Greetings. Welcome to Surgery Partners, Inc. Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Dave Doherty, CFO. Thank you. You may begin.

Good morning. 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 file 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 reconciled 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 first comments will briefly highlight our fourth quarter results and the consistency of our long-term growth algorithm. Then I will provide additional color on the strong business execution underpinning each of the three pillars of our growth algorithm, organic growth, margin improvement and deploying capital for M&A. I will also provide our initial outlook for 2025, including how our business is positioned in the current regulatory environment. Starting with our fourth quarter results. I am pleased to report that our team continues to deliver on our mission to enhance patient quality of life through partnership. The 2024 financial results that we 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. This morning, we reported full year adjusted EBITDA growth of 16% and net revenue growth of 13.5%, resulting in margin expansion of 30 basis points, each consistent with or exceeding our growth algorithm. This is the first time Surgery Partners has recorded revenue over $3 billion and adjusted EBITDA over $0.5 billion. Our growth in 2024 is attributed to continued strong organic results, including same facility revenue growth of 8% with equal contribution from both case volume and rate improvements as well as meaningful contributions from our recent acquisitions. Dave will elaborate on our financial results next. Across our 161 surgical facilities, we partner with top notch surgeons who consistently provide high-quality clinical care. Our partnership model uniquely positions the company for sustained success because we partner with talented physicians to create a safe, convenient and cost-efficient environment that patients and payers prefer. Increasingly, we are experiencing above average volume growth at higher acuity levels because we are focused…

Thanks, Eric. Starting with the top line, we performed over 174,000 surgical cases in our consolidated facilities in the fourth quarter, bringing our full year case count to 657,000, 8.4% higher than 2023. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double-digit growth in MSK related surgical cases. The combined case growth in higher acuity specialties, specific managed care actions and the continued impact of acquisitions supported our fourth quarter revenue growth of 17.5% over last year to $864 million. For the full-year, revenue grew 13.5% to $3.1 billion. Our same facility total revenue increased 5.6% in the fourth quarter and 8% in the full-year, exceeding our growth algorithm target of 4% to 6%. Adjusted EBITDA was $163.8 million for the fourth quarter, giving us a margin of 18.9%. For the full-year, we reported $508.2 million in adjusted EBITDA, 16% over 2023 and in line with our expectations. We ended the quarter with $270 million in cash, when combined with the available revolver capacity, we have over $770 million in total liquidity. We reported operating cash flows of $300 million in 2024, distributed $171 million to our physician partners and incurred $45 million in maintenance-related capital expenditures. The increase in distributions and capital spend are correlated to the growth in our facilities and underlying earnings. Operating cash flows in 2024 were higher than 2023, but lower than originally estimated due to the increased variable costs associated with acquisitions completed in 2024, the incremental interest costs on our revolver loan. Working capital needed for recently opened de novo investments, costs related to a strategic alternatives process undertaken by our Board and restructuring costs we incurred related to key growth initiatives and operational efficiency. More specifically, we completed a higher…

[Operator Instructions]. Our first question is from Brian Tanquilut with Jefferies. Please proceed.

Hey, good morning. Maybe, Dave, just to follow-up on the color that you provided -- you guys provided on the impact of potential legislation, specifically in site neutrality. Just curious if you can give us any more granularity on how you get to that 1% number. And maybe asked differently, how are you thinking about the differences in impact between the ASP side, which is probably benign versus your short-stay specialty facilities.

Hey, Brian, let me just kick that off, and then I'll let Dave get into some of the specifics. As I said in my comments, high level, our company is based on this idea of getting care to the right side. And it's our mission to do that. We think it's the right answer for the health care system. And when we look at this, I want to reiterate in my comments, we gave the risk number on revenue, which approximately 1% if you look at the worst case. But the reality of it is there's a lot of upside for us gaining cases that will move out of the traditional acute care system. And so more than likely, we do expect this to be a net tailwind just from our business standpoint. But I'll let Dave get into the specifics. We obviously spend a lot of time going in the details of what's been proposed so far. So Dave.

