Surgery Partners, Inc. (SGRY) Earnings

Management highlights

### Portfolio Optimization Update - The company signed definitive agreements to sell its Idaho Falls market interests (Mountain View Hospital and Idaho Falls Community Hospital) to partner Intermountain Health, completing the vast majority of planned portfolio optimization. The transaction is expected to close in the near term, subject to customary closing conditions. - The Idaho Falls facilities have expanded beyond Surgery Partners' core short-stay surgical focus to include full acute care services (obstetrics, neonatology, pediatrics, emergency care, inpatient services) that are misaligned with the company's strategic direction. The facilities are also far more capital-intensive than the rest of the portfolio, with average annual capital expenditures of $17 million over the past three years and representing 32% of the company's total finance lease obligations, with distributions to Surgery Partners representing less than 50% of the facilities' adjusted EBITDA. - Post-closing, the company will be a pure-play short-stay surgical provider, with a clearer ASC and surgical hospital profile, significantly lower Medicaid mix, elimination of non-core obstetrics/neonatology services, majority reduction of non-surgical admissions, and decreased exposure to state Medicaid reimbursement changes. Gross proceeds from the transaction are expected to be $795 million, which will primarily be used to pay down debt, reducing balance sheet leverage by approximately 0.3x. The transaction is 17x the average annual distributions the company received from the facilities over the past three years, which management views as the most accurate reflection of value realized. ### Core Operating Performance - Q2 2026 results exceeded management expectations for both revenue and adjusted EBITDA, driven by strong same facility growth from higher acuity procedures. Total surgical cases in Q2 were approximately 168,000, led by robust growth in orthopedic and vascular procedures. - Physician recruiting remains a key growth driver: 191 new physicians joined the platform in Q2, bringing year-to-date 2026 new recruits to 330. Initial revenue contribution from the 2026 new physician cohort is up nearly 16% compared to the 2025 cohort, with broad-based recruitment across orthopedics, ophthalmology, GI, and pain management. New physician volumes compound over multiple years, driving sustained long-term growth. ### Growth Strategy - Organic growth is supported by targeted de novo facility development: 6 de novo facilities are currently under construction, with an additional 7 facilities in the development pipeline, all anchored by high-quality health system and physician partners in attractive markets. - M&A strategy remains disciplined, focused on strategic fit, return thresholds, and balance sheet impact. Due to the focus on portfolio optimization in 2026, the company will not reach its $200 million average annual M&A investment target this year, though management expects to close some small acquisitions before year-end. Given the ongoing fragmentation of the ASC industry, Surgery Partners' position as the only scaled, fully independent ASC management company makes it a preferred acquirer and partner, and management expects to return to normalized acquisition activity in future years. ### Cost Management - Operating expense efficiency improved sequentially from Q1 2026: salaries and wages fell to 29.8% of revenue from 30.5% in Q1, supplies fell to 26.7% from 27.2%, G&A fell to 4.3% from 4.8%, and other operating expenses fell to 6.1% from 7.3%. This improvement reflects seasonal revenue growth and ongoing cost discipline, which remains a core strategic priority focused on labor efficiency, supply chain standardization, and eliminating systemic inefficiencies.

Guidance

- Management reaffirms its full-year 2026 guidance, which excludes any financial impact from the pending Idaho Falls transaction, calling for total net revenue of $3.35 billion to $3.45 billion and adjusted EBITDA of at least $530 million. This guidance incorporates the expected shift toward higher government payer mix that was observed in Q2. - Updated full-year guidance will be issued promptly after the Idaho Falls transaction closes, which is expected in the near term, along with additional detail on the company's go-forward financial profile. - The company's core capital allocation priorities post-transaction will remain deleveraging, high-return organic growth, de novo development, and strategic acquisitions that meet the company's return thresholds.

Segment performance

Surgery Partners operates as a single unified short-stay surgical segment, with all ambulatory surgical centers (ASCs) and surgical hospitals grouped together given similar operating and performance profiles. Q2 2026 overall net revenue was $849 million, up 2.7% year-over-year (YoY), representing 100% of revenue for the quarter. Adjusted EBITDA for Q2 was $125 million, with an adjusted EBITDA margin of 14.7%. Year-to-date (H1 2026) overall net revenue was $1.66 billion, up 3.6% YoY, and adjusted EBITDA was $228 million, down 2.3% YoY with a 13.7% margin. Same facility net revenue increased 5% YoY in Q2, with 0.3% case growth and 4.8% net revenue per case growth, driven by higher acuity orthopedic, vascular, and spine procedures. Commercial payer mix was 49% of Q2 net revenue, down 350 basis points YoY, with government payer mix increasing correspondingly, a shift concentrated in larger surgical hospitals. Excluding the pending divestiture of the Idaho Falls facilities, Q2 2026 revenue would have been approximately $660 million and adjusted EBITDA approximately $98 million, while H1 2026 revenue would have been approximately $1.29 billion and adjusted EBITDA approximately $173 million.

