Surgery Partners Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 12, 2025

Key Takeaways

  • Q1 Financial Performance: Net revenue of $776 M and adjusted EBITDA of $103.9 M represented year-over-year growth of 8.2% and 7%, respectively, in line with expectations.
  • Strong Organic Growth: Same facility revenue grew 5.2% in Q1 driven by 6.5% case volume growth, with full-year 2025 same facility growth expected at or above 6%.
  • Orthopedic Expansion & Technology Investment: First quarter total joint procedures increased 22%, supported by investment in 68 surgical robots and recruitment of approximately 150 new physicians.
  • Margin Dynamics: Slight margin pressure in Q1 due to mix shifts, but management maintains confidence in annual margin expansion through procurement efficiencies and synergies.
  • Capital Deployment & Liquidity Strength: Deployed $55 M on five acquisitions at under 8× EBITDA, opened 8 de novos in 2024 with 10 under construction, and holds over $615 M in total liquidity with net debt/EBITDA at 4.1×.
AI Generated. May Contain Errors.
Earnings Conference Call
Surgery Partners Q1 2025
00:00 / 00:00

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Operator

Greetings and welcome to Surgery Partners' first quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, CFO. Thank you. You may begin.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Good morning, and thank you for joining Surgery Partners' first quarter 2025 earnings call. My name is Dave Doherty, CFO of Surgery Partners. 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 filed with the SEC, 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 reconcile these measures to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Eric Evans, our CEO. Eric.

Eric Evans
Eric Evans
CEO at Surgery Partners

Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our first quarter results and the consistency of our long-term growth algorithm. Then I will provide additional color on the strong business execution and underpinning of each of the three pillars of our growth algorithm: organic growth, margin improvement, and deploying capital for M&A. I will also provide our views on how our business is positioned in the current regulatory environment, as well as our outlook for the remainder of the year. We are pleased to report Surgery Partners' first quarter net revenue of $776 million and adjusted EBITDA of $103.9 million, both in line with our expectations. The financial results announced this morning are a testament to the focus of our colleagues and physician partners to serve our communities with valuable, high-quality, and convenient care.

Eric Evans
Eric Evans
CEO at Surgery Partners

Our team continues to deliver on our mission to enhance patient quality of life through partnership. Compared to the prior year's first quarter, Adjusted EBITDA grew nearly 7%, and net revenue grew 8%, with contributions from each pillar of our long-term growth algorithm. Our growth in 2025 is attributed to continued strong organic results, including same-facility revenue growth of over 5%. Revenue growth was comprised of 6.5% surgical case growth, offset by a decline in rates of approximately 1%, driven primarily by robust growth in lower acuity specialties in the quarter, including growth from recently opened de novos, as well as a very strong prior-year comp. These components of our same-facility revenue growth are consistent with our internal expectations that we shared on our fourth quarter earnings call in March.

Eric Evans
Eric Evans
CEO at Surgery Partners

We continue to expect full-year 2025 same-facility growth to be at or above the high end of our growth algorithm target of 6%, with a more balanced growth between volume and rate as the year progresses. Dave will elaborate on our financial results next, but these results give us increased confidence about the company's growth trajectory and, in a more near-term basis, our guidance for 2025. Let me touch on some of the initiatives that are critical to our sustained long-term growth, starting with our organic growth activities. In the facilities that we consolidate, we performed over 160,000 surgical cases in the first quarter of 2025, compared to 153,000 in 2024. In the first quarter, we experienced growth across all of our core specialties.

Eric Evans
Eric Evans
CEO at Surgery Partners

The volume growth in GI procedures was relatively higher, and because these procedures bill at a relatively lower reimbursement rate when compared to the blended company average, that slight shift in business mix mathematically resulted in rate pressure in our same-facility rate metric. Having said that, we are still experiencing growth in our orthopedic cases, driven by an increase in total joint surgeries. To illustrate this, we performed over 29,000 orthopedic cases in the first quarter of 2025, 3.4% more than 2024. Most of this growth in orthopedic procedures is driven by total joint procedures, which grew 22% in the first quarter compared to the prior year. As a reminder, 80% of our surgical facilities have the capability to perform higher acuity orthopedic procedures, and currently, 48% of our facilities perform total joint procedures.

Eric Evans
Eric Evans
CEO at Surgery Partners

This capability provides significant additional growth as we continue to position our assets to meet the expanding orthopedic demand, with targeted recruitment and investments in additional equipment, including robotics. Within our portfolio, we have invested in 68 surgical robots that enable our physician partners to perform increasingly more complex and higher acuity procedures. These investments also help support our strong physician recruitment process. In the first quarter, we added nearly 150 new physicians to our facilities, many of which we expect to eventually become partners. This recruiting class includes all our specialties, but skews towards orthopedic-focused positions. It's early in the year, but so far, these newly recruited physicians are bringing surgical cases with higher overall acuity compared to the 2024 cohort. Based on our experience with prior recruiting classes, we fully expect 2025 recruits to continue to grow and have a meaningful impact in 2025 and beyond.