Yes. And thanks for the question, Brian. So I'll reiterate what Eric said this site neutrality is kind of core to our business, right? Supporting shifting procedures to the right side of care is our business model. So we're in favor, largely upside neutrality, pricing transparency and the current legislation and regulatory actions that are kind of out there. We think at best that even though we looked at the downside risk at 1%, we think at best, this is probably positive to the results. And worst likely it's neutral to us for a number of reasons. But the way we've calculated it just to be fully transparent. The way we've calculated this is looking at those procedures that are in scope and there are some very specific procedures in scope in the legislation that has been drafted or being discussed the most detailed of which is the MedPAC proposal that forms the basis of the current act that those two senators are evaluating. The procedures that we have kind of in place, to your point, a large majority of those procedures are occurring inside the larger surgical facilities. However, there are some of the some of those procedures that are occurring inside the ASC. So if you were to believe only the worst-case scenario and assume no upside from procedures that are shifting out of the much higher cost acute care and their related outpatient business. Then you're going to see the exposure that we have at 1%. About two-thirds of that would be in our larger facilities. And about one-third of that is going to be in our ASCs, and that's really when you look at procedures that could be performed inside a physician office.

Got it. And then, Dave, maybe as we think about the guidance, I appreciate all the color there, but obviously, we're hearing a lot of noise around weather and the flu season impact in Q1. Just curious if there's any call out you want us to consider as we model Q1?

At this point, Brian, again, thank you for the question on the quarter. At this point, we're not seeing anything major. Of course, we did see those freezing conditions and some unusual weather patterns in January. But for the most part, our business just gets rescheduled. So when there are cases like that, there might be a little bit of fixed cost that will create some burden for us, but that has been factored into our guidance. And as you look at guidance for the year, the way we have thought about revenue and adjusted earnings guidance throughout the year, the quarterly pattern will look roughly consistent that what we've seen in the past, perhaps a little bit -- we're a conservative bunch here. So I would suggest maybe 23% of our midpoint of our guide inside the first quarter, about 18.5% for adjusted earnings.

Awesome. Thank you.

You bet.

Our next question is from Benjamin Rossi with JPMorgan Chase. Please proceed.

Hey, thanks for the question. So just on M&A cadence, you did over $400 million in M&A in 2024, and you mentioned the $53 million spent so far in 2025. Just thinking with the offer letter in the public year, has this changed your approach to your M&A pipeline during 2025 and maybe the time line of any of your conversations as this process for self out?

Yes. Benjamin, thanks for the question. Actually, I would say that really hasn't been an impact. We tried, I think we've done a good job of just focusing on the business. So there's obviously any kind there's a process, there's a little bit of noise. But as far as the pipeline goes, you can see we executed, we were very opportunistic last year. We've got some great assets that are highly orthopedic, high acuity fast growth kind of facilities. We're proud of the team's work there, as I mentioned. As far as this year goes, nothing really has changed, really strong pipeline. You'll note we closed three facilities in Q1 already between California and Texas, spent about $53 million, so kind of on pace with a really, really attractive pipeline. So no, I don't think that's had any impact on kind of how we're approaching that. We're just approaching it consistent with our long-term growth algorithm.

Great. Thanks for the color. And then just on the de novos. It sounds like those have been progressing nicely. Are you seeing any acceleration in ramp-up under a more elevated demand setup and more normalized labor backdrop? And then how are you thinking about start-up costs here in 2025 compared to [indiscernible] than we've seen in recent years. Thanks.

Yes. Thanks for the question. We are really excited about our de novo pipeline and continue to gain additional traction there. It's hard to say whether that's because physicians now see less inflationary backdrop and less labor pressures, I don't know, it could be part of it. But the reality of it is, it's as strong as it's been, since I've been here. We've actually built out more capabilities in that space. And what we're seeing is they're incredibly accretive, right? So if we can do all de novos and put that to work and get them going faster. I mean we'd love that. So you're going to see us continue to expand that. As we've mentioned, we've committed to 10 a year. As far as specific costs related to networks, I'll let Dave kind of dive into some of those details.

Yes. Thanks, Eric. And you're right. The costs associated with those on an upfront basis is relatively marginal. As Eric was just mentioning the return on those things is remarkable. The working capital needs that sit inside there, you see that we pull those out, we disclosed them in our press release. As we continue to ramp up to get to 10 in process every single year, you'll start to see that get to run rate. Again, assuming that we keep that pace at 10x, but we'll keep pace with the demand in our capabilities. So I would expect that number to be roughly equivalent year-over-year. It will start to get offset as facilities open up and they reach breakeven, they generally reach breakeven within the first year of ownership, sometimes within the first six months. So you'll see that start to normalize probably in 2026, just completely predictable on a year-over-year basis. You'll see -- you should see a little bit of that ramp-up in this year, but not material.

