Surgery Partners, Inc. Q1 FY2025 Earnings Call

Greetings, and welcome to Surgery Partners' First Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, CFO. Thank you. You may begin.

Good morning, and thank you for joining Surgery Partners' First Quarter 2025 Earnings Call. My name is Dave Doherty, CFO of Surgery Partners. I am joined today by Eric Evans, our CEO. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements that are described in this morning's press release and the reports we filed with the SEC, each of which are available on our corporate website. The company does not undertake any duty to update these forward-looking statements. In addition, we reference certain financial measures that are non-GAAP, which we believe can be useful in evaluating our performance. We 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 Evans, our CEO. Eric?

Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our first quarter results and the consistency of our long-term growth algorithm. Then I will provide additional color on the strong business execution and underpinning of each of the three pillars of our growth algorithm: organic growth, margin improvement, and deploying capital for M&A. I will also provide our views on how our business is positioned in the current regulatory environment as well as our outlook for the remainder of the year. We are pleased to report Surgery Partners' first quarter net revenue of $776 million and adjusted EBITDA of $103.9 million, both in line with our expectations. The financial results announced this morning are a testament to the focus of our colleagues and physician partners who serve our communities with valuable, high-quality, and convenient care. Our team continues to deliver on our mission to enhance patient quality of life through partnership. Compared to the prior year's first quarter, adjusted EBITDA grew nearly 7% and net revenue grew 8%, with contributions from each pillar of our long-term growth algorithm. Our growth in 2025 is attributed to continued strong organic results including same-facility revenue growth of over 5%. Revenue growth was comprised of 6.5% surgical case growth, offset by a decline in rates of approximately 1%, driven primarily by robust growth in lower acuity specialties in the quarter, including growth from recently opened de novos as well as a very strong prior year comp. These components of our same-facility revenue growth are consistent with our internal expectations that we shared on our fourth quarter earnings call in March. We continue to expect full year 2025 same-facility growth to be at or above the high end of our growth algorithm target of 6% with a more balanced growth between volume and rate as the year progresses. Dave will elaborate on our financial results next, but these results give us increased confidence throughout the company's growth trajectory and in a more near-term basis, our guidance for 2025. Let me touch on some of the initiatives that are critical to our sustained long-term growth, starting with our organic growth activities. In the facilities that we consolidate, we performed over 160,000 surgical cases in the first quarter of 2025 compared to 153,000 in 2024. In the first quarter, we experienced growth across all our core specialties. The volume growth in GI procedures was relatively higher and because these procedures build in relatively lower reimbursement rates when compared to the blended company average, that slight shift in business mix mathematically resulted in rate pressure in our same-facility rate metric. Having said that, we are still experiencing growth in our orthopedic cases driven by an increase in total joint surgeries. To illustrate this, we performed over 29,000 orthopedic cases in the first quarter of 2025, 3.4% more than 2024. Most of this growth in orthopedic procedures is driven by total joint procedures, which grew 22% in the first quarter compared to the prior year. As a reminder, 80% of our surgical facilities have the capability to perform higher acuity orthopedic procedures. And currently, 48% of our facilities perform total joint procedures. This capability provides significant additional growth as we continue to position our assets to meet the expanding orthopedic demand with targeted recruitment and investments in additional equipment, including robotics. Within our portfolio, we have invested in 68 surgical robots that enable our physician partners to perform increasingly more complex and higher acuity procedures. These investments also help support our strong physician recruitment process. In the first quarter, we added nearly 150 new physicians to our facilities, many of which we expect to eventually become partners. This recruiting class includes all our specialties with a skew towards orthopedic-focused positions. It's early in the year, but so far, these newly recruited physicians are bringing surgical cases with higher overall acuity compared to the 2024 cohort. Based on our experience with prior recruiting classes, we fully expect 2025 recruits to continue to grow and have a meaningful impact in 2025 and beyond. As I mentioned on our