Surgery Partners - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue was $821.5M (+6.6% YoY); Adjusted EBITDA was $136.4M (+6.1% YoY); Adjusted EPS was $0.13, below Wall Street consensus of ~$0.16, while revenue modestly beat consensus (~$821.0M). EPS consensus values retrieved from S&P Global*.
• Full-year 2025 guidance was lowered: revenue to $3.275–$3.30B (from $3.30–$3.45B) and Adjusted EBITDA to $535–$540M (from $555–$565M), citing softer volume/payer mix and delayed capital deployment (M&A and de novo ramps).
• Management flagged commercial payer mix softness (commercial down 160 bps YoY in Q3) and Q4 prudence; same-facility revenue growth now expected nearer the midpoint of 4–6% long-term algorithm.
• Stock-reaction catalysts: guidance cut, commentary on payer mix softness, and portfolio optimization timing (investor day shifted to spring 2026), balanced by continued strength in orthopedics (total joints +16% in Q3; +23% YTD in ASCs) and procurement/revenue-cycle efficiency gains.

What Went Well and What Went Wrong

What Went Well

• Orthopedics momentum: “Growth in total joint surgeries in our ASC facilities continues to be robust, with these cases growing 16% in the third quarter and 23% on a year-to-date basis…”.
• Capacity and capability investments: 74 surgical robots deployed; >500 new physicians recruited YTD, supporting higher-acuity mix and long-term ramp.
• Cost and cash discipline: supply costs as % of revenue down 70 bps YoY; operating cash flow $83.6M in Q3; liquidity >$600M (cash $203.4M + revolver $405.9M).

What Went Wrong

• Payer mix shift: commercial payer revenue mix 50.6%, down 160 bps YoY; government (primarily Medicare) up 120 bps; pressured margin accretion and Q4 outlook.
• Softer same-facility volumes vs internal plan: trends “broad-based” prompting cautious Q4 stance despite still-positive volume and rate growth expectations.
• Reduced FY guidance driven by slower M&A/deployment and lost earnings from divested ASCs; de novo ramp slower due to construction and regulatory delays.

Transcript

Operator (participant)

Welcome to the Surgery Partners third quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Dave Doherty. Please go ahead.

Dave Doherty (EVP and CFO)

Good morning, and thank you for joining Surgery Partners third quarter 2025 earnings call. I am joined today by Eric Evans, our CEO. 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 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 reconcile these measures to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Eric.

Eric Evans (CEO)

Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our third quarter results, which reflect continued execution and consistency with our long-term growth algorithm. I will discuss in more detail our recent progress across our three growth pillars: organic growth, margin improvement, and deploying capital for M&A. I will also provide some additional color on our ongoing strategic portfolio optimization process before concluding with some commentary on our outlook for the remainder of the year. First, let me provide highlights from our third quarter earnings. Net revenue was $821.5 million, up 6.6% year-over-year. Adjusted EBITDA was $136.4 million, up 6.1% year-over-year. Adjusted EBITDA margin was 16.6%. Same facility revenue grew 6.3%. These results are a testament to the focus of our colleagues and physician partners who serve our communities with valuable, high-quality, and convenient care.

Our team continues to deliver on our mission to enhance patient quality of life through partnership. Starting with our organic growth. In our consolidated facilities, we performed over 166,000 surgical cases in the third quarter. Volume growth in GI and MSK procedures was relatively high, including continued growth in orthopedics driven by an increase in joint-related surgeries, while ophthalmology procedures were slightly lower this quarter. Growth in total joint surgeries in our ASC facilities continues to be robust, with these cases growing 16% in the third quarter and 23% on a year-to-date basis compared to the same period last year. Our investments in robotics and physician recruitment continue to position us to capture high acuity demand. Within our portfolio, we have invested in 74 surgical robots that enable our physician partners to perform increasingly more complex and higher acuity procedures.

These investments are also an enabler of our strong physician recruitment team. Through September 30 of this year, we have recruited over 500 new physicians into our facilities, many of which we expect to eventually become partners. In the third quarter, payer mix moved modestly, with commercial payers representing 50.6% of revenues, down 160 basis points year-over-year, and governmental sources, primarily Medicare, up 120 basis points. While these changes fall within normal quarterly variability, we are also observing softer-than-expected same facility volume growth in recent months. Although volumes remain positive and generally in line with industry trends, they have trailed our internal expectations, prompting us to adjust our fourth quarter outlook. Given our typical seasonal lift in commercial volumes during Q4, we are monitoring this closely and refining expectations accordingly. Margin performance was stable, with cost discipline and reduced incentive-based compensation offsetting inflationary pressures and weaker-than-expected volume and payer mix.