To add to your demand point I would just mention, for total joints, it's really focused on orthopedics and these de novos, it's still 3:1 procedures in HOPDs versus the ASC world. So there's a long way to run there. So I do think if you think about high acuity new facilities, we're well positioned to be part of that answer on the de novo side.

Great, thanks for the commentary.

Our next question is from Joanna Gajuk with Bank of America. Please proceed.

Hi, good morning. This is Joanna Gajuk. Thanks for taking the questions. I guess one first follow-up. In the press release, you talked about $11 million EBITDA from assets you divested at, I guess in late Q4. So how much revenues, I guess those assets were contributing to '24 annually? And then why did it start to sell? And is there more?

Yes. So I'll let Dave talk about specifics on the revenue side. What I would say is on those facilities, we're constantly doing a portfolio analysis, right? In a business like this, you want to make sure you're always the best natural owner. We had a few more this year than we would expect as a run rate. We do expect to grow our facility count quite rapidly over the next several years. But when we find markets where we're not as well positioned and we're not the best natural owner, we do try to find ways to move it out of those markets and into markets where we think there's better growth prospects. So a little bit unusually as far as the number of facilities, although they were small, not as well positioned as we'd like them to be, and we've reinvested that into places where we think the growth prospects are stronger. Dave, I don't know if you want to comment on her specific question.

Yes. The revenue impact of our divestitures is included in our guide. So if you look at the $3.3 billion to $3.45 billion, less than 2% of that growth is going to be trying to jump over our divestiture-related activity. The reason why we kind of pulled out the $11 million is to help folks kind of understand how our growth is consistent with our long-term growth algorithm yet again this year.

Great. That's very helpful. Thank you for the super stand there. And if I may, another follow-up on the comments you were making about the site neutral reforms and your estimate there. I appreciate that 1% of revenue for, I guess, the worst scenario, one of the versions that we know of right now. How should we think about the impact to the bottom line? I assume, first of all, the losses because of the ownership structure, but is there something else to think about as you know kind of what down the P&L, how this would impact the EBITDA line?

Yes, sure. Let me address that. So first off, I appreciate why we're continuing to focus on this. But hopefully, the point that we're making at 1% of revenue is not material to the company and there is upside to it. It just -- I just want to make sure we're not over indexing on that, even, if you were to look at 1% and somehow, say that's material, you're absolutely right. It would be affected by our ownership level plus any cost action that we take in order to kind of react to any type of reimbursement change. So it's going to be negligible, if anything. And I would argue the revenue piece is negligible as well. So I'm hopeful, Joanna that's what you take away from our call this morning.

Joanna, the one thing I would add on procedures, as you think about this, too, is that we are constantly working to have the most appropriate procedures in the right places within our portfolio. So higher acuity and the highest acuity facilities we have, lower acuity in the appropriate ASC. So we're actively mitigating that number all the time. So we expect that number to shrink as every month goes by.

Okay, thanks for that additional color. Appreciate it.

Of course.

Our next question is from A.J. Rice with Credit Suisse. Please proceed.

Hi, everybody. I don't know whether there's anything to be said here or not, but I understand you don't want to comment on the specifics of the ongoing special committee review. But is there any way to put a time frame on when you might, not a specific month or day necessarily, but are we talking about something over the next -- by midyear, by year-end? Any way to put parameters around that?

A.J., I appreciate the question. Unfortunately, there's no more I can comment on that. It is one of those things where the independent committee will play this out, and I can't comment further than what we've said so far.

Okay. I know this year -- in the past year, the back half of the year, the revenue per case moderated and case growth was strong. If you look at the full year number, you were more balanced on that. As you think about your buildup for guidance for '25, can you just comment on those two metrics and any inputs to those two metrics and how you think it will play out? I know you said you've got a lot of your -- 99% of your managed care contracts done. Do you have any sense of what the rate of increase on averages on those contracts?

