Summary of Surgery Partners FY Conference Call (March 10, 2026) Company Overview - **Company**: Surgery Partners (NasdaqGS:SGRY) - **Industry**: Healthcare, specifically focused on surgical facilities and outpatient care Key Points and Arguments Market Dynamics - The company operates as an independent surgical facility amidst large integrated nonprofit systems that are moving away from Medicare Advantage (MA) contracts, impacting patient access and revenue [1] - There is a noted growth of 18% in high acuity procedures, but this growth was primarily driven by Medicare patients, leading to lower net revenue despite increased case volume [2][3] - The company is experiencing pressure from the Affordable Care Act (ACA) exchange patients, which affects their commercial patient mix and overall revenue [3][9] Financial Performance - Total case volumes fell below expectations due to payer mix issues, yet the company exceeded the high end of revenue guidance, indicating strong performance in high acuity cases [8] - The company is actively working on cost reduction and efficiency improvements to address margin compression faced by physicians [5][10] Strategic Initiatives - The company is focused on optimizing its portfolio by potentially divesting from larger facilities that have higher debt loads and lower free cash flow conversion [24][25] - A share repurchase program of $200 million has been authorized, indicating confidence in future cash flows from portfolio optimization efforts [26][28] Guidance and Future Outlook - The company has adopted a conservative approach to guidance for 2026, excluding unannounced M&A, while maintaining a target of at least $200 million for capital deployment [12][15] - There is an expectation that some market pressures will take time to resolve, particularly regarding MA and commercial access [9][11] Policy and Regulatory Environment - The company supports site neutrality in healthcare payments, believing that their facilities can provide care at a lower cost compared to traditional acute care settings [30][31] - The expiration of enhanced ACA subsidies has had a localized impact on patient volumes, particularly in one market where exchange patients were significant [33][36] Cost Structure and Anesthesia Challenges - The relationship between labor costs, anesthesia costs, and shifts in government payer mix is complex, with anesthesiologists facing reimbursement challenges that affect coverage and costs for the company [38][40] - The company is exploring ways to manage anesthesia costs more effectively, given the significant disparity in reimbursement rates between Medicare and commercial payers [39][40] Additional Important Insights - The company emphasizes the importance of physician partnerships and the need for better coordination to capture commercial patients effectively [7] - There is a strong focus on maintaining high patient experience and outcomes, which are critical for attracting and retaining physician partners [6][10] - The company believes that even in a potential economic slowdown, their value proposition as a lower-cost provider positions them well in the market [18][20]

Financial Data and Key Metrics Changes - The company reported full year net revenue of $3.3 billion, up 6.2% year-over-year, with same facility revenue growth of 4.9% [4][24] - Full year Adjusted EBITDA was $526 million, up 3.5% year-over-year, but below expectations, with an Adjusted EBITDA margin of 15.9%, reflecting 40 basis points of margin compression [4][25] - Fourth quarter revenue grew 2.4% to $885 million, with Adjusted EBITDA of $156.9 million and a margin of 17.7% [23][25] Business Line Data and Key Metrics Changes - The company performed nearly 670,000 surgical cases in 2025, a 2% increase from 2024, with same facility case growth of 1.3% in the fourth quarter [6][23] - Orthopedic cases grew significantly, with total joint replacements increasing by 15% in the fourth quarter and 19% year-to-date compared to the previous year [7] - The company faced challenges in three surgical hospital markets, which experienced slower case growth and shifts in payer mix, impacting overall performance [5][9] Market Data and Key Metrics Changes - The payer mix softened during the fourth quarter, with a decline in commercial patients compared to historical trends, primarily affecting surgical hospitals [24][41] - The company noted that the pressure on payer mix was concentrated in specific markets, with some competitors opting to limit access to Medicare Advantage patients [46][81] Company Strategy and Development Direction - The company remains committed to its growth strategy, focusing on organic growth, acquisitions, and optimizing its portfolio to enhance shareholder value [6][12] - A portfolio optimization strategy is underway, aimed at divesting