Surgery Partners SGRY Q1 2026 Earnings Transcript

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DATE

Tuesday, May 5, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — J. Eric Evans
• Chief Financial Officer — David Doherty
• Chief Operating Officer — Justin Oppenheimer

TAKEAWAYS

• Net Revenue -- $811 million, reflecting 4.4% same-facility revenue growth driven by both acuity and rate improvements.
• Adjusted EBITDA -- $102 million with an adjusted EBITDA margin of 12.6%, aligning with seasonal expectations for the first quarter.
• Same-Facility Case Growth -- 0.6%, impacted by weather-related disruptions estimated to reduce growth by 40 basis points, with prior year comparison at 6.5% growth.
• Musculoskeletal Volume -- Total joints performed in ambulatory surgery centers grew 14.6% year over year.
• Physician Recruitment -- Approximately 140 physicians added, concentrated in orthopedics, ophthalmology, and gastroenterology.
• De Novo Openings -- One de novo facility opened, with nine in total over the past twelve months, primarily focused on musculoskeletal procedures.
• Surgical Robotics Portfolio -- Seventy-three surgical robots deployed across the network, supporting higher-acuity case growth.
• Labor and Supply Expenses -- Labor (SWB) expenses at 30.5% of revenue and supply expenses at 27.2% of revenue, both showing year-over-year improvement.
• Payer Mix -- Commercial mix was approximately 50%, with payer mix pressures moderating but not fully alleviated since the fourth quarter of 2025.
• Operating Cash Flow -- $12 million generated, doubling the $6 million in the prior year period due to improved working capital and lower below-the-line spend.
• Capital Deployment -- $4 million spent on acquisitions, with an estimated $7 million revenue contribution for the year; full-year capital deployment target remains $200 million.
• Net Leverage -- Net leverage under the credit agreement was 4.3x, consistent with the fourth quarter; GAAP net debt to adjusted EBITDA was 5.1x.
• Provider Taxes and Medicaid Cuts -- Combined headwind of approximately $2 million in the quarter and estimated $8 million for the full year, related to new provider taxes and state Medicaid rate reductions.
• Distributions -- $58 million distributed to physician partners in the quarter as part of the partnership-based model.
• De Novo Pipeline -- Five de novos projected to open later in the year, with seven more in the pipeline.
• Guidance -- Full year revenue guidance reiterated at $3.35 billion to $3.45 billion; adjusted EBITDA guidance of at least $530 million; Q2 revenue expected to be 24%-24.5% of annual target, adjusted EBITDA at 23%-23.5%.
• Portfolio Optimization -- Advanced discussions ongoing for a transaction in a larger surgical hospital market, with an announcement targeted mid-2026.
• Days Sales Outstanding -- DSO measured 66 days, unchanged from prior quarters, with further improvement targeted through facility-level working capital discipline.
• Share Repurchase -- No share repurchases were conducted during the quarter; the program remains available for opportunistic use.

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RISKS

• David Doherty stated, "Interest expense increased year over year by approximately $7 million, reflecting higher rates following the expiration of our interest rate swap," which represented "a meaningful cash headwind during the quarter."
• Provider taxes introduced in two new states and a 4% Medicaid rate reduction in one state caused an estimated $2 million headwind in the quarter and are projected at $8 million for the year, negatively impacting EBITDA.
• Payer mix pressure persisted in the quarter, though moderating, creating continued risk to margin expansion.
• J. Eric Evans indicated, "near-term headwinds" and said, "We do have some near-term headwinds. We've outlined in our slides, but we still feel really good about the team's ability to continue to take advantage of our scale in efficiency to drive those costs down."

SUMMARY

Surgery Partners (NASDAQ:SGRY) reported financial results directly in line with internal expectations, driven by disciplined operational execution and a focus on higher acuity service lines. Management expressed confidence in meeting or exceeding full-year targets, underpinned by sustained investment in technology, physician recruitment, and portfolio optimization. The company continues to target significant capital deployment opportunities, while maintaining a proactive approach to managing cost pressures and payer mix headwinds.

• The company is in advanced stages of a portfolio optimization initiative, with the Board actively engaged and a significant transaction targeted for midyear announcement.
• Musculoskeletal volume and robotic surgical capability continue to be focal points, with double-digit growth in total joint procedures and expansion in robotic asset deployment.
• While guiding for typical second-quarter seasonality, management highlighted that contributions from M&A would be additive, as current guidance excludes the impact of potential acquisitions.
• Improved working capital management and targeted operational efficiencies are expected to further enhance cash flow as the year progresses, with specific plans to reduce days sales outstanding below the current 66-day level.
• De novo facility development remains a high-return priority, with an active pipeline expected to begin consolidating into run-rate performance as newer centers mature.

INDUSTRY GLOSSARY

• ASC (Ambulatory Surgery Center): Outpatient healthcare facility where surgical procedures not requiring hospital admission are performed.
• De Novo: A newly developed or constructed medical facility, as opposed to an acquired one.
• MSK (Musculoskeletal): Medical specialty and procedures involving bones, muscles, and joints, such as orthopedics and total joints.
• Inpatient-Only List: CMS designation of surgical procedures allowed only in hospital inpatient settings, removal of which enables more cases to shift to outpatient or ASC settings.
• SWB (Salaries, Wages, and Benefits): The aggregate personnel cost category reported as a percentage of revenue.