Yes. Thanks for the question, A.J. Let me start high level and just say we talked about this a lot that we try not -- we don't look at the business quarterly just because of all the various inputs and puts and takes of things rolling in here. The seasonality, there's a whole bunch of things that happen. And that's why we do think the balanced year look is the right way to think about it. So last year, very balanced between cases and growth, but it does move around quite a bit from quarter-to-quarter. And so we urge everyone to think about this business not on a quarterly basis when you look at those metrics because there's a lot of moving parts there. I'll let Dave kind of talk a little bit about kind of how we see seasonality playing out this year.

Yes. And just to kind of pile on to that comment on over-indexing on one quarter over another. The impact that Eric was referring to is at prior year acquisitions or any divestitures. And if you have an acquisition that's focused on high number of cases that are at low acuity, for example, GI or ophthalmology acquisitions that we've done in the past or it's a heavy focus on orthopedic, it would be lower case volume and higher rates. As those matriculate into the same-store calculation that creates some unusual variances, and the second part is, of course, the number of days in the quarter. We only operate 60 business days. And so one day different because of holidays or where Monday is kind of fall you could have some unusual variances -- and so that's why we really do caution against looking at that on a quarterly basis. Having said that, A.J., we do look at that to try to explain it just to make sure that there's no underlying trend that's actually occurring to impact the organization. So -- to answer your specific question, as we look at the quarters, again, we are going to say for the full year, we're going to be at or above our long-term range. We think it's going to be relatively balanced between case growth and rate growth. But the rate pressure that we saw in the second half of the year only due to mathematics will continue to occur for perhaps to a more muted extent in the first half of this year, and we'll balance out in the second half of the year. And I hope that's helpful.

Great, thanks a lot.

Our next question is from Tao Qiu with Macquarie. Please proceed.

Hey, thank you. Good morning. I was just trying to go back to the outlook that you gave. On the top line, you are forecasting 6% to 11% revenue growth. Based on our earlier comments, we get 3% incremental from acquisitions. There's a 2% drag from divestitures and a little bit of headwind from a leap year impact in 2024. I think I'm still missing some parts regarding to kind of the organic long-term growth outlook like 4% to 6%. I think Dave, you mentioned it will be a little bit higher than that, but I think I'm still missing like 1% to 2%. Could you comment on where that's coming from?

Yes. So first off, our range is a pretty big range, which would imply growth year-over-year of 6% to 11%. It's a pretty big range as you can look at that. And so elements of that are going to be the conservatism that we should look at. It's still very early in the year. There's a lot of the year to kind of go. We've only closed the books on one month. So you're going to see elements of there and there. As you pointed out, we do have some pressure point, although it's marginal, related to prior year divestiture activity. The most challenging part for you is not going to be the number of days. And so in fact, I think the number of surgical days inside the year is the same year-over-year or within one day. So that's not going to be a pressure point for us. The biggest thing that's going to drive that is the type and the timing of acquisitions. Again, we've only completed three ASC transactions this year for a total of $50 million or so. We have another $150 million to hit our annual target timing of that and the nature of those is going to depict where ultimately, revenue is going to turn out. So we do look forward to updating that guidance as we get into our first quarter call. As a reminder, that's only a short number of weeks away from where we are today. So we should be able to give a better update as we go towards that.

Got you. And just a follow-up. I think the recruiting numbers are pretty strong this quarter. Could you comment on general SWMB trend? What's the labor environment looking like out there? Thanks.

Yes. Let me start with physician recruiting. Obviously, it was a really strong year for us again. And that's been a strength of our company. It's a huge part of our organic growth story. And what we know is the physicians that we recruited this year, a record number, they are heavily orthopedic and we also know that they tend to double. They almost always double in the next year. So we expect to gain the benefits of that recruiting class maturing. We don't see that slowing down. We've got a really strong pipeline physicians that we'll continue to bring into our facilities. So yes, it's been quite good there. Now that's separate and apart from SWB on the books, and I'll let Dave maybe talk a little bit about SWB trends.

Yes, again, great question. I do agree with that victory lap on recruiting. That's an incredible team and an incredible momentum. If you look at the past three years, just year after year, getting better in terms of the number of physicians brought into our fold and the revenue contributions from those. So very, very encouraging. And as you know, they have a compounding effect. So the good news for 2025 as many of those stocks will just add more and more volume and more complexity into our business mix. So a great outcome. On SWB to put that point on that Eric was just mentioning, we believe we completely moderated the inflationary impact of underlying salary costs, and you can see that in our results sequentially 180 basis points better. We look at SWB compared to revenue. We think that's the right way of kind of looking at that because our business is such a growth oriented business with new acquisitions coming into the fold. And when you look at that, we think we're in line with where we have historically been, which we believe is an illustration of how well we have managed that.