Eric Evans
Eric Evans
CEO at Surgery Partners

As I mentioned on our last call, in 2024, we opened eight de novo facilities. Since 2022, we've opened 20 de novo facilities, and we currently have 10 under construction, as well as a robust pipeline of future de novos we expect to begin development soon. De novos represent an exciting growth prospect for Surgery Partners, given the low cost of entry and opportunity to bring the scale of our operations to growth-oriented partners. As a reminder, those under development 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. Moving to our second pillar, margin expansion. During the quarter, we saw slight margin pressure, primarily due to the mix of business that will improve throughout the year.

Eric Evans
Eric Evans
CEO at Surgery Partners

When we consider our continued growth, ongoing procurement, operating efficiency initiatives, and synergy achieved on previously acquired facilities, we have high confidence to deliver margin expansion annually, as our guidance implies for 2025. The third and final leg of our long-term growth algorithm is acquiring and integrating accretive surgical facilities into our platform. I'm immensely proud of our dedicated development team that manages and maintains a robust pipeline of attractive partnership opportunities. To date, in 2025, we deployed $55 million and have added five surgical facilities at an effective multiple under 8x Adjusted EBITDA. 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. The pipeline of attractive assets is robust and supportive of our 2025 guidance.

Eric Evans
Eric Evans
CEO at Surgery Partners

As Dave will discuss, we have sufficient liquidity to fund this growth in the short and long term without having to tap the capital markets. The level of activity supporting our comprehensive M&A strategy requires incremental variable costs in terms of due diligence, transaction costs, integration costs, and de novo working capital investment. As we discussed on our last call, transaction and integration efforts were higher than typical, given the level and complexity of acquisitions completed in 2024, but we expect this level of spend to significantly diminish in the second half of 2025, based on a more normalized volume of expected M&A. Next, I would like to briefly comment on how Surgery Partners is positioned, given the current significant regulatory uncertainty. I will start with tariffs and their potential impact on Surgery Partners. Like many of our peers, our primary purchasing organization is HealthTrust.

Eric Evans
Eric Evans
CEO at Surgery Partners

Nearly 70% of our purchased goods go through this GPO. HealthTrust has been a great partner for several reasons, but in this case, the significant contracting transparency they provide gives us confidence in estimating our exposure to global trade. For example, working with HealthTrust, we know the country of origin for our spend, our contract renewal risks,as well as our mitigation options available. Similarly, through our dedicated professional supply chain team, we have visibility to where we have tariff exposure. We can confidently report that we don't have material exposure in the near to midterm to any tariff-related price increases, nor do we believe there is a substantial risk to our supply chains.

Eric Evans
Eric Evans
CEO at Surgery Partners

Regarding potential legislative changes to Medicaid and exchange-based reimbursement programs, I would like to remind listeners that our exposure to these payer groups is less than 5% of our revenue, and we do not consider prospective changes to either program as a risk to our short or long-term growth prospects. We will continue to closely monitor ongoing regulatory developments and remain prepared to adjust our approach as needed to ensure continued growth. Before I turn it over to Dave, I would like to briefly update you on the non-binding acquisition proposal that Bain Capital sent to our board of directors in late January. Bain has been a longstanding investor in Surgery Partners and a valued partner to us over the years, with representation on our board.

Eric Evans
Eric Evans
CEO at Surgery Partners

As we noted in our press release on January 28, in our fourth quarter earnings call, our board formed a special committee comprised of independent directors that are not affiliated with Bain Capital to consider this proposal with the help of leading independent financial and legal advisors. Out of respect for the process underway with the special committee, our Executive Chair, Wayne DeVeydt, who serves as a managing director at Bain, continues to remove himself from many of his normal activities with Surgery Partners, including this call. We will not be commenting further on this matter unless or until there is a material update. Overall, I am pleased with the start of 2025, as the company continues to deliver growth that is consistent with our long-term algorithm.

Eric Evans
Eric Evans
CEO at Surgery Partners

Our continued focus on maximizing the performance of our portfolio, robust M&A pipeline, steady improvements in enabling greater operating efficiencies, and bullish outlook on surgical trends and the regulatory landscape have positioned us to continue to deliver industry-leading earnings growth in 2025 and beyond. With that, I will now turn the call over to Dave to provide more color on our financial results. Dave?

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Thanks, Eric. Starting with the top line, we performed over 160,000 surgical cases in our consolidated facilities in the first quarter, 4.5% higher than 2023. These cases spanned across all our specialties, with higher relative growth in gastrointestinal and MSK procedures, including continued growth in orthopedic cases. This case growth drove our first quarter revenue to $776 million, 8.2% higher than the first quarter of 2023. Our same-facility total revenue increased 5.2% in the first quarter, consistent with our growth algorithm target of 4%-6%, and in line with our expectations for the quarter. Adjusted EBITDA was $103.9 million for the first quarter, giving us a margin of 13.4%. We ended the quarter with $229 million in cash. When combined with the available revolver capacity, we have over $615 million in total liquidity.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

We reported operating cash flows of $6 million in the first quarter of 2025, distributed $62 million to our physician partners, and incurred $6 million in maintenance-related capital expenditures. As a reminder, operating cash flows are typically lower in the first quarter of the year due primarily to quarterly earnings patterns, but these results can also be impacted by the timing of working capital activities. For example, accounts payable were processed at a significantly faster clip in the first quarter versus at year-end as a result of payment schedules related to the holidays at the end of December. Also, we are pleased that our first-quarter distributions to our partners were higher than the prior year, based on facility-level timing of certain distributions that effectively doubled the impact in the first quarter, as well as higher distributions related to stronger results in the fourth quarter.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