That said, we continue to drive improvements through procurement and revenue-cycle operating efficiencies that will contribute to margin expansion moving forward. Moving to capital deployment. To date in 2025, we have deployed approximately $71 million in capital for acquisitions, adding several facilities at attractive multiples. We also sold interest in three ASCs at an enterprise value of $50 million of cash plus sold debt, achieving a combined double-digit effective multiple. The most significant of these divestitures occurred late in the second quarter. Our long-term growth algorithm and initial 2025 outlook contemplated deploying $200 million plus proceeds from divestitures for a total of roughly $250 million of acquisitions this year. While we have not reached that level of deployment year-to-date and in-year earnings contributions will be lower than originally anticipated, our disciplined approach prioritizes long-term value over short-term gains.

Importantly, the near and midterm M&A pipeline remains robust, with well over $300 million in opportunities under active evaluation. We are focused on deploying capital strategically in the months ahead and anticipate a return to our normal levels of annual capital investment moving into 2026. Our investments in de novo facilities remain an important part of our growth strategy and among the highest return opportunities in our portfolio. In the third quarter, we opened two new de novos, with nine currently under construction and more than a dozen in the development pipeline. These de novos are primarily focused on higher acuity specialties, with a majority devoted to orthopedics. These facilities typically require 12-18 months to build and up to another year post-opening to reach break-even, given the nature of building scale from the ground up.

Over the last nine months, several recently opened de novos have turned profitable, while others are still ramping and have not reached break-even as quickly as anticipated, primarily due to construction and regulatory approval delays. While this timing creates modest near-term pressure on earnings, these investments are strategically positioned in high-growth markets and are expected to be highly accretive and profitable moving forward. We remain confident that the current pipeline will drive meaningful value creation and reinforce our long-term double-digit growth algorithm. Now, I'd like to spend a moment updating you on our portfolio optimization review. As we shared during our second quarter earnings call, we have initiated a strategic portfolio review designed to enhance our flexibility, streamline our portfolio, and self-fund our long-term growth algorithm. Today, we want to provide additional color on the types of assets under evaluation and the objectives of this process.

Our focus is on selectively partnering or divesting facilities that can expedite leverage reduction, accelerate cash flow generation, and sharpen our focus on our core ASC service lines. The facilities we are evaluating for this effort are primarily larger surgical hospitals that provide services beyond our short-stay surgical focus. Often, these facilities are more capital-intensive and also carry higher levels of finance lease obligations, which adversely impact cash flow conversion. We are currently in active discussions on a small number of assets, which we believe will be accretive to shareholder value and demonstrate the financial benefit to the company with reduced leverage and increased cash conversion as a percent of EBITDA. Given the timing of these discussions and the long-term value creation it will generate, we will not be in a position to share material details during a December investor day.

To ensure we provide the most comprehensive and meaningful update on our portfolio optimization efforts, we have made the decision to shift our inaugural investor day to the spring of 2026. At that event, we will share greater detail on these portfolio optimization efforts, as well as additional details on our long-term growth drivers and outlook for the business. As we look ahead to the remainder of 2025, we are revising our full-year guidance to reflect timing-related impacts of capital activity and the revised outlook for our fourth quarter. We now expect revenue in the range of $3.275 billion-$3.3 billion and adjusted EBITDA in the range of $535 million-$540 million. During our second quarter earnings call, we implied approximately $5 million of adjusted EBITDA pressure tied to slower M&A timing.

Today, we are acknowledging incremental impacts from delayed capital investments and lost earnings from the three ASC divestitures in the first half of the year, for which proceeds have not yet been redeployed. We remain disciplined and confident in our ability to deploy this capital, supported by a strong pipeline of opportunities that align with our short-stay surgical ethos. Based on the trends we observed in the third quarter, we now anticipate that same facility revenue growth for the full year will more closely align with the midpoint of our long-term target range of 4%-6%. This adjustment reflects our prudent approach as we monitor recent shifts in surgical demand and payer mix, particularly among commercial patients, which typically increased proportionally in the fourth quarter.

