Surgery Partners, Inc.

Greetings. Welcome to Surgery Partners' first quarter 2024 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. Please note this conference is being recorded. I will now turn the conference over to Dave Dougherty, CFO. Thank you. You may begin.

Good morning. Good morning. My name is Dave Doherty, CFO of Surgery Partners. I am joined today by Eric Evans, our CEO, and Wayne DeVite, our Executive Chairman. During this call, we will make forward-looking statements. There are risk factors that can 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. With that, I will turn the call over to Wayne. Wayne?

Thank you, Dave. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated first quarter results and the strength we continue to see in our long-term growth algorithm as it relates to both our organic and capital deployment initiatives. I will then provide a brief update on our recent acquisition activity and refreshed outlook for the remainder of the year before I hand over the call to Eric and Dave. They will provide additional insights into our operating and financial performance for the quarter along with recent activities to further strengthen our balance sheet and support our long-term mid-teens growth goals. Turning to our first quarter results, we reported net revenue of approximately $717 million, representing growth of 7.7% over the prior year quarter. On a same facility basis, net revenues grew 10.2% as compared to the comparable period, representing a combination of both case and net revenue per case growth. Adjusted EBITDA was $97.5 million, representing 8.2% growth over the prior year quarter, with adjusted EBITDA margins improving in the quarter by 10 basis points to 13.6%. Finally, our efforts to pursue higher acuity procedures continue to produce strong results, with total joint replacements increasing by 54% over the first quarter of 2023. Eric will provide additional insights into our physician recruitment and total joint expansion programs, along with our early success in targeting orthopedic surgeons specializing in total shoulder procedures, which were removed from the inpatient only list starting January 1st 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 expanse and 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 movement of higher acuity procedures into a purpose-built outpatient setting. We believe our results reflect the strength and durability of our business model as we pursue this highly fragmented segment, which currently consists of over 6,000 ambulatory surgical facilities and an estimated $150 billion total addressable market, representing both current and expected surgical procedures to be performed 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. As a reminder, we previously completed a $60 million transaction in early January that we had initially targeted closing in the fourth quarter of 2023. Since that time, We've maintained a robust pipeline and anticipate closing an additional $200 to $250 million in acquisitions in the second quarter of this year, with the low end of that range having closed on April 30th. This level of deployment reflects both an annual targeted goal of at least $200 million, along with the redeployment of the remaining net proceeds from assets divested in 2023. Our business development team continues to source a robust pipeline of acquisition and de novo investment opportunities, and we believe the capital deployment aspects of our growth algorithm remain predictable and executable. 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 quarter and the timing of our recently completed acquisitions, we are increasing full-year net revenue and adjusted EBITDA outlook to at least $3.05 billion and $505 million, respectively. This refreshed outlook represents at least 11% and 15% 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. We look forward to updating you on our progress as the year unfolds With that, let me turn the call over to Eric to provide additional insights for the quarter. Eric?