We are committed to providing transparency into the drivers of our cash flow generation. We are seeing incremental improvements in the cash conversion of our revenue, with the metric of day sales outstanding decreasing two days from the fourth quarter, which is critical to convert the company's growing earnings. We remain pleased with the disciplined management of capital deployed for maintenance-related purchases. Moving to the balance sheet, we have $2.2 billion in outstanding corporate debt with no maturity dates until 2030. The effective interest rate on our corporate debt was fixed at approximately 6% through March 31, 2025. Our $1.4 billion term loan is now protected by interest rate caps that limit the variable rate of the interest rate to 5%. That floating rate is currently 4.3%, but that could change throughout the year.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Our first-quarter ratio of total net debt to EBITDA, as calculated under our credit agreement, was 4.1x, consistent with our expectations given recent acquisitions. Leverage calculated using consolidated debt from our balance sheet divided by EBITDA was 4.8x. Leverage will decrease based on our continued earnings growth. As we have discussed previously, our 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 at levels that support our long-term growth algorithm without having to access incremental capital from the debt or equity markets over the next five years. The results we reported today and all metrics are very much aligned with our internal expectations that support our guidance that we are reiterating this morning.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Specifically, we are reaffirming full-year 2025 revenue and adjusted EBITDA guidance to be in the range of $3.3 billion-$3.45 billion and $555 million-$565 million, respectively. Our guidance implies continued margin expansion in line with our long-term growth algorithm, reflecting our ongoing and accretive progress in supply chain and revenue cycle, as well as the integration benefits from recent acquisitions and contributions from de novos we opened last year. We have high confidence in these growth areas based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting and managed care contracting. With that, I would like to turn the call back over to the operator for questions. Operator?

Operator

Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If you would like to remove yourself from the queue, please press Star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Once again, that's Star one to ask a question at this time. One moment while we pull for our first question. The first question comes from Brian Tanquilut with Jefferies. Please proceed.

Brian Tanquilut
Brian Tanquilut
Senior Equity Analyst at Jefferies

Hey, good morning, guys. Eric, congrats on the strong volume quarter. Just curious how you're thinking about current utilization trends and the sustainability of that. Maybe the other side of this question would just be the same-store revenue per procedure, obviously a little softer this past quarter. I mean, is that just a tough comp, or is there anything we should be thinking about as we model out same-store going forward? Thank you.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah. Hey, Brian. Thank you. Good morning to you as well. Appreciate the question. I would say, obviously, there's a tough comp associated with the pricing, but let me give you a little bit more detail. I think first quarter same-store revenue growth was very much in line with where we thought it would be. The case growth is a reflection of some stronger de novos that are coming online and some MSK growth that I think is pushing that up. You think about this, as I mentioned in my comments, higher volume, lower revenue, it's really just a mix and a little bit of a comp, as you point out. As a reminder, our same-facility metric is based on the number of operating days per quarter, which was 63 in the first quarter. In our business, the days of the week matter for certain volumes.

Eric Evans
Eric Evans
CEO at Surgery Partners

Internally, as we've talked about in the past, we don't place a lot of stock in kind of any given quarter. We talked about this metric. We would expect by the end of the year to be at the high end or above our long-term range with balance between volume and growth. This is very much in line with where we thought we'd be. We did have very strong growth across all of our core service lines, particularly in GI and MSK, both of which are kind of growing at rates that are above our long-term assumptions. In addition to the typical growth expected in our portfolio, we also experience, as I mentioned, this growth in de novos that opened in late 2023.

Eric Evans
Eric Evans
CEO at Surgery Partners

De novos ramp up the full run rate typically over a couple of years, and that time to break even is within the initial 6-12 months. These de novos are performing very well out of the gate, and they're kind of on their way to their full run rate. That is having an effect on this mix, which you're seeing show up in rate. Again, GI, really, really happy with the GI growth in the first quarter. It has a lot to do with the calendar and the way these cases tend to fall. The rate pressure really is just a matter of the underlying commercial and government mix, nothing there to really read into.

Eric Evans
Eric Evans
CEO at Surgery Partners

I would just point you back to we expect to be kind of more balanced between rate and volume, much like we finished last year over the course of the year.