non-core facilities and enhancing operational efficiency [13][15] - The company plans to continue investing in de novo facilities, with eight openings in 2025 and more in the pipeline, targeting high-growth markets [12][31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges faced in the second half of 2025 but expressed confidence in the long-term growth potential of the business [5][10] - The initial guidance for 2026 includes net revenue of $3.35 billion to $3.45 billion, reflecting single-digit growth, and at least $530 million in Adjusted EBITDA [16][33] - Management emphasized the need for improved execution and cost management to address near-term headwinds while remaining optimistic about structural growth opportunities [18][19] Other Important Information - The company authorized a share repurchase program of up to $200 million, reflecting confidence in future growth and capital allocation strategy [20][56] - New leadership has been appointed to support operational improvements in underperforming facilities [10][73] Q&A Session Summary Question: Challenges and Volume Outlook - A question was raised regarding the balance between conservative volume expectations and the belief in strong fundamentals [40] - Management responded by reiterating confidence in the growth algorithm and the value created within the healthcare system [41][42] Question: Payer Mix Dynamics - Inquiry about the payer mix situation and its impact on volumes, particularly regarding Medicare and commercial patients [40] - Management acknowledged the unique pressures faced in specific markets and expressed optimism about returning to a balanced payer mix [45][54] Question: Capital Deployment and Share Buyback - A question was posed about balancing capital deployment with the share buyback program [55] - Management clarified that the share buyback is part of a measured approach to maximize shareholder value while considering debt reduction [56][85] Question: Recovery of Surgical Hospital Markets - A question was asked about the recovery assumptions for surgical hospital markets [70] - Management indicated that while there are pressures, they do not expect a repeat of the previous year's challenges and are focused on turnaround plans [73][81]

Financial Data and Key Metrics Changes - Net revenue for Q3 2025 was $821.5 million, reflecting a 6.6% year-over-year increase [3][15] - Adjusted EBITDA was $136.4 million, up 6.1% year-over-year, with an adjusted EBITDA margin of 16.6% [3][15] - Same facility revenue grew by 6.3%, with same facility case growth of 3.4% and rate growth of 2.8% [15][20] Business Line Data and Key Metrics Changes - Over 166,000 surgical cases were performed in Q3, representing a 2.1% growth [15] - Growth in total joint surgeries was robust, with a 16% increase in Q3 and a 23% increase year-to-date compared to the same period last year [4][15] - Volume growth in gastrointestinal (GI) and musculoskeletal (MSK) procedures was relatively high, while ophthalmology procedures were slightly lower this quarter [4][5] Market Data and Key Metrics Changes - Payer mix showed commercial payers at 50.6% of revenues, down 160 basis points year-over-year, while governmental sources, primarily Medicare, increased by 120 basis points [5] - Same facility revenue growth for the full year is now expected to align with the midpoint of the long-term target range of 4%-6% [12][20] Company Strategy and Development Direction - The company is focused on organic growth, margin improvement, and capital deployment for M&A [3] - A strategic portfolio optimization process is underway to enhance flexibility and streamline operations [9][10] - The company plans to continue investing in DeNovo facilities, with two opened in Q3 and nine under construction [8][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged softer-than-expected same facility volume growth in recent months, prompting adjustments to the fourth quarter outlook [5][12] - The company remains confident in its long-term growth algorithm and the resilience of its business despite near-term challenges [13][21] - Revised full-year guidance expects revenue in the range of $3.275 billion to $3.3 billion and adjusted EBITDA between $535 million and $540 million [11][19] Other Important Information - The company has deployed approximately $71 million in capital for acquisitions in 2025, with a robust M&A pipeline of over $300 million under evaluation [6][8] - The company completed divestitures of three ASCs, generating cash proceeds of $45 million [18][40] - The inaugural investor day has been shifted to spring 2026 to provide a comprehensive update on portfolio optimization efforts [11] Q&A Session Summary Question: What is causing the weakness in demand or procedure volumes as you think through Q4? - Management noted