core demand versus some of the company-specific things that you're doing around the physician recruiting, etc. Any color there?

[Eric Evans, CEO at Surgery Partners]

Yeah, so I think it's—first of all, we're obviously constantly working to grow the business on higher acuity procedures. You see that flowing through on physician recruitment. Really, really proud of the start to the year, our strongest start ever on physician recruitment. So all that continues to work well. But what I would point to is over the last five years, we've had really consistent case growth. It might bounce around quarter to quarter. We continue to see that strong demand this year, and it's not different than past years. It's just part of our model, and we do expect it to end up in the very much the same place.

[Kevin Fischbeck, Vice President, Director and Senior Equity Research Analyst at Bank of America]

All right, great. Thanks.

[Operator]

Our next question is from Andrew Mok of Barclays.

[Andrew Mok, Stock Analyst at Barclays]

Hi, good morning. Looks like there was a pretty meaningful increase in professional fees in the quarter. I think it was up 10% per case and over 100 basis points year-over-year. So just want to get a little bit more color on what's driving that increase. Thanks.

[Dave Doherty, CFO at Surgery Partners]

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

[Andrew Mok, Stock Analyst at Barclays]

Okay, great. That's helpful. And then on, on the free cash flow, I just wanted to follow up there. It sounds like you guys are confident around the annual targets for this year. I think year to date, year to date, free cash flow is tracking around $22 million. So just what's driving that confidence in the full year, and what's driving that second half acceleration? Thanks.

[Dave Doherty, CFO at Surgery Partners]

Yeah. The free cash flow number is in line with where we expected it to be. It is a bit, it's wonky, as we've talked about last year, because of the timing of collections.

[Dave Doherty, CFO at Surgery Partners]

... But what we've seen inside the second quarter is directly in line with what our internal expectations were. So that, that gives us increased confidence in our ability to kind of hit there. The book of business is seasonally adjusted. First half of the year is gonna be affected by distributions that come from last year. So the strong earnings inside the fourth quarter of last year do increase distributions for the first half of the year. That trend goes down a little bit, and of course, the book of business generates a lot more cash flow in the second half of the year.

[Andrew Mok, Stock Analyst at Barclays]

Great, thanks for the color.

[Operator]

We'll take our next question from Jason Cassorla of Citi.

[Jason Cassorla, Equity Research Analyst at Citi]

Great, thanks. Good morning. I just wanted to go back to your commentary around capital deployment. It sounds like, you know, you've met your capital deployment goals this year. Should we be reading into that in terms of your remaining deployment for the year being a bit more muted, or are you keeping optionality open for incremental capital deployment? Just any incremental color around capital deployment, how you're thinking about the back half and then go forward would be helpful.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

Hey, Jason, much appreciated. Yeah, while we've achieved our full year goals for the year, I would remind you that of the $280, $60 of that did relate to the prior year, fourth quarter. We closed it in the first week of January. So you're looking around $220, which was deploying our targeted goal of $200, plus remaining cash proceeds from dispositions from last year. So at this point, anything we do in the back half of the year is clearly going to be icing. We continue to have a strong pipeline. We like the optionality of that pipeline. We have LOIs on a number of items and a number of items that are under LOI.

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

So I don't think we're going to postpone, you know, acquisitions if the timing is right and the quality of the asset is there. But I would also say, as you know, these acquisitions can be very fickle, and so it's always about having a robust pipeline so that you can respond accordingly. But I would just read it as we continue to be a partner of choice, and we like where we stand relative to the current pipeline, and if opportunities present themselves, we'll take advantage of them in the back half of the year.

[Jason Cassorla, Equity Research Analyst at Citi]

Okay, great. Thanks, helpful. And then I just wanted to ask around total shoulders. They've been, you know, pretty sizable benefit this year. Can you just remind us the opportunity set on the shoulder side? And then just kind of given the complexity of total shoulders, how we should think about kind of like the margin considerations as those continue to move into the ASC. Just any more color around the shoulder opportunity set and kind of how we should think about margins for that service line. Thanks.

[Eric Evans, CEO at Surgery Partners]

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

[Eric Evans, CEO at Surgery Partners]

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

[Jason Cassorla, Equity Research Analyst at Citi]

Okay, great. Thank you.

[Operator]

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

[Bill Sutherland, Director of Research at Benchmark Company]

Hey, thanks. Good morning, everybody. Wayne, I think you mentioned about the procedures coming off the inpatient-only list, or maybe it was Eric, I'm not sure. Can you just give us a little more color on what's coming off and kind of how you think about the potential for you guys?

