Greetings. Welcome to Surgery Partners, Inc. Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Dave Doherty, CFO. Thank you. You may begin.

Good morning. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements that are described in this morning's press release and the reports we 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. We reconciled these measures to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Eric Evans, our CEO. Eric?

Thank you, Dave. Good morning, and thank you all for joining us today. My first comments will briefly highlight our fourth quarter results and the consistency of our long-term growth algorithm. Then I will provide additional color on the strong business execution underpinning each of the three pillars of our growth algorithm: organic growth, margin improvement, and deploying capital for M&A. I will also provide our initial outlook for 2025, including how our business is positioned in the current regulatory environment. Starting with our fourth quarter results, I am pleased to report that our team continues to deliver on our mission to enhance patient quality of life through partnership. The 2024 financial results that we announced this morning are a testament to the focus of our colleagues and physician partners who serve our communities with valuable, high-quality, and convenient care. This morning, we reported full-year adjusted EBITDA growth of 16% and net revenue growth of 13.5%, resulting in margin expansion of 30 basis points, each consistent with or exceeding our growth algorithm. This is the first time Surgery Partners has recorded revenue over $3 billion and adjusted EBITDA over $0.5 billion. Our growth in 2024 is attributed to continued strong organic results, including same facility revenue growth of 8% with equal contributions from both case volume and rate improvements as well as meaningful contributions from our recent acquisitions. Dave will elaborate on our financial results next. Across our 161 surgical facilities, we partner with top-notch surgeons who consistently provide high-quality clinical care. Our partnership model uniquely positions the company for sustained success because we partner with talented physicians to create a safe, convenient, and cost-efficient environment that patients and payers prefer. Increasingly, we are experiencing above-average volume growth at higher acuity levels because we are focused on providing exceptional care and service and recruiting the right future physician partners. We continue to invest in Surgery Partners' growth through acquisitions, facility expansions, de novos, and service line expansions as well as better, more efficient operations. The investments we made in 2024 will contribute to reliable and consistent growth as we enter 2025. Let me touch on some of these initiatives, starting with our continued robust organic growth activities. In the facilities that we consolidate, we performed over 656,000 surgical cases in 2024 compared to 605,000 cases in 2023. We experienced growth in each of our core specialties that exceeded our growth algorithm expectations. Importantly, we performed over 117,000 orthopedic cases in 2024, 11% more than 2023, reflecting our focus on growing this high acuity specialty through targeted recruiting, acquisitions, and de novos. Most of the growth in orthopedic procedures is driven by total joint procedures, which grew 50% in 2024. Notably, over 70% of our surgical facilities have the capability to perform higher acuity orthopedic procedures and 41% of our ASCs currently perform total joint procedures. This capability provides significant additional growth opportunity as we continue to position our assets to meet the expanding orthopedic demand we have been experiencing with targeted recruitment and investments in additional equipment, including robotics. In 2024, we added 14 surgical robots to our portfolio to enable our physician partners to perform increasingly more complex and higher acuity procedures. These investments also help support our strong position recruiting process. We were pleased to conclude the year having added over 750 new physicians, many of whom will eventually become partners. This recruiting class includes all our specialties with a skew toward orthopedic-focused physicians. Based on our experience with prior recruiting classes, we fully expect our 2024 recruits to more than double their impact in 2025. I also want to highlight our growing de novo capabilities. In 2024, we opened eight de novo facilities, and we have 12 facilities in various stages in our pipeline, many of which we expect to open in 2025. As we have said before, we expect to have at least 10 de novos in development or under construction annually. These de novo investments are syndicated with well-established and high-quality physician partners that specialize in high-growth areas such as total joints, spine, and other high acuity services. We expect to see meaningful long-term organic growth from our de novo ASP starting two years after they open. Next, I want to touch briefly on the second leg of our growth algorithm: our margin improvement efforts. Our 2024 adjusted EBITDA margins improved by 30 basis points over the prior year to 16.3%. This improvement reflects our procurement and operating efficiency initiatives that continue to improve from our increasing scale, along with synergies achieved on our previously acquired facilities. Given our structure, most of our revenue is generated by commercial payers. In 2024, approximately 90% of our revenue was commercial and Medicare. Our managed care team, which partners and negotiates actively with our health plans, has already secured over 99% of our expected contractual rates for 2025. When combined with Medicare rate increases, which were approximately 3% for 2025, we have high confidence in and significant visibility to our expected 2025 rate growth. As we enter 2025, our teams are effectively executing on our key initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations. As such, we continue to expect margin expansion in 2025 and beyond. The third and final leg of our long-term growth algorithm is acquiring and integrating accretive surgical facilities into our platform. I am immensely proud of our dedicated development team that manages and maintains a robust pipeline of attractive partnership opportunities. In 2024, we added seven surgical facilities focused on physician-owned specialty surgical care and affiliated services. We deployed just under $400 million of capital, primarily on facilities that specialize in higher acuity specialties like orthopedics and spine. This level of acquisition activity was higher than normal, but reflects our disciplined approach to managing our pipeline. In 2024, we seized the opportunity to add strong and immediately accretive orthopedic assets to our portfolio. Acquisitions are an important part of our growth algorithm, not only because of the immediate earnings they contribute, but also the margin expansion we experienced as we integrate these facilities into our platform. As previously shared, we expect to effectively take at least one turn off the acquisition multiple within the first 18 months of ownership. Our record of successfully executing intentional, disciplined acquisitions gives us confidence that we can continue to generate the same level of margin expansion. For example, the average multiple on acquisitions completed in the period from 2021 through 2023 was less than 8x adjusted EBITDA. After integrating these acquisitions, the average multiple decreased by 1.5 turns. As we look at our projections for 2025, we expect the annualization of the net partnerships we acquired in 2024 will contribute at least 3% of our projected growth. We also expect acquisitions will continue at a more normalized pace as our guidance assumes approximately $200 million of capital deployment. So far in 2025, we have deployed $53 million, buying three ASCs in California and Texas with an average purchase price multiple of approximately 8x. The pipeline of attractive assets is robust and supportive of our 2025 guidance. And as Dave will discuss, we have sufficient liquidity to fund this growth in the short and long term without having to tap the capital markets. The level of activity supporting our comprehensive M&A strategy requires incremental variable costs in terms of due diligence, transaction costs, integration costs, and de novo working capital investments. In 2024, our transaction and integration efforts were higher than typical, which is directly correlated to the increased number of acquisitions and de novo investments that took place in late 2023 and throughout 2024. It is important to note that we expect these costs to be significantly lower in 2025 based on a more normalized volume of expected M&A. Moving on to our 2025 guidance. Based on the recently completed 2025 budgeting process, we expect net revenue, adjusted EBITDA, and margin growth in line with our long-term growth algorithm. Specifically, we provided initial guidance for net revenue in the range of $3.3 billion to $3.45 billion and adjusted EBITDA in the range of $555 million to $565 million. These ranges reflect our confidence in the core tenets of our business and strategy within the context of the current markets. With that in mind, I would like to provide our perspective on how Surgery Partners is positioned relative to today's legislative environment. The vast majority of our surgical volumes are elective and are referred from a physician office rather than originating from an emergency brand. We see very few Medicaid patients that have virtually no uncompensated or charity care. This business model stands in stark contrast to traditional acute care hospitals, which provide inpatient and outpatient medical care for the treatment of a wide variety of medical conditions, injuries, and illnesses with significantly higher levels of Medicaid, state-based, and self-pay reimbursement due to their inherent higher emergent patient mix. Traditional acute care hospitals also typically own and equip facilities that are multiple times larger than our surgical facilities and provide care across nearly all medical and surgical specialties. Our surgical facilities, in general, are small and focus solely on delivering outstanding surgical care for a handful of service lines. This distinction is important to appreciate as our portfolio has significantly less exposure to policy shifts such as changes to Medicaid programs at the federal or state level or legislative considerations for Medicare site-neutral payment policies. To put a fine point on this, less than 5% of our revenue is from Medicaid and associated state-based programs. With respect to site neutrality policies, there are several frameworks that have been discussed including The Lower Costs, More Transparency Act, The Site Act, and a Legislative Framework released by Senators Bill Cassidy and Maggie Hassan. As a company, we are deeply committed to providing quality and compassionate care in the most cost-effective environment. As such, we support efforts to encourage procedures to move to the best site of care such as our short-stay surgical facilities. Based on detailed reviews of all the frameworks we are tracking, we believe none individually or collectively will have a material impact on the company's net revenue or earnings. More specifically, there are very few procedures performed in our facilities that should be done in a lower-cost site as contemplated in any of the current frameworks. Evaluating all the procedures we performed that could be impacted, the worst-case scenario would be limited to 1% of our net revenue. It is more likely that if site neutrality legislation moves forward, our facilities will be the net beneficiaries as procedures may transition faster from acute care health systems and their outpatient departments to the facilities that we own and manage. To put it another way, we believe our facilities are the solution to the problem our government is trying to solve. Of course, the legislative processes are still in initial stages, but at this point, we do not see a material risk to our revenue or earnings from Medicaid policy changes or site neutrality legislation. Before I turn it over to Dave, I would like to briefly address the nonbinding acquisition proposal that Bain Capital sent to our Board of Directors in late January. Bain has been a long-standing investor in Surgery Partners and a valued partner to us over the years with representation on our board. As we noted in our press release on January 28, our Board formed a special committee comprised of independent directors that are not affiliated with Bain Capital to consider this proposal with help from leading independent financial and legal advisors. Out of respect to the process underway with the special committee, our Executive Chairman, Wayne DeVeydt, who serves as Managing Director at Bain, has removed himself from many of his normal activities with Surgery Partners. And as you may have noticed, that includes this call today. We will not be commenting further on this matter unless or until there is a material update. Overall, I am pleased with the consistent growth and progress our business recognized in 2024 because of our continued focus and execution against Surgery Partners' strategic growth goals. Our continued focus on maximizing the performance of our portfolio, robust M&A pipeline, steady improvements in enabling greater operational efficiencies, and a bullish outlook on surgical trends and the regulatory landscape have us positioned to continue delivering industry-leading growth in 2025 and beyond. With that, I will now turn the call over to Dave to provide more color on our financial results as well as the 2025 outlook.