last call, in 2024, we opened eight de novo facilities. Since 2022, we've opened 20 de novo facilities, and we currently have 10 under construction as well as a robust pipeline of future de novos we expect to begin development soon. De novos represent an exciting growth prospect for Surgery Partners, given the low cost of entry and opportunity to bring the scale of our operations to growth-oriented partners. As a reminder, those under development are heavily weighted towards higher acuity specialties such as orthopedics. Although they take time to develop and construct, the effective multiples on these assets are a fraction of traditional acquisition multiples. Moving to our second pillar, margin expansion. During the quarter, we saw slight margin pressure primarily due to the mix of business that will improve throughout the year. When we consider our continued growth, ongoing procurement, operating efficiency initiatives and synergies achieved on previously acquired facilities, we have high confidence to deliver margin expansion annually as our guidance implies for 2025. The third and final leg of our long-term growth algorithm is acquiring and integrating accretive surgical facilities into our platform. I'm immensely proud of our dedicated development team that manages and maintains a robust pipeline of attractive partnership opportunities. To date in 2025, we deployed $55 million and have added 5 surgical facilities at an effective multiple under 8x adjusted EBITDA. Acquisitions are an important part of our growth algorithm, not only because of the immediate earnings they may contribute, but also the margin expansion we experienced as we integrate these facilities into our platform. The pipeline of attractive assets is robust and supportive of our 2025 guidance. And as Dave will discuss, we have sufficient liquidity to fund this growth in the short and long term without having to tap the capital markets. The level of activity supporting our comprehensive M&A strategy requires incremental variable costs in terms of due diligence, transaction costs, integration costs, and de novo working capital investment. As we discussed on our last call, transaction and integration efforts were higher than typical given the level and complexity of acquisitions completed in 2024, but we expect this level of spend to significantly diminish in the second half of 2025 based on a more normalized volume of expected M&A. Next, I would like to briefly comment on how Surgery Partners is positioned given the current significant regulatory uncertainty. I'll start with tariffs and their potential impact on Surgery Partners. Like many of our peers, our primary purchasing organization is HealthTrust. Nearly 70% of our purchased goods go through this GPO. HealthTrust has been a great partner for several reasons, but in this case, the significant contracting transparency they provide gives us confidence in estimating our exposure to global trade. For example, working with HealthTrust, we know the country of origin for our spend, our contract renewal risks as well as our mitigation options available. Similarly, through our dedicated professional supply chain team, we have visibility to where we have tariff exposure. We can confidently report that we don't have material exposure in the near to midterm to any tariff-related price increases nor do we believe there is a substantial risk to our supply chain. Regarding potential legislative changes to Medicaid and exchange-based reimbursement programs, I would like to remind listeners that our exposure to these payer groups is less than 5% of our revenue, and we do not consider prospective changes to either program as a risk to our short or long-term growth prospects. We will continue to closely monitor ongoing regulatory developments and remain prepared to adjust our approach as needed to ensure continued growth. Before I turn it over to Dave, I would like to briefly update you on the 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 and our fourth quarter earnings call, our Board formed a special committee comprised of independent directors that are not affiliated with Bain Capital to consider this proposal with the help of leading independent financial and legal advisers. Out of respect for the process underway with the special committee, our Executive Chair, Wayne DeVeydt, who serves as a Managing Director at Bain, continues to remove himself from many of his normal activities with Surgery Partners, including this call. We will not be commenting further on this matter unless or until there is a material update. Overall, I am pleased with the start of 2025 as the company continues to deliver growth that is consistent with our long-term algorithm. Our continued focus on maximizing the performance of our portfolio, robust M&A pipeline, steady improvements in enabling greater operating efficiencies and bullish outlook on surgical trends and the regulatory landscape have positioned us to continue to deliver industry-leading earnings growth in 2025 and beyond. With that, I will now turn the call over to Dave to provide more color on our financial results.