Thanks, Wayne, and good morning, everyone. The start of 2024 for Surgery Partners has been productive, and our results continue to demonstrate the outsized demand for purpose-built short-stay surgical facilities that offer a safe, high-quality, and high-value experience for both patients and physicians. Importantly for our investors, and based on current and past performance, our growth remains consistent and predictable, in line or better than our internal expectations. As Wayne mentioned, all aspects of our mid-teens growth algorithm continue to deliver. Diving deeper into our results, same facility net revenue growth was 10.2% in the first quarter and represented both case and net revenue per case growth of 1.3% and 8.8% respectively. 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. On the physician recruitment front, we added over 200 physicians in the quarter, slightly higher than our historic run rate, and our 2024 recruitment class has a revenue per case that is 25% higher than the class of 2023. That is partially impacted by the growth of orthopedic surgeons that specialize in higher acuity total joints, including shoulder procedures, which represented approximately one third of our first quarter recruitment class. Additionally, as we have previously stated, each of our recruiting cohorts continue to drive strong compounding year over year growth with our 2023 class performing 134% more cases in the first quarter of 2024 as compared to their initial quarter in 2023. Our recruitment activities have continued to fuel our growth, especially in musculoskeletal, with over 61,000 MSK-related procedures performed in the first quarter of 2024, representing 14% growth over the prior year quarter. More importantly, total joint bases in our ASCs continue to grow at a disproportionate rate, which saw a 54% increase in case volume as compared to the prior year quarter and a 90% compound annual growth rate since 2019. On a consolidated basis, our specialty case mix and volumes were in line with our expectations, with over 153,000 consolidated surgical cases in the quarter, with particular focus in our high-acuity business lines. To put a finer point on this, while all our specialties have recovered from the pandemic with strong growth rates, in aggregate, our first quarter case volume has a compound annual growth rate since 2019 of just over 4%, with growth of over 6% in orthopedics. Our unique partnership model and our approach to enabling our physician partners independence and strong community reputation allows us to naturally benefit from the continued side of CareShift to our safe, high-quality, and cost-effective facilities. We work every day to bring the benefits of a professional-scale management company while keeping the invaluable local feel and connection that differentiate our surgical facilities. This approach preserves the strong reputation of our partners have earned allowing them to focus on their patients, knowing their preferences and input will remain an integral part of the facility that they have helped build. Together, our partners win, our payers win, and most importantly, our patients get the best care possible for their surgical care needs. When this happens, we deliver consistent, high-quality results as we have done over the past five-plus years, despite managing through a global pandemic and a challenging inflationary macro environment. Moving to operating margins. As Wayne mentioned, our operating margins improved in the quarter by 10 basis points to 13.6%. Our operating margin improvements reflect 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 earning patterns. Finally, diving deeper into our capital deployment activities, As Wayne discussed, we continue to have a robust pipeline of opportunities and expect to deploy over $200 million in the second quarter of 2024. We closed on the majority of our targeted acquisitions on April 30th, representing five different transactions, including a large system acquisition that includes a specialty surgical hospital, ambulatory surgical center, and related physician practices. We are excited about partnering with the physicians in this market, which is in a region we know quite well. These acquisitions, which increase our multi-specialty capacity, are rapidly being integrated into our operations and are expected to yield further earnings from our operating system synergies in the first 12 to 18 months post-closing. On the de novo front, since 2019, we have opened 11 new ASC facilities and have 11 fully syndicated de novos under construction. Many of these projects are slated to open in 2024 and early 2025. These facilities include consolidated and minority interest ownerships, and are primarily multi-specialty with a concentration in orthopedics. In closing, I'm proud of our management team and our many talented physician partners and colleagues for effectively managing through inflationary labor and supply pressures over the past few years, while delivering a superior patient experience with high clinical quality. With inflationary pressures largely abated, coupled with how well our teams are effectively executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations, we are confident that we will achieve our updated 2024 goals. More than ever, our company provides a cost-efficient, high-quality, and patient-centered environment in purpose-built short-stay surgical facilities that provide meaningful value to all of our key stakeholders. The desire and need to move more procedures to our care setting has never been greater, and our company is positioned to deliver industry-leading growth associated with these tailwinds. This, coupled with an existing and growing M&A pipeline, and a talented, deep, and experienced leadership team provides further optimism for long-term sustainable mid-teens adjusted to EBITDA growth. With that, 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? Thanks, Eric.

