Surgery Partners, Inc. Common Stock 2026 Q2 Earnings Call

Good morning. Thank you for joining Surgery Partners second quarter 2026 earnings call. I am joined today by Eric Evans, our Chief Executive Officer, and Justin Oppenheimer, our Chief Operating Officer. 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, as described in this morning's press release and in the reports we file with the SEC. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain non-GAAP financial measures which we believe can be useful in evaluating our performance. We have reconciled these measures to the most applicable GAAP measures in this morning's press release and in the supplemental materials posted to our investor relations website. With that, I will turn the call over to Eric Evans.

Eric? Thank you, Dave. Good morning, everyone.

Before discussing our quarterly results, I want to address a significant portfolio optimization milestone we announced last month. As we noted, we have signed definitive agreements in escrow for the sale of our interests in the Idaho Falls market, Mountain View Hospital and Idaho Falls Community Hospital, to our partner, Intermountain Health. We have had a successful and longstanding partnership with Intermountain, not only in Idaho, but also in 15 ASCs across Utah and Montana that remain in our portfolio. The Idaho Falls facilities have built an exceptional reputation as preferred providers and leaders in delivering high-quality, affordable care for the Idaho Falls region. At the same time, they have evolved in ways that today extend well beyond our core short-stay surgical focus to include more traditional acute care services such as obstetrics, neonatology, pediatrics, and other non-surgical service lines.

We are confident these facilities will continue to grow and serve the healthcare needs of this community with the strength of Intermountain's partnership. This pending transaction is the most impactful part of our strategic review process to date and represents the vast majority of planned portfolio optimization. Our objectives in this process were to further sharpen our focus on our core short-stay surgical facility portfolio to simplify our operations, drive growth, and strengthen our balance sheet. We believe we have been successful in achieving this. To help investors evaluate the company on a comparable basis, in the supplemental financial information we posted on our investor relations website this morning, we provide key financial and non-financial metrics about this market to help illustrate the change in our business mix, assuming this transaction closes. Dave will speak to the transaction financials in greater detail shortly.

We believe this additional information will make it easier for investors to evaluate the growth profile, margin profile, and capital structure of the company following the anticipated closing of the transaction. Upon closing, we will update our forward guidance. Turning now to our second quarter results. We delivered results that were ahead of our expectations for both revenue and Adjusted EBITDA, giving us the confidence to reaffirm our full-year guidance. Net revenue was approximately $849 million, up 2.7% year-over-year. Adjusted EBITDA was approximately $125 million. Adjusted EBITDA margin was 14.7%. On a year-to-date basis, net revenue was approximately $1.66 billion, up 3.6%, and Adjusted EBITDA was approximately $228 million.

As we have consistently reiterated, same-facility revenue is one of the clearest indicators of the underlying performance of our platform because it captures case volume, acuity, and rate. In the second quarter, same-facility net revenue increased 5% over last year, with 4.8% related to rate, which reflects the continued benefit of our focus on higher acuity procedures. On a year-to-date basis, same-facility revenue increased 4.9%, with same-facility cases increasing 0.8% and net revenue per case increasing 4%. We performed approximately 168,000 surgical cases in the second quarter, driven by orthopedic and vascular procedures, reflecting the continued robust growth in both acuity and joint-related surgeries. Payer mix also contributed to quarterly performance. As expected, commercial mix moderated compared to the prior year period on both a quarterly and year-to-date basis, while government mix moved correspondingly higher.

This dynamic was primarily isolated to our larger surgical hospitals and was consistent with the assumption embedded in our full-year guidance. Importantly, we view this as an expected revenue mix item rather than a change in the underlying patient demand environment, and our focus remains on driving acuity, clinical quality, and appropriate reimbursement across the portfolio. Physician recruiting is another important contributor to that same facility growth profile. In the second quarter, 191 new physicians began using our facilities, bringing our year-to-date recruits to 330. The mix of new recruits continues to be broad-based across our specialties, including orthopedics, ophthalmology, GI, pain, and other service lines, and the initial revenue contribution from the 2026 cohort increased nearly 16% compared to last year's cohort.

As we have discussed in prior periods, these recruiting cohorts compound over time as physicians build volumes in our facilities. We believe our recruiting capabilities, physician relationships, and differentiated operating platform remain key contributors to sustainable growth. Beyond same-facility performance, we are pursuing growth through targeted de novo development and M&A activity. At quarter end, we had six de novo facilities under construction and an additional seven facilities in the pipeline. These projects are an important long-term growth opportunity and are anchored by high-quality health systems and physician groups in attractive markets. Our approach to M&A continues to be disciplined as we evaluate opportunities against their strategic fit, return and growth potential, and impact on our balance sheet objectives. While we maintain and continue to pursue a strong pipeline of opportunities, we have completed an immaterial amount of acquisitions year-to-date.

A significant focus this year has admittedly been on optimizing our existing portfolio, divesting assets that no longer align with our short-stay surgical strategic direction, and sharpening our focus on core growth. While we do anticipate closing additional acquisitions before year-end, we will clearly not reach our $200 million average annual M&A investment target in 2026. That said, we remain confident that our M&A strategy is appropriate given how fragmented the ASC industry remains, our unique position as the only scaled, fully independent ASC management company, and our track record of successful integrations and physician partner value creation that has and will continue to make us a partner of choice. That foundation, combined with a stronger portfolio and balance sheet, keeps us well positioned as the right opportunities emerge. Before turning the call back to Dave, I want to thank our colleagues, physicians, partners, and operators across the company.

We are excited about our growth trajectory, the value of our physician partnerships, and the significant long-term opportunity we have to expand access to high quality, high value surgical care provided in the optimal setting. The pending Idaho Falls transaction represents an important step on that journey, our first half results reinforce our confidence in our full year outlook and long-term strategy. With that, I'll turn it to Dave.

Dave? Thanks, Eric. As Eric mentioned, our second quarter net revenue was approximately $849 million, up 2.7% year-over-year.

Adjusted EBITDA was approximately $125 million compared to approximately $129 million in the prior year period and in line with our expectations. Adjusted EBITDA margin was 14.7%. For the first half of the year, net revenue was approximately $1.66 billion, up 3.6% year-over-year, Adjusted EBITDA was approximately $228 million, down 2.3% year-over-year. Year to date, Adjusted EBITDA margin was 13.7%, compared to 14.5% in the prior year period. Looking at the quarter in more detail, revenue growth was driven primarily by higher acuity cases, bringing strong net revenue per case, partially offset by the anticipated increase in our government payer mix. Same-facility revenue increased 5% in the quarter, with case growth of 0.3% and net revenue per case growth of 4.8%.

Year to date, same-facility revenue has increased 4.9%, with cases increasing 0.8% and net revenue per case increasing 4%. Our commercial payer mix was approximately 49% of net revenue in the second quarter, approximately 350 basis points lower than last year, with a correspondingly higher mix of government payments driven by shifts within our larger surgical hospitals and case growth that skewed slightly toward higher government pay. Turning to expenses, salaries and wages were approximately 29.8% of revenue in the second quarter, improving sequentially from 30.5% in the first quarter, though higher than 28.5% in the prior year quarter, due primarily to the change in payer mix we've noted. Supplies were 26.7% of revenue, also improving sequentially from 27.2% last quarter, though higher than 26.0% reported in the second quarter of 2025.