Thanks, Eric. Starting with the top line, we performed over 160,000 surgical cases in our consolidated facilities in the first quarter, 4.5% higher than 2024. These cases spanned across all our specialties with higher relative growth in gastrointestinal and MSK procedures, including continued growth in orthopedic cases. This case growth drove our first quarter revenue to $776 million, 8.2% higher than the first quarter of 2024. Our same-facility total revenue increased 5.2% in the first quarter, consistent with our growth algorithm target of 4% to 6% and in line with our expectations for the quarter. Adjusted EBITDA was $103.9 million for the first quarter, giving us a margin of 13.4%. We ended the quarter with $229 million in cash. When combined with the available revolver capacity, we have over $615 million in total liquidity. We reported operating cash flows of $6 million in the first quarter of 2025, distributed $62 million to our physician partners, and incurred $6 million in maintenance-related capital expenditures. As a reminder, operating cash flows are typically lower in the first quarter of the year due primarily to quarterly earnings patterns, but these results can also be impacted by the timing of working capital activities. For example, accounts payable were processed at a significantly faster clip in the first quarter versus at year-end as a result of payment schedules related to the holidays at the end of December. Also, we are pleased that our first quarter distributions to our partners were higher than the prior year based on facility level timing of certain distributions that effectively doubled the impact in the first quarter, as well as higher distributions related to stronger results in the fourth quarter. We are committed to providing transparency into the drivers of our cash flow generation. We are seeing incremental improvements in the cash conversion of our revenue with the metric of days sales outstanding decreasing 2 days from the fourth quarter, which is critical to convert the company's growing earnings. We remain pleased with the disciplined management of capital deployed for maintenance-related purchases. Moving to the balance sheet, we have $2.2 billion in outstanding corporate debt with no maturity dates until 2030. The effective interest rate on our corporate debt was fixed at approximately 6% through March 31, 2025. Our $1.4 billion term loan is now protected by interest rate caps that limit the variable rate of the interest rate to 5%. That floating rate is currently 4.3%, but that could change throughout the year. Our first quarter ratio of total net debt-to-EBITDA as calculated under our credit agreement was 4.1x, consistent with our expectations given recent acquisitions. Leverage calculated using consolidated debt from our balance sheet divided by EBITDA was 4.8x. Leverage will decrease based on our continued earnings growth. As we have discussed previously, our short- and long-term financial models highlight that we will have sufficient liquidity from our cash on hand, our revolver capacity, and cash generated from operations to support future M&A at levels that support our long-term growth algorithm without having to access incremental capital from the debt or equity markets over the next 5 years. The results we reported today and all metrics are very much aligned with our internal expectations that support our guidance that we are reiterating this morning. Specifically, we are reaffirming full year 2025 revenue and adjusted EBITDA guidance to be in the range of $3.3 billion to $3.45 billion and $555 million to $565 million, respectively. Our guidance implies continued margin expansion in line with our long-term growth algorithm, reflecting our ongoing and accretive progress in supply chain and revenue cycle as well as the integration benefits from recent acquisitions and contributions from de novos we opened last year. We have high confidence in these growth areas based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting and managed care contracting. With that, I would like to turn the call back over to the operator for questions.

Thank you. We will now conduct a question-and-answer session. The first question comes from Brian Tanquilut with Jefferies. Please proceed.

Hey, good morning, guys. Eric, congrats on the strong volume quarter. So just curious how you're thinking about current utilization trends and the sustainability of that? And then maybe the other side of this question would just be the same-store revenue per procedure, obviously, a little softer this past quarter. I mean, is that just a tough comp? Or is there anything we should be thinking about as we model out same-store going forward?