Full Conference Call Transcript

Now moving to our first quarter operational and financial performance. I'll start with a brief overview of our first quarter results, followed by additional color on our progress across the 3 pillars of our growth algorithm, organic growth, margin improvement and capital deployment. Let's start with the highlights. We are encouraged by our start to the year. First quarter performance broadly in line with our internal expectations, reflecting improved stability across the portfolio and initial signs of recovery in areas that were pressured towards the end of 2025. As a reminder, we ended last year with a select number of clearly identified addressable headwinds, particularly within a small subset of our surgical hospital portfolio.

Entering 2026, our focus has been on restoring operating consistency and predictability, better supporting physician transitions and positioning the business for sustainable growth. We believe our first quarter results reflect early progress we have made and position us well to meet or exceed our 2026 objectives. At a high level, during the quarter, we delivered approximately $811 million of net revenue, same-facility revenue growth of 4.4% and adjusted EBITDA of approximately $102 million, as we continue to execute against the foundational drivers of our long-term growth strategy. Dave will walk through the financial details shortly. Tracking our first pillar, organic growth.

Same-facility case growth of 0.6% in the first quarter was modest and below our long-term growth algorithm driven by primarily by temporary weather-related disruptions early in the quarter that led to case losses or deferrals in several higher volume but lower acuity markets. Importantly, these impacts were not broad-based and did not materially affect the higher acuity portion of our portfolio. We would also note that this performance is relative to a strong prior year comparison where we delivered approximately 6.5% same-facility case growth in the first quarter of 2025.

As we have noted in the past and given the continued acuity shift in our space, we believe the total same-facility net revenue metric remains the best to assess our growth as it reflects both total cases, acuity and rate improvements. At 4.4%, our same-facility revenue growth was in line with our first quarter and long-term expectations. We remain focused on executing our organic growth strategy centered on expanding surgical case volumes while strategically shifting towards higher acuity procedures. To this end, we continue to see favorable trends in our musculoskeletal service line with total joints performed in our ASCs growing 14.6% year-over-year. Our investment in surgical robotics continues to support this momentum.

Our portfolio consists of 73 surgical robots, further supporting higher acuity procedures, we can perform safely and efficiently across the platform. We remain focused on thoughtfully deploying this technology to enhance our capabilities where it drives clinical value and enables us to earn more complex, higher acuity cases. Physician recruiting remains another key driver of long-term growth. During the quarter, we recruited approximately 140 physicians with a strong concentration in orthopedics, ophthalmology, GI and other priority specialties. While new recruits take time to ramp, these additions position us well for accelerating volume and acuity as the year progresses. De novo development continues to provide one of the highest returns on capital across our portfolio.

During the first quarter, we opened one de novo, bringing our total openings to 9 over the trailing 12 months. Our de novo ASCs are heavily weighted towards MSK, aligning closely with our long-term strategy to expand higher acuity capabilities in attractive markets. Turning to margin expansion. Our adjusted EBITDA margin was 12.6%, in line with our expectations for the seasonally lower margin first quarter. Overall, cost management was solid in the quarter, with both labor and supply costs showing sequential improvements as a percentage of net revenue relative to the first quarter of 2025, which Dave will provide greater detail on in his comments.

Our proactive efforts allowed us to partially offset the onetime pressures related to reestablishing incentive compensation, increased provider taxes and tariff pressures that are detailed in our posted slides. Regarding payer mix, while we did see modest payer mix pressure in the first quarter, the trend is moderating from the second half of 2025, and we are continuing to take action to both recover and grow our commercial market share as well as to reduce our expenses to improve our Medicare case profitability.

Importantly, regarding the 3 surgical hospital markets we discussed on our fourth quarter call, they are executing their plan through the first quarter, and I am confident that our new leadership teams that are in place will continue to drive progress. Moving into -- on to our third pillar, capital deployment towards M&A. During the first quarter, we deployed approximately $4 million of capital. Our pipeline remains active, and we continue to target deploying approximately $200 million in capital annually. While first quarter deployment was modest, we continue to have a healthy pipeline and remain optimistic about our long-term opportunity to be an accretive consolidator in the very fragmented ASC landscape.

As a reminder, our full year 2026 guidance does not factor in any potential impact of M&A. In parallel to continued execution of disciplined M&A, we have made progress on our portfolio optimization initiative. Our efforts remain focused on a small number of larger surgical hospital markets that have broader services than our core short-stay surgical focus. We are in advanced discussions on one key opportunity in a larger surgical hospital market and are working through customary diligence and transaction considerations. Our Board is actively engaged in this process, and we continue to target an announcement in mid-2026.

As we continue to advance our portfolio optimization efforts, our focus remains on unlocking financial benefit to the company through reduced leverage and improved free cash flow conversion. Before turning the call back to Dave, I want to thank our teams across the organization as well as our physician partners for their focus and execution, particularly in navigating a dynamic operating environment. We remain confident in the durability and value of our model, the strength of our physician partnerships and our ability to execute against our strategy as we move through the remainder of the year. With that said, I will turn the call back to Dave. Dave?

David Doherty: Thanks, Eric. Adjusted EBITDA for the quarter was $102 million. Compared to last year, results reflected the planned impact of payer mix and provider tax items discussed on our fourth quarter call and embedded in our 2026 outlook. Against that backdrop, overall performance came in modestly ahead of expectations and in line with our underlying assumptions for the year. Supply expense represented approximately 27.2% of net revenue during the quarter, while SWB expense was approximately 30.5% of revenue, both showing modest improvement year-over-year. Both professional and medical fees and G&A expenses were broadly in line with the prior year. Other operating expenses were 7.3% of revenue, higher year-over-year, reflecting the provider taxes we have previously discussed.