Brian Tanquilut
Brian Tanquilut
Senior Equity Analyst at Jefferies

No, that makes sense. Maybe, David, as a follow-up, as I think about your comments on free cash flow generation, obviously, Q1 is seasonally weaker. It sounds like there were a few kind of timing issues there. Curious how we should be thinking about the seasonality of free cash flow generation over the course of the year.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. For sure. The view that we have on forward-looking operating cash flows is we should see some overall improvement as the earnings growth manifested. As you look at our earnings growth guidance that we have out there, it should be translating nicely over the course of the year. Much like we've seen in the past, it tends to skew better as the year progresses, second quarter being relatively strong and fourth quarter being our strongest quarter from a cash flow generation perspective. We do believe, as we think and as we've talked about, I think on the call a little bit earlier, and as we talked about in the fourth quarter, distributions, which is an offset to cash, as you kind of look at this from a free cash flow perspective, distributions should also grow as we go throughout the course of the year.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Now, we did effectively double up on our distributions inside the first quarter, which did create that little bit of a pressure point. That should normalize as we go throughout the year. The only watch-out on cash flows as we look at the year that is kind of unrelated to the underlying strength of our operating performance and better working capital management would be related to our interest costs. As you know, we were protected by an interest rate swap on our $1.4 billion term loan. That swap expired at the end of the first quarter, is being replaced by an interest rate cap that caps our interest rate exposure at 5%. We feel really good about that over the life of the term loan. However, that will create a headwind for us as we go into the balance of this year.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

The math that we look at this does create some exposure based on where we think SOFR rates currently are, which is at roughly 4.4%. That would be compared to effectively a 2.2% interest rate cap that we had through the swap that just expired. You have about a 220 basis point exposure that will be a headwind on cash flows for the last nine months of the year.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah, Brian, I might add to that, though, just big picture, stepping back a little bit. The business continues to produce a lot of strong cash flow, right? We know it's a big focus of investors. When we reiterate our long-term growth algorithm, we do rely on investing in M&A. We appreciate the sensitivity of equity holders on leverage. I would just reiterate that we have no concerns with the generation of sufficient free cash flow given our current liquidity to fund our short and long-term growth without needing to go back to the equity or debt market. We feel good about where it's going. We do expect that to strengthen throughout the year and to continue to grow with the company as we move forward.

Brian Tanquilut
Brian Tanquilut
Senior Equity Analyst at Jefferies

Sounds good. Thank you.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah. Thanks, Brian.

Operator

The next question comes from Joanna Gajuk with Bank of America. Please proceed.

Joanna Gajuk
Joanna Gajuk
Equity Research Analyst at Bank of America

Hi, good morning. Thanks so much for taking the question. I guess a little bit of a follow-up on the pricing discussion. On the Q4 call, I think you alluded to a slight pressure on payer max. Have you actually seen that in 2025? Is it essentially alluding to the idea of Medicare cases growing faster?

Eric Evans
Eric Evans
CEO at Surgery Partners

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

Joanna Gajuk
Joanna Gajuk
Equity Research Analyst at Bank of America

Okay. Good. Glad we clarified that. I guess related to that, my question on commercial rates for this year, I guess, where are you tracking, I guess, for this year? I guess, how are the negotiations for the upcoming cycle? Have you seen any change in contracting with these commercial payers or maybe MA payers for that matter? Obviously, there's a lot of pressure on these guys on higher trends. I just want to check if there's anything that's changing. Maybe I can throw in there any change to denials and things like that. Thank you.

Eric Evans
Eric Evans
CEO at Surgery Partners

Joanna, thanks for the questions. I'll just start with it's always nice to be in a business where your three major constituents prefer you, right? Patients prefer us because of their experience and their outcomes. Doctors prefer us because of our efficiency, and they can be at the table. Of course, payers prefer us because we are the low-cost alternative. They continue to be very constructive with us. I think we continue to find ways to try to work with them to move patients to the right side of care. There's nothing that's really changed in those negotiations. I think there's, again, a pretty warm reception for us trying to work together to create value for those companies and move patients to the right side of care. I think the trends you've seen over the last couple of years are still holding true.

Eric Evans
Eric Evans
CEO at Surgery Partners

As we've mentioned, we're pretty much fully contracted for this year if you think about where we start the year. We have really good visibility in our outlook and guidance as far as rate goes. Same with MA. I mean, MA, obviously, there's some challenges. You hear about some challenges with MA. We obviously have great MA relationships. We're a value provider. Don't see that changing. I think you had one other question at the end. I'm going to let Dave answer that.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah, it was a rep cycle question. And it's a good one because in the third quarter last year, we did talk about some changing dynamic in the way payers were processing medical necessity and denial charges. We did see it. We talked a little bit about that pressure in the fourth quarter call. You may recall, Joanna, we did talk about the adjustments that we put in place on our rep cycle as part of our standardization journey that we're taking inside that world. I'm pleased to say inside the first quarter that continued. So we did not see any adverse change in our denial patterns. To the contrary, rather, we're now seeing a little bit more on the positive side. Again, the nature of our business almost entirely across the platform is scheduled procedures.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

That enables us to do a lot of work on a pre-service basis to get in front of many medical necessity or any changing requirements from the payer community. I'm pleased to say that we've implemented that. You can see that in our days sales outstanding. That metric continues to improve. I think we improved two days inside the quarter. A really positive trend for us.

Joanna Gajuk
Joanna Gajuk
Equity Research Analyst at Bank of America

Great. Thank you so much for the color.

Operator

The next question comes from Benjamin Rossi with JPMorgan. Please proceed.

