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Ladies and gentlemen, greetings, and welcome to the Surgery Partners first quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please signal the operator by pressing star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, Surgery Partners Chief Financial Officer. Please go ahead.

Good morning. Thank you for joining Surgery Partners first quarter 2026 earnings call. I am joined today by Eric Evans, our Chief Executive Officer, as well as Justin Oppenheimer, our Chief Operating Officer, who joined the company in January. 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, as described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update these forward-looking statements. In addition, we reference certain non-GAAP financial measures which we believe can be useful in evaluating our performance. We reconcile these measures to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Eric. Eric?

Thank you, Dave. Good morning, everyone. Before we get started, I'd like to introduce Justin Oppenheimer on the call this morning. Justin joined the company as our Chief Operating Officer in January and has made an immediate positive impact on the organization. By way of background, Justin was previously an executive at Hospital for Special Surgery, the world's leading academic system focused on musculoskeletal care, where he held several roles overseeing operations and strategy. Justin will be available to answer questions during the Q&A portion of our call. We look forward to you getting to know him better in the months ahead. 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 three 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, with 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 and 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 1st pillar, organic growth. Same-facility case growth of 0.6% in the first quarter was modest and below our long-term growth algorithm, driven primarily by temporary weather-related disruptions early in the quarter that led to case losses or referrals in several higher volume but lower acuity markets. Importantly, these impacts were not broad-based and did not materially affect the higher acuity portions 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. 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 nine 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 one-time 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 three 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 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 in 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?

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. day 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 historical patterns and our partnership-based model. Net leverage under our credit agreement was approximately 4.3 times, which is consistent with the fourth quarter.

GAAP net debt to adjusted EBITDA was approximately 5.1 times. 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 will 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-$3.45 billion and adjusted EBITDA guidance of at least $530 million.

For the second quarter, we expect revenue to represent 24%-24.5% of the annual target and adjusted EBITDA to be 23%-23.5%. 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?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Ladies and gentlemen, we request you to limit to 1 question and 1 follow-up question per participant. We take the first question from the line of Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, guys. Congrats on the quarter. I know it was tough. Maybe I'll start with Justin, since you're new to the earnings call. Just curious, I mean, you've been here about four 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, you know, like blocking and tackling or areas of further productivity and efficiency gains where you can make a difference in the operations?

Thank you for the very first question. Maybe what I'll do is just highlight three categories of early observations, just to stay organized. Maybe one, around people. Second, around our organization's positioning. Three, our operational priorities. The first are 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. I think just a level set summary on our people, I think our culture is very strong. Initial talent assessment is 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. You know, 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. You can really see this on the ground. 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. This has been all confirming.

You know, to get to your question about operational priorities, with the cultural foundation and these industry tailwinds, the priority is really on execution. 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, 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 hum. Both our teams and you all will hear this drumbeat of growth and operational excellence from me throughout the year. Maybe I'll end with that.

No, 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 costs, and even prof fees. 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 costs, essentially at the operations level? Thanks.

Yeah. Thanks, Brian. I may jump in here, then I'll let Dave add a little color if he wants to. First of all, thank you for the comment from the quarter. Glad to have a solid start to the year. I think when we look at the cost controls, and look, Justin's been jumping in with this, our team has been focused on cost management for a long time. We came out of last fourth quarter with a real focus on, you know, 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. You know, we've talked about if you look across the business the last five years, we have consistently improved 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 and efficiency to drive those costs down as a % of net revenue. I don't know, Dave, you have anything to add to that. I mean, I would say we leave Q1 with a lot of confidence in our ability to manage those costs and to find ways to drive improvement around margins.

Yeah, I would, I'd just supplement that with a couple things maybe to highlight where we're gonna see some of this pressure coming through on those headwinds that we've cited, and we experienced a little bit inside the first quarter. 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 significantly in the third quarter. You'll see a little bit of pressure, really more of a return to normal on that SWB line as a result of, 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 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.

Thank you. We take the next question from the line of Matthew Gillmor from KeyBanc Capital Markets. Please go ahead.

Hey, thanks for the question. I appreciate the comments on the three markets showing some recovery. I just wanted to see if there was any additional details to share, especially with respect to some of the payer mix dynamics that you called out last quarter.