Risks & headwinds

- The pending Idaho Falls transaction is subject to customary closing conditions, including required physician member and governing board approvals, and may not close on the expected timeline or at all. - While the observed shift toward higher government payer mix (with lower reimbursement than commercial payers) was expected and incorporated into full-year guidance, sustained larger-than-expected shifts could pressure margins and earnings. - Broader industry weakness in overall surgical case volumes could impact top-line growth, even as the company prioritizes higher-acuity, higher-margin procedures to offset low single-digit case growth. - M&A activity depends on market conditions and availability of attractive targets that meet the company's return thresholds, so acquisition growth may not return to historical levels as quickly as expected.

Analyst Q&A

• Q: With broader industry concern about weak surgical volumes, how is core volume holding up, and what is the outlook for the company's high-acuity strategy? Also, should investors expect more large divestitures after the Idaho Falls transaction, and what additional detail can you share on the deal's tax and leverage impacts?

  A: Management reported strong, in-line growth in high-acuity procedures, particularly total joints, spine, and vascular, with same facility net revenue growth aligned with full-year expectations even as overall case growth remains at industry-low levels. The Idaho Falls transaction represents nearly all planned portfolio optimization; smaller opportunistic partnerships may continue (similar to the 2025 Bryan, Texas deal), but no additional large divestitures are expected. No material tax leakage will occur from the transaction, as the company still has sufficient net operating losses to offset any tax liability; approximately $350 million of consolidated facility debt will be removed from the balance sheet, with ~75% of that being the company's proportionate share, reducing net leverage by ~0.3x.

• Q: Does the increased government payer mix shift come solely from surgical hospitals, not ASCs? Are you seeing procedure inflow to ASCs from changes to the Medicare inpatient-only list, and what is driving the surgical hospital payer shift? Is there material exposure to Health Insurance Exchange (HIX) or uninsured patients?

  A: The expected payer mix shift is almost entirely concentrated in surgical hospitals, with minimal impact on ASCs. The company is already seeing new higher-acuity cases (orthopedics, cardiovascular, spine) move into ASCs as a result of the inpatient-only list changes, which is contributing to overall acuity growth. The shift is driven by broad industry trends in where procedures are performed, not HIX/uninsured exposure; the company's exposure to HIX and uninsured patients is very small, and will fall even further after the Idaho Falls divestiture, with post-closing Medicaid exposure totaling less than 2%.

• Q: What is the company's view on the 2027 Medicare ASC rate proposal, particularly the larger bump for MSK procedures?

  A: Management is very pleased with the proposal, noting that the Medicare program has consistently supported the ASC space under both Democratic and Republican administrations, due to the significant cost value ASCs deliver. The proposed larger increase for high-acuity MSK procedures aligns with the company's strategic focus on this segment, and the outcome was broadly in line with management expectations. Management expects continued strong government support for ASC growth long-term.

• Q: How much does the Idaho Falls divestiture reduce exposure to acute care volatility, and what impact will it have on the company's consolidated expense profile? Are there any capacity constraints from staffing or anesthesia issues in the back half of 2026?

  A: The divestiture eliminates ~75% of the company's non-surgical admissions and the majority of its ICU beds, greatly simplifying the business and dramatically reducing exposure to traditional acute care volatility (such as Medicaid reimbursement changes and site-of-care pressure) that is unrelated to the company's core short-stay surgical model. The transaction will lead to a noticeable reduction in professional and medical fees as a percentage of consolidated revenue, with full details provided in updated guidance after closing. Management reports no material staffing, anesthesia, or capacity constraints for the back half of 2026, with remaining capacity across the portfolio to support growth, and no meaningful differences in capacity dynamics between ASCs and surgical hospitals.

• Q: When can M&A activity return to normal levels after 2026's focus on portfolio optimization, and how strong is the current pipeline?

  A: The company maintains an active pipeline of acquisition opportunities and expects to close some small deals before the end of 2026, though it will not hit the $200 million annual target this year. There has been no change to the company's long-term M&A strategy; given the high fragmentation of the ASC market and the company's position as the only scaled independent ASC manager, it remains well-positioned to continue consolidating the industry, with management expecting a return to normalized annual acquisition levels in 2027.