Benjamin Rossi
Benjamin Rossi
Analyst at JPMorgan

Great. Thanks for the question. Just turning to expenses on professional fees, that came in a little high here versus expectations. Just given some of the broader industry pressure here, how would you describe current labor dynamics for specialty areas like anesthesia during Q1? Are there any particular specialties or geographies where this growth has been noticeably accelerating over the quarter? Thanks.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah, Ben, thanks for the question. I'll just take one exception to the way you got the preamble to your question there. This was actually in line with our expectations from a pro fee perspective. Pro fees, the driver behind that is primarily associated with two of the significant acquisitions that we did last year. At the beginning of the year, we acquired Key-Whitman that came with several practices. That's an ophthalmology vehicle business, a couple of ASCs, several practices. In the middle of the year, as we talked about, we did an acquisition, a pretty significant acquisition up in Milwaukee. That too came with associated physician practices, which carry some costs that kind of sit inside there.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

The anesthesia pressure for us, although we have seen that anesthesia cost marginally being affected across some of our facilities, most of our facilities still are not being affected by adversity in either the availability of anesthesia or the revenue guarantees required for them. I think that speaks to the nature of our business, I think, as Eric and I have talked about in prior meetings. We see no notable change inside the first quarter. At this point, we're not seeing that being a major headwind for us in 2025 or beyond.

Benjamin Rossi
Benjamin Rossi
Analyst at JPMorgan

Great. No, appreciate the clarification there. I guess as a follow-up, just on the physician recruiting, it sounds like this year's 150-person cohort is coming together nicely across specialties, and you're getting maybe some of the compounding growth potential from last year's class. I guess, what is the percentage of doctors from this class coming from higher acuity service lines? Is it north of 50%?

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah, I don't know if we've disclosed that. I'd start off and say we're certainly proud of it. It's another strong start for the year for recruiting. Definitely in line with our historical run rate and our expectations. We have a very diverse recruiting class. It spans all of our specialties. I don't know that I have that percentage breakdown as far as whether it's mostly high acuity, although I think the mix of orthopedic continues to grow. Relative to 2024, which was a record-setting year, this class really skews higher in revenue generated per doctor. So that net revenue per physician is up about 14% versus what we saw last year. We remain optimistic in our ability to recruit the 500-600 docs that we have built into our plan. We've been doing that consistently and I think become a lot more targeted.

Eric Evans
Eric Evans
CEO at Surgery Partners

As a reminder, we've seen strong multi-year gains in our recruiting cohorts. For example, the doctors we recruited in Q1 of last year, they brought an additional 160% more cases in the first quarter of 2025 with 182% more revenue. It is a compounding effect. You guys have heard us talk about this in that first year. You usually expect to see the second year double for each cohort. It is certainly a big focus area for us. We spend a lot of time on it, and we're constantly trying to refine the way we target the right doctors for our facilities.

Benjamin Rossi
Benjamin Rossi
Analyst at JPMorgan

Great. Thanks for the commentary there.

Operator

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

Sarah James
Sarah James
Managing Director and Equity Analyst at Cantor Fitzgerald

Thank you. You guys have been talking for a while about the GI mix. I think the last data point that we have is that it was going up about 1% a year, and it was 24% in 2023. What does it look like now? Can you give us a little context for every percent it goes up? What type of headwind is that on your revenue per case? Thanks.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. So we did experience growth in the GI portfolio, and I think it had a marginal impact on the relative share of GI cases in our mix, the total mix that we have. I think that 24%. I'll go ahead and check your numbers there, Sarah, just because I don't have them handy in front of me. If we did see some benefit that kind of sat inside there, it's going to be relatively minor, I would think, in terms of basis points year-over-year. However, as Eric mentioned, it's all the nature of kind of the calendar. You've heard me say this before. I really dislike a quarterly view of same-store metrics because of the influence of the calendar that sits inside there. 63 days.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Depending on the day of the week and the days that happen inside any particular facility, you could have a large number of procedures that does adversely or, in this case, positively affect the same-store case metrics, which cases look great, and the rate then will suffer just because on a relative basis, you have relatively low acuity GI procedures that sit in there. Great news story for us. We are experiencing, I will say this, we are experiencing GI case volume over the last six months that is slightly higher than our long-term growth algorithm. We're really pleased about that. We do expect that to be a continuation as we go throughout the year. Nothing significantly out of the norm, but that volume increase, again, primarily related to the calendar inside the quarter, did affect that rate pressure.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

I'll remind you what Eric mentioned about the forward look on same-facility rate. Any given quarter is going to have some unusual variance just because of that calendar. That normalizes. As we project out, we do a budget, and our budget process does look at every single day of the week. We have some pretty good visibility to it. We predicted that we were going to see rate pressure relative to case growth inside the first quarter. You might recall that from our fourth quarter call a few weeks ago. We will see this kind of return to somewhat more balanced growth, but still end the year at a same-facility revenue number that's above our growth algorithm of 4%-6%. I think it'll look at the end of the year somewhat consistent with what we saw last year.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah. Sarah, I would just reiterate the GI growth. We're really pleased with that service line. We have three businesses that make up the majority of our business. All three of them, ophthalmology, GI, MSK, growing at nice clips. We talk a lot about orthopedics because it's the one that drives tremendous value for payers and patients and is moving so quickly. We really like our GI and ophthalmology business, and they continue to grow nicely.

Sarah James
Sarah James
Managing Director and Equity Analyst at Cantor Fitzgerald

Thank you.