Our next question is from Andrew Mok with Barclays. Please proceed.

Hi, good morning. Maybe just a follow-up on that question around expenses. Revenue beat by more than 4% in the quarter, but EBITDA was in line. So we didn't see a lot of operating leverage in the business, at least in the fourth quarter. You talked about the higher level of integration costs, but most of those are adjusted out. So can you help us understand what drove the higher level of operating costs across several expense lines, including the salaries, but also other OpEx and G&A. Are any of those increases temporary in nature? Thanks.

Yes, a little bit inside our -- and we talked about this on a quarterly basis, it becomes a particular challenge for us in the second half of the year between the third quarter and the fourth quarter, and that relates to the accounting for the company's performance management, incentive plans, in other words, the corporate bonus. So last year, if you may recall, in 2023, we had to take some pressure off of that corporate bonus. But I'm pleased to say that we were able to kind of do much better this year. So that is acute inside the fourth quarter. It is fair. Again, if you take a longer view of that. So between third and fourth quarter, you would have seen some slip. But for the balance of the year, that's a good run rate for you to use on a go-forward basis. And quarter-over-quarter, you're going to have swings like this. But for the most part, it's there. I would say the other thing is a slight pressure that exists just on payer mix. It's difficult to predict kind of how that ultimately turns out. We don't see anything unusual in terms of trend from that perspective. But that would be the only other point as you're kind of looking at EBITDA pressure inside the quarter.

Great. And transaction and integration costs more than doubled from Q1 to Q4 and finished the year at $100 million. Clearly, that's weighing on free cash flow, and now you're talking about a significant abatement in 2025. One, what level of visibility do you have into reducing those expenses at this point? And is it fair to think that free cash flow should improve by $50 million to $100 million as those costs abate? Thanks.

Great question. Let me start with your -- we have great visibility into it. And obviously, if you think about kind of where we expect that number to go because it was directly tied to our increase in M&A plus some transaction or some project or process-related costs that Dave mentioned that will obviously naturally abate to, hopefully, this year. So we look at that and we would say that -- we expect that our run rate of below the line kind of M&A expenses will be similar to was in 2023. Our expectation is we're going to manage that very, very closely. That will have a natural improvement on free cash flow. But I would also say that ultimately, free cash flow was a little hard to predict because of timing of M&A and everything else that goes in there. But you're right in your thesis, and we absolutely expect to drive that number down to more normalized levels. So with that, I'll let Dave maybe add a little bit more color.

Yes, so -- and again, it's a great question. It's obviously very visible that we have incurred more expense in 2024 than what is typical for transactions. And I would provide just perhaps a little bit more color on what happened inside 2024 and we couldn't talk about this before, but clearly, with Bain's letter that came in, you could see that there was a process that we went through last year that did burden that cost bill the line. That's one of the difficult things that's difficult to predict because as you now know, we're going through a similar process that's going to have some costs. It's unclear how much those costs will be and kind of when that process will end. But that will -- that's an uncertainty that makes it difficult for you to kind of say definitively, we're going to be able to take out $50 million. So not a lot of visibility that we can kind of see to that at this point, sufficient to provide you with that guidance. On the transaction and integration costs, clearly, we spent twice as much in M&A last year, $400 million out the door. It is a heavier due diligence burden, heavier transaction costs, right, the legal fees, the advisory fees that we use to kind of evaluate those and managing a pipeline, those costs are always going to be there. So you're going to see a direct correlation to how we manage the pipeline. And when it comes to that, at this point, we're not looking at anything major in the pipeline so much so that we're saying $200 million is our target for the year. So that should abate. And again, you're going to see a direct correlation to that. The integration side, is where we…

Yes. And maybe we get to your underlying question too. Look, we're growing the business. We're growing -- we're generating strong cash flow. Regardless of timing of M&A, the expectation is we're going to grow cash flow with the business. We're going to be de-levering in all circumstances over the next several years, and we don't need any external help for funding our M&A. So -- but I appreciate the question.

Thanks for all the color. If I could sneak in one more. There was a change in the valuation allowance for deferred tax assets of $100 million in the quarter, which exceeds the total DTA on the balance sheet at 3Q. Can you help us understand what's going on there and the drivers of the change in the valuation allowance? Thanks.