Thank you, Brian, for your question. There's definitely a challenging comparison related to pricing, but let me provide more details. The same-store revenue growth in the first quarter aligned with our expectations. The case growth reflects stronger new facilities that are starting operations and some growth in musculoskeletal services that is driving this increase. As I mentioned earlier, we're seeing higher volume with lower revenue, which is really just a mix issue and a bit of a comparison challenge. Our same-facility metric is based on the number of operating days each quarter, which was 63 in the first quarter. In our business, the days of the week significantly impact certain volumes. As we've discussed, we don't place much emphasis on any single quarter; we expect that by the end of the year, we'll be at the higher end or above our long-term range, balancing volume and growth effectively. This aligns well with our expectations. We saw strong growth across all our core service lines, particularly in gastrointestinal and musculoskeletal areas, both of which experienced rates above our long-term assumptions. Along with the typical growth in our portfolio, we also saw an increase due to new facilities that opened in late 2023. These new facilities typically ramp up to full performance over a couple of years, with a break-even period of 6 to 12 months. They are performing well from the start and moving towards their full operational capacity, which is influencing the mix we see in rates. I'm particularly pleased with the gastrointestinal growth in the first quarter, which largely relates to the calendar and how these cases are distributed. The pressure on rates primarily stems from the underlying commercial and government mix, and there’s nothing concerning to note there. We anticipate a more balanced approach to rate and volume throughout the year, similar to how we closed out last year.

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

Yes. For sure, the view that we have on forward-looking operating cash flows is we should see some overall improvement as the earnings growth manifests as you look at our earnings growth guidance that we have out there should be translating nicely over the course of the year. And much like we've seen in the past, it tends to skew better as the year progresses, second quarter being relatively strong and fourth quarter being our strongest quarter from a cash flow generation perspective. So we do believe, as we think and as we've talked about, I think, on the call a little bit earlier and as we talked about in the fourth quarter, distributions, which is an offset to cash as you kind of look at this from a free cash flow perspective, distribution should also grow as we go throughout the course of the year. Now we did effectively double up on our distributions inside the first quarter, which did create that little bit of a pressure point. That should normalize as we go throughout the year. The only watch out on cash flows as we look at the year that is kind of unrelated to the underlying strength of our operating performance and better working capital management would be related to our interest cost. As you know, we were protected by an interest rate swap on our $1.4 billion term loan. That swap expired at the end of the first quarter is being replaced by an interest rate cap, that caps our interest rate exposure at 5%. We feel really good about that over the life of the term loan. However, that will create a headwind for us as we go into the balance of this year. The math that we look at this does create some exposure based on where we think SOFR rates currently are, which is at roughly 4.4%. That would be compared to effectively a 2.2% interest rate cap that we had through the swap that just expired. So you have about 220 basis point exposure that will be a headwind on cash flows for the last 9 months of the year.

Yes. Brian, I might add to that, though, just big picture, stepping back a little bit. The business continues to produce a lot of strong cash flow, right? We know it's a big focus of investors. And when we reiterate our long-term growth algorithm, we do rely on investing in M&A. So we appreciate there's a sensitivity of equity holders on leverage. But I would just reiterate that we have no concerns with the generation of sufficient free cash flow, given our current liquidity to fund our short- and long-term growth without needing to go back to the equity or debt market. So we feel good about where it's going. We do expect that to strengthen throughout the year and to continue to grow with the company as we move forward.

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

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

Joanna, I'm not certain if we discussed that, but there hasn’t been any change in payer mix. In fact, it's been quite strong commercially. We remain positive about our growth in Medicare and commercial sectors, but there are no significant mix changes aside from what could occur with the timing of a particular acquisition. Overall, there’s no pressure on payer mix.

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

Joanna, thank you for your questions. I'll begin by saying it's beneficial to be in a business where our three main stakeholders prefer us. Patients choose us for their experience and outcomes. Doctors favor us due to our efficiency and their involvement. Additionally, payers appreciate us because we offer a low-cost alternative, and they remain supportive of our efforts. We continue to explore ways to collaborate with them to ensure patients receive appropriate care. Nothing has significantly changed in our negotiations, and we are still seeing a positive response as we work together to create value and facilitate patient care. The trends observed over the past few years are still in place. As noted, we are nearly fully contracted for this year, which provides us with clear visibility in our outlook and guidance regarding rates. Regarding Medicare Advantage, while there are some challenges discussed in the industry, we maintain strong relationships in that area as a value provider and do not anticipate changes. I believe you had another question at the end, and I will let Dave address that.