Thanks, Eric. Starting with the top line, we performed over 174,000 surgical cases in our consolidated facilities in the fourth quarter, bringing our full year case count to 657,000, 8.4% higher than 2023. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double-digit growth in MSK-related surgical cases. The combined case growth in higher acuity specialties, specific managed care actions, and the continued impact of acquisitions supported our fourth quarter revenue growth of 17.5% over last year to $864 million. For the full year, revenue grew 13.5% to $3.1 billion. Our same facility total revenue increased 5.6% in the fourth quarter and 8% in the full year, exceeding our growth algorithm target of 4% to 6%. Adjusted EBITDA was $163.8 million for the fourth quarter, giving us a margin of 18.9%. For the full year, we reported $508.2 million in adjusted EBITDA, 16% over 2023 and in line with our expectations. We ended the quarter with $270 million in cash, when combined with the available revolver capacity, we have over $770 million in total liquidity. We reported operating cash flows of $300 million in 2024, distributed $171 million to our physician partners, and incurred $45 million in maintenance-related capital expenditures. The increase in distributions and capital spend are correlated to the growth in our facilities and underlying earnings. Operating cash flows in 2024 were higher than 2023 but lower than originally estimated due to the increased variable costs associated with acquisitions completed in 2024, the incremental interest costs on our revolver loan, working capital needed for recently opened de novo investments, costs related to a strategic alternatives process undertaken by our Board, and restructuring costs we incurred related to key growth initiatives and operational efficiency. More specifically, we completed a higher volume of acquisitions that were also comparably higher in complexity of diligence and integration than prior year acquisitions. For example, some of the acquisitions included small separate physician practices that needed separate integration efforts. In addition, in 2024, we assumed management rights for four ASPs and launched four de novos with our health system partners, which requires separate and intensive integration efforts to complete. This increased complexity, combined with the higher overall volume of activity, contributed to the higher costs we incurred in 2024. We expect those costs to significantly abate in 2025 as we complete the integrations from 2024 acquisitions in the first half of 2025. We incurred approximately $11 million in cost to support strategic alternatives considered by the Board in the second half of 2024 and expect more costs in 2025 related to the special committee process Eric discussed, but we cannot provide an estimate for these costs at this point. Finally, as we continue to invest in improved corporate management support services for our facilities, we incurred restructuring costs in 2024, and expect to incur more such costs in 2025. We are comfortable with the company's underlying cash flow generation and its continued growth. Moving to the balance sheet. We have $2.2 billion in outstanding corporate debt with no maturity dates until 2030. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025, and after that, we have interest rate caps in place that limit the variable rate component of our $1.4 billion term loan to 5%. That floating rate is currently 4.3%, but that could change throughout the year. Our fourth quarter ratio of total net debt-to-EBITDA as calculated under our credit agreement was 3.7x, 10 basis points lower than the third quarter. We believe this is an appropriate metric to evaluate leverage as the impact of joint venture accounting could lead to incorrect conclusions. Having said that, this internal metric differs from leverage calculated using consolidated debt from our balance sheet divided by EBITDA, which results in a debt leverage of 4.5x. Based on our annual operating budget and five-year financial models, we expect leverage to decrease based on sustained double-digit earnings growth. In addition, these models highlight that we will have sufficient liquidity from our cash on hand, our revolver capacity, and cash generated from operations to support future M&A at levels that support our long-term growth algorithm without having to access incremental capital from the debt or equity markets over the next five years. We are carrying the momentum of the strong finish to 2024 into 2025, with all our growth engines working effectively. As a result, our initial guidance for 2025 adjusted EBITDA is a range of $555 million to $565 million, which reflects double-digit growth over 2024 at the midpoint. Additionally, our 2025 revenue guidance is a range of $3.3 billion to $3.45 billion. Organic growth from our same facilities is expected to provide growth at or near the top end of our long-term growth algorithm target. We expect to deploy at least $200 million of capital on M&A. We expect cash flows from operations to increase in 2025 based on our forecasted adjusted EBITDA growth, but we are not providing a specific range given the inherent variability in costs related to acquisitions, continued restructuring activities, the pace of growth in our de novo investments, and the current strategic process underway with the special committee. We expect capital expenditures related to maintenance activities to be between $40 million and $50 million, consistent with our historical run rate. Distributions to our partners should grow in line with the underlying earnings growth. We feel that we have built a conservative outlook for 2025, subject to the timing of our capital deployment. Our guidance implies continued margin expansion in line with our long-term growth algorithm, reflecting our ongoing and accretive progress in supply chain and revenue cycle as well as the integration benefits from recent acquisitions and contributions from de novos as we expect to open this year. We have high confidence in these growth areas based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting and managed care contracting. Once again, our well-established and proven growth algorithm is firing on all cylinders and enables the company to confidently guide to double-digit adjusted EBITDA growth and margin expansion in 2025 and beyond. With that, I would like to turn the call back over to the operator for questions.

