Surgery Partners, Inc. Q2 FY2024 earnings call

• Consolidated second quarter results: Net revenue $762 million, +14.2% y-o-y; same-facility net revenues +~10%, surgical case volume +~4%; adjusted EBITDA $118.3 million, +18%, margin 15.5%.
• Acquisition activity: Deployed nearly $280 million through Q2, including a $60 million transaction initially targeted for Q4 2023. Business development team has robust pipeline of acquisitions and de novo opportunities.
• Physician recruitment: Over 200 new physicians started using facilities in Q2, with ~400 total in H1 2024; initial volume and rate from new recruits exceed last year’s cohort. Total joint cases in ASCs up 46% H1 2024 vs prior year, 90% CAGR since 2019.
• Capital deployment: Deployed ~$220 million acquiring 5 facilities in Q2; 10 de novos under construction slated to open in 2024-2025.

Net revenue for the second quarter was $762 million, representing a 14.2% growth over the prior year quarter. On a same-facility basis, net revenues grew just under 10%, with surgical case volume growth in the quarter just under 4%. Adjusted EBITDA grew 18% to $118.3 million, generating adjusted EBITDA margins of 15.5%, expanding 50 basis points compared to the prior year quarter. Total joint replacements in ASCs increased 46% in the first half of 2024 over the comparable period in 2023. Revenue contribution: Net revenue from various segments with a focus on higher acuity procedures driving growth.

• Increased full-year net revenue outlook to >$3.075 billion and adjusted EBITDA to >$508 million, representing at least 13% net revenue growth and 16% adjusted EBITDA growth y-o-y.
• Expect margins to continue improving throughout 2024, with annualized margins improving by at least 50 basis points over 2023.
• Confident in achieving free cash flow goals for 2024, with operating cash flows $83 million in Q2.

• Inflationary pressures related to labor and supply costs, though abating, need ongoing monitoring.
• Interest rate environment impacts on debt servicing, with effective interest rate fixed at ~6% through Mar 2025 and interest rate caps in place on term loan.
• Uncertainty in acquisition timing and pipeline fickleness affecting capital deployment.

Q: Brian Tanquilut of Jefferies asked about same-store rate and volume balance in the back half and seasonality of EBITDA.

A: Dave Doherty said same-facility growth algorithm expects balance, with fourth quarter typically strongest due to deductible swing.

Q: Tao Qiu of Macquarie asked about organic growth vs acquisitions/de novos in guidance.

A: Dave Doherty and Eric Evans said majority growth is from organic same-facility, supplemented by acquisitions.

Q: Kevin Fischbeck of Bank of America asked about volume firming and core demand vs physician recruiting.

A: Eric Evans said volume is calendar/timing based, but confident in annual growth exceeding algorithm.

Q: Andrew Mok of Barclays asked about professional fees increase and free cash flow.

A: Dave Doherty said professional fees mix affected by acquisitions/divestitures, and free cash flow is in line with expectations.

Q: Jason Cassorla of Citi asked about capital deployment remaining and total shoulders opportunity.

A: Wayne DeVeydt said capital deployment back half is icing, Eric Evans discussed total shoulders opportunity and margin considerations.

Q: Bill Sutherland of Benchmark Company asked about procedures coming off inpatient list and capital deployment target.

A: Eric Evans discussed incremental movement of procedures off inpatient list, Wayne DeVeydt said target $200 million long term.

Q: Whit Mayo of Leerink Partners asked about free cash flow and state supplemental programs.

A: Dave Doherty said free cash flow target $140-160 million, Eric Evans said state programs have minimal impact.

Q: Will Spivack of TD Cowen asked about stock comp and revenue divestiture headwind.

A: Dave Doherty said stock comp is timing related, revenue divestiture impact minimal in back half.