Yes, it's a rev cycle question. And it's a good one because in the third quarter last year, we did talk about changing dynamics in the way payers were processing medical necessity and denial charges. We did see it. We talked a little bit about that pressure in the fourth quarter call. You may recall, Joanna, we did talk about the adjustments that we put in place on our rev cycle as part of our standardization journey that we're taking inside that world. I'm pleased to say, inside the first quarter, that continued. So we did not see any adverse change in our denial patterns. To the contrary, rather, we're now seeing a little bit more on the positive side. Again, the nature of our business almost entirely across the platform is scheduled procedures. That enables us to do a lot of work on a preservice basis to get in front of many medical necessity or any changing requirements from the payer community. And I'm pleased to say that we've implemented that, and you can see that in our days sales outstanding, that metric continues to improve. I think we improved 2 days inside the quarter, so a really positive trend for us.

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

Great. Thanks for the question. Just turning to expenses on professional fees that came in a little high here versus expectations. Just given some of the broader industry pressure here, how would you describe current labor dynamics for specialty areas like anesthesia during 1Q? And then are there any particular specialties or geographies where this growth has been noticeably accelerating in that over the quarter?

Thank you for your question, Ben. I want to clarify that the professional fees were in line with our expectations. The increase is mainly due to two significant acquisitions from last year. At the start of the year, we acquired Key-Whitman, which added several practices and an ophthalmology business, as well as a couple of ASCs. Then, in the middle of the year, we made a substantial acquisition in Milwaukee that included Associated Physician Practices, which contributes to some costs. We've observed a slight impact on anesthesia costs across some of our facilities, but many are still not experiencing issues with anesthesia availability or the revenue guarantees associated with it. This reflects the nature of our business, as Eric and I have discussed previously. So far, we haven't noticed any significant changes in the first quarter, and we don't expect this to be a major challenge for us in 2025 or in the future.

Great. I appreciate the clarification there. I guess just as a follow-up, just on the physician recruiting, it sounds like this year's 150-person cohort has come together nicely across specialties and you're getting maybe some of the compounding growth potential from last year's class. I guess what is the percentage of doctors from this class coming from higher acuity service lines? Is it north of 50%?

Yes. I don't know if we've disclosed that. I'd start off with we're certainly proud of it. It's another strong start for the year for recruiting, definitely in line with our historical run rate and our expectations. We have a very diverse recruiting class. It spans all of our specialties. I don't know that I have that percentage breakdown as far as whether it's mostly high acuity. Although I think the mix of orthopedic continues to grow. Relative to '24, which was a record-setting year, this class really skews higher in revenue generated per doctor. So that net revenue per physician is up about 14% versus what we saw last year. We remain optimistic in our ability to recruit the 500 to 600 docs that we have built into our plan. We've been doing that consistently and I think become a lot more targeted. As a reminder, we've seen strong multiyear gains in our recruiting cohorts. For example, the doctors we recruited in Q1 of last year, they brought an additional 160% more cases in the first quarter of 2025 with 182% more revenue. So it's a compounding effect. You guys have heard us talk about this in that first year. You usually expect to see the second year double for each cohort. And so certainly a big focus area for us. We spend a lot of time on it, and we're constantly trying to refine the way we target the right doctors for our facilities.

The next question comes from Sarah James with Cantor Fitzgerald.

So you guys have been talking for a while about the GI mix. And I think the last data point that we have is that it was going up about 1% a year and it was 24% in '23. So what does it look like now? And can you give us a little context for every percent it goes up? What type of headwind is that on your revenue per case?