While these items contributed to margin pressure during the quarter, they were fully contemplated in our internal expectations and full year outlook. Collectively, expense ratios were generally consistent with the prior year and our expectations. Same-facility case growth was 0.6%, with several specialties contributing above 2% growth, including vascular and orthopedics. These trends helped offset case deferrals driven by weather-related disruption in higher volume, low acuity markets early in the quarter, which we estimated affected growth by approximately 40 basis points. Working capital performance remained solid. Days sales outstanding were approximately 66 days, consistent with both the fourth quarter of 2025 and the first quarter of 2025.

Interest expense increased year-over-year by approximately $7 million, reflecting higher rates following the expiration of our interest rate swap. This increase represented a meaningful cash headwind during the quarter, though it was partially offset by base rate reductions we executed on our credit facility in 2025 and by improved working capital performance. Operating cash flow for the quarter was approximately $12 million, an increase from $6 million from the prior year period, reflecting improved underlying performance consistent with typical first quarter seasonality and timing-related movements in working capital. Capital expenditures during the quarter included $9 million of maintenance-related spend, largely associated with equipment refreshes, information technology and routine facility investments necessary to support ongoing operations.

In addition, we made $58 million of distributions to our physician partners, consistent with the historical patterns and our partnership-based model. Net leverage under our credit agreement was approximately 4.3x, which is consistent with the fourth quarter. GAAP net debt to adjusted EBITDA was approximately 5.1x. We remain focused on disciplined capital allocation and expect to continue to drive gradual deleveraging over time, supported by earnings growth and ongoing portfolio optimization. During the quarter, we deployed approximately $4 million on acquisitions. Based on internal development reporting, we estimate these acquisitions will contribute approximately $7 million of revenue in 2026. Regarding our share repurchase authorization, we did not repurchase shares during the quarter.

As discussed previously, we will remain disciplined in the use of this program and we'll evaluate repurchases opportunistically based on valuation, liquidity and alternative uses of capital. We are reiterating our full year 2026 revenue guidance of $3.35 billion to $3.45 billion and adjusted EBITDA guidance of at least $530 million. For the second quarter, we expect revenue to represent 24% to 24.5% of the annual target and adjusted EBITDA to be 23% to 23.5%. We -- as you've heard from us today, we continue to manage the business prudently with a focus on enhancing execution and protecting and growing margins.

While we know there is still work to be done as we continue to navigate near-term market dynamics, we believe our early efforts have laid solid groundwork for continued improvements in 2026. In addition to disciplined execution of our organic growth strategy and continuing to drive operational efficiencies, progress on M&A and our portfolio optimization initiative represents additional potential levers to accelerate our return to our long-term growth algorithm. We remain confident in our full year outlook and more broadly, our ability to return to consistent and sustainable growth, fueled by the strength of our unique short-stay surgical platform. With that, I will turn the call back over to the operator for questions. Operator?

Operator: [Operator Instructions] We take the first question from the line of Brian Tanquilut from Jefferies.

Brian Tanquilut: Congrats on the quarter. I know it was tough. So maybe I'll start with Justin, since you're new to the earnings call, just curious, I mean, you've been here about 4 months now. Anything you can share with us in terms of what you see -- what you've learned about the company, the operations and then what areas of opportunity you see in terms of like blocking and tackling or areas of further productivity and efficiency gains where you can make a difference in the operations.

Justin Oppenheimer: Thank you for the very first question. Maybe what I'll do is just highlight 3 categories of early observations just to stay organized, maybe one around people second around our organization's positioning and three, our operational priorities. So the first, our people, I've spent nearly every week on the ground in our markets, spending time with our people and physician partners. And very impressed with the positive culture of Surgery Partners. It's palpable. Everyone is committed to their patients, to their physician partners to each other. We have talented people who want to have an impact and create value for our physician partners and our shareholders.

And so I think just a level set summary on our people, and I think our culture is very strong. Initial talent assessment as our core operators are strong. There's always places to shore up, but that's to be expected. The second category just around our organization's positioning. One of the reasons I joined Surgery Partners is its positioning in the market. The tailwinds in this sector are real, and you can really see them on the ground. Patients want and appreciate the convenient high-value care that we're producing. Physicians want to bring their patients to our efficient facilities and partnered facilities and payers want the procedures done in the right setting.

And so you can really see this on the ground. And what's more positive from my mindset is Surgery Partners is the only company at scale focused solely on the management of surgical facilities into the future. So this has been all confirming. To get to your question about operational priorities, with the cultural foundation and these industry tailwinds, the priority is really on execution. And I do believe there are a lot of embedded earnings with better execution, a real focus for our teams coming out of the first quarter is on organic growth and operational excellence. And those have been the central themes coming out of my first 100 days.

Growth means physician recruiting and physician relationships, operational excellence means hardwiring cost management and really pulling the key levers that make surgical facilities. And so both our teams and you all hear this drumbeat of growth and operational excellence from me throughout the year. So maybe I'll end with that.