Starting with the top line, we performed 153,000 consolidated surgical cases and 178,000 total surgical cases in the first quarter. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our 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 7.7% over last year to $717.4 million, which is overcoming approximately $36 million of revenue headwinds associated with facilities divested in 2023. On a same facility basis, total revenue increased 10.2% in the first quarter. Same facility rate growth was 8.8%. We have seen especially strong rate growth in the back half of 2023 and continuing into 2024, primarily driven by higher acuity procedures specifically orthopedics and spine. We continue to forecast our same facility net revenue growth to exceed our algorithm target of 4% to 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 $97.5 million for the first quarter, giving us a margin of 13.6%, 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 volume. 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 a full year of 2023. We ended the quarter with $185 million in cash. When combined with the untapped revolver capacity, we had nearly $800 million in total liquidity. we reported operating cash flows of $40 million in the quarter, which was in line with our expectations. This amount differs somewhat from last year due to the timing of certain events. However, it is in line with our expectations of lower cash generation in the first quarter and supports our continued belief that we will achieve our previously discussed free cash flow goals in 2024. The effective interest rate on our corporate debt is 6.3% fixed through the first quarter of 2025. the company was able to effectively redeem our senior unsecured debt at favorable terms and pricing, extending the maturity to 2032. We now have no debt maturities until 2030. We also recently entered into interest rate caps that will cap the variable component of our $1.4 billion term loan at 5% starting in the second quarter of 2025. Over the past six months, we have addressed all exposures we had related to financing and interest rate risk through the end of the decade. Accordingly, we have predictability in our interest costs and are not exposed to significant interest rate risks, which are key factors giving us confidence in our free cash flow growth. In the event that the interest rate environment becomes more favorable in the future, we will have an opportunity to capitalize on such improvements. Our first quarter ratio of total net debt to EBITDA as calculated under our credit agreement was 3.5 times. As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but we remain committed to our long-term target of sub 3.5 times. In the first quarter, we deployed just over $70 million in acquisitions, including $60 million associated with the previously discussed transaction closed earlier in January. We also completed additional acquisitions on April 30th of this year, which represented our targeted goal of $200 million in annual capital deployment. The facilities we invested in are primarily focused on MSA procedures and are well-positioned to support and strengthen our St. Facility growth trends in future years. Carrying the momentum of our first quarter results, we remain optimistic and confident about the company's growth and are raising our outlook for 2024 net revenue to at least $3.05 billion and adjusted EBITDA to at least $505 million, representing at least 11% and 15% growth respectively compared to 2023. This guidance implies continued year-over-year margin expansion consistent with our long-term guidance. This updated outlook represents greater than a 14% compound annual growth rate since 2019, emphasizing the resiliency of the business model and demonstrating the power of our long-term growth. Our business has a natural seasonal pattern, largely driven by the number of surgical days and annual deductibles resetting for commercial payers that tend to skew our results lower in the first quarter and higher in the fourth, relatively speaking. We continue to anticipate the seasonal pattern of our results will be consistent with 2023 with second quarter adjusted EBITDA to be approximately 23% and revenue to be approximately 24% of our full year guidance. Our first quarter results speak to the strength of our operations and our business model. And we believe that the balance of the year should continue to capitalize on that momentum. With that, I'd like to turn the call back over to the operator for questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing your star keys. We ask that you please limit to one question and one follow-up question. One moment while we poll for questions. Our first question is from Brian Tranquit with Jefferies. Please proceed.

Hey, good morning, guys, and congrats on a solid quarter in the acquisitions. I guess my first question, maybe for Eric or Wayne, as we think about this bolus of deals coming in the second quarter, number one, you know, is there something in the market or are there assets that are just coming up for sale? Because this is a big chunk of deals that you're announcing. And then maybe second, I know Dave mentioned it's MSK, but just anything you can share with us in terms of the margin profile for these assets or the seasonality factor for these assets as it compares to yours. Thanks.

Brian, good morning. Let me start with the M&A and then I'll actually have Eric talk a little bit about the MSK because I think as we look at the increases in total joints coupled with the new activities around shoulders, I think you'll get a better feel of why we're having such a positive impact on Same Store. Starting on the M&A front, Just a reminder for all those listening that our base algorithm assumes that we will achieve 4% to 6% growth through deploying somewhere between $150 million and $200 million a year for M&A. And we continue to target $200 million as our preferred goal for the year. As we mentioned in prior years, we always have this robust pipeline, but as you know, M&A can be fickle. So a lot of the timing of what you're seeing in 2Q was really a function of a lot of the grassroots efforts that were done last year in building these relationships with a number of facilities and physician partners, and really just came to a head in the second quarter of this year. We were somewhat optimistic we might have gotten those done in the first quarter, but they pushed into April 30th of the second quarter. That being said, with those transactions closed on April 30th, we have already accomplished our entire $200 million goal. targeted goal for the year. I will remind you, though, that the algorithm assumed we would deploy 200 and use generally a mid-year convention assuming a high single-digit multiple. So you'll get an incremental value, though, due to the timing for the current year. And then you get, of course, full run rate effect as we move into next year. Last thing I would say is we continue to have a robust pipeline, and I don't anticipate that slowing down. It's nothing new, though, Brian. We're not necessarily seeing the pipeline growing because of any kind of macro situation. It really is, though, the importance of partnership, and I think many of these organizations are realizing the value we can bring. And word of mouth gets out there over time as we continue to do this, and these partners have an opportunity to get some liquidity for themselves, but also have an opportunity to remain owners in something that they built. With that, Eric maybe highlight a little bit just on the higher acuity stuff and what we're doing in that space.