Yes, we saw growth in the GI portfolio, which had a minor impact on the share of GI cases in our overall mix. I'm looking at the 24% figure, but I don't have the exact numbers in front of me. If there was some benefit, I believe it would be relatively small in terms of basis points year-over-year. As Eric pointed out, the calendar plays a significant role in this. I've mentioned before that I prefer to look at a quarterly view of same-store metrics due to the calendar's influence. The timing can greatly affect the number of procedures performed, which can positively or negatively impact the same-store case metrics. While we have strong cases, the rate may struggle because the GI procedures tend to have lower acuity. On a positive note, we've experienced GI case volume over the last six months that is slightly higher than our long-term growth expectations, which is encouraging. We expect this trend to continue throughout the year. There is nothing unusually significant, but the increase in volume, largely due to the calendar, did put pressure on rates. As Eric noted, any specific quarter may face unusual variations because of the calendar, but we do plan and budget considering every day of the week for better visibility. We anticipated rate pressure in relation to case growth for the first quarter, which I mentioned during our last call. Looking ahead, we expect to see a return to more balanced growth, ultimately ending the year with same-facility revenue growth that exceeds our target of 4% to 6%. Overall, we anticipate that year-end results will align closely with what we experienced last year.

Yes. And Sarah, I would just reiterate the GI growth, we're really pleased with that service line. We have three businesses that make up the majority of our business. All three of them, ophthalmology, GI, MSK growing at nice clips. We talk a lot about orthopedics because it's one that drives tremendous value for payers and patients and it's moving so quickly, but we really like our GI and ophthalmology business and they continue to grow nicely.

The next question comes from Andrew Mok with Barclays.

Your projected confidence in the near to midterm tariff exposure in your prepared remarks. Can you elaborate on what's driving that confidence? Is that driven more by pricing protections built into your supply contracts or total exposure to countries with tariffs? Any detail there would be helpful.

Yes, I can't share much more than what we've already discussed. Currently, 70% of our spending goes through HealthTrust. As you've likely heard from other companies in our sector, our relationship with HealthTrust is impressive due to the contract protections in place and the visibility it provides regarding potential tariff risks. This increased visibility is beneficial for us since we are aware of when our contracts will expire and can discuss alternatives with our physician partners ahead of any possible tariff impacts. For this year, we don’t anticipate any significant exposure from contract renewals concerning tariffs. Our outlook for the midterm also shows no substantial changes in this regard. The remaining 30% of our spending, most of which is also contracted, benefits from our professional procurement team’s expertise. They offer us insights into when we could face exposure by assessing the country of origin and when those situations might arise, along with what alternatives we might have. We are confident in our procurement team’s capabilities and our relationship with HealthTrust, which have proved invaluable, especially during disruptions like COVID in terms of both pricing and availability. Currently, we do not foresee any major obstacles, but we are monitoring the situation closely.

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

Yes. It's really just timing. I'll remind everybody about how the calendar looked. I hate to kind of always talk about the calendar, but the calendar at the end of the year had holidays kind of awkwardly in the middle of the weeks. Our distributions to our physician partners and to surgery partners happens at a facility level. It's not a centrally controlled process, although the formulas that sit behind that are largely the same, those checks are cut at the facility level. So what we experienced at the end of the fourth quarter was slightly lower distribution. Some of those, in many cases, some of the larger ones occurred in the first week of January. Normally, they will happen at the end of any given month. So you saw basically a double up. I think we were at $62 million or $63 million of distributions, that's about $22 million more than kind of what's typical. That's an unusual number for any given quarter. Again, we believe that's going to normalize back to traditional levels and relative to earnings growth should grow as the course of the year and a macro annual number.

Next question comes from A.J. Rice with UBS.

First, regarding the balance sheet and leverage comments, could you clarify what a typical year for M&A and development looks like for you over the next few years? Additionally, do you have a specific target for your leverage levels?