Brian Tanquilut: That's very helpful. Maybe, Dave, just shifting gears quickly. As I look at the P&L, a lot of progress here on SWB, supplies cost and even profits. So just curious, I mean, how do we think about, number one, what those levers were pulled during the quarter? And second, the sustainability of these levels of cost essentially its operations level.

J. Evans: Yes. Thanks, Brian. I may jump in here, and then I'll let Dave add a little color if he wants to. First of all, thank you for the comments on the quarter. Glad to have a solid start to the year. I think when we look at the cost controls and Justin has been jumping in with this, our team has been focused on cost management for a long time. But we came out of last fourth quarter with a real focus on driving some cost out of the business to improve margins on the Medicare business. You're seeing that show up in SWB and supply management. We do think there's still opportunities there.

We've talked about -- if you look across the business the last 5 years, we have consistently improve margin over time. We do have some near-term headwinds. We've outlined in our slides, but we still feel really good about the team's ability to continue to take advantage of our scale in efficiency to drive those costs down as a percent of net revenue. So I don't know, Dave, if you have anything to add to that. But I mean I would say we believe Q1 with a lot of confidence in our ability to manage those costs and to find ways to drive improvement around margins.

David Doherty: Yes. I'd just supplement that with a couple of things maybe to highlight where we're going to see some of this pressure coming through on those headwinds that we've cited. And we experienced a little bit inside the first quarter. So those are legitimate headwinds that we're seeing. Reestablishing the bonus is a big one that will start to show up in the second quarter, and you'll really start to see that more significant in the third quarter. So you'll see a little bit of pressure really more of a return to normal on that SWB line as a result of that.

The provider tax pressure that we'll see will pop up in our other expenses, and that's a net new item for us. I think historically, that number has been around $200 million for the year. That number will be a little bit elevated this year as we overcome those new -- those new pressures that we've talked about before. Offsetting all of that is exactly what Eric was talking about and what we alluded to in our fourth quarter call as we adjust to the payer mix that we've talked about, cost containment is the other way that we're doing that in a strong partnership. That's what we're really excited about the early work that Justin has done.

That we'll see kind of across the board supplies G&A and SWB improvement accelerating more in the second half of the year.

Operator: We take the next question from the line of Matthew Gillmor from KeyBanc Capital Markets.

Matthew Gillmor: I appreciate the comments on the 3 markets showing some recovery. I just wanted to see if there's any additional details to share, especially with respect to some of the payer mix dynamics that you called out last quarter.

J. Evans: Yes. Thanks for the question, Matt. And Justin has actually been on the ground a lot as have I in those markets. What I would say is, look, the pressures have moderated, although there are certainly -- it sounds like we've bounced back completely. We've talked about a little bit. We've got new leadership teams in those markets. We've also got a just -- we've had a lot of time to sit down with our physician partners and focus on the fact that despite all their hard work and growth efforts, they didn't necessarily see it flow through.

And so the focus on really, really coordinating closer and tighter to make sure we're competing appropriately for each and every commercial patient to maintain and grow that market share has been there. We've also done a lot of work around just timing of physician transitions, and that continues to be a focus area for us. I would say pretty pleased with the first quarter. Those 3 markets are in line with where we expected them to be making progress. And again, I will reiterate, while those 3 markets had pressure, they are really great markets for us overall. They continue to have really strong payer mix in general, despite the pressure. They also have really, really strong market positions.

But yes, no, it's encouraging to see those get back online. Obviously, the fourth quarter was an unexpected kind of challenge in those 3 markets, and we're excited to kind of see the early progress.

David Doherty: Great. And then following up on the comment you made about surgical robots and the contribution to total joints. Can you maybe just sort of paint the picture in terms of the growth in surgical robots over the past maybe a year or 2? And how many you think you can add to the portfolio over the next couple of years?

J. Evans: Yes. Great question. I mean surgical robots really over the last 4 or 5 years have been an unlock for us and largely with physicians that might have already been partners are using our facility. And we did not feel comfortable bringing those higher acuity cases until they had the matching technology. We continue to see technology in general robotics, whether it be orthopedic robots in some cases, some of the new soft tissue robots that are coming out. The ability for us to make it easy for physicians to move patients safely and have the same level of technology they get in the traditional acute care setting has been a big unlock. And we still see opportunity there.

Again, roughly 70% of our total facilities have the ability to do MSK. And a lot of those over time have added robots. We still have a ways to go there. I mean you see that even -- we're still seeing strong double-digit growth in total joints. I don't see that changing in the near future. There's still a lot of cases to transition. When you think about -- we talked a little bit in the opening comments about our de novo pipeline, again, very, very MSK heavy. I think you can expect to see robotic expansion there as well. So we think we're in the early innings.

Over the last several years, I mean, we've added double-digit robots on average most every year, continue to find opportunities for that. And in some cases, as we're out recruiting, one of the things we have to be very focused on is how do we match up technology and capacity in a way that's attracted to physicians. And I think our team does that very, very well.

Operator: We take the next question from the line of Ben Hendrix from RBC Capital Markets.

Benjamin Hendrix: I just wanted to talk a little bit about the lower acuity deferrals weather-related that you saw in the first quarter, just how you're thinking about those getting back on the schedule. Should we expect some skewness in the second quarter in terms of the case growth versus rate balance? And how do you expect that mix to kind of track through the rest of the year?