Yeah, thanks for the question, Matt. I, Justin's 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's not 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 just a, you know, 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. The focus on really coordinating closer and tighter to make sure we're competing appropriately for the 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 three markets are in line with where we expected them to be, making progress. Again, I will reiterate, while those three markets had pressure, they're really great markets for us overall. They continue to have really strong payer mix in general, despite the pressure. They also have really strong market positions. Yeah, no, it's encouraging to see those get back online. Obviously, the fourth quarter was an unexpected kind of challenge in those three markets, and we're excited to kinda see the early progress.

Great. 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, you know, maybe year or two, and how many you think you can add to the portfolio over the next couple years?

Yeah, great question. I mean, surgical robots really over the last four or five years have been an unlock for us, and largely with physicians that might have already been partners or using our facility and, you know, we did not feel comfortable bringing those higher acuity cases until they had the matching technology. You know, 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. You know, we still see opportunity there.

Roughly 70% of our total facilities have the ability to do MSK and, you know, a lot of those over time have added robots. We still have a ways to go there. I mean, you see that even, you know, 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 transition. When you think about, we talked a little bit in the opening comments about our de novo pipeline. Very MSK heavy. I think you can expect to see robotic expansion there as well. 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.

In some cases, you know, as we, 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 attractive to physicians, and I think our team does that very, very well.

Thank you. We take the next question from the line of Ben Hendrix from RBC Capital Markets. Please go ahead

Great. Thank you very much. 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? How do you expect that mix to kind of track through the rest of the year? Thanks.

Hey, Ben, thanks for the question. 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. You know, Dave mentioned in the script about 40 basis points of impact on our growth. Instead of 60 basis points, we would have been at 1%, still not where we expect to be long term. As far as you know, getting those cases back, I, you know, 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 know, you lose 1 day, it's hard.

A lot of those really busy facilities, you know, they're full most of the time. Yeah, we'll capture some of that, but I wouldn't think it's gonna lead to any kind of real skewing. The good news is we've seen really strong growth within high acuity. I don't know, Dave, if you'd add anything to that.

Yeah, 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. 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.

Thanks. Just to follow up, we're getting some incomings on the cash flow from operations print. Any more detail you can provide on the working capital dynamics you're expecting, and how should we think about timing of cash flow realization through the year? Thanks.

Yeah. I'll let Dave dive into the details. I just say high level on free cash flow. We're very focused on driving improvement there. You know, 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.

First off, just dissecting 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. 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. 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, you know, a 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. 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, 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 day 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. 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. We do expect that that unlock should happen over the course of the year.

Thank you. We take the next question from the line of Whit Mayo from Leerink Partners. Please go ahead.

Hey, thanks. I may have missed this, but how much were the provider taxes in the quarter, both revenue and other operating expenses?

Yeah. Thanks, Whit, for the question. As a reminder for the large group, we did talk about new headwinds that we're facing this year that fall into kind of two categories. In one state, the pretty much the only state where we have any exposure to Medicaid, there was an across-the-board 4% rate reduction that started to impact us in the 4th quarter of last year and did impact us this year. That had a very small impact on revenue, almost inconsequential, of course, that flows all the way down to the bottom line. We also had provider taxes introduced in two new states for which we have virtually no Medicaid business, just for the fact that we carry the title hospital in those two markets.

The combined pressure on the adjusted earnings line, for those two 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 three-quarters of the year. We're a little bit more than 25% of that number impacting our results, split between revenue and other operating expenses.

Okay. 8 divided by 4, 2. More than 2 in the quarter year-over-year was the pressure.

That's fair.

Yeah. Okay. 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. 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's prior auth demo with the WISeR model, whether or not that's having any impact one way or the other. Thanks.

Yeah. Thanks, Whit. Appreciate the question. Look, we are certainly all on board and in favor of all the work the payers are talking about with all of the prior authorizations. You know, we do see in markets, you know, one of the great things about our model is we are aligned with payers in saving the system money. This idea of payers making it harder to get approval in the wrong setting of care is a great thing for us. We'd be 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.

You know, 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, you know, that has gone in place, the Medicare demo. We have seen, you know, early on, there were some learnings there. As you know, it adds some more administrative, unfortunately, work on our side. 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, you know, wanna make sure patients are getting the care they need, the right care in the right place. All of those efforts align perfectly with, you know, our mission, which is really to provide high value care at the right setting, right care, right place, right price. You know, we think those are gonna be long-term tailwinds. We haven't seen tremendous impact there yet, although there are certainly markets where, you know, we are hearing that it's harder for harder for physicians to get their patients into a hospital when there's an ASC option, and, you know, that's great.

