Surgery Partners, Inc. (SGRY) Earnings

Management highlights

• Full-year net revenue $3.3B, up 6.2% Y/Y, same facility revenue growth 4.9%. Adjusted EBITDA $526M, up 3.5% Y/Y but below expectations. • Second half had headwinds with slower case growth, payer mix shifts, and anesthesia dynamics in three surgical hospital markets. • Organic growth focus on expanding surgical case volumes, especially orthopedic specialties like total joint replacements. 74 surgical robots in service, with 6 added in 2025. Over 700 physicians recruited in 2025. • Capital deployment in 2025: $182M towards acquisitions, below target but at attractive valuations. Opened 8 de novo facilities in 2025. • Portfolio optimization strategy focused on selectively partnering divesting facilities, with recent Baylor Scott and White joint venture in Bryan, Texas. • New leadership at affected facilities, with Chief Operating Officer Justin Oppenheimer dedicating time to support success.

Guidance

• 2026 net revenue guidance: $3.35 billion to $3.45 billion, single-digit Y/Y growth. • Adjusted EBITDA guidance: at least $530 million, incorporating anticipated near-term headwinds. • Anticipated contributions from last year's net acquisitions and divestitures: $9 million. • Impact from funding annual cash incentive at Target: $15 million. • State-specific reimbursement and new or increased hospital provider taxes in three markets: $8 million pressure. • Potential tariff exposure in supply costs: $4 million year-over-year pressure. • Not including M&A impact in initial guidance for 2026. • Expect margin compression in 2026 but focused on operational efficiency through supply chain, revenue cycle, and cost reduction plans. • Expect to deploy at least $200 million towards M&A but not including in preliminary guidance. • Capital expenditures for maintenance-related activities roughly in line with 2025. • Distributions to partners to grow in line with earnings growth. • Cash flow from operations expected to increase in 2026 based on adjusted EBITDA growth and working capital management, partially offset by increased interest costs.

Segment performance

Full-year net revenue was $3.3 billion, up 6.2% year-over-year, with same facility revenue growth of 4.9%. Full-year adjusted EBITDA was $526 million, up 3.5% year-over-year but below expectations. Adjusted EBITDA margin was 15.9%. Organic growth saw nearly 670,000 surgical cases in 2025 vs 656,000 in 2024, with 1.3% same-facility case growth. Orthopedic cases grew, with over 42,000 in Q4 and 15% growth in Q4 and 19% YTD. Payer mix pressure in second half due to physician transitions. Margin pressure in Q4 from slower case growth, payer mix shift, and cost structure not adjusting quickly enough. Surgical hospitals were the main area of pressure, with three markets being most impacted while balance of portfolio performed in line.

Risks & headwinds

• Physician transition dynamics leading to payer mix pressure, with newly recruited physicians serving higher proportion of Medicare patients and not ramping as quickly. • Slower-than-expected case growth and sharper-than-anticipated shift in payer mix in certain surgical hospital markets. • Cost structure not adjusting quickly enough to changing payer mix in those markets, leading to incremental margin pressure. • Anesthesia dynamics in surgical hospitals with higher Medicare mix creating additional pressure. • State-specific reimbursement and hospital provider taxes in three markets impacting earnings. • Potential tariff exposure in supply costs. • Uncertainty around market dynamics and the impact of ongoing portfolio optimization efforts on financial performance.

Analyst Q&A

• Q: Brian Tankaloud with Jefferies asked about balancing growth outlook with headwinds, payer mix situation, and fixability of issues in three markets.

  A: Eric Evans discussed fundamentals of the business, value creation, pair mix being steady historically with some unique issues in the three markets, and robust plans to address them.

• Q: Sarah James with Cantor Fitzgerald asked about breakdown of 3% same-star revenue guide between price and volume, and when positive signs in influencing mix could be seen.

  A: Dave Doherty said it's roughly even, and positive signs would be seen as strategies are implemented with physician partners to support commercial patients.

• Q: Matthew Gilmore with KeyBank Capital Markets asked about recovery of surgical hospital markets and historical M&A contribution.

  A: Eric Evans said surgical hospitals are fantastic assets with pressure allowed in guidance, and historical M&A contribution was typically 200 - 250 million of EBITDA.

• Q: Andrew Mock with Barclays asked if Q4 issue was extension of Q3, and if ASCs are affected.

  A: Andrew Doherty said it was in surgical hospitals, ASCs were in line with history.

• Q: Benjamin Rossi with JP Morgan asked about weather impact on patient throughput and incremental cost.

  A: Eric Evans said weather can affect, but underlying demand for services remains.

• Q: Joanna Gajuk with Bank of America asked about payer mix pressure, resolution, and organic growth.

  A: Eric Evans discussed payer mix pressure, plans to compete for commercial patients, and organic growth still within 4 - 6% range.

• Q: Whit Mayo with LeeRank Partners asked about baseline for EBITDA growth and timing of identifying issues.

  A: Eric Evans said 2026 guide took into account entire year and trends, with issues identified and plans in place.

• Q: Ben Hendricks with RBC Capital Markets asked about phase-out of inpatient-only list impact on cardiology procedures.

  A: Eric Evans said cardiology has opportunity, with some procedures ramping and others taking time due to physician transition and state rules.