J. Evans: Ben, thanks for the question. So as far as the weather-related deferrals, obviously, I think you've heard all of our peers and everyone talk about January and February, certainly had some weather where it hit us tended to be in markets where we had a lot of kind of high volume, lower acuity procedures, think GI and eyes. About -- Dave mentioned in the script, about 40 basis points of impact on our growth. So instead of 60 basis points, we would have been at 1%, still not where we expect to be long term. As far as getting those cases back, some of them will probably come back over the course of the year.

The reality of it is when you lose those cases for weather, you lose a day, it's hard. A lot of those really busy facilities. They're full most of the time. And so yes, we'll capture some of that, but I wouldn't think it's going to lead to any kind of real skewing. The good news is we've seen really strong growth within high acuity. So I don't know, Dave, if you would add anything to that.

David Doherty: Yes. Maybe just one thing, just a reminder on the calculation for same-store rate, particularly on a business that has high-acuity business and lower acuity business. And it's not a return of those cases, but a return to normalcy sequentially between the first quarter and second quarter, we'll put a little bit of pressure on that rate just sequentially, if you're looking at net revenue per case.

Benjamin Hendrix: And just to follow up. We're getting some incomings on the cash flow from operations print. Just any more detail you can provide on the working capital dynamics you're expecting? And how should we about timing of cash flow realization through the year?

J. Evans: Yes, I'll let Dave dive into the details. I'd just say high level on free cash flow, we're very, very focused on driving improvement there. First quarter was an improvement over last year. This business produces a lot of cash. We've got to make sure we continue to convert that and grow with our business along the way we see lots of opportunities in working capital. I'll let Dave talk about a few of those that he's working on this year.

David Doherty: Yes. Yes. So first off, just dissecting the first quarter cash flow from operations. We did have some benefit from working capital relatively marginal. I'll talk about that in just a quick second. But other factors that you can kind of look at lower below-the-line spend year-over-year as that number comes back down as we've been guiding to more in line with long-term historical perspective. And interest cost is interesting. There's 2 components of our corporate debt. As you might recall, last year, we did refinance our term loan and the revolver, bringing that down to very good interest rates of SOFR plus 250 basis points. That generated a net positive for us in the quarter of about $9 million.

However, in the quarter, that was offset by pressure from unwinding the last quarter's benefit of the interest rate swap that we had last year and then marginally higher debt that we hold related to our refinancing of last year. So working capital, we will now kind of overcome that. Starting in the second quarter, you won't see that interest pressure from the interest rate swap termination. So that unlock should start to happen there. On a working capital basis, again, something I'm super excited about working with Justin and his team on is embedding greater working capital discipline at the facility level. Our days sales outstanding was 66 days in the quarter.

That's the same as it was in the fourth quarter. We need to make that better as we progress throughout the course of the year, and we've got plans in place. That's the single largest lever that we have at the facility level in order to unlock that cash flow. Our physician partners are aligned with that because they get better distributions when that happens. So we do expect that, that unlock should happen over the course of the year.

Operator: We take the next question from the line of Whitt Mao from Leerink Partners. .

Benjamin Mayo: I may have missed this, but how much were the provider taxes in the quarter, both revenue and other operating expenses?

David Doherty: Yes. Thanks, Liz, for the question. Yes. So as a reminder for the large group, we did talk about new headwinds that we're facing this year that fall into kind of 2 categories. In one state, the -- pretty much the only state where we have any exposure to Medicaid that was in across the board, 4% rate reduction that started to impact us in the fourth quarter of last year and did impact this year. That had a very small impact on revenue, almost inconsequential, but of course, that flows all the way down to the bottom line.

And we also had provider taxes introduced in 2 new states, for which we have virtually no Medicaid business just for the fact that we carry the title hospital in those 2 markets. The combined pressure on the adjusted earnings line for those 2 things is estimated to be around $8 million for the full year, a little bit more front loaded because of that Medicaid rate pressure only affects 3 quarters of the year. So we're a little bit more than 25% of that number impacting our results, split between revenue and other operating expenses.

Benjamin Mayo: Okay. So divide it by 4, so more than 2 in the quarter year-over-year was the pressure...

David Doherty: That's fair.

Benjamin Mayo: Yes. Okay. And my other question is just around like what we're seeing with a lot of the payers that continue to push this campaign around prior authorization. And I'm just wondering if you're seeing any changes with the plan's behavior? And then just also any comments you have around CMS' prior of demo with the Wiser model, whether or not that's having any impact one way or the other.

J. Evans: Yes. Thanks, Whit. Appreciate the question. Look, we are certainly all on board and in favor of all the work the payers are talking about when all of the prior authorizations. We do see in markets one of the great things about our model is we are aligned with payers and saving the system money. So this idea of payers making it harder to get approval in the wrong setting of care is a great thing for us. We obviously fully supportive this push to reduce prior authorization burden going back to that 66 DSO days and all the other complexities we face, obviously, would be a welcome headwind -- or a welcome tailwind for cash flow.

So we do see payers making real efforts there, and I do think that benefits our business moving forward just because of our cost position. With regard to the Wiser program, that has gone in place the Medicare demo. We have seen -- early on, there were some learnings there just to make sure, as you know, it add some more administrative, unfortunately, work on our side. But we feel like we're through understanding the program. We don't see any material impact. And we understand the goals of that program, which, again, I want to make sure patients are getting the care they need the right care in the right place.

All of those efforts align perfectly with our mission, which is really to provide high-value care at the right setting, right care, right place, right price. And so we think those are going to be long-term tailwinds. We haven't seen tremendous impact there yet, although there are certainly markets where we are hearing that it's harder for physicians to get their patients into a hospital when there's an ASC option, and that's great.