Thank you. We take the next question from the line of Joanna Gajuk from Bank of America. Please go ahead.

Hi, good morning. Thanks for taking the question. Can you give us an update on the portfolio optimization and selling or reducing exposure to your surgical hospitals?

Sure. Joanna, thanks for the question. Obviously, something we've talked about for the last several quarters is portfolio optimization. We remain committed to reviewing those opportunities within our portfolio to do several things. I just wanna remind everyone what we're looking to accomplish with this. One is actually, you know, de-lever faster, finding a way to help us de-lever. 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. Lastly, just, you know, simplify the business to our core short stay strategy. We do see opportunities there. It has been, as you bring up here, the timing of this has 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 mid-year. I'd be clear on 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 wanna do it in a way that's accretive to shareholders and make sure we accomplish those things that I talked about earlier. There's one market that's in the very advanced stages there. We're targeting mid-year. We'll see. Obviously, nothing's done until it's signed. There are a couple of other markets that we're going to be exploring, and we'll give you the updates as those are appropriate.

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? Are you waiting to complete more of these before you know, have this meeting?

Yeah, no, we're definitely still committed to doing an investor day. As we said before, we are tying that to, you know, having something meaningful done within our portfolio optimization. We do plan to do that later this year, we're staying very closely tied to that timing. As we have something to update you on there, we'll obviously do it quickly.

Thank you. We take the next question from the line of Andrew Mok from Barclays. Please go ahead.

Good morning. 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? Could you comment more broadly on the view of the strength of the consumer wallet and employment trends in your markets?

Sure. Commercial came in about 50% for the first quarter, which was, you know, had a little pressure if you look at it sequentially. You know, we always have a little bit of pressure. Obviously, our population's aging. We gotta take commercial market share to stay even, feel pretty good about the moderation of that. We are seeing some, you know, again, some improvement signs there. Was not nearly the same pressure we saw in the fourth quarter, also did not totally abate. We're very focused on that. I think from your question around just the consumer wallet, you know, it's interesting. You know, it's the pressure we saw on cases in the first quarter relative to kind of lower acuity, higher volume patients 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. Again, one of the hardest things in healthcare is to determine why patients don't walk into your doors. We feel good about the start of the 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, you know, we haven't really felt the material pressure there, but we continue to watch that. The good news is we're not exposed, to kind of payer mix weakening. You know, 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, or 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%.

Thanks. Following up, you've provided second quarter revenue and EBITDA outlook that appears slightly below your normal revenue seasonality and somewhat below consensus estimates. Are there any timing elements in the second quarter to consider or for the remaining of the year?

Thanks for the question. I mean, there's always some timing elements. I would say we would at least start off with 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, you know, 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. I think you should just say that I should say it's early in the year. It's prudent guidance for Q2. I don't know, Dave, if you would add anything.

Perhaps just a point of emphasis when you're doing a comparison year-over-year. In the second quarter of last year, 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 gonna affect your year-over-year performance inside the second quarter are those headwinds that we've highlighted in our financial supplement.

Thank you. We take the next question from the line of Sarah James from Cantor Fitzgerald. Please go ahead.

Thanks. I wanna 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?

Yeah. Thanks for the question, Sarah. I think, look, if you're thinking about bridging the first half performance to second half performance, we are not, there's nothing embedded in there that's some dramatic improvement in our payer mix. you know, 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. I, you know, I think what I would say is from a seasonal adjustment standpoint, that this is a relatively normal spread. you know, we feel really confident in our ability to deliver not only on Q2 but on the full year.

Maybe if I just add, just to that, Sarah, 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. The other two things Eric did mention the focus on cost containment in the industry. As those pick up and we kinda mature into those will have an impact inside the second half of the year.

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. Those are the key components that would drive better performance in the second half of the year. All relatively marginal, 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.

Is normal, yep.

Thank you.

Thank you. We take the next question from the line of A.J. Rice from UBS. Please go ahead.

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?

Sure, A.J. Rice, 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 a timing of M&A is fickle. We'll say, look, we feel good about our pipeline. You know, we continue to see new things coming in. 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.

You know, look, I, I expect we're gonna make progress. I think last year we ended up finishing not too far off, AJ. I think we ended 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. You know, this year looks like we're gonna end up being a little back-end weighted too, given the first quarter. Look, I, I would say we're, you know, we're the last kind of only standalone short-stay surgical operator. We're well-positioned in the market that is going to continue to consolidate. We think we're well-positioned to be one of those consolidators. Like, I don't Long term, nothing's changed, but the timing is fickle and, admittedly, it's been a slow start.