Operator

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

Andrew Mok
Andrew Mok
Director of Equity Research at Barclays

Hi. Good morning. You projected confidence in the near to midterm tariff exposure in your prepared remarks. Can you elaborate on what's driving that confidence? Is that driven more by pricing protections built into your supply contracts or total exposure to countries with tariffs? Any detail there would be helpful. Thanks.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. I can't provide a whole lot more than what we talked about earlier. 70% of our spend right now goes through HealthTrust. As you probably have heard from several of our peer group, that relationship with HealthTrust is remarkable in terms of the contract protection that sits underneath it, but also good visibility as to where you could have tariff exposure going forward. This is what we like about that increased visibility to it. We know when contracts will expire, and we know all that we can start to talk to our physician partners about well in advance of any potential impact if the tariffs were to survive. Inside the year, we see very little exposure to any contract renewals that could ultimately take any tariff exposure that kind of sits inside there.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

We do not really see any material change in that even in the midterm forward-looking view. The remaining spend, so you could look at 70% of our spend going through HealthTrust. The remaining amount, a large majority of that is also under contract. This is just what our professional procurement team does. Likewise, we have good visibility to both the future state when you may be exposed by looking at the country of origin that sits there, as well as when that could occur and what alternatives we may have available to us. We feel pretty good. This is what a professional procurement team is responsible for doing. This is certainly our expectations of both that team as well as our relationship with HealthTrust. They have helped us significantly.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

If you look back all the way back to COVID, just the way for us to navigate through disruptions that could occur either from a pricing perspective or from an availability perspective. At this point, we see no major headwinds that sit out there, but it's definitely something that we're paying very close attention to.

Andrew Mok
Andrew Mok
Director of Equity Research at Barclays

Great. Maybe a follow-up on the cash flow. You talked about the timing impact on operating cash flows, but it also looks like the Q1 NCI payout is up meaningfully both year over year and relative to the Q4 NCI expense. Is there anything impacting the timing or payout to NCI partners in the quarter? Thanks.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. It's really just timing. I'll remind everybody about how the calendar looked. I hate to kind of always talk about the calendar, but the calendar at the end of the year had holidays kind of awkwardly in the middle of the weeks. Our distributions to our physician partners and to Surgery Partners happen at a facility level. It's not a centrally controlled process. Although the formulas that sit behind that are largely the same, those checks are cut at the facility level. What we experienced at the end of the fourth quarter was slightly lower distribution. Some of those, in many cases, some of the larger ones occurred in the first week of January. Normally, they will happen at the end of any given month. You saw basically a double-up. I think we were at $62 or $63 million of distributions.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

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

Andrew Mok
Andrew Mok
Director of Equity Research at Barclays

Great. Thank you.

Operator

The next question comes from A.J. Rice with UBS. Please proceed.

A.J. Rice
A.J. Rice
Managing Director at UBS

Hi, everybody. Just first, maybe on the comments about the balance sheet and leverage. I know you say that on your growth targets, you can do what you want to do in M&A and development with internal cash flow. Just to remind us, what are the parameters as we think out over the next few years on what would be a normal year for M&A and development for you? Do you have an ultimate goal as to where you'd like to see those leverage levels get to?

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. Great question, A.J. Thank you so much for asking that again. Leverage, what we've talked about from a leverage perspective, is really a factor of the substantial growth and outsized growth that this company has experienced, right? Double-digit, mid-teens has been this company's story for the history, at least the past eight years. It's something that we do expect to see going forward. A key element to that, of course, is deploying capital for M&A and de novo activities. We target around $200 million of M&A mid-year convention. We assume kind of relatively stable pricing on that. We've experienced roughly 8x historical earnings. Again, for the past eight years, I think we've averaged something just slightly below that 8x. For modeling purposes, we assume 8x going forward.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

At that level of spend every single year with immediate accretion that comes from there, we do think it converts to cash flow quite nicely. Our models do suggest continued conversion of cash on both existing assets as well as newly acquired ones. Coupled with that growth in the mid-teens level, we'll spit off cash sufficient for us to keep that overall leverage number going downwards. Whether you look at this on a credit agreement basis or use the face of the balance sheet, you see the slope of the line going down. Using credit agreement leverage, what we have talked about is we target a sub-three leverage number. I think we're at 4.1 at the end of the first quarter.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

We do expect that number is going to come down to roughly around in the three range at the end of this year, and it will continue to go down over the next few years. If your modeling does suggest anything different than that, it is a relatively simple model, then let's talk to the team about that because in every model that we've looked at, we do see that coming down over time.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. If I could just maybe have a follow-up. Talking about the same-store metrics, pricing, and case volumes, you're just coming off a year of above-average M&A and development activity. Can you just remind us when those get into the same-store mix? Will those acquisitions and development be enough to skew either more positively or more negatively what we're likely to see on same-store pricing and same-store volumes?