Yeah, I guess related to the M&A, I would just comment that these are MSK-heavy, our transactions. And so your question on margin, seasonality, it's going to match our portfolio overall, though it leans MSK-heavy. I think to Wayne's point, one of the things you saw this quarter, and we're glad it's MSK-heavy, there's a lot of growth opportunity within that service line. So one of the changes this year was CMS took the total shoulders off. of the inpatient-only list and put them on the ASC list. We've, since that time, in Q1, have performed over 500 total shoulders, really strong growth, with the vast majority of that being in ASCs. Certainly, this new acquisition gives us the opportunity to grow that, along with bringing our synergies to a really, really exciting market. So we couldn't be more pleased with the transactions we just completed.

That's awesome. And then maybe my second question for Dave. We've got a lot of questions about the Idaho payments last year and how that affects comps and growth rates this year. And I know you gave sort of guidance and cue to even that, but maybe if you can just share some color on how we should be thinking about those comps from a growth rate perspective, given the lumpiness of those payments.

Yeah, Brian, thanks for the question. I'm going to jump in on this one. And I know there was some confusion coming out of the end of the year last year and want to make sure I clarify a few things. So I'd make three points. But one point that I think you should all hear is this is not a material issue for the company. As you think about our total Medicaid business is 4% of our cases. The net revenue is roughly comparable to that 4%. So you have 4% of our cases. I want to make sure you hear it's immaterial. And that 4% revenue, that includes all the different programs that go into it. So it's not a big part of our business. I'll start there and make sure everyone hears that. On the second point, these programs that are in multiple states, whether it's upper payment limit or Huff payments or across different states, there's different programs that wrap around Medicaid. Those programs are sustainable and expanding, but will still be immaterial to our business for the foreseeable future. Just don't see that as as a big thing for us. Now, what I would say the last point is the timing of reimbursement and state tax policy and the way payments come in, that is really hard to predict. So that's kind of what you saw a little bit of last year. But the key message here is we don't do a lot of Medicaid business, small portion of our business. The vast majority of the payment for Medicaid is fee-for-service. There are some of these programs that help make Medicaid, you know, sustainable. And those programs, you know, again, still insignificant in the grand scheme of things. Awesome. Thank you, Eric.

Our next question is from Whit Mayo with SVB Learing. Please proceed.

Hey, thanks. Good morning. Maybe just remind me, guys, just on the revenue cycle initiatives, now that you're on one clearinghouse, just the anticipated impact this year. I think it's expected to be a larger driver of growth. I think there's been a big focus on this internally in the would be helpful.

Yeah, good morning, Whit. Thank you for the question. Our rev cycle initiatives are definitely a component part of our growth. They have been now for several years. As we enter into 2024, we've become a lot more mature in our rev cycle process, but we do expect continued contributions from there. Our first quarter results in this area are reflected somewhat in our revenue and in our cash flows that we reported from an operating perspective and gives us confidence that the value is going to continue to show through in our results for 2024.