broad-based weakness in volumes and payer mix, with higher government payer mix than expected [23][24] Question: Is the low level of spend on acquisitions due to deal timing or evaluation? - Management confirmed strong deal flow but emphasized a disciplined approach to acquisitions [25] Question: Can you clarify the payer mix commentary regarding commercial volumes being weaker? - Management indicated that while there is always pressure from payers, the current issue is more about the growth trend not being as strong as expected [29][30] Question: Can you break down the $20 million pressure on EBITDA guidance? - Management stated that approximately 60% of the pressure is related to development or capital timing, with the rest due to recent trend changes [31][32] Question: What are the expectations for free cash flow in Q4 and the year ahead? - Management does not provide specific guidance on free cash flow but noted strong operating cash flow and improvements in working capital [75][78]

Financial Data and Key Metrics Changes - Surgery Partners reported second quarter net revenue of $826 million, an increase of 8.4% compared to the previous year, and adjusted EBITDA of $129 million, reflecting a 9% growth [6][25][26] - The company achieved a same facility revenue growth of 5.1%, with same facility case growth at 3.4% and rate growth at 1.6% [25][26] - The adjusted EBITDA margin was 15.6%, which is 10 basis points higher than the prior year [26] Business Line Data and Key Metrics Changes - The company performed nearly 173,000 surgical cases in the second quarter, a 3.8% increase from the previous year, with significant growth in gastrointestinal (GI) and musculoskeletal (MSK) procedures [9][25] - Total joint procedures grew by 26% in the second quarter compared to the prior year, indicating strong demand for orthopedic surgeries [10] Market Data and Key Metrics Changes - The total addressable market for Surgery Partners is estimated to grow from $40 billion to over $150 billion in the near to medium term, driven by demographic trends and technological advancements [22] - The company has less than 5% exposure to Medicaid, indicating limited risk from changes in Medicaid reimbursement policies [18] Company Strategy and Development Direction - The company focuses on three growth pillars: organic growth, margin improvement, and capital deployment for mergers and acquisitions (M&A) [5][6] - Surgery Partners plans to deploy $200 million in acquisitions for the year, with a disciplined approach to ensure long-term value creation [15][31] - The company is actively evaluating its asset portfolio to optimize for growth and leverage reduction, including potential partnerships or sales of non-core facilities [22][80] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's positioning within the current regulatory environment, noting minimal exposure to tariff-related price increases and a favorable outlook from CMS regarding outpatient rates [17][18] - The company anticipates continued growth in same facility revenue, expecting to reach the high end of its growth target of 6% for the full year [9][81] Other Important Information - Surgery Partners opened eight de novo facilities in 2024 and has a robust pipeline for future developments, particularly in higher acuity specialties [12][22] - The company recorded a 27% sequential decrease in transaction and integration costs, reflecting a more normalized M&A activity level [17] Q&A Session Summary Question: What is the expected pace of acquisitions for the year? - Management confirmed a strong pipeline and reiterated the target of at least $200 million in acquisitions, emphasizing the importance of timing and quality over rushing to meet targets [34][36] Question: How do de novo facilities impact margins? - Management explained that de novo facilities take time to reach full profitability, typically achieving breakeven within 6-12 months and full run rate earnings within three years [39][40] Question: Are there any service lines considered less core? - Management indicated that they are evaluating opportunities to optimize the portfolio, which may include divesting non-core facilities or expanding partnerships with local health systems [45][80] Question: What is the impact of the potential removal of the inpatient-only list? - Management expressed optimism about the potential for increased revenue from higher acuity procedures being performed in outpatient settings, although they cautioned against overestimating immediate impacts [51][72] Question: How is the company addressing payer behavior and revenue cycle standardization? - Management noted ongoing efforts to improve revenue cycle processes and maintain strong relationships with payers, which are crucial for optimizing cash flow and operational efficiency [62][63]