[Eric Evans, CEO at Surgery Partners]

Hey, Bill, it's Eric. You know, there's not a lot of news right now about stuff coming off the inpatient-only list for this year. As you know, last year, the early read was there wasn't much coming off, and then we got total shoulders added at the end. You know, we continue to be. We have so much room on the stuff they've added over the last few years. We feel good about what's out there. Certainly, we're always pushing every year. As technology gets better, there's more opportunities for us to move procedures out. You know, we talk a lot about our $150 billion TAM.

[Eric Evans, CEO at Surgery Partners]

$110 billion of that stuff is still gonna move out of the traditional acute care setting, and a lot of that has to do with technology changes and higher acuity procedures every year. So, you know, look, we expect that march to continue. It, it's sometimes incremental, sometimes it's got big jumps, like it did during COVID, when we got all the cardiology procedures and the rest of orthopedics. But, you know, look, I think you're gonna continue to see it grow what comes off that list, just because the math is too compelling. We save a ton of money for procedures. They're safely done in our setting, and so we're gonna continue to push on that every year.

[Eric Evans, CEO at Surgery Partners]

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

[Bill Sutherland, Director of Research at Benchmark Company]

Mm-hmm. And then, Wayne, back to your capital deployment comment. As your platform gets bigger and bigger, do you think we should think about, I mean, are you guys thinking about maybe a an annual target that's greater than $200 million?

[Wayne DeVeydt, Executive Chairman at Surgery Partners]

Hey, Bill. It's a really good question. I think we would continue to target the 200, though, for the next, you know, 3-5. I mean, to be fair, could we do a little more in any one year and create some lumpiness? Yes. But we're committed to the sub-3 times leverage goal that we've laid out to our shareholder base. And so to ultimately accomplish that goal, you know, we're gonna be in that 200 range. Again, could we go up in any one year? Yes, but long term, over time, that's where I think we would anticipate continuing to target.

[Bill Sutherland, Director of Research at Benchmark Company]

Great. Thanks, everybody.

[Operator]

Thank you. We'll take our next question from Whit Mayo of Leerink Partners. Your line is open.

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink]

Hey, thanks. Dave, I may have missed this, and I know you don't have a formal target this year around free cash flow, but just any thoughts around, like, how we should maybe think about the cash flow this year?

[Dave Doherty, CFO at Surgery Partners]

Yeah. Good morning, Whit. Yeah, you did miss it. We, we are talking about, our same target of $140-$160 as we end the year.

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink]

Okay, great. On state supplemental programs last year, Idaho was a benefit, that's gotten a little bit of attention. Just any anything in the quarter or anything for the year that we should we should be aware of?

[Dave Doherty, CFO at Surgery Partners]

No, nothing material. I mean, those programs, as you probably know, so a very, very low percentage of our business is Medicaid, so we're not that impacted by it. So I think our total-

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink]

Right

[Dave Doherty, CFO at Surgery Partners]

... mix is around 5%. So, like, those programs are very rarely material for us, but and this year, that's holding true.

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink]

Okay. Thanks, guys.

[Operator]

We'll take our final question from Ryan Langston of TD Cowen.

[Will Sevack, Analyst at TD Cowen]

Hey there, this is Will Sevack on for Ryan. Just kinda wondering about stock comp in the quarter. It was a little bit higher than quarterly averages. Was that related to the acquisitions in the quarter? And as well, if you could maybe just let us know what the revenue divestiture headwind was in the quarter. And I think that was gonna drop to zero in the back half of the year. Is that still accurate? Thank you.

[Dave Doherty, CFO at Surgery Partners]

Yeah, Will, I just take those in order. The stock comp piece is really just timing of vesting activity as well as just the kind of normal roll rate that would happen with those. Nothing unusual inside the stock comp piece. The revenue that we overcame from divestitures was minimal inside the quarter. Most of our divestitures were completed within the first half of last year, so there was a marginal impact inside the second quarter, but not material enough for us to kind of call out. You're right, that's not considered a headwind for us as we look at the back half of the year.

[Will Sevack, Analyst at TD Cowen]

Thank you.

[Operator]

This does conclude our question and answer session. I'd be happy to return the call to Eric Evans for closing comments.

[Eric Evans, CEO at Surgery Partners]

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

[Operator]

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

Participants

Executives

• Dave Doherty, CFO
• Eric Evans, CEO
• Wayne DeVeydt, Executive Chairman

Analysts

• Andrew Mok, Stock Analyst at Barclays
• Bill Sutherland, Director of Research at Benchmark Company
• Brian Tanquilut, Senior Equity Analyst at Jefferies
• Jason Cassorla, Equity Research Analyst at Citi
• Kevin Fischbeck, Vice President, Director and Senior Equity Research Analyst at Bank of America
• Tao Qiu, Senior Healthcare Equity Research Analyst at Macquarie Research
• Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink
• Will Sevack, Analyst at TD Cowen