Surgery Partners, Inc.

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 Daugherty, CFO. Thank you. You may begin.

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 reconciled 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?

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 who serve our communities with valuable, high-quality, and convenient care. Our team continues to deliver on our mission to enhance patient quality of life through partnership. 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 and 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. 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 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. The volume growth in GI procedures was relatively higher, and because these procedures bill at a relatively lower reimbursement rates when compared to the blended company average, that slight shift in business mix mathematically resulted in rate pressure in our same facility rate metric. 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. 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 physicians. 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. As I mentioned in 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. 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 eight times 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. And, as Dave will discuss, we have sufficient liquidity to fund this growth in the short and long term without having to tap the capital markets. 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 investments. As we discussed in 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'll start with Taros and their potential impact on Surgery Partners. Like many of our peers, our primary purchasing organization is Health Trust. Nearly 70% of our purchase goods go through this GPO. Health Trust 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 Health Trust, 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 mid-term to any tariff-related price increases, nor do we believe there is a substantial risk to our supply chains. 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. 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 DeVites, 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. 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?

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 2024. 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 2024. Our same facility total revenue increased 5.2% in the first quarter, consistent with our growth algorithm target of 4 to 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. 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. 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. Our first quarter ratio of total net debt to EBITDA, as calculated under our credit agreement, was 4.1 times, consistent with our expectations given recent acquisitions. Leverage calculated using consolidated debt from our balance sheet divided by EBITDA was 4.8 times. 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 market 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. Specifically, we are reaffirming full year 2025 revenue and adjusted EBITDA guidance to be in the range of $3.3 to $3.45 billion and $555 to $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?

Thank you. We will now conduct a question and answer session. 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. If you would like to remove yourself from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to ask a question at this time. One moment while we pull for our first question. The first question comes from Brian Tanquillet with Jefferies. Please proceed.

Hey, good morning, guys. Eric, congrats on the strong volume corridor. So just curious how you're thinking about Current utilization trends and the sustainability of that, and then maybe the other side of this question would just be the same store revenue per procedure, obviously a little softer this 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.

Yeah. Hey, Brian. Thank you, and 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, 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. Because 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. And in our business, the days of the week matter for certain volumes. Internally, as we 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. And so, you know, 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 were 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 23. De novos ramp up the full run rate typically over a couple of years, and that time to break even is within the initial six to 12 months. So these de novos performing very well out of the gate, and they're kind of on their way to their full run rate, and 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. But the rate pressure really is just a matter of the underlying commercial and government mix, nothing there to really read into. And I would just point you back to we expect to be kind of more balanced between rate and volume, much like we finished last year over the course of the year.

No, that makes sense. And then maybe, Dave, as a follow-up, as I think about your comments on free cash flow generation, obviously Q1 is Seasonally weaker, it sounds like there were a few kind of like timing issues there. But curious how we should be thinking about the seasonality of free cash flow generation over the course of the year.

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 manifests as you look at our forecast. earnings growth guidance that we have out there should be translating nicely over the course of the year. And much like we've seen in the past, it tends to skew better as the year progresses, second quarter being relatively strong and fourth quarter being our strongest quarter from a cashflow generation perspective. So we do believe as we think, and as we've talked about, I think on the call or 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 pre-cash flow perspective, distributions should also grow as we go throughout the course of the year. 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. 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. So you have about a 220 basis point exposure that will be a headwind on cash flows for the last nine months of the year.

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. And when we reiterate our long-term growth algorithm, we do rely on investing in M&A. So we appreciate there's a sensitivity of equity holders on leverage. But 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 the equity or debt market. So we feel good about where it's going. We do expect that to strengthen throughout the year and to continue to grow with the company as we move forward. Thank you. Yeah, thanks, Brian.

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

Hi, good morning. Thanks so much for taking the question. So I guess a little bit of a follow-up on the pricing discussion. So on the Q4 call, I think you alluded to a slight pressure on Payermax. So have you actually seen that in 25? So is it essentially alluding to the idea of Medicare cases growing faster?

Hey, Joanne, 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, you know, good about our growth in Medicare and commercial, but no real mixed changes other than what might happen with a given acquisition timing, but in general, no pressure on payer mix.

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

Joanna, thanks for the questions. So I'll just start with it's always nice to be in a business where your three major constituents prefer you, right? So patients prefer us because of their experience, their outcomes. Doctors prefer us because of our efficiency, and they can be at the table. And, of course, payers prefer us because we are the low-cost alternative. They continue to be very constructive with us. I think, you know, we continue to find ways to try to work with them to move patients to the right side of care and 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. So I think the trends you've seen over the last couple of years are still holding true. As we've mentioned, we're pretty much fully contracted for this year, if you think about where we start the year. So we have really good visibility in our outlook and guidance as far as rate goes. Same with MA. I mean, MA, you know, 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. And then I think you had one other question at the end. I'm going to let Dave answer that.