Yes. So first off, great question. I'm glad that you brought that up, because it can be easily misinterpreted. This -- we're falling into the trap of a very technical accounting standard that requires us to recognize this. But I want to be very clear, nothing has changed in our underlying growth story and our cash tax position remains unchanged and where we think we're going to utilize the NOLs that sit on our balance sheet. Those NOLs we predict will be used to help offset cash tax payments until we get to the end of the decade. The -- as a way of kind of evidencing that over the past two years, we have averaged $2 million a year in cash taxes. We have no federal cash tax payments in those periods. Those are all related to very specific state tax utilization issues. The technical accounting, I won't bore you with it, but it has something to do with how GAAP accounting triggers losses and what that does to a requirement to recognize a valuation allowance. It's something that occurs if you have a trended GAAP loss and the GAAP loss that you would see on an income tax valuation basis would have been impacted by somewhat unique items, the divestitures and the losses associated with those, the debt extinguishment as we did a lot to right size our financing, which I'm very proud of. And our derivatives and the way the accounting for those works through that kind of innocuous statement of accumulated losses in our consolidated results. You can get pretty sleepy kind of going through this example. But the big takeaway behind this is it's a pure accounting regulation that was required to be reported inside the fourth quarter just because we tripped that accounting standard, but nothing changes in our underlying business.

Great. Thanks for all the color.

Our next question is from Matthew Gillmor with KeyBanc Capital Markets. Please proceed.

Hey, thanks for the question. I want to just circle back on the site-neutral topic, and I appreciate the analysis you shared today. That's really helpful. I was curious if you thought there'd be any positive downstream impact on your development efforts. And I guess I was thinking of more hospitals looking for JV partners or even just physicians looking for ASC partners to make sure they get OR time as hospitals have to shift around their priorities. But just any curious or any thoughts on how development could be impacted by site neutral?

Yes. Thanks. It's a great question. Look, I would say, regardless of site neutral, we have a really extensive pipeline and continue to see great opportunities, but I would agree with you that anything that puts pressure on getting patients to the right place and actually drives that is going to drive interest from health systems. We do get a lot of calls from health systems. We're very picky on the ones we partner with. Because we want to move fast, and we want to make sure that they're fully committed to this kind of movement. But we have seen certainly a lot of interest from them. I think that will only grow with site neutrality. And from a physician perspective, I think this will force more discussions of docs that are going to be open and looking to find a surgery center home. So yes, no, I think it helps what's already a very strong pipeline. So we think that's all good. And again, it comes down to it's the core of what we do. Part of what we believe in as a company is we can say we're part of the solution for the health care system. We can save a tremendous amount of money, while providing a great product by moving patients to where they need to be for care, right place, right cost, right time.

That's great. I'll leave it there. Thank you.

Great. Thank you.

Our next question is from Whit Mayo with SVB Leerink. Please proceed.

Hey, good morning. Eric, just a quick clarification. You said Medicaid is 5% of revenue, not supplemental payments are 5%, correct?

No. I said all of Medicaid and state funding is for less than 5%. So in total, everything, including any state-based funding that comes, yes.

Would you be willing to size the state-based funding?

Within that less than 5%? What I would say is, in total, it's not that material, but I don't know that we've ever sized that. I think the majority is probably straight Medicaid.

Yes. Clearly, a majority is going to be straight Medicaid. And I think you guys know enough about what state-based reimbursement kind of looks like. It is for us, fairly predictable and not material, especially as you kind of think about how that revenue flows through to the bottom line, state-based reimbursements can be affected by kind of timing, clearly, but is neutralized to some extent, by the provider taxes at some states kind of put on this as well as our non-controlling interest piece of that. So as you kind of flow through the risk that you're alluding to with it's really marginal on the bottom line perspective. Overall, we do not consider state-based reimbursements, changes in there more changes in the Medicaid to be a material headwind or even a significant headwind for us. To be very clear, we're tracking everything that happens on a state base as well as at the federal level. This is not a headwind for us because of the nature of our business being primarily elective and primarily referred to from physician office.