Operator: We take the next question from the line of Joanna Gajuk from Bank of America.

Joanna Gajuk: So can you give us an update on the portfolio optimization and selling or, I guess, reducing exposure to your surgical hospitals?

J. Evans: Sure, Joanna, thanks for the question. Obviously, it's something we've talked about for last several quarters is portfolio optimization. We remain committed to reviewing those opportunities within our portfolio to do several things. I just want to remind everyone what we're looking to accomplish with this. One is to make -- to actually delever faster, so finding a way to help us delever improving free cash flow conversion. Some of those places are a little bit more capital intensive than our core business. The third is really to improve our growth rate going forward. And then lastly, just simplify the business to our core short-stay strategy. So we do see opportunities there.

It has been -- as you bring up here, the timing of this, it's been hard to predict. We do have a large market, we mentioned in my comments earlier that we are in the final stages of, we are still targeting midyear. But I'd be clear on that, that we're going to be very disciplined on making sure these are good assets, making sure we get the right value while we're committed to portfolio optimization. We want to do it in a way that's accretive to shareholders and make sure we accomplish those things that I talked about earlier. So there's one market that's in the very advanced stages there. We're targeting midyear. We'll see.

Obviously, nothing is done until it's signed. And then there are a couple of other markets that we're going to be exploring and we'll give you the right -- we'll give you the updates as those are appropriate.

Joanna Gajuk: And I guess with that, if I can, any update on your Investor Day that you were planning? I guess, is it still in the works? So are you waiting to complete more of these before you have this meeting?

J. Evans: Yes. No, we're definitely still committed to doing an Investor Day. As we've said before, we are tying that to having something meaningful done within our portfolio optimization. We do plan to do that later this year. And so we're staying very closely tied to that timing. And as we have something to update you on there, we'll obviously do it quickly.

Operator: We take the next question from the line of Andrew Mok from Barclays.

Unknown Analyst: This is Thomas Walsh on for Andrew. You shared some of the deliberate actions taken to address payer mix pressures from the back half of 2025. How did commercial mix come in, in the quarter? And could you comment more broadly on the view of the strength of the consumer wallet and employment trends in your markets?

J. Evans: Sure. So commercial came in about 50% for the first quarter, which was -- had a little pressure. If you look at sequentially, and we always have a little bit of pressure. Obviously, our population is aging. We've got to take commercial market share to stay even. But I feel pretty good about the moderation of that. We are seeing some -- again, some improvement signs there. It was not nearly the same pressure we saw in the fourth quarter, but also did not totally abate. So we're very, very focused on that.

I think from your question around just the consumer wallet, it's interesting, the pressure we saw in cases in the first quarter relative to kind of lower acuity, higher volume rates was mainly around weather. I think it's a little early to say. I mean the economy still seems to be holding up relatively well. I'm not ready to say that we're seeing consumers make different decisions. But again, one of the hardest things in health care is to determine why patients don't walk into your doors. But we feel good about the start year for growth.

When it comes to -- I think you're kind of alluding to some of the pressure, too, that's been on exchange -- the exchanges and kind of patients transitions there. We've mentioned before because of the nature of our business. We don't really have ERs. It's purely elective. We have not historically in most markets, seen a lot of those HIX patients. And so we haven't really felt a material pressure there, but we continue to watch that. The good news is we're not exposed to kind of payer mix weakening. The only thing that we would have to watch closely is there some kind of dampening or postponing of procedures.

And I think it's too early to say we've seen any of that. We continue to believe have great confidence in our outlook for cases this year, which admittedly is a bit below our kind of long-term algorithm of 2% to 3%.

Unknown Analyst: And following up, you provided second quarter revenue and EBITDA outlook, that appears slightly below your normal revenue seasonality and some below consensus estimates. Are there any timing elements in the second quarter to consider or for the remaining of the year?

J. Evans: Yes. Thanks for the question. I mean there's always some timing elements. I would say -- let me start off by saying we were very confident in our full year guidance. The second quarter guide is just a prudent guide from where we sit today. We feel it's -- actually, if you look at the longer-term seasonality, it's relatively in line with what we've said historically. Certainly, we're entering Q2 with confidence in how the business is progressing this year. We feel good about our ability to meet or exceed our outlook. And I think you should just say that -- I should say it's early in the year. It's a prudent guidance for Q2.

I don't know, Dave, if you would add anything.

David Doherty: Yes, perhaps just a point of emphasis when you're doing a comparison year-over-year. In the second quarter of last year, we -- I'm sorry, in the third quarter of last year, we announced one of our initial portfolio optimization efforts that took a surgical hospital from a consolidated position down to a deconsolidated position. So that revenue would have been in the second quarter last year, not in the revenue for this year. Any other factor that's going to affect your year-over-year performance inside the second quarter are those headwinds that we've highlighted in our financial supplement.

Operator: We take the next question from the line of Sarah James from Cantor Fitzgerald.

Sarah James: I want to continue that topic a little bit more. Can you help us bridge the first half to the second half, the EBITDA ramp there? How much of that depends on payer mix recovery versus your cost actions?