Yeah, it was a red 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 of 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 rev 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. 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. And I'm pleased to say that we implemented that. And you can see that in our days sales outstanding, that metric continues to improve. I think we improved two days inside the quarter. So a really positive trend for us.

Great. Thank you so much for the call.

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

Great. Thanks for the question. So, to turn 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 1Q? And then are there any particular specialties or geographies where this growth has been noticeably accelerating over the quarter? Thanks.

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-feed perspective. Pro-feeds, 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 ASCs, several practices. And 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. 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. And I think that speaks to the nature of our business. I think as Eric and I have talked about in prior meetings, So we see no notable change inside the first quarter, and at this point we're not seeing that being a major headwind for us in 2025 or beyond.

Great. I 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%?

Yeah, I don't know if we've disclosed that. 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 24, which was a record-setting year, this class really skews higher in revenue generated per doctor. So that net revenue proposition is up about 14% versus what we saw last year. We remain optimistic in our ability to recruit the 500 to 600 docs that we have built into our plan. We've been doing that consistently and I think become a lot more targeted. 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. So it's 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, and so it's 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.

Great. Thanks for the commentary there.

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

Thank you. So you guys have been talking for a while about the GI mix. And I think the last data point that we have is that it was going up about 1% a year, and it was 24% in 23. So what does it look like now? And 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. 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. So I think that 24%, I look at it, check your numbers there, Sarah, just because I don't have them handy in front of me. So 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. And 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. And 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 new 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. And 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. And as we project out, we do a budget. And our budget process does look at every single day of the week. So we have some pretty good visibility to it. We predicted that we were going to see rate pressure relative to case growth inside the first 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% to 6%. So I think it'll look at the end of the year somewhat consistent with what we saw last year.

Yeah, and Sarah, I would just reiterate the GI growth. We're really pleased with that service line. You know, we have three businesses that make up the majority of our business, all three of them, ophthalmology, GI, 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, but we really like our GI and ophthalmology business, and they continue to grow nicely.

Thank you. The next question comes from Andrew Mark with Barclays. Please proceed.

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.

Yeah, I can't provide a whole lot more than what we talked about Earlier, 70% of our spend right now goes through health trust. And as you probably have heard from several of our peer group, that relationship with health trust 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, that increased visibility to it. We know when contracts will expire, and we know that we can start to talk to our physician partners about well in advance of any potential impact if the tariffs were to survive. But 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. We don't really see any material change in that, even in the midterm forward-looking view. The remaining spend, so if you look at 70% of our spend going through health trust, the remaining amount majority, a large majority of that is also under contract. This is just what our professional procurement team does. And likewise, we have good visibility 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. So 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 Health Trust. And they have helped us significantly, if you look back, you know, 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.

Great. And then maybe a follow-up on the cash flow question. You talked about the timing impact on operating cash flows, but it also looks like the 1Q NCI payout is up meaningfully both year over year and relative to the 4Q NCI expense. Is there anything impacting the timing or payout to NCI partners in the quarter?

Thanks. 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 is had holidays kind of awkwardly in the middle of the weeks. Our distributions to our physician partners and to surgery partners happens 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. So 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 and Normally, they will happen at the end of any given month. So you saw basically a double up. I think we were at $62 or $63 million of distributions. That's about $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.

Great, thank you.

The next question comes from AJ Rice with UBS. Please proceed.

Hi, everybody. Just first maybe on the comments about the balance sheet and leverage. So 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. And do you have an ultimate goal as to where you'd like to see those leverage levels get to?

Yeah, great question, AJ. Thank you so much for asking that again. So leverage... What we've talked about from a leverage perspective is really a factor of the growth, the substantial growth and outsized growth that this company has experienced. Double-digit, mid-teens has been this company's story for the history, at least the past eight years. It's something that we do expect to see going forward. And a key element to that, of course, is deploying capital for M&A and de novo activities. We target around $200 million. of M&A mid-year convention. We assume kind of relatively stable pricing on that. We've experienced roughly eight times historical earnings. You know, again, for the past eight years, I think we've averaged something just slightly below that eight times. But for modeling purposes, we assume eight times going forward. And at that level of spend every single year with immediate accretion that comes from there, we do think it converts to cash flow quite nicely. So our models do suggest continued conversion of cash on both existing assets as well as newly acquired ones, coupled with that growth in the mid-teens level, will spit off cash sufficient for us to keep that overall leverage number going downwards. So 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. We do expect that number is going to come down to roughly around in the three range at the end of this year, and will continue to go down over the next few years. So if your modeling does suggest anything different than that, it's a relatively simple model, then let's talk to the team about that because we do, in every model that we've looked at, we do see that coming down over time.