Yes, thank you for the question, A.J. When we discuss leverage, it's primarily linked to the significant growth this company has achieved, which has consistently been in the double digits or mid-teens over the past eight years. We expect this trend to continue. A critical aspect of this is our plan to invest around $200 million in mergers and acquisitions and new developments, assuming stable pricing. Historically, we’ve seen about 8x earnings over these years, and for our modeling, we project that to continue. This level of investment each year should yield immediate cash flow benefits. Our projections indicate that cash flow from both existing and newly acquired assets, along with ongoing mid-teens growth, will help reduce our overall leverage. Looking at our credit agreement, we aim to reach below a 3x leverage ratio. Currently, we are at 4.1, but we anticipate lowering it to around 3 by the end of this year and continuing that downward trend in the following years. If your forecasts differ, let's discuss them with the team, as all models we've reviewed indicate a decrease in leverage over time.

Okay. And if I could just maybe have a follow-up. Talking about the same-store metrics, pricing, and case volumes, you're just coming off a year of above-average M&A and development activity. Can you just remind us when those get into the same-store mix? And will those acquisitions and development be enough to skew either more positively or more negatively what we're likely to see on same-store pricing and same-store volumes?

Sure. Again, great question because this company rate, as we've talked about, can be significantly affected by the mix of business that you see. If you look at last year's acquisitions at the beginning of the year, Key-Whitman was an ophthalmology book of business. Middle of the year, and for the most part, the acquisitions that we completed in the balance were more orthopedic and MSK-related focus, which do tend to have a higher net revenue per case. So when they do come into our calculations, you should see some change that happens. We include them in our same facility calculation when they are in there at the beginning and the end of the period. So if you're doing a year-over-year comparison, any acquisition that we completed inside the second quarter last year would start to come into our same facility calculation in the third quarter of 2025.

The next question comes from William Spivack with TD Cowen.

Just a quick question. Was there any impact from weather in the first quarter? If so, could you quantify it? Additionally, I understand that you no longer provide guidance on free cash flow. However, considering the improvements in revenue cycle management and earnings, which are countered by increased interest expenses and transaction fees, do you expect free cash flow in 2024 to be higher, lower, or similar compared to this year versus the previous year?

We did experience some weather-related issues in the first quarter, but we didn't see a significant impact overall. While it had some effect, it wasn't substantial enough to warrant much discussion, as we still achieved strong case growth. Regarding free cash flow, we anticipate that it will grow alongside our business this year, despite some timing considerations. We understand the importance of this metric, and we have the liquidity we need to continue to increase free cash flow as we expand our operations.

The next question comes from Matthew Gillmor with KeyBanc.

Maybe following up on some of the margin comments. In the press release, there was a comment about ongoing operating system improvements that will help drive margin expansion. Maybe that was in reference to rev cycle, but just wanted to get a sense for what those efforts are focused on to drive margins higher?

Yes. So I'd say there's several things that go into our operating system, obviously. And a big part of that is rev cycle and Dave can talk about some specifics on that. Also, the supply chain, it's scheduling efficiency, all those things impact costs. The more efficient we are on scheduling, the better utilization we drive out of a given facility, the lower anesthesia costs because they're more efficient. There's just a bunch of things that are part of our operating system. But I think in relation to what was mentioned in the script, certainly, revenue cycle is a big part of that, and Dave can talk a little bit about that journey.

Yes. Our revenue cycle has been a focus for us, and as we discussed last year, we initiated a multiyear effort to establish a standardized revenue cycle approach across the organization. This follows years of integrating our IT systems and building a data warehouse that allows us to analyze the platform and connect directly to billing systems. We have invested significantly in the early stages, positioning ourselves well to start this journey last year. This effort emphasizes not only improving processes but also utilizing better data to make informed decisions, which will ultimately lead to higher revenue generation and enhanced company scale. We are very proud of this progress. It is a long-term journey, and as we advance, similar to what we observed in the fourth quarter and the first quarter, we expect to see benefits related to how we manage receivables and the overall net revenue flow. This trend will continue over time, and we will keep you updated throughout the year and possibly into 2026. I want to stress that our work to integrate companies and maintain these processes is vital to our operations. For instance, in recent years, we have made some larger acquisitions, including one in the second quarter of last year, which necessitated integrating data from the revenue and billing systems of our facilities. The larger the facility, the more careful we need to be in integrating or migrating to a common platform. By the end of last year and as we enter this year, we are finalizing three of those migrations. Like any integration, these efforts will lead to improved margin generation for reasons we've outlined. Having a unified data platform allows us to leverage the company’s scale across various areas, including revenue cycle, managed care, clinical variations, and supply chain management. We are excited about this progress. It requires ongoing investment and focus, which is evident in our activities this year. Thank you for the question.