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

Yeah, great question. I would say the 140 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. Our physicians that we recruited 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, the team is focused on driving growth there. I would say, you know, 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.

Again, we very much closely watch kind of that performance and, you know, 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. Definitely back-end loaded. Feel good about the early start.

Thank you. We take the next question from the line of William Spiwak from TD Cowen. Please go ahead.

Hey, guys. Thanks for taking my question. Can you just talk about your expectations for the split between case growth and net revenue per case growth as the year progresses? Thanks.

Yeah, yeah. Thanks, William, for the question. What we have implied in our guidance for the year continues to be approximately 3-plus% 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 I would consider that to be normal fluctuations. You'll roughly get an equal contribution between both of those, perhaps skewing a little bit more towards the rate side.

Okay, thanks. Just as a follow-up, just to clarify a question from earlier on the other OpEx and provider taxes. I think you said that was about a $2 million headwind, you know, maybe a little bit more to EBITDA in the quarter. 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 kinda back into the revenue as well? Thanks.

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 tax is about $11 million, with the biggest part of that being the new states that we've added. We're happy to go through those details. 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 in the biggest contributor this year, the new states that added those, and unfortunately added those without any Medicaid benefit for us.

We're still gonna be very active in advocacy on some of those areas. 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.

Yeah, 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 for which we get no benefit. The good news is those, even though they may be a big number on provider or other operating expenses, they're in facilities that we don't have a significant ownership interest. In some cases, they're relatively small. That does move down to in line with kind of what our long-term growth algorithm, the way I answered Whit's question earlier. The adjusted earnings piece of that is gonna be a little bit lower. A lot lower, I should say.

Thank you. We take the next question from the line of Bill Sutherland from The Benchmark Company. Please go ahead.

Thank you. Hey, good morning, everybody. Just wanted to think about the de novos for a second. You know, 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?

Hey, 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. We continue to see interest in that area. It is a place where we see, you know, the opportunity for accretive growth. Unfortunately, it takes a while to show up. As we've talked about, you know, it takes 12 to 18 months to syndicate and 12 to 18 months to build, 1 year to get to cash flow break even. The return on these is quite good. We're getting into that point where we've been doing this now for 2 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. Though that independent number I think is gonna 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 our meet our growth algorithm.

Great. Thanks, Eric.

Of course. Thank you, Bill.

Thank you. Ladies and gentlemen, we take the last question from the line of Benjamin Rossi from JPMorgan. Please go ahead.

Hi, all. Thanks for squeezing me in here. Just following up on your physician recruitment comment. In the language from the final OPPS rule, much of the logic stream from CMS's discussion about removing the inpatient-only list come from this concept of greater physician autonomy over where they treat their patient caseload. 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 obstacles or pain points for doctors that prevent them from treating their entire caseload of Medicare and commercial patients in the outpatient setting at this point?

Yeah, great question, Benjamin. I appreciate the question. The inpatient-only list, we are very excited about the fact that they, 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. I think you look at some of these things, and the government has seen repeatedly where commercial has moved faster and doctors have moved patients safely based on technology in front of their list on the Medicare side.

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. 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, you know, in cardiovascular, there are, I think there's always different parts of the country that physicians have, sometimes can be a little bit of a guild mentality. They have their own, you know, reasons they think patients can't be safely treated in a 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. 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 in higher acuity. You know, we're thrilled that, you know, no matter which administration's been in, Democrat or Republican, they've supported the ASC space. In particular, this administration, with the removal of the inpatient-only list, you know, that plays perfectly into our thesis, perfectly into what we're trying to deliver for the healthcare system.

you know, we expect that that's gonna be a nice tailwind for us in the coming years.

With that, I appreciate. Oh, go ahead.

Yeah. Oh, go ahead, sorry.

Sorry, just wanted to say, appreciate the color there. Just real quick, the 140 new additions on physician recruiting, any comments on if these are replacing retirees and departures versus being truly additive? Thanks.

I think in the first quarter, you know, we feel really good about the additions we've 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. I would say we're pretty happy with our start around the physician recruiting. We do see it as additive to the to our growth profile going forward. We're gonna 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. Super excited about kind of the early reads on recruitment this year.

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, we're very, very focused on that. Appreciate the question. I think that was our last question. I appreciate everyone's time today, I'll let you enjoy the rest of the day. Thanks so much for your time. See you.