One thing I would highlight for our listeners on the call is that our growth algorithm of 3% to 5% of EBITDA growth through margin expansion really is reflective of the opportunities we have in the rev cycle, coupled with the opportunities we have in procurement, coupled with the synergies we get from the additional M&A. And so to Dave's comment, you know, in the rev cycle, I personally think we're in maybe the third inning of what we are capable of doing as an organization today. around RevCycle. And as we continue to grow our company, we continue to get new and unique talent into the organization that's worked on a larger scale. And that talent then is bringing really new ideas to us around opportunities that we are losing to be able to collect more for the services we're actually performing. And in many cases, things that get denied that we really shouldn't have denied based on the procedures that were done. So long and short of it is, I don't expect this going away in the near term or in the midterm or in the long term. I think this is something that's another five-year-plus journey for us. And every time we plug and play a new entity, those opportunities repeat.

Okay. So it's safe to say some element of the rate that you're getting in the quarter is coming from increased yield from some of these initiatives. Just want to make sure that I'm clear on that.

There's definitely an element to that. And again, as Wayne mentioned, it's part of the way this company operates as we integrate new companies.

Okay, got it. And the $19 million or roughly $19 million in transaction integration M&A costs, can you maybe put some of those costs into context? I did step up. I know you were more active in M&A. I just want to make sure that that's, you know, is this the right number to sort of think about on a go-forward basis? Just any help would be helpful there.

I think it will go down. I think that's kind of the bolus of the pig in the python of all these deals that we just got closed on April 30th. So you kind of have all these things happening at once and all that's flowing through the quarters. We're getting to the end. And that includes a combination of legal advisors, evaluation work we do, et cetera. So I think that will come down over time.

Got it. Thanks, guys.

Our next question is from Kevin Fishbeck. with Bank of America. Please proceed.

Great, thanks. Can you talk a little bit about the volume number in the quarter? I know that there's certainly some concern about the quarter and I think a little bit of confusion about what Q1 should look like based upon leap year and calendar. Talk a little bit about how you feel like the calendar impacted that number because it was below the two to three that you guys normally target for the year.

Thanks. Yeah, thank you, Kevin. Appreciate the question. So, obviously, last year we had 5.3% case growth. Felt really good about that. If you look at the two years combined, still feel good about our growth in the quarter. There certainly were weather impacts. There were days of the week impacts. We have to manage through that, right? The reality of it is when we look at our case volume for the year, we still expect to finish the year at the upper end or above our guidance. And so, you know, first quarter, really, really pleased with the high acuity growth, which again, you know, one of the problems with case count is there's a lot of movement between where we want, what procedures we're really going after. So we were really pleased with where we landed within our expectations, given the comparables. And quite honestly, just to reemphasize, we expect to be at the high end or above our algorithm by the end of the year.

Kevin, on your question of a leap year, it's an important one because In the current year, as a reminder, we don't benefit from it unless we get an extra Monday through Friday. And so if you actually look at the days we were open this year, it's comparable to the days that were there last year despite the leap year. That being said, we will pick up a day in the third quarter and the fourth quarter of this year versus last year due to the leap year and due to when the number of Mondays through Fridays fall on the calendar. So no inherent benefit to us for the day in the quarter. but it will newer to us as the year progresses.

All right. Great. Thanks. And then just a little color on the deal that you were doing, you know, I guess consolidated versus unconsolidated. I mean, is the revenue boost related to the deals? I know I was a little bit confused as you pointed out in your earlier response that you assume a certain amount of deals with a mid-year convention. So is the guidance raised due to just the timing impact or, of those deals coming in a little bit earlier? Or how should we think about how much of that revenue guidance raises is kind of run rateable, if you will, versus just kind of accelerated timing?

Thanks. Yeah, Kevin, Dave here. And again, thanks for that follow-up question, because it is a little bit, perhaps a little bit confusing. Our guidance, as we talked about at the beginning of the year, does assume $150 to $200 million of M&A mid-year convention. And I think we mentioned on our fourth quarter call that our pipeline at that point in time was all or predominantly consolidated. So you could assume a revenue in your calculations kind of associated with that. Fast forward to today, we have now approximately $200 million that we're going to do inside the second quarter, a majority of which was done in April, the end of April. Most of those are going to be in consolidated assets. There was one ASC inside that portfolio that will be non-consolidated. So it is definitely a component. of our increased guidance for the year. The other component, of course, is increased confidence in our underlying revenue growth for the organization.

Great, thanks.