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

Yes. No, honestly, for us, scheduled surgical cases really doesn't have an impact. I mean actually, the only impact it could have for us is a negative one, which we didn't really see from an impact on staffing or canceled cases.

The next question comes from Whit Mayo with Leerink Partners.

I think you said that you've closed 5 acquisitions or 5 facilities this year. Were those consolidated or unconsolidated, Dave? And then just remind me on the de novo targets for this year?

Yes. The 5 acquisitions that we did, 4 inside the first quarter, I think 1 slipped into the beginning of the second quarter, all consolidating assets, all ASCs that will provide immediate benefit to us. The de novos, we opened 10 last year. They're in various stages of development. As soon as they flip to breakeven, we'll start to see that benefit come through to our EBITDA line item. I think we have close to that number currently in development or under construction that we expect the number of them to open up in 2025, some of them flipping into 2026. And we have a handful, I think, north of or close to our annual target of 10 in the pipeline and under syndication opportunities right now. So we're really pleased, and thank you for asking that question. The de novo track for us is a very intentional focus for us as an organization where we target to have 10 under development every single year. So last year, a great year for us. This year is shaping up to be very good, and the pipeline looks good from an ongoing perspective going forward.

Yes. Most of the de novos will be unconsolidated at least initially. We expect that perhaps half of those will eventually become consolidated, but they start off as minority investments. One important aspect of the de novo initiatives is that they are beneficial to us for many reasons. A significant reason is that they are usually established in locations where we can directly connect with the traditional acute care system. This creates a unique opportunity to collaborate with payers in a way that adds significant value. It allows us to reset our approach, and these locations tend to have higher acuity as well. There are numerous positive aspects to the de novos that we are enthusiastic about. Regarding the refresh, as you know, we undertook several divestitures at the end of last year and do not anticipate any similar large divestitures this year, so that will not be a regular occurrence.

Yes. Managing a portfolio of over 160 facilities will always involve some level of activity. However, as Eric pointed out, last year was exceptionally busy, but the impact on the company was relatively small. This is why we are not considering it a significant challenge this year, although we will continuously update the portfolio. We have a team dedicated to ensuring that we maximize the value we provide to the communities we serve.

The last question will come from Ben Hendrix with RBC Capital.

Just wanted to follow up on your growth commentary around GI and MSK. I just wanted to see kind of where cardio procedures are fitting in on that. I know, in the past, you've talked about that being a longer ramp, but just wanted to see kind of how growth there is progressing and how that's fitting into your recruiting and development efforts?

Thank you for the question, Ben. Yes, I have mentioned this before. In the long run, we are very optimistic about this transition. However, in the short term, there are several factors that contribute to it being a slow-growing service line, particularly because some states have not yet aligned with Medicare on this. That said, we have several facilities introducing cardiac rhythm management procedures. I recently attended the grand opening of our first cardiac cath lab-based ASC, which indicates progress in this area. While the growth in the near term may be modest, we anticipate strong growth in the coming years, though it is starting from a small base. We are enthusiastic about this, as it resembles orthopedics in that our savings per case are significant. Considering the cost pressures within the healthcare system, we expect this area to gain traction over time. Even if orthopedic procedures slow down in the future, which is not currently the case, there is still a substantial opportunity for growth as we move towards transitioning about $100 billion from traditional acute care to our model in the next several years.

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

Great. Thank you. I just want to take a moment to express my gratitude to my colleagues and physician partners who work together every day to fulfill our mission of enhancing patient quality of life through partnership. Thank you for joining our call this morning, and have a nice day.

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