Our first question is from Brian Tanquilut with Jefferies. Please proceed.

Good morning. Dave, could you provide more details about the impact of potential legislation, particularly regarding site neutrality? I'm interested in how you arrived at that 1% figure. Additionally, how do you view the differences in impact between the ASP side, which seems relatively straightforward, and your short-stay specialty facilities?

Hey, Brian, let me just kick that off, and then I'll let Dave get into some of the specifics. As I said in my comments, high level, our company is based on this idea of getting care to the right side. And it's our mission to do that. We think it's the right answer for the health care system. And when we look at this, I want to reiterate in my comments, we gave the risk number on revenue, which is approximately 1% if you look at the worst case. But the reality of it is there's a lot of upside for us gaining cases that will move out of the traditional acute care system. And so more than likely, we do expect this to be a net tailwind just from our business standpoint. But I'll let Dave get into the specifics. We obviously spend a lot of time going in the details of what's been proposed so far. So Dave.

Yes. And thanks for the question, Brian. So I'll reiterate what Eric said: this site neutrality is kind of core to our business, right? Supporting shifting procedures to the right side of care is our business model. So we're in favor, largely, upside neutrality, pricing transparency, and the current legislation and regulatory actions that are kind of out there. We think at best that even though we looked at the downside risk at 1%, we think at best this is probably positive to the results. And worst likely it's neutral to us for a number of reasons. But the way we've calculated it, just to be fully transparent, the way we've calculated this is looking at those procedures that are in scope. There are some very specific procedures in scope in the legislation that has been drafted or being discussed; the most detailed of which is the MedPAC proposal that forms the basis of the current act that those two senators are evaluating. The procedures that we have kind of in place, to your point, a large majority of those procedures are occurring inside the larger surgical facilities. However, there are some of those procedures that are occurring inside the ASC. So if you were to believe only the worst-case scenario and assume no upside from procedures that are shifting out of the much higher-cost acute care and their related outpatient business, then you're going to see the exposure that we have at 1%. About two-thirds of that would be in our larger facilities, and about one-third of that is going to be in our ASCs, and that's really when you look at procedures that could be performed inside a physician office.