J. Evans: Yes. Thanks for the question, Sarah. I think look, if you want to -- if you're thinking about bridging the first half performance second half performance, we are not -- there's nothing embedded in there that's some dramatic improvement in our payer mix. So we do have -- again, we're seeing moderation so that is contemplated, but it's -- the second half does not depend on that. From a cost standpoint, we're always working on ways to more efficiently run the business. We do expect to continue to drive improvement on that throughout the year. But I think what I would say is from a seasonal adjustment standpoint that this is a relatively normal spread.

And we feel really confident in our ability to deliver not only on Q2, but on the full year.

David Doherty: Maybe if I just add just to that fair -- for your benefit. As a reminder, I mentioned this a little bit earlier on the call, but some of those headwinds that we've noted are more front-end loaded and the biggest one being that Medicaid cut, which will not affect our year-over-year performance in the fourth quarter. And the other thing is -- the other 2 things, Eric did mention the focus on cost containment in the industry as those pick up, and we kind of mature into those, those will have an impact inside the second half of the year.

And then finally, that portfolio optimization work that we talked about a little bit earlier in my last question, the increase that comes from an earnings perspective, as we talked about last year, is mostly back half of the year weighted. So those are the key components that would drive better performance in the second half of the year, all relatively marginal. But when you add them together, that's how you get north of 50% of the earnings in the second half of the year which is normally the case. It's normal, yes.

Operator: We take the next question from the line of A.J. Rice from UBS.

Albert Rice: First question around the deal activity, you did $4 million in the quarter, you're saying you're still reiterating the $200 million spend. That's been an area of volatility the last 2 years, 2 years ago above expectations last year, well below. Can you comment on visibility on that deal spend, what the pipeline looks like, what the competitive landscape looks like?

J. Evans: Sure, A.J. And it's a great question. Actually, the point you're bringing up is exactly why we don't have it in guidance this year, right? I think we've struggled the last several years with kind of over and under and the timing of M&A is fickle. We'll say, look, we feel good about our pipeline. We continue to see new things coming in. And certainly, it's a very fragmented industry. So big picture that $200 annual number is one that we are continuing to talk about long term. Obviously, off to a little bit of a modest start this year, but we do feel good about the pipeline. It's always a little bit fickle.

I would remind everyone that anything we do on the M&A pipeline is pure upside to guidance. And so we do -- look, I expect we're going to make progress. I think last year, we ended up finishing not too far off A.J. I think we had up spending about $180 million had some great deals. We finished up with a big one in the fourth quarter. it was back-end weighted, obviously. And this year, it looks like we're going to end up being a little back-end weighted to given the first quarter. But look, I would say we're were the last kind of only stand-alone short-stay surgical operator.

We're well positioned in the market that need -- that is going to continue to consolidate. We think we're well positioned to be one of those consolidators. And so like I don't -- long term, nothing's changed, but the timing is fickle and admittedly, it's been a slow start.

Albert Rice: Okay. The other thing I was going to ask you about, you mentioned that you recruited roughly 140 physicians in the quarter. I usually think of the heavy recruiting periods more in the second half of the year, the back half of the year, but maybe not in your case. But just give us a perspective on that. Is that sort of normal course? Or are you -- is that a step up? And anything to call out on where their focus is in terms of any kind of surgical specialty or anything?

J. Evans: Yes. Great question. I would say the 140 is kind of -- is basically in line with where we would expect in the first quarter. You're right, we are back-end loaded when it comes to recruitment. That's always the case. And so our physicians that we recruited in August through December of last year, obviously contributing into this year, that will be where you'll see that number raised in the back part of the year. Very focused still on MSK. We spend a lot of time on those higher acuity services and so the team is focused on driving growth there.

I would say as a kind of a positive of those 140 doctors this year, they are, by doctor, higher net revenue in total than last year's recruiting class. So again, we very much closely watch kind of that performance. And we've got a very targeted list we're going after. The good news is with technology and with the inpatient only list coming off, that eligible list of proceduralists who can bring all their cases continues to grow. We continue to stay focused on going after the right docs. But definitely back-end loaded, I feel good about the early start.

Operator: We take the next question from the line of William Spivack from TD Cowen.

Will Spivack: Can you just talk about your expectations for the split between case growth and revenue per case growth as the year progresses?

David Doherty: Yes. Thanks, William, for the question. So what we have implied in our guidance for the year continues to be approximately 3-plus percent same facility revenue growth, which is how we prefer to look at this. As you saw in the first quarter, we had just under 1% same-facility case growth. I think you'll skew more positively on the rate side as the year progresses. Of course, as I mentioned earlier, with the return to normalcy in the second quarter, that may be pressured a little bit. But -- so that -- I would consider that to be normal fluctuations.

But you'll roughly get an equal contribution between both of those, perhaps skewing a little bit more towards the rate side.

Will Spivack: Okay. Just as a follow-up, just to clarify a question from earlier on the other OpEx and provider taxes. So I think you said that was about a $2 million headwind maybe a little bit more to EBITDA in the quarter. So I think other OpEx was up about $15 million. Can you break out how much of that other OpEx increase was the provider tax side so we can kind of back into the revenue as well?

J. Evans: Yes. So there's a lot of moving parts there because of all the different states and how they flow through. If you think about in total at a gross level, that OpEx expense related to provider taxes is about $11 million, with the biggest part of that being the new states that we've added. But we'll certainly -- we're happy to go through those details. Then I would also say that other operating expense, if you look at it over time, it does fluctuate quite a bit. This year, though, that change is driven by those provider tax changes, not only in existing states, but importantly and the biggest contributor this year as the new states that added those.