Our next question is from Andrew Mock with Barclays. Please proceed.

Hi, good morning. Just wanted to follow up on the professional fees and other op-eds. It looks like that was up double-digit sequentially year over year. Can you elaborate on what's driving those costs higher and whether we should expect some moderation in any of those categories for the balance of the year? Thanks.

Yeah. Thanks, Andrew.

I appreciate the question there. So first off, you know, managing the margin in the company does require us to look at and evaluate all of the costs kind of sitting inside these categories. And as Eric mentioned a little bit earlier, Our state-based reimbursement programs do have a degree of estimation associated with provider taxes as a component of that, and provider taxes can be a pretty material part. So as we true those up, those may be reflected in there. In the first quarter, what you're seeing inside those other operating expenses is that true up of provider taxes.

Got it. That's helpful. And then I just wanted to follow up on the free cash flow. How did that trend relative to your internal expectations? And it seems like there's still some seasonal elements here that are impacting that or timing elements. Can we get a refresh view on expectations and cadence for the balance of the year? Thanks.

Yeah, for sure. As you know, 2023, we generated positive operating cash flow and free cash flows for the first time in the company's history. And we continue to expect that operating and free cash flow will exceed prior year amounts for the full year. Prior year and current year quarters purely impacted by timing related items, which we expect to normalize on a full year basis.

Our next question is from Sarah James with Cantor Fitzgerald. Please proceed.

Thank you. You talked about the back half of the year being more driven by volume than revenue per case, but it also sounded like strong revenue per case was related to acuity, including hiring mix, so things that would continue. Just wondering if you can clarify why you would expect revenue per case to normalize down and if there was any kind of one-time benefit that inflated revenue per case in one queue like DPP or anything else.

Thanks. Hey, Sarah. Good morning. Just a reminder, as I mentioned earlier, I think first and foremost, it's important to recognize that as we get closer towards the end of the year, we will have, obviously, the same level of higher acuity cases we have in many situations. But we do have extra business days, and the number of Mondays and Tuesdays, again, do affect a lot of procedures, specifically GI and ophthalmology, and there's a lot more volume on those days. And, again, the number of Mondays and Tuesdays then will disproportionately affect that mathematical calculation in any one quarter. The second thing I would just remind you is as we continue to grow in these high acuity procedures, Just the math of it, if we grow quite a bit in the fourth quarter as we did last year, and then you move to the fourth quarter of this year, we'll continue to grow on those. But the incremental growth in terms of how the math of that calculation works gets somewhat abated. So the way I would look at it is not to look at any one quarter, but to look at the algorithm for the full year. And as Eric mentioned earlier, we expect to exceed or at least be at the high end of that 2% to 3% on volume for the full year, biased towards exceeding that in the back half of the year due to the extra days. And then I would also say that relative to the rate, I definitely believe we will be well above the 2% to 3% targeted rate. So same store is probably going to finish closer to high single digit for the year, but a little more balanced as we get to the full annualized basis.

That's helpful. And just on thinking about the calendar, given we did have that calendar pressure in one queue for planned procedures with spring break and Easter, did you see that come back in April? Have you already seen it come back into the system?

I don't want to get ahead of ourselves. It's one month, but we are not disappointed with April.

Thank you.

Our next question is from Gary Taylor with TD Cowen. Please proceed.

Hi, good morning. Most of my good questions asked, so just a few detailed ones. Just first, on supplies, really good performance there. I think flat dollars and supply cost per case down 1.4% year-over-year. Best result in a few years, I think. Anything unique to call out on supply expense?

No, nothing unusual.

but I wouldn't, I mean, would we be modeling this good for the rest of the year or think about having some modest level of inflationary growth or mixed growth in that, I would think.

Now, our inflationary growth factors that we built into our guidance would be marginal and well contained within our revenue growth.

But mixed growth, mixed growth would be the factor if we see that, right?

As a percent of revenue, it should be neutral.

Okay. And then can you just elaborate for a second on the AR growth in the quarter? I think you highlighted that in the release. Anything related to change, or is it state program accruals that aren't yet paid? Any comments there?