Got it. And then, Dave, maybe as we think about the guidance, I appreciate all the color there, but obviously, we're hearing a lot of noise around weather and the flu season impact in Q1. Just curious if there's any callout you want us to consider as we model Q1?

At this point, Brian, thank you for your question about the quarter. Currently, we’re not noticing anything significant. We did experience freezing conditions and some unusual weather patterns in January. However, for the most part, our business simply gets rescheduled. In such cases, there might be a minor fixed cost that poses some burden, but we have already factored that into our guidance. As you review our guidance for the year, we believe revenue and adjusted earnings will follow a similar quarterly pattern to what we've observed in the past. We are generally conservative, so I would suggest around 23% of the midpoint of our guidance for the first quarter, with about 18.5% for adjusted earnings. You bet.

Our next question is from Benjamin Rossi with JPMorgan Chase. Please proceed.

Hey, thanks for the question. So just on M&A cadence, you did over $400 million in M&A in 2024, and you mentioned the $53 million spent so far in 2025. Just thinking with the offer letter in the public year, has this changed your approach to your M&A pipeline during 2025 and maybe the timeline of any of your conversations as this process unfolds?

Yes, Benjamin, thanks for the question. Actually, I would say that really hasn't been an impact. We tried, I think we've done a good job of just focusing on the business. So there's obviously—any kind of there's a process, there's a little bit of noise. But as far as the pipeline goes, you can see we executed, we were very opportunistic last year. We've got some great assets that are highly orthopedic, high acuity, fast growth kind of facilities. We're proud of the team's work there, as I mentioned. As far as this year goes, nothing really has changed, really strong pipeline. You'll note we closed three facilities in Q1 already between California and Texas, spent about $53 million, so kind of on pace with a really attractive pipeline. So no, I don't think that's had any impact on kind of how we're approaching that. We're just approaching it consistent with our long-term growth algorithm.

Great. Thanks for the color. And then just on the de novos. It sounds like those have been progressing nicely. Are you seeing any acceleration in ramp-up under a more elevated demand setup and more normalized labor backdrop? And then how are you thinking about start-up costs here in 2025 compared to what we've seen in recent years?

Yes. Thanks for the question. We are really excited about our de novo pipeline and continue to gain additional traction there. It's hard to say whether that's because physicians now see less inflationary backdrop and less labor pressures, I don't know, it could be part of it. But the reality of it is, it's as strong as it's been since I've been here. We've actually built out more capabilities in that space. And what we're seeing is they're incredibly accretive, right? So if we can do all de novos and put that to work and get them going faster, I mean, we'd love that. So you're going to see us continue to expand that. As we've mentioned, we've committed to 10 a year. As far as specific costs related to networks, I'll let Dave kind of dive into some of those details.

Yes. Thanks, Eric. And you're right. The costs associated with those on an upfront basis are relatively marginal. As Eric was just mentioning, the return on those things is remarkable. The working capital needs that sit inside there, you see that we pull those out, we disclosed them in our press release. As we continue to ramp up to get to 10 in process every single year, you'll start to see that get to the run rate. Again, assuming that we keep that pace at 10x, but we'll keep pace with the demand in our capabilities. So I would expect that number to be roughly equivalent year-over-year. It will start to get offset as facilities open up and they reach breakeven; they generally reach breakeven within the first year of ownership, sometimes within the first six months. So you'll see that start to normalize probably in 2026, just completely predictable on a year-over-year basis. You'll see—you should see a little bit of that ramp-up in this year, but not material.

To add to your demand point, I would just mention, for total joints, it's really focused on orthopedics and these de novos, it's still 3:1 procedures in HOPDs versus the ASC world. So there's a long way to run there. So I do think if you think about high acuity new facilities, we're well positioned to be part of that answer on the de novo side.

Great, thanks for the commentary.

Our next question is from Joanna Gajuk with Bank of America. Please proceed.

Hi, good morning. This is Joanna Gajuk. Thanks for taking the questions. I guess one first follow-up. In the press release, you talked about $11 million EBITDA from assets you divested at, I guess, in late Q4. So how much revenue, I guess those assets were contributing to '24 annually? And then why did it start to sell? And is there more?

Yes. So I'll let Dave talk about specifics on the revenue side. What I would say is on those facilities, we're constantly doing a portfolio analysis, right? In a business like this, you want to make sure you're always the best natural owner. We had a few more this year than we would expect as a run rate. We do expect to grow our facility count quite rapidly over the next several years. But when we find markets where we're not as well positioned and we're not the best natural owner, we do try to find ways to move it out of those markets and into markets where we think there's better growth prospects. So a little bit unusually as far as the number of facilities, although they were small, not as well positioned as we'd like them to be, and we've reinvested that into places where we think the growth prospects are stronger. Dave, I don't know if you want to comment on her specific question.

Yes. The revenue impact of our divestitures is included in our guide. So if you look at the $3.3 billion to $3.45 billion, less than 2% of that growth is going to be trying to jump over our divestiture-related activity. The reason why we kind of pulled out the $11 million is to help folks kind of understand how our growth is consistent with our long-term growth algorithm yet again this year.