While we remain confident in the underlying strength of our business, we believe it is appropriate to take a measured stance heading into the fourth quarter, ensuring our expectations are well-calibrated to current market dynamics. While our updated outlook acknowledges some near-term challenges, we are confident in the resilience of our growth algorithm, the significant tailwinds in the ambulatory surgery space, and our ability to execute. We are closely tracking these dynamics and will factor in any near- to midterm implications into our 2026 planning, which we intend to review during our Q4 call. Finally, we remain focused on disciplined capital employment, operational excellence, and strategic initiatives that position us for sustainable growth and shareholder value creation well beyond 2025. Before I turn the call back to Dave, I want to take a moment to honor Dr. Patricia Maryland, who recently passed away. Pat served on our board with distinction.

Her thoughtful counsel and unwavering dedication to advancing access and equity in healthcare inspired us all. We are profoundly grateful for her contributions and the legacy she leaves behind. With that, I'll turn the call back to Dave for a detailed financial review.

Dave Doherty (EVP and CFO)

Thank you, Eric. Starting with the top line, total consolidated net revenue for the quarter was $821.5 million, up 6.6% from the third quarter of 2024. We performed over 166,000 surgical cases in our consolidated facilities in the third quarter, representing 2.1% growth. This growth was broad-based across our specialties, with higher relative increases in gastrointestinal and MSK procedures, including continued strength in orthopedics. This growth overcame 10,000 surgical cases in the third quarter of 2024 related to facilities that we have since divested. Same facility total revenue increased 6.3% in the third quarter, with same facility case growth of 3.4% and rate growth of 2.8%. Adjusted EBITDA for the quarter was $136.4 million, representing 6.1% growth over the prior year and a margin of 16.6%, essentially flat to last year. Year-to-date, adjusted EBITDA stands at $369.3 million, up 7.2% from the prior year, and our year-to-date margin is 15.2%.

We ended the quarter with a cash balance of $203.4 million and a revolver capacity of $405.9 million, providing total available liquidity of over $600 million. Operating cash flow for the third quarter was $83.6 million. During the quarter, we distributed $52.5 million to our physician partners and invested $10 million in maintenance-related capital expenditures. There were no unusual transactions or matters affecting operating cash flows other than the change in interest rates on our corporate debt portfolio that we have previously discussed. We remain pleased with the disciplined management of capital deployed for maintenance-related purchases and with cost management controls for transaction and integration costs, which are at levels consistent with 2023 and significantly below the elevated activity we saw in the second half of last year. We have approximately $2.2 billion in outstanding corporate debt with no maturities until 2030.

During the third quarter, we completed a repricing of our term loan and revolving credit facility, reducing our rates to SOFR plus 250 basis points. This action positions us to achieve meaningful interest expense savings and improve cash flows going forward. The current floating rate is 4.0%, and interest payments for the quarter increased by $9 million compared to the third quarter of 2024, primarily due to the favorable swaps that matured earlier this year. Our capital structure remains well-positioned to support our long-term growth algorithm while providing flexibility for future capital deployment. At quarter end, our net leverage ratio under the credit agreement was 4.2x and is 4.6x on a balance sheet net debt to EBITDA basis. This level is consistent with our expectations, reflecting timing on capital deployment. Turning to expenses, salaries and wages were 29.6% of net revenue, flat with the prior year.

Supply costs were 25.4% of net revenue, down 70 basis points from last year, reflecting ongoing procurement and efficiency initiatives. G&A expenses were 2.7% of revenue, down from 3.8% in the prior year period, primarily reflecting lower stock-based and incentive-based compensation related to our year-to-date performance. From a capital deployment perspective, to date in 2025, we have deployed $71 million for acquisitions, adding several facilities at attractive multiples. We also completed divestitures of three ASCs in the first half of the year, generating cash proceeds of $45 million and a reduction in debt of $5 million, the largest of which sold at a 15x effective multiple. These proceeds have not yet been redeployed, which, along with the timing of M&A, is reflected in our revised guidance. As Eric mentioned, our de novo program continues to be a key driver of long-term value.

With recent openings, nine under construction, and more than a dozen in the development pipeline, we are excited about the future of these investments. Our revised guidance reflects a slower ramp on recently opened de novo facilities. Guidance for the full year 2025 has been revised to reflect these timing-related impacts. We now expect revenue in the range of $3.275 billion-$3.3 billion and adjusted EBITDA in the range of $535 million-$540 million. As noted, the revision reflects delayed capital deployment, lost earnings from divested ASCs, and a more cautious outlook on the commercial payer mix and volume in the fourth quarter. We remain disciplined and confident in our ability to deploy capital, supported by a strong pipeline of opportunities aligned with our long-term growth strategy.