Yeah, thanks for pointing that out. That is not specifically related to the items that you mentioned. It's almost purely related to the growth in the organization, both from recent acquisitions and from growth in revenue, and then typical seasonal patterns with the first quarter billing cycles.

Last one for me on the acquired practice as part of this system deal. Is that orthopedic practices or any detail you can provide there?

Yeah, so it is, yes, it is orthopedic-related practices. As you know, I mean, we are primarily an enabler of independent physicians, and even when we do this type of arrangement, we do it in partnership even at the practice level, and it's tied to our surgical facilities. But yes, those are MSK-related practices.

Got it.

Thank you.

Of course, thank you for the question.

Our next question is from Bill Sutherland with the Benchmark Company. Please proceed.

Thank you. Good morning, everybody. I'm curious, Dave, given you've gotten to the target already in April for the capital deployment for the year, clearly you may close a little bit more. You said 200, 250, but kind of how are you thinking about it at this point from an opportunistic perspective, or is this really kind of it for the year?

No, the short answer is I'm optimistic it won't be the last acquisitions for the year. As Dave mentioned earlier, at the end of the quarter, we have over $800 million available at the consolidated level plus the undrawn revolver. And as Dave mentioned, we plan to grow into our free cash flow as the year progresses. The pipeline is robust. Despite the number of acquisitions we completed, it continues to be in that high 200-plus million still of many transactions. And I would anticipate we have an opportunity to get a few more done this year, but we haven't baked any of that into our outlook because, again, it can be fickle and these things can change as the year progresses. But right now, I think there's a very reasonable chance we'll do better than the 200s.

That's good. Eric, can you kind of go through the de novo progression? I mean, you hit it during the prepared comments, and perhaps how it will flow through to the income statement as these get developed.

Sure. So, you know, we're excited about our de novo capabilities growing, and you've seen that over the past couple of years. You know, we expect to be, you know, have double-digit in process at any given moment. Those facilities, you know, there's a lot of startup kind of delays as we think through those. But in general, we spend the first several months getting them open post-syndication, getting contracted, getting started. Obviously, highly accretive investments. If we could do all de novos, we would, although there'd be a delay, obviously. So we like the investment profile. Typically, by the end of the first year, they're cash flowing and have a positive EBITDA, but there is a ramp up. Those first six months can be a little bit bumpy with just new contracts and getting doctors comfortable, changing habits, all that stuff. But by the end of the year, the first year, we expect them to be contributing to our financial performance. By the end of year two, we would expect them to be close to run rate and then just getting into our organic profile. So again, from a capital investment standpoint, these are our best investments along with in-market M&A. And so we're really excited about how much it's growing. Those opportunities continue actually to be at a higher level than we've ever seen. So we're really pleased with the progress there.

So you mentioned 11 fully syndicated under construction. That would be for next year's P&L.

Yeah, so you think about it. We said a portion of those will be opening later this year, another portion in early 2025. So, again, probably not a huge contribution when you think about 25, really start to hit us in 26. But, you know, obviously planning seats for the future that give us increased confidence in that mid-teens growth we've committed to. Great. Thanks for all the color. Appreciate it. Of course. Thank you, Bill.

Our next question is from Jason Casarola with Citi. Please proceed.

Great. Thanks and congrats on the quarter. I just wanted to ask about the 2.7 million of unconsolidated minority earnings in the quarter. It's not a major driver of EBITDA trend. It was down a little bit year over year. Obviously, the number of ramping unconsolidated facilities, maybe can you just help bifurcate how that 2.7 million balances between the newer investments on their maturity curve that could be a drag in that against the more mature assets with positive contribution included in that as well?

Yeah, I'll make this real simple, DT. The number of de novos that Eric just talked about, including those that are opening up, that may operate in a somewhat of a lost position are considered to be the investments that we make in those. We back those out of that number. And you can see this in our press release. There's a tabular disclosure in the back. It was around $800,000. He stripped that out. You can see kind of the growth. in the total contributions that come from those. The other part of our contributions, just as a reminder, Jason, is the management fees that are reflected in revenue associated with those transactions. So you can see that level of detail in our press release.