Great. That's very helpful. Thank you for the super stand there. And if I may, another follow-up on the comments you were making about the site neutral reforms and your estimate there. I appreciate that 1% of revenue for, I guess, the worst scenario, one of the versions that we know of right now. How should we think about the impact to the bottom line? I assume, first of all, the losses because of the ownership structure, but is there something else to think about as you know kind of what down the P&L, how this would impact the EBITDA line?

Yes, sure. Let me address that. So first off, I appreciate why we're continuing to focus on this. But hopefully, the point that we're making at 1% of revenue is not material to the company and there is upside to it. It just—I just want to make sure we're not over-indexing on that, even if you were to look at 1% and somehow, say that's material, you're absolutely right. It would be affected by our ownership level plus any cost action that we take in order to kind of react to any type of reimbursement change. So it's going to be negligible, if anything. And I would argue the revenue piece is negligible as well. So I'm hopeful, Joanna, that's what you take away from our call this morning.

Joanna, the one thing I would add on procedures, as you think about this too, is that we are constantly working to have the most appropriate procedures in the right places within our portfolio. So higher acuity and the highest acuity facilities we have, lower acuity in the appropriate ASC. So we're actively mitigating that number all the time. So we expect that number to shrink as every month goes by.

Okay, thanks for that additional color. Appreciate it.

Our next question is from A.J. Rice with Credit Suisse. Please proceed.

Hi, everyone. I'm not sure if there's anything to add here, but I realize you prefer not to discuss the details of the ongoing special committee review. Is there any way to estimate when we might receive updates? I'm not looking for a specific month or day, but could you indicate if it's likely to be around midyear or year-end?

A.J., I appreciate the question. Unfortunately, there's no more I can comment on that. It is one of those things where the independent committee will play this out, and I can't comment further than what we've said so far.

Okay. I know this year—in the past year, the back half of the year, the revenue per case moderated and case growth was strong. If you look at the full year number, you were more balanced on that. As you think about your buildup for guidance for '25, can you just comment on those two metrics and any inputs to those two metrics and how you think it will play out? I know you said you've got a lot of your—99% of your managed care contracts done. Do you have any sense of what the rate of increase on averages on those contracts?

Yes. Thanks for the question, A.J. Let me start high level and just say we talked about this a lot that we try not—we don't look at the business quarterly just because of all the various inputs and puts and takes of things rolling in here. The seasonality, there's a whole bunch of things that happen. And that's why we do think the balanced year look is the right way to think about it. So last year, very balanced between cases and growth, but it does move around quite a bit from quarter-to-quarter. And so we urge everyone to think about this business not on a quarterly basis when you look at those metrics because there's a lot of moving parts there. I'll let Dave kind of talk a little bit about kind of how we see seasonality playing out this year.

Yes. To build on that point about one quarter being overemphasized compared to another, the impact Eric mentioned relates to prior acquisitions or divestitures. If an acquisition targets a high volume of low-acuity cases, such as gastrointestinal or ophthalmology cases we've previously pursued, or has a strong emphasis on orthopedics, this can lead to lower case volumes but higher rates. As these factors influence the same-store calculations, they can create significant variances. Additionally, the number of days in each quarter plays a role; for instance, with only 60 business days, even a one-day difference due to holidays can lead to unexpected variances. Therefore, we advise caution when interpreting quarterly results. However, A.J., we do analyze these variances to ensure that there are no underlying trends affecting our organization. To specifically address your question, as we evaluate the quarters, we anticipate that for the full year, we will meet or exceed our long-term expectations. We believe that case growth and rate growth will be relatively balanced. However, the rate pressures we experienced in the second half of last year, primarily due to mathematical factors, may persist to a lesser degree in the first half of this year, with a balancing out in the second half. I hope that clarifies things.

Our next question is from Tao Qiu with Macquarie. Please proceed.

Hey, thank you. Good morning. I was just trying to go back to the outlook that you gave. On the top line, you are forecasting 6% to 11% revenue growth. Based on our earlier comments, we get 3% incremental from acquisitions. There's a 2% drag from divestitures and a little bit of headwind from a leap year impact in 2024. I think I'm still missing some parts regarding the organic long-term growth outlook like 4% to 6%. I think Dave, you mentioned it will be a little bit higher than that, but I think I'm still missing like 1% to 2%. Could you comment on where that's coming from?

Yes. So first off, our range is a pretty big range, which would imply growth year-over-year of 6% to 11%. It's a pretty big range as you can look at that. And so elements of that are going to be the conservatism that we should look at. It's still very early in the year. There's a lot of the year to kind of go. We've only closed the books on one month. So you're going to see elements of there and there. As you pointed out, we do have some pressure points, although it's marginal, related to prior year divestiture activity. The most challenging part for you is not going to be the number of days. And so in fact, I think the number of surgical days inside the year is the same year-over-year or within one day. So that's not going to be a pressure point for us. The biggest thing that's going to drive that is the type and the timing of acquisitions. Again, we've only completed three ASC transactions this year for a total of $50 million or so. We have another $150 million to hit our annual target timing of that and the nature of those is going to depict where ultimately, revenue is going to turn out. So we do look forward to updating that guidance as we get into our first quarter call. As a reminder, that's only a short number of weeks away from where we are today. So we should be able to give a better update as we go towards that.

Got you. And just a follow-up. I think the recruiting numbers are pretty strong this quarter. Could you comment on general SWMB trend? What's the labor environment looking like out there? Thanks.