And unfortunately, added those without any Medicaid benefit for us. We're obviously still going to be very active in advocacy on some of those areas. So I don't think those things are necessarily forever, if we can work on them, but that's where that's showing up, and that's roughly the numbers.

David Doherty: Yes. Yes. I would say a large majority of that year-over-year increase is related to provider taxes, roughly a little bit less than half of that relates to the new provider taxes associated with those programs from which we get no benefit. The good news is those -- even though there may be a big number on provider or other operating expenses, they are in facilities that we don't have a significant ownership interest in some cases, they're relatively small. So that does move down to -- in line with kind of what our long-term growth algorithm, the way I answered with question earlier.

So the adjusted earnings piece of that is going to be a little bit lower -- a lot lower, I should say.

Operator: We take the next question from the line of Bill Sutherland from the Benchmark Company.

William Sutherland: Just want to think about the de novos for a second. Can you give us a sense of kind of what's in the pipeline and maybe how they're sort of moving towards consolidation as a group?

J. Evans: Bill, I appreciate the question. We are excited about the de novo pipeline. We have 5 expected to open later this year, 7 more in the pipeline, and we continue to see interest in that area. It is a place where we see the opportunity for accretive growth. Unfortunately, it takes a while to show up. As we've talked about, it takes 12 to 18 months to syndicate and 12 to 18 months to build, a year to get to cash flow breakeven, but the return on these is quite good. And so we're getting into that point where we've been doing this now for a couple of years, it will start becoming run rate.

We are not yet to the point, Bill, where we're doing buy-ups in those facilities. We've got about half of those that are with health systems about half that are independent although that independent number, I think, is going to go up over time. In those independent centers, there will be an opportunity as they ramp, we expect to buy up and consolidate those centers. But we're not to that level of maturation, but we're super excited about where those are heading. And feel good about the opportunity to continue to have that be a nice lever to help meet our growth.

Operator: Ladies and gentlemen, we take the last question from the line of Benjamin Rossi from JPMorgan.

Benjamin Rossi: Just following up on your physician recruitment comment, in the language from the final OPPS rule, much of the logic stream from CMS' discussion about removing the inpatient-only list come from this concept of greater physician autonomy over where they treat their patient case load. Just taking a step back, when thinking about the changes that allow physicians to take a greater portion of their book of business into the outpatient setting, what do you consider to be some of the remaining obstacle they're paying points for doctors that prevent them from treating their entire caseload of Medicare and commercial patients in the outpatient setting at this point?

J. Evans: Yes. Great question, Benjamin. I appreciate the question. So the inpatient only [indiscernible], we are very excited about the fact that the government has decided to put the decision back in the physician's hands. As you probably know, over the last 10 years, the government has spent a lot more money than it needed to because they were behind on getting Medicare caught up with what was happening with commercial patients. It happened with total joints. It certainly happened in vascular procedures.

And so you I think you look at some of these things, and the government has seen repeatedly where commercial has moved faster and doctors that move patients safely based on technology in front of their list on the Medicare side. So we're always excited when the government leans in to prefer our setting because we know we create great value. We've got great outcomes. So continue to see that as a nice tailwind for the business going forward. Some of the obstacles that still remain. There are some states that haven't caught up with CMS in certain areas of vascular and EP. There are -- in cardiovascular.

There are -- I think there's obviously always different parts of the country that physicians have. It's a little bit sometimes going to be a little bit of gill mentality. They have their own reasons they think patients can't be safely treated and certain side of care that we have to go through. Technology is sometimes a barrier. There are certain specialties where the technology, the robotics technology, for instance, is sometimes a limiting factor for ASCs to be able to afford the capital. We think there's real opportunity with payers and with some of the new technologies coming out to fix that issue. So There are some minor things left.

I do think that a lot of those things continue to melt away as physicians experience our side of care, continue to have great outcomes with patients and higher acuity. And we're thrilled that no matter which administration has been in democratic, republic and they've supported the ASC space. But in particular, this administration with the removement of the inpatient-only list, that plays perfectly into our thesis, perfectly into what we're trying to deliver for the health care system, and we expect that, that's going to be a nice tailwind for us in the coming years. With that, I appreciate -- go ahead, sorry.

Benjamin Rossi: No, sorry, I just wanted to say appreciate the color there. Just real quick then. Now 140 new additions on physician recruiting. Any comments on if these are replacing retirees and departures versus being truly additive?

J. Evans: Yes. So I think in the first quarter, we feel really good about the additions we have had. Some of those would be replacing retiring some of them are pure net adds. I don't have that net number. We haven't released that. But I would say we're pretty happy with our start around this recruiting. We do see it as additive to the -- to our growth profile going forward. We're going to be closely watching that this year. Obviously, last year, we had a bit higher retirement rate than we've seen in the past, and we are adjusting to that to make sure we manage that very, very carefully.

But super excited about kind of the early reads on recruitment this year. And again, I think as technology and as government regulation allows us to target additional procedures, it certainly continues to open up that world of recruits for us, and we're being very focused on that. So -- appreciate the question. I think that was our last question. I appreciate everyone's time today. And look, I'll let you enjoy the rest of the day. Thanks so much for your time. See you.

Operator: Thank you. Ladies and gentlemen, with that, we conclude today's conference call of Surgery Partners. Thank you for your participation. You may now disconnect your lines.

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