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.

Greetings, and welcome to the Surgery Partners, Inc. Q4 and full year 2025 earnings call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, David T. Doherty, Chief Financial Officer. Please go ahead.

Good morning, and welcome to the Surgery Partners, Inc. Q4 and full year 2025 earnings call. I am joined today by J. Eric Evans, our Chief Executive Officer. 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, as described in yesterday’s press release and the reports we file 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. These measures are reconciled to the most applicable GAAP measure in yesterday’s press release. I will now turn the call over to J. Eric Evans.

Thank you, David. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated fourth quarter and full year 2025 results. I will then provide additional color on the drivers of performance this quarter and on our initial outlook for 2026. First, let me provide highlights from our fourth quarter and full year results. We reported full year net revenue at the low end of expectations at $3.3 billion, up 6.2% year over year, with same-facility revenue growth of 4.9%. Full year adjusted EBITDA was $526 million, up 3.5% year over year but significantly below our expectations. Our adjusted EBITDA margin was 15.9%, reflecting 40 basis points of margin compression. These results tell a tale of two halves where momentum in the first half of the year gave way to significant headwinds in the second half, culminating in fourth quarter performance that fell short of our revised expectations. Before getting into the details, I want to level-set the scope of the challenges we experienced in the second half of the year. In our Q3 call, we lowered our guidance based on delayed net capital deployment as well as slower case growth and payer mix trends we experienced in Q3 and early Q4. While those trends continued in Q4, the impacts were isolated to our surgical hospitals and our earnings shortfall was concentrated in just three surgical hospital markets. These markets had a combination of softer-than-expected case growth, payer mix shifts, and anesthesia dynamics that created outsized pressure. The balance of our portfolio performed in line with expectations, and these issues were not systemic across the enterprise. I will address these headwinds in more detail shortly. However, I first want to emphasize that we are confident that our long-term structural growth remains intact, driven by a combination of organic, de novo, and acquired growth. We remain committed to our growth algorithm and are focused on improving free cash flow, reducing leverage, and creating long-term shareholder value through our portfolio optimization strategy. I will now turn to the drivers of Q4 performance in more detail. Starting with organic growth, in the facilities we consolidate, we performed nearly 670,000 surgical cases in 2025, compared to 656,000 cases in 2024. We ended the quarter with 1.3% same-facility case growth, reflecting marginally softer-than-expected volume growth. Despite the short-term weakness, we remain committed to our organic growth strategy, centered on expanding surgical case volumes while strategically shifting towards higher-acuity procedures, including orthopedic specialties and total joint replacements. We performed over 42,000 orthopedic cases in the fourth quarter, supported by strong growth in total joints, with these cases growing 15% in the fourth quarter and 19% on a year-to-date basis compared to the same periods last year. We are reaffirming and continuing to execute on expanding our facilities’ capabilities to deliver high-acuity procedures. Our investments in robotics and physician recruitment remain core to our strategy of capturing greater high-acuity demand. Within our portfolio, we have 74 surgical robots in service, including the addition of six in 2025, that enable our physician partners to safely perform increasingly complex procedures. Physician recruitment, a critical component of our organic growth initiatives, remains on track with almost 700 physicians recruited in 2025. That said, a portion of our payer mix pressure in 2025 was attributable to physician transitions. Several experienced physicians who historically contributed to higher commercial payer mix and volumes retired or departed during the period. At the same time, many of our newly recruited physicians served a higher proportion of Medicare patients than previous cohorts and did not ramp as quickly as anticipated. This physician transition dynamic contributed to our payer mix pressure, as commercial payers represented a declining percentage of total revenue year over year. Notably, this phenomenon was not seen across the full enterprise. It was largely seen in our surgical hospital markets and was more concentrated in a handful of our larger facilities. We anticipate improvement in both volume and payer mix as these newer physicians mature within our platform, but we will need to lower operating expenses in the short term to protect margin. As I mentioned earlier, fourth quarter margins saw compression year over year and came in below our revised outlook from the third quarter. At a high level, the margin pressure we experienced in the fourth quarter was driven by two primary factors concentrated in three surgical hospital markets. First, we saw slower-than-expected case growth and a sharper-than-expected shift in payer mix in those facilities, driven by both physician transitions as well as near-term addressable market-specific dynamics. Second, in those same markets, our cost structure, including labor expenses as well as the cost of anesthesia coverage, did not adjust quickly enough to that changing payer mix, creating incremental near-term margin pressure. While we have been managing anesthesia dynamics