Yes. Let me start with physician recruiting. Obviously, it was a really strong year for us again. And that's been a strength of our company. It's a huge part of our organic growth story. And what we know is the physicians that we recruited this year, a record number, they are heavily orthopedic, and we also know that they tend to double. They almost always double in the next year. So we expect to gain the benefits of that recruiting class maturing. We don't see that slowing down. We've got a really strong pipeline of physicians that we'll continue to bring into our facilities. So yes, it's been quite good there. Now that's separate and apart from SWB on the books, and I'll let Dave maybe talk a little bit about SWB trends.

Yes, again, great question. I do agree with that victory lap on recruiting. That's an incredible team and an incredible momentum. If you look at the past three years, just year after year, getting better in terms of the number of physicians brought into our fold and the revenue contributions from those. So very, very encouraging. And as you know, they have a compounding effect. So the good news for 2025 is many of those stocks will just add more and more volume and more complexity into our business mix. So a great outcome. On SWB to put that point on that Eric was just mentioning, we believe we completely moderated the inflationary impact of underlying salary costs, and you can see that in our results sequentially, 180 basis points better. We look at SWB compared to revenue. We think that's the right way of kind of looking at that because our business is such a growth-oriented business with new acquisitions coming into the fold. And when you look at that, we think we're in line with where we have historically been, which we believe is an illustration of how well we have managed that.

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

Hi, good morning. Maybe just a follow-up on that question around expenses. Revenue beat by more than 4% in the quarter, but EBITDA was in line. So we didn't see a lot of operating leverage in the business, at least in the fourth quarter. You talked about the higher level of integration costs, but most of those are adjusted out. So can you help us understand what drove the higher level of operating costs across several expense lines, including the salaries, but also other OpEx and G&A? Are any of those increases temporary in nature? Thanks.

Yes, a little bit inside our—and we talked about this on a quarterly basis; it becomes a particular challenge for us in the second half of the year between the third quarter and the fourth quarter, and that relates to the accounting for the company's performance management, incentive plans, in other words, the corporate bonus. So last year, if you may recall, in 2023, we had to take some pressure off of that corporate bonus. But I'm pleased to say that we were able to kind of do much better this year. So that is acute inside the fourth quarter. It is fair. Again, if you take a longer view of that. So between third and fourth quarter, you would have seen some slip. But for the balance of the year, that's a good run rate for you to use on a go-forward basis. And quarter-over-quarter, you're going to have swings like this. But for the most part, it's there. I would say the other thing is a slight pressure that exists just on payer mix. It's difficult to predict kind of how that ultimately turns out. We don't see anything unusual in terms of trend from that perspective. But that would be the only other point as you're kind of looking at EBITDA pressure inside the quarter.

Great. And transaction and integration costs more than doubled from Q1 to Q4 and finished the year at $100 million. Clearly, that's weighing on free cash flow, and now you're talking about a significant abatement in 2025. One, what level of visibility do you have into reducing those expenses at this point? And is it fair to think that free cash flow should improve by $50 million to $100 million as those costs abate? Thanks.

Great question. Let me start with your—we have great visibility into it. And obviously, if you think about kind of where we expect that number to go because it was directly tied to our increase in M&A plus some transaction or some project or process-related costs that Dave mentioned that will obviously naturally abate to, hopefully, this year. So we look at that and we would say that—we expect that our run rate of below the line kind of M&A expenses will be similar to what was in 2023. Our expectation is we're going to manage that very, very closely. That will have a natural improvement on free cash flow. But I would also say that ultimately, free cash flow was a little hard to predict because of timing of M&A and everything else that goes in there. But you're right in your thesis, and we absolutely expect to drive that number down to more normalized levels. So with that, I'll let Dave maybe add a little bit more color.

Yes, so—and again, it's a great question. It's obviously very visible that we have incurred more expense in 2024 than what is typical for transactions. And I would provide just perhaps a little bit more color on what happened inside 2024 and we couldn't talk about this before, but clearly, with Bain's letter that came in, you could see that there was a process that we went through last year that did burden that cost bill the line. That's one of the difficult things that's difficult to predict because, as you now know, we're going through a similar process that's going to have some costs. It's unclear how much those costs will be and kind of when that process will end. But that will—that's an uncertainty that makes it difficult for you to kind of say definitively, we're going to be able to take out $50 million. So not a lot of visibility that we can kind of see to that at this point, sufficient to provide you with that guidance. On the transaction and integration costs, clearly, we spent twice as much in M&A last year, $400 million out the door. It is a heavier due diligence burden, heavier transaction costs, right, the legal fees, the advisory fees that we use to kind of evaluate those and managing a pipeline, those costs are always going to be there. So you're going to see a direct correlation to how we manage the pipeline. And when it comes to that, at this point, we're not looking at anything major in the pipeline so much so that we're saying $200 million is our target for the year. So that should abate. And again, you're going to see a direct correlation to that. The integration side is where we probably saw a little bit more pressure inside the year. And that's correlated to not only the number of facilities that we acquired, but also the relative complexity of those. So as you can imagine, and we use a lot of our external resources, we're very intentional about integrating these facilities as fast as possible. It's difficult for us to avoid and for me, in particular, to avoid the opportunity of taking a turn to a turn and a half off of that asset. I want to do that as fast as possible. So we deploy a lot of resources to make sure that we kind of do that. In 2024, if you look at the construct of our acquisitions, they did include some things that are unusually complex. Key Whitman at the beginning of the year includes several physician practice offices to support the ASCs that form the nucleus of that deal. Physician practice, each individual physician practice requires its own separate integration. There was a similar construct of our asset that we acquired up in Milwaukee that had several physician offices that also required separate integration efforts. And as you might recall, in 2023, we took over some of the management of the ASCs owned by Intermountain Health through that health system partnership deal, and we did some additional integrations with them in partnership as we acquired new ASCs in joint ownership with them. Those represented some unique complexity for us as well. All of that complexity, we believe, is going to go away this year. And we'll revert back to a traditional pipeline of traditional ASCs in traditional de novo builds. That's where we see the more significant reduction in integration costs. It's going to take us the first quarter going into the second quarter to complete all of those integrations. It roughly takes six to nine months for us to fully integrate those. And that's how we see the abatement happening more in the second half of the year. But again, the reason why we have difficulty predicting what this is, is because the M&A spend and the type of acquisitions can make that fluctuate. Our commitment to you is to always talk about those, talk about what drove those costs and to predict with as much as we can how that's going to change. So we do expect an abatement. It's just to kind of give a specific number that sits behind it. We have a lot of visibility to this. As you can imagine, there's very few internal folks that we kind of look at this. Most of that is going to be contract spend for which we have great relationships with our external vendors, and there's a direct variability associated with those.