Okay, thanks. And maybe just to follow up, you know, you've highlighted for a while now that the major driver of revenue per case growth has been the high acuity focus, certainly. But I guess just curious on any updates on the managed care contracting side, how those conversations are going. If there's anything, you know, from a cycle perspective to highlight or areas where you see opportunity, including on the value-based care side of FLY, just any thoughts around that would be helpful. Thanks.

Yeah, thanks for the question, Jason. We continue to make progress in our managed care negotiations. I'd say the national payers are increasingly interested in the value, obviously, our facilities can provide. And so we look for a balanced approach there. You've heard us talk about this for quite some time, which is we want to make sure we're paid fairly. We also really want steerage and we want to make sure our doctors are paid fairly. So there's a balance in how we think about those negotiations. We continue to be pleased with our rate lift there. Now, again, the majority of our rate lift is going to be still the acuity. But, you know, we are making progress in those conversations. And, you know, when it comes to value-based care, I'd say this, you know, we always kind of start with, you know, we're 50% cheaper on average than some of our peers. And so we always say let's save half before we take any risk. But we're happy to enter into value-based care arrangements in the markets where they make sense. You know, we do that periodically. And I expect that over time that will become a bigger part of the story. But I think in the fee-for-service world, payers see us as a value care player, and they're increasingly having conversations with us about how to take advantage of our independent portfolio.

Great. Thank you. Thank you.

Our next question is from Lisa Gill with JPMorgan Chase. Please proceed.

Hey, good morning. It's Cal on for Lisa. A couple of quick questions here. I guess on recruitment, it sounded like that was a little bit better than you guys expected. Can you talk about what drove the strength there in the quarter and how you're thinking about that over the remainder of the year? And then I guess second, you know, I know you don't have much Medicaid exposure, but just wondering if you saw any impact from redeterminations on volumes in the quarter and how you think about that as you move into the back half.

Hey, Cal, appreciate the question. From the recruitment side, yeah, we were really pleased with the first quarter. I think we have a veteran team that is very targeted based on data and very targeted on a few specific service lines. Now, as you know, those service lines continue to expand every year with technology. So they've got a little brighter hunting ground. We've got new markets. But we feel really good about that trajectory. Expect that to remain a little, continue to be above where we've been the rest of the year. So we've got a really nice pipeline on recruitment. Again, just a veteran team. It's very focused on data and executing well. On the redeterminations, you know, look, as I mentioned earlier, Medicaid's a very small part of our business, so I think even if there were an impact, we'd be unlikely to feel it, but we definitely have not seen an impact in that area at all.

All right, thanks.

Our final question is from Ben Hendricks with RBC Capital Markets. Please proceed.

Yeah, just a quick follow-up on the redetermination issue. We've heard some of the hospitals talk about health exchange pickup, you know, at the tail end of redeterminations, and that there could potentially be some delay in that volume just because of higher co-pays and deductibles. Is there a potential for health exchange volume to kind of increase your typical 4Q seasonality? Maybe some upside there.

Thank you. Appreciate the question, Ben. What I would say is there is potential, but it's small. Right. I'm going to go back to like the book of business is so small for us that even if there were some pickup there, it's likely to be immaterial. But, you know, we'll keep an eye on that. I would go back to compared to other businesses that are broader in health care services. It's just such a small portion of our business. It's unlikely to be worth spending much time on.

Great. Thank you. And also just one more question about cash flow guidance. Are we still thinking kind of I think you're going to 140 to 160 for the year? Is that still the right number to think about?

Yes, it is, Ben.

Thank you.

We have reached the end of our question and answer session. I will now turn the call over to Eric Evans for closing remarks.

Great. Thank you so much. Before we conclude today, I'd like to reiterate how proud I am of my colleagues and our position partners. who collaborate to deliver on our mission to enhance patient quality of life through partnership. Their work and contributions allow us to deliver consistent and predictable results and drive sustained growth for all of our stakeholders. Most importantly, they also continue to serve our communities with the highest clinical care in a lower cost setting with the convenience and professionalism our facilities are known for. Thank you for joining our call this morning and have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.