No, that's perfect. Obviously, we've gotten a lot of questions on that for the last few days. So that's helpful. And maybe just my follow-up. Eric, just wondering sort of where we are on the revenue cycle, the implementation, where we are on the standardization of those processes? And maybe also just procurement. We've heard you talk about this for a couple of years. And so I'm just wondering if these are still incremental opportunities. I'm sure plenty probably plenty of variation down at the performance at the center level. So just any color would be helpful. Thanks.

It's a great question, Whit. I'll start off high level, and I'll let Dave get into some of the specifics as he's over those areas. I think when you think about revenue cycle, it's always, I think, for everyone an ongoing opportunity to mature those processes. We're still in the early innings there. We see lots of opportunity in our revenue cycle. And so if you think about our growth algorithm at middle 3% to 5% of just making our operating system better long way to run in revenue cycle. So supply chain, look, we have an excellent supply chain group here that works closely with our GPO. We continue to find opportunities there and continue to see that a place that's maturing. And then we have other opportunities as we go forward around clinical variation that we're excited to get started on. But there's a bunch of things that make us -- give us a lot of confidence that we're going to be able to continue to drive those kind of benefits to our business. But I'll let Dave go into some specifics on revenue cycle and procurement.

Yes. Thank you. So let me just start kind of with the why the underlying your question is how long can you continue to get the benefits that kind of sit behind there? And if you've talked about that so much for the past couple of years, is it drying up, it is not. And I'll tell you the reason why -- it starts with the company's kind of history of all of the roll-ups that we've done. We've spent the first several years at the latter part of last decade, rolling up all of those into common systems that were behind the scenes. Behind the scenes gives us better data. Now we've moved into the cycle of moving to common processes and aligning all of our people. That takes a while with 180 facilities across our portfolio to make sure that we hit that the right way. That cycle, we're in early innings on for both procurement and for revenue cycle. But as Eric mentioned, very, very pleased. I'm going to give you a couple of data points. Revenue cycle DSO improved three days quarter-over-quarter. And as you might remember, in the third quarter, we talked about a little bit of pressure coming from managed care. We had seen increased denials and increased aggressive policies being implemented by the payers that are out there. It's our job to react to those. And as you could tell in the fourth quarter with those types of numbers, we did, as a primary elective company, we have a lot of visibility to schedule cases. There's plenty of time for us to kind of navigate through any medical necessity requirements and make sure we get the documentation there. We've also seen denials kind of pick up and denials at lower dollar cost levels,…

Thanks.

Our last question is from Sarah James with Cantor Fitzgerald. Please proceed.

Thank you. A few years ago, you set a goal of net debt-to-EBITDA in the mid-3s in 2025. And you've been just above that range in '24. How should we think about how high that metric could temporarily stretch fund growth and is a goal of mid-3s in 2025 and beyond still valid? Thanks.

Hey, Sarah, thanks for the question. Obviously, we've talked a lot about being focused on deleveraging the company, and we see that in our five year model very specifically as we continue to grow. You're right that there could be pressures when you have kind of like last year, we had $400 million of M&A could be short-term pressures on that number. But we do expect in our planning horizon, our goal is three. We're going to continue to march towards that de-lever as we grow. And we do expect to hit that. But I'll let Dave talk about kind of short-term pressures that you could see in the interim just based on timing of M&A.

Yes. Great question. Thanks, Sarah. I know that there's an area of focus on leverage. So again, the big takeaway that everybody should hear when we talk about leverage and cash flows is that there is no headwind that sits in front of us that suggests that our long-term growth algorithm has to change. We will always anticipate 4% to 6% of our growth will come from M&A. That implies a $200 million deployed a year. And again, the takeaway is during this five year window, which we beat up our five year model, there is no need for us to enter the capital markets. And since we've done everything that we've done on our balance sheet, to avoid exposure to interest rates. We do not believe that we have any such exposure in our capital markets decision or in our cash flow generation as we go throughout the year. Specific to 2025, we do anticipate that the credit agreement leverage or any leverage that you kind of look at, will continue to show downward trajectories may tick up just inside the first quarter related to the recent acquisitions, that's that unusual pressure that kind of sits inside that number, but we'll continue its downward trajectory as we go through '25, and we'll -- mid-3s and better as we continue to go down during that five year window. Thanks for that question, Sarah.

All right. Before we conclude today, I want to say thank you to my colleagues and our physician partners who collaborate each and every day to deliver on our mission to enhance patient quality of life through partnership. Thank you for joining our call this morning, and have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.