Yes. And maybe we get to your underlying question too. Look, we're growing the business. We're generating strong cash flow. Regardless of timing of M&A, the expectation is we're going to grow cash flow with the business. We're going to be de-levering in all circumstances over the next several years, and we don't need any external help for funding our M&A. So—but I appreciate the question.

Thanks for all the color. If I could sneak in one more. There was a change in the valuation allowance for deferred tax assets of $100 million in the quarter, which exceeds the total DTA on the balance sheet at 3Q. Can you help us understand what's going on there and the drivers of the change in the valuation allowance? Thanks.

Yes. So first off, great question. I'm glad that you brought that up because it can be easily misinterpreted. This—we're falling into the trap of a very technical accounting standard that requires us to recognize this. But I want to be very clear, nothing has changed in our underlying growth story and our cash tax position remains unchanged and where we think we're going to utilize the NOLs that sit on our balance sheet. Those NOLs we predict will be used to help offset cash tax payments until we get to the end of the decade. The—as a way of kind of evidencing that over the past two years, we have averaged $2 million a year in cash taxes. We have no federal cash tax payments in those periods. Those are all related to very specific state tax utilization issues. The technical accounting, I won't bore you with it, but it has something to do with how GAAP accounting triggers losses and what that does to a requirement to recognize a valuation allowance. It's something that occurs if you have a trended GAAP loss, and the GAAP loss that you would see on an income tax valuation basis would have been impacted by somewhat unique items: the divestitures and the losses associated with those, the debt extinguishment as we did a lot to right-size our financing, which I'm very proud of. And our derivatives and the way the accounting for those works through that kind of innocuous statement of accumulated losses in our consolidated results. You can get pretty sleepy kind of going through this example. But the big takeaway behind this is it's a pure accounting regulation that was required to be reported inside the fourth quarter just because we tripped that accounting standard, but nothing changes in our underlying business.

Great. Thanks for all the color.

Our next question is from Matthew Gillmor with KeyBanc Capital Markets. Please proceed.

Hey, thanks for the question. I want to just circle back on the site-neutral topic, and I appreciate the analysis you shared today. That's really helpful. I was curious if you thought there'd be any positive downstream impact on your development efforts. And I guess I was thinking of more hospitals looking for JV partners or even just physicians looking for ASC partners to make sure they get OR time as hospitals have to shift around their priorities. But just any curious or any thoughts on how development could be impacted by site neutral?

Yes. Thanks. It's a great question. Look, I would say regardless of site neutral, we have a really extensive pipeline and continue to see great opportunities, but I would agree with you that anything that puts pressure on getting patients to the right place and actually drives that is going to drive interest from health systems. We do get a lot of calls from health systems. We're very picky on the ones we partner with. Because we want to move fast, and we want to make sure that they're fully committed to this kind of movement. But we have seen certainly a lot of interest from them. I think that will only grow with site neutrality. And from a physician perspective, I think this will force more discussions of docs that are going to be open and looking to find a surgery center home. So yes, no, I think it helps what's already a very strong pipeline. So we think that's all good. And again, it comes down to it's the core of what we do. Part of what we believe in as a company is we can say we're part of the solution for the health care system. We can save a tremendous amount of money while providing a great product by moving patients to where they need to be for care: right place, right cost, right time.

That's great. I'll leave it there. Thank you.

Great. Thank you.

Our last question is from Whit Mayo with SVB Leerink. Please proceed.

Hey, good morning. Eric, just a quick clarification. You said Medicaid is 5% of revenue, not supplemental payments are 5%, correct?

No. I said all of Medicaid and state funding is for less than 5%. So in total, everything, including any state-based funding that comes, yes.

Would you be willing to size the state-based funding?

Within that less than 5%? What I would say is, in total, it's not that material, but I don't know that we've ever sized that. I think the majority is probably straight Medicaid. Yes. Clearly, a majority is going to be straight Medicaid. And I think you guys know enough about what state-based reimbursement kind of looks like. It is for us, fairly predictable and not material, especially as you kind of think about how that revenue flows through to the bottom line, state-based reimbursements can be affected by kind of timing, clearly, but is neutralized to some extent by the provider taxes at some states kind of put on this as well as our non-controlling interest piece of that. So as you kind of flow through the risk that you're alluding to with it's really marginal on the bottom line perspective. Overall, we do not consider state-based reimbursements, changes in there more changes in the Medicaid to be a material headwind or even a significant headwind for us. To be very clear, we're tracking everything that happens on a state base as well as at the federal level. This is not a headwind for us because of the nature of our business being primarily elective and primarily referred to from physician offices.