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Sure. Again, great question because this company's rate, as we've talked about, can be significantly affected by the mix of business that you see. If you look at last year's acquisitions at the beginning of the year, Key-Whitman was an ophthalmology book of business. Middle of the year, and for the most part, the acquisitions that we completed in the balance were more orthopedic and MSK-related focus, which do tend to have a higher net revenue per case. When they do come into our calculations, you should see some change that happens. We include them in our same-facility calculation when they are in there at the beginning and the end of the period. If you're doing a year-over-year comparison, any acquisition that we completed inside the second quarter last year would start to come into our same-facility calculation in the third quarter of 2025.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. Great. Thanks so much.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

You're welcome.

Eric Evans
Eric Evans
CEO at Surgery Partners

Thanks, AJ.

Operator

The next question comes from William Spivack with TD Cowen. Please proceed.

William Spivack
William Spivack
Equity Research Associate at TD Cowen

Hey there. Just a quick one. Any impact from weather in the first quarter? If so, would you mind qualifying it? The second thing is, I know you do not all guide to free cash flow anymore, but given the puts and takes on better RCM, improved earnings, offset by higher interest expense and transaction fees, do you think free cash flow in 2024 will be higher, lower, or similar versus—sorry—this year versus prior year? Thanks.

Eric Evans
Eric Evans
CEO at Surgery Partners

William, I'll probably—I can knock both those out, I think, pretty quickly. On the weather side, we did have weather in the first quarter. We never really fully recaptured it, but honestly, we do not talk about it just because it was immaterial in the grand scheme of things. Certainly, it had some impact, but not worth talking about. Still had really strong case growth.

Eric Evans
Eric Evans
CEO at Surgery Partners

As you can see, we outran any kind of major impacts there. As far as free cash flow goes, we do expect—and we talked about this—we expect the business to grow free cash flow with the business. I think you should expect that this year, even with timing. More or less, free cash flow to us is a metric. We understand everybody's focused on it. We have the liquidity we need, and we expect to continue to grow that as we grow our business.

William Spivack
William Spivack
Equity Research Associate at TD Cowen

Got it. Thanks very much.

Operator

The next question comes from Matthew Gillmor with KeyBanc. Please proceed.

Matthew Gillmor
Matthew Gillmor
Director and Equity Research Analyst at KeyBanc

Hey, thanks for the question. Maybe following up on some of the margin comments. In the press release, there was a comment about ongoing operating system improvements that'll help drive margin expansion. Maybe that was in reference to rev cycle, but just wanted to get a sense for what those efforts are focused on to drive margins higher.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah. I'd say there's several things that go into our operating system, obviously. A big part of that is rev cycle, and Dave can talk about some specifics on that. Also, supply chain and scheduling efficiency, all those things impact costs. The more efficient we are in scheduling, the better utilization we drive out of a given facility, the lower anesthesia costs because they're more efficient. There's just a bunch of things that are part of our operating system. I think in relation to what was mentioned in the script, certainly, revenue cycle is a big part of that. Dave can talk a little bit about that journey.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. Rev cycle for us is—and we've talked about this a lot last year—we embarked upon a multi-year journey to come up with one standardized rev cycle approach across the organization. This is after years of underlying IT integration, building a data warehouse that enables us to look across the platform and drive directly into billing systems. We've made a lot of that investment in the early years, positioned ourselves nicely to start this journey last year that focuses not only on process, but using better data to make informed decisions, which ultimately will turn right back around to higher revenue generation and greater use of the scale of the company. We're awfully proud of that. It's a multi-year journey, as I mentioned.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

As we go through that process, much like you saw in the fourth quarter and the first quarter, we should begin to see some benefits coming through how we manage receivables and the overall net revenue pull-through that we get from that. That will continue for a period of time. We'll talk about that as we go throughout the year and perhaps into 2026. I'll say this: the work that we do to integrate companies and the maintenance of that kind of process is critical to us. For example, over the past several years, we've included some relatively larger acquisitions, including the one we did in the second quarter of last year, that do require us to plug and play data from the revenue or billing systems from some of our facilities.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

The larger the facility, the more deliberate we have to be in terms of integrating or migrating to a common platform. At the end of the year last year and as we go into this year, we are completing three of those migrations. Those migrations, much like every other integration that we do, will turn into enhanced margin generation, again, for the same reasons that we talked about. Having common data platforms enables us to bring the scale of the company not only from a revenue cycle perspective, but also manage care, clinical variation, supply chain, all of that. We are very excited about that. It does require some investment, ongoing focus in that space. That is what you are seeing kind of happen this year. Thank you for the question.

Matthew Gillmor
Matthew Gillmor
Director and Equity Research Analyst at KeyBanc

Got it. Thanks. One quick follow-up. Anything to call out in terms of how flu impacted volumes or even case mix in the quarter?

Eric Evans
Eric Evans
CEO at Surgery Partners

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

Matthew Gillmor
Matthew Gillmor
Director and Equity Research Analyst at KeyBanc

Got it. Thank you.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yep.

Operator

The next question comes from Whit Mayo with Leerink Partners. Please proceed.