Okay. And 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 and 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?

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. So 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. So if you're doing a year-over-year comparison, any acquisition that we completed inside the second quarter last year would start to come into our same facility calculation in the third quarter of 2025.

Okay, great. Thanks so much.

You're welcome.

Thanks, AJ. The next question comes from William Spivak with TD Cowen. Please proceed.

Hey there. Just a quick one. Any impact from weather in the first quarter? And if so, would you mind quantifying it? And then the second thing is, I know you don't 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.

William, probably I can knock both those out, I think, pretty quickly. So on the weather side, we did have weather in the first quarter. You know, we never really fully recaptured it, but honestly, we don't 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, and as you can see, we outran any kind of major impacts there. As far as free cash flow goes, you know, we do expect, and we talked about this, we expect the business to grow free cash flow with the business, and I think you should expect that this year, even with timing. But more or less, free cash flow to us is a metric. We understand everybody's focused on it. We have the liquidity we need, and we expect to continue to grow that as we grow our business.

Got it. Thanks very much.

The next question comes from Matthew Gilmore with KeyBank. Please proceed.

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 RevCycle, but just wanted to get a sense for what those efforts are focused on to drive margins higher.

Yeah, so I'd say there's several things that go into our operating system, obviously, and a big part of that is rev cycle, and Dave can talk about some specifics on that. Also, supply chain, 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, but I think in relation to what was mentioned in the script, certainly revenue cycle is a big part of that, and Dave can talk a little bit about that journey.

Yeah. So WebCycle 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 WebCycle 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. So 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. So we're awfully proud of that. It's a multi-year journey, as I mentioned. And as we go through that process, much like you saw in the fourth quarter and the first quarter, we should begin to see some benefits coming through how we manage receivables and the overall net revenue 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 that maintenance of that kind of process is critical to us. So, 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. 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 managed care, clinical variation, supply chain, all of that. So we're very excited about that. It does require some investment, ongoing focus in that space, and that's what you're seeing kind of happen this year. Thank you for the question.

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

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 canceled cases. Got it. Thank you.

Yep.

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

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.

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 breakeven, 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. And 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. So we're really pleased. And thank you for asking that question. Track for us is a very intentional focus for us as an organization where we target to have 10 under development every single year. So last year was 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.

And on those de novos, are those... Are those consolidated or mostly unconsolidated? And then really 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.

Yeah, thanks, Whit. So most of those are going to be – the Novos are going to be unconsolidated at least at the beginning. Probably 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. And 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. And so it's a really opportunity to work with payers in a way that's different because you're creating a ton of value. So it gives us a reset there. And they tend to be really higher acuity as well. So there's so many angles to the de novos that we're excited about. As far as the refresh, you know, as you know, we did do a fair amount of divestitures at the end of last year. Don't expect any kind near that size this year as far as kind of full divestitures, so that won't be an ongoing play. Yeah.

Having said that, with, you know, managing a portfolio of over 160 facilities, we'll always have some degree of activity, but as Eric mentioned, last year it was an unusually high year, relatively small impact to the company. That's why we're not talking about that as a major headwind this year. But we will constantly refresh that portfolio. We've got a team that's kind of dedicated to making sure that we're maximizing those, the value that kind of sits inside there for the communities that they serve.

Thanks.

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

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.

Hey, Ben, thanks for the question. Yeah, I definitely talked about this in the past. You know, over the long run, we're quite excited about this moving over. But in the near term, you know, there's still a lot of things that make it a slow growth kind of service line. Just a number of states that still haven't actually caught up with Medicare on this. But I will say, you know, we have a number of facilities that are adding cardiac, CRM, cardiac rhythm management procedures, EP. We did just, I was just at a grand opening for our first cardiac cath lab-based ASC recently. So we're seeing those come into the platform. But I would just say that, you know, the end growth should be quite strong, I think, over the next few years. But again, it's a small end. We are excited about that, though, Ben, because I do think long-term, you know, It's much like ortho. It's one of those procedures where our savings in our side of care is, you know, five figures plus per case. And so I definitely think as you look at the cost pressures in the health system, I think it's one of 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. But that one is a huge part of that, you know, 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.

Great, thank you very much.

Of course.

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

Great, thank you. 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.

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