No, that's perfect. Obviously, we've gotten a lot of questions on that for the last few days. So that's helpful. And maybe just my follow-up. Eric, just wondering sort of where we are on the revenue cycle, the implementation, where we are on the standardization of those processes? And maybe also just procurement. We've heard you talk about this for a couple of years. And so I'm just wondering if these are still incremental opportunities. I'm sure plenty probably plenty of variation down at the performance at the center level. So just any color would be helpful. Thanks.

It's a great question, Whit. I'll start off high level, and I'll let Dave get into some of the specifics as he's over those areas. I think when you think about revenue cycle, it's always, I think, for everyone an ongoing opportunity to mature those processes. We're still in the early innings there. We see lots of opportunity in our revenue cycle. And so if you think about our growth algorithm at middle 3% to 5% of just making our operating system better a long way to run in revenue cycle. So supply chain, look, we have an excellent supply chain group here that works closely with our GPO. We continue to find opportunities there and continue to see that a place that's maturing. And then we have other opportunities as we go forward around clinical variation that we're excited to get started on. But there's a bunch of things that make us—give us a lot of confidence that we're going to be able to continue to drive those kind of benefits to our business. But I'll let Dave go into some specifics on revenue cycle and procurement.

Yes. Thank you. So let me just start kind of with the why behind your question is how long can you continue to get the benefits that kind of sit behind there? And if you've talked about that so much for the past couple of years, is it drying up, it is not. And I'll tell you the reason why—it starts with the company's kind of history of all of the roll-ups that we've done. We've spent the first several years at the latter part of last decade, rolling up all of those into common systems that were behind the scenes. Behind the scenes gives us better data. Now we've moved into the cycle of moving to common processes and aligning all of our people. That takes a while with 180 facilities across our portfolio to make sure that we hit that the right way. That cycle, we're in early innings on for both procurement and for revenue cycle. But as Eric mentioned, very, very pleased. I'm going to give you a couple of data points. Revenue cycle DSO improved three days quarter-over-quarter. And as you might remember, in the third quarter, we talked about a little bit of pressure coming from managed care. We had seen increased denials and increased aggressive policies being implemented by the payers that are out there. It's our job to react to those. And as you could tell in the fourth quarter, with those types of numbers, we did, as a primary elective company, we have a lot of visibility to schedule cases. There's plenty of time for us to kind of navigate through any medical necessity requirements and make sure we get the documentation there. We've also seen denials kind of pick up and denials at lower dollar cost levels, which perhaps the payers thought that you're not going to chase after those, we chase after every dollar, and so you see investments on the front end on the back end. That will continue as we continue to bring more of our facilities under one common process. And on the procurement, I'll give you just one other data point that hasn't come up today, which kind of surprises me, but the tariffs that have been discussed and threatened kind of out there on a global scale and then more specifically in a couple of the countries that we source from. We believe the procurement team—I couldn't be more proud of them. They have navigated through and given us great visibility as to where those specific exposure areas are. Those have been factored into—the worst-case scenario has been factored into our guidance for 2025. We believe the exposure that we have there is around 1%. I mean, that's simply incredible for the types of tariffs that they're talking about out there. But that's a—from a cost basis, we think we're in control there, and we have greater flexibility because we operate this business in partnership with physicians who have an economic interest in navigating through. So where change can be necessary, we can deploy those. I think we've got a long runway, several more years, and that benefit will always be there because we're acquiring companies that are largely less mature or don't benefit from the scale at which we provide. So it will be an ongoing source of margin enhancement for the length of time that's covered by our long-term growth algorithm. Thanks for the question, Whit.

Thanks.

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

Thank you. A few years ago, you set a goal of net debt-to-EBITDA in the mid-3s in 2025. And you've been just above that range in '24. How should we think about how high that metric could temporarily stretch fund growth and is a goal of mid-3s in 2025 and beyond still valid? Thanks.

Hey, Sarah, thanks for the question. Obviously, we've talked a lot about being focused on deleveraging the company, and we see that in our five-year model very specifically as we continue to grow. You're right that there could be pressures when you have kind of like last year we had $400 million of M&A. There could be short-term pressures on that number. But we do expect in our planning horizon, our goal is three. We're going to continue to march toward that de-lever as we grow. And we do expect to hit that. But I'll let Dave talk about kind of short-term pressures that you could see in the interim just based on timing of M&A.

Yes. Great question. Thanks, Sarah. I know that there's an area of focus on leverage. So again, the big takeaway that everybody should hear when we talk about leverage and cash flows is that there is no headwind that sits in front of us that suggests that our long-term growth algorithm has to change. We will always anticipate 4% to 6% of our growth will come from M&A. That implies a $200 million deployed a year. And again, the takeaway is during this five-year window, which we beat up our five-year model, there is no need for us to enter the capital markets. And since we've done everything that we've done on our balance sheet, to avoid exposure to interest rates. We do not believe that we have any such exposure in our capital markets decision or in our cash flow generation as we go throughout the year. Specific to 2025, we do anticipate that the credit agreement leverage or any leverage that you kind of look at will continue to show downward trajectories; may tick up just inside the first quarter related to the recent acquisitions, that's that unusual pressure that kind of sits inside that number, but we'll continue its downward trajectory as we go through '25, and we'll—mid-3s and better as we continue to go down during that five-year window. Thanks for that question, Sarah.

All right. Before we conclude today, I want to say thank you to my colleagues and our physician partners who collaborate each and every day to deliver on our mission to enhance patient quality of life through partnership. Thank you for joining our call this morning, and have a great day.

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