across our ASC portfolio for several years, the incremental pressure we saw in 2025 was largely in our surgical hospitals, with a higher Medicare mix, rather than broad-based across our ambulatory footprint. Given these impacts, we acknowledge that our performance does not reflect the potential of our business or the strength of our model, and we recognize that there is work to be done in terms of execution. Importantly, the dynamics we experienced in the second half are identifiable, measurable, and addressable. We now have clear visibility into the drivers of our recent performance, and those learnings are embedded in our 2026 planning assumptions. Reflecting on performance and the need for improvement, we have also invested in new leadership at those facilities, and our recently named Chief Operating Officer, Justin Oppenheimer, is dedicating substantial time to support their success. I will speak about the 2026 outlook shortly and our plan to move forward, but first, let me finish my review of the quarter with a brief discussion on capital deployment. In 2025, we deployed $182 million of capital toward acquisitions, modestly below our annual target of $200 million plus proceeds from divestitures and admittedly back-end weighted. We continue to believe this is the right annual deployment level given how fragmented our industry remains and the breadth of opportunities available to us. Importantly, acquisitions we completed during the year were made at attractive value and represent meaningful additions to our portfolio that we expect will support future growth. The pace of deployment reflected our disciplined approach to capital allocation, and we remain encouraged by the strength of our near- and mid-term pipeline. M&A remains a critical component of our growth strategy, and we remain focused on executing transactions that align with our strategic objectives and generate long-term value at favorable multiples. Investing in the development of de novo facilities represents a relatively new and expanding component of our long-term growth, enabling us to establish ASCs in strategically selected high-growth markets where they focus on higher-acuity specialties. In the fourth quarter, we opened four de novos, which makes the total eight openings throughout 2025. As a reminder, the typical development timeline for de novo facilities entails 12 to 18 months to build, with an additional year required to reach breakeven performance. Now I would like to take a moment to share a progress update on our portfolio optimization process. As a reminder, we are executing a comprehensive portfolio optimization strategy designed to accelerate balance sheet improvement without sacrificing growth. The portfolio optimization process reflects a proactive long-term approach to unlock value and drive sustained success, rather than a reactive response to near-term market pressures. Our focus remains on selectively partnering or divesting facilities that will help us best meet the goals of our strategy. We continue to advance our portfolio optimization efforts and are focused on a small number of our larger surgical hospitals that fall outside of our core short-stay surgical strategy. These efforts, some of which are in active negotiations, are intended to be incremental and disciplined, and any actions we ultimately take will be guided by value creation rather than timing. We believe these actions will be accretive to shareholder value and demonstrate financial benefit to the company through reduced leverage and increased cash conversion as a percentage of adjusted EBITDA. We are encouraged by the steady advancement of our portfolio optimization efforts, and our team is confident we will reach a resolution on a key part of this effort within the first half of the year. The recent Baylor Scott & White joint venture involving our surgical hospital in Bryan, Texas is a good example of the strategic alignment we are seeking through our portfolio optimization efforts. This transaction allows us to partner with a leading health system that is well-positioned to support long-term growth and physician alignment in the market. As a result of the transaction, we will no longer consolidate the facility, which will reduce reported revenue. However, on a run-rate basis, we expect the earnings contribution to improve despite our lower ownership, reflecting a more efficient capital structure and improved alignment with our strategic objectives. Importantly, this transaction was driven by long-term value creation rather than near-term financial impact, and it reinforces our focus on simplifying the portfolio and concentrating on assets that best fit our short-stay surgical strategy. We look forward to sharing any further material updates from the ongoing portfolio review process when appropriate. We also plan to provide a comprehensive update on our longer-term portfolio composition at the upcoming Investor Day, the timing of which will be aligned with a validating milestone in our portfolio optimization process. As we assess our operating landscape and plan for the year ahead, we are taking a measured and conservative approach to the 2026 preliminary guidance resets for parts of the business. Our initial guidance for net revenue is $3.3 billion to $3.45 billion, representing single-digit year-over-year growth and underscoring our continued conviction in the company’s organic growth opportunities. We are providing initial guidance of at least $530 million of adjusted EBITDA, contributing to growth of at least 0.7%, which incorporates the anticipated near-term impact from many of the key headwinds we have discussed this morning. We have quantified the impact of anticipated headwinds and the core organic growth underlying our initial guidance in the supplemental slide that we provided with our earnings materials. Let me now take you through…