Whit Mayo
Whit Mayo
Senior Managing Director and Senior Research Analyst at Leerink Partners

Hey, thanks. I think you said that you've closed five acquisitions or five facilities this year. Were those consolidated or unconsolidated, Dave? And then just remind me on the de novo targets for this year.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. The five acquisitions that we did, four inside the first quarter, I think one slipped into the beginning of the second quarter, all consolidating assets, all ASCs that will provide immediate benefit to us. The de novos, we opened 10 last year. They're in various stages of development. As soon as they flip to break even, we will start to see that benefit come through to our EBITDA line item. I think we have close to that number currently in development or under construction that we expect the number of them to open up in 2025, some of them flipping into 2026. We have a handful, I think, north of or close to our annual target of 10 in the pipeline and under syndication opportunities right now. We are really pleased, and thank you for asking that question.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

The de novo track for us is a very intentional focus for us as an organization where we target to have 10 under development every single year. Last year, a great year for us. This year is shaping up to be very good, and the pipeline looks good from an ongoing perspective going forward.

Whit Mayo
Whit Mayo
Senior Managing Director and Senior Research Analyst at Leerink Partners

On those de novos, are those consolidated or mostly unconsolidated? My follow-up is just more around the portfolio refresh that you went through last year. Just wanted to get any more thoughts on additional activity.

Eric Evans
Eric Evans
CEO at Surgery Partners

Yeah. Thanks, Whit. Most of those are going to be de novos, are going to be unconsolidated, at least at the beginning. We expect that maybe half of those will end up being consolidating at some point in the future, but they start out as minority investments. Quite honestly, the one thing that I would just add on the de novo side, they're beneficial to us for lots of reasons. One of the big reasons is that they typically are set up in a place where you're pulling directly out of the traditional acute care system. It is a really opportunity to work with payers in a way that's different because you're creating a ton of value. It gives us a reset there. They tend to be really higher acuity as well. There are so many angles to the de novos that we're excited about.

Eric Evans
Eric Evans
CEO at Surgery Partners

As far as the refresh, as you know, we did do a fair amount of divestitures at the end of last year. Do not expect any kind near that size this year as far as kind of full divestiture. That will not be an ongoing play.

Dave Doherty
Dave Doherty
CFO at Surgery Partners

Yeah. Having said that, Whit, managing a portfolio of over 160 facilities will always have some degree of activity. As Eric mentioned, last year was an unusually high year, relatively small impact to the company. That is why we are not talking about that as a major headwind this year. We will constantly refresh that portfolio. We have got a team that is kind of dedicated to making sure that we are maximizing the value that kind of sits inside there for the communities that they serve.

Whit Mayo
Whit Mayo
Senior Managing Director and Senior Research Analyst at Leerink Partners

Thanks.

Operator

Thank you. The last question will come from Ben Hedrick with RBC Capital. Please proceed.

Ben Hedrick
Ben Hedrick
Analyst at RBC Capital

Great. Thank you for squeezing me in. Just wanted to follow up on your growth commentary around GI and MSK. I just wanted to see kind of where cardio procedures are fitting in on that. I know in the past you've talked about that being a longer ramp, but just wanted to see kind of how growth there is progressing and how that's fitting into your recruiting and development efforts. Thanks.

Eric Evans
Eric Evans
CEO at Surgery Partners

Hey, Ben. Thanks for the question. Yeah, I definitely talked about this in the past. Over the long run, we're quite excited about this moving over. In the near term, there's still a lot of things that make it a slow growth kind of service line. Just number of states that still haven't actually caught up with Medicare on this. I will say we have a number of facilities that are adding cardiac CRM, cardiac rhythm management procedures, EP. I was just at a grand opening for our first cardiac cath lab-based ASC recently. We're seeing those come into the platform. I would just tell you that the end growth should be quite strong, I think, over the next few years. Again, it's a small end. We are excited about that, though, Ben, because I do think long term, it's much like ortho.

Eric Evans
Eric Evans
CEO at Surgery Partners

It's one of those procedures where our savings in our side of care is five figures plus per case. I definitely think, as you look at the cost pressures in the health system, it's one of those areas that we do expect over time. If ortho ever does slow down, which it's not anywhere near slowing down at this point, lots left to convert. That one is a huge part of that kind of, let's call it $100 billion that's going to transition out of the traditional acute care system into our side of care over the next several years.

Ben Hedrick
Ben Hedrick
Analyst at RBC Capital

Great. Thank you very much.

Eric Evans
Eric Evans
CEO at Surgery Partners

Of course.

Operator

Thank you. At this time, I would like to turn the floor back to Eric Evans for closing remarks.

Eric Evans
Eric Evans
CEO at Surgery Partners

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

Operator

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

Executives
    • Dave Doherty
      Dave Doherty
      CFO
    • Eric Evans
      Eric Evans
      CEO
Analysts
    • Sarah James
      Managing Director and Equity Analyst at Cantor Fitzgerald
    • Benjamin Rossi
      Analyst at JPMorgan
    • Whit Mayo
      Senior Managing Director and Senior Research Analyst at Leerink Partners
    • Matthew Gillmor
      Director and Equity Research Analyst at KeyBanc
    • William Spivack
      Equity Research Associate at TD Cowen
    • Joanna Gajuk
      Equity Research Analyst at Bank of America
    • Andrew Mok
      Director of Equity Research at Barclays
    • Ben Hedrick
      Analyst at RBC Capital
    • A.J. Rice
      Managing Director at UBS
    • Brian Tanquilut
      Senior Equity Analyst at Jefferies
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