Same facility revenue growth for the full year is now expected to be closer to the midpoint of our long-term growth algorithm of 4%-6%, reflecting a prudent approach to the fourth quarter as we hedge against potential softness in both volume and the overall commercial payer mix, while still anticipating positive contributions from both case growth and pricing. While we are not assuming this recent shift is an ongoing headwind, we are monitoring these dynamics closely and will consider any potential near- to midterm implications as part of our 2026 planning that we plan to discuss in our fourth quarter call. Finally, I want to echo Eric's appreciation for the dedication of our colleagues and physician partners. Their commitment continues to drive our results and positions us for long-term success. With that, I'll turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that is star one if you would like to ask a question. Our first question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

Hey, good morning, guys. Maybe, Eric, as I think about the weakness that you called out in demand or in procedure volumes as you think through Q4, anything you can point us to? I mean, is that specific to certain kinds of procedures or certain classes of procedures, ortho versus GI or geographies? I mean, just kind of what you guys are thinking in terms of what's causing some of that? Is that a referral flow issue or just broader macro?

Eric Evans (CEO)

Hey, Brian. First of all, thanks for the question. Obviously, we've spent a lot of time looking at this. In Q3, we saw, to our internal expectations, some weakness on both volumes and payer mix. It's obviously always a big ramp going into Q4. We looked at that really, really closely. Relatively broad-based, higher government payer mix than we would expect entering Q4, and just a bit softer on the growth. Now, look, we still expect fourth quarter to be a growth on both cases and rate, but below our internal expectations. Some of those things in certain markets, you can have a very specific story, but it was broad enough and apparent enough to us that we had to react to it. We're still looking at that.

We do not expect this to be a long-term trend, but it was, again, material enough that we wanted to make sure we were prudent in our guide. I would not say it was necessarily any particular specialty. As we think about this across the spectrum, it was just a broader-based weakness. Hard to know, right? What patients show up in a doctor's office at any given period? We did expect that mix to flip, as it always has, a little bit stronger. We are reacting to the trends we have seen, whether that is macroeconomic, who knows? I think it is too early to say, but we are certainly seeing enough that we had to react to it.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

I appreciate that. Maybe just on the pullback or kind of relatively low level of spend on acquisitions, is that a matter of just deal timing, or is that evaluation? I mean, what are you seeing in that area, or is that more of a company-specific decision to kind of throttle back a little bit as you also look at divestitures here?

Eric Evans (CEO)

Yeah, Brian, great question. We continue to be encouraged by our pipeline. We actually have relatively strong deal flow. We've had a couple we've turned down. We're very, very disciplined in how we think about these opportunities. We're in a very fragmented industry where we still have a preferential position to be partners with independent ASCs. We feel good about it. It is a matter of timing, and it is about us being quite disciplined. We don't see any reason we don't get back to our normal M&A flow as we move forward.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

Thank you.

Eric Evans (CEO)

Of course.

Operator (participant)

Our next question comes from Joanna Gajuk with Bank of America.

Joanna Gajuk (Equity Research Analyst)

Hi, good morning. Thanks for taking the question. Just maybe to follow up on the payer mix commentary, just to make sure. Is it just volumes, commercial volumes being weaker relative to government, or anything to call out in terms of denials or rate updates from commercial? Obviously, we're hearing from other types of providers some pressure there. I just want to ask that question.

Eric Evans (CEO)

Maybe high level. I mean, there's always pressure from payers, but there's nothing that we would call out that's systematically different for us. As you know, with an elective commercial business, we have a lot of control over that side of it. We have a lot of visibility. Certainly, that's not an easy process, and there are some pressures, but that's not what we're pointing to here. It's just really the commercial flip and growth trend is not quite as strong as we expected. Still going to grow. Look, I want to be very clear. We're going to have volume and rate growth in the fourth quarter, but we have a very detailed look into this as we head into the fourth quarter. It's a huge quarter for us, and we are just reacting to a trend that's not quite as strong as we would normally expect.

Joanna Gajuk (Equity Research Analyst)

Right, in terms of the magnitude of things, if you can help us, so there's a couple of things. There's delayed in acquisitions, you also mentioned divestitures, right? Then obviously the cautious outlook for the commercial mix and volume. Is there any way to break it out when we look at the annual, say, number in terms of the EBITDA? It looks like $20 million or so cut to that midpoint versus the last quarter commentary about being the lower half of the range. Kind of break it down. Can you break it down for us, or at least kind of scale from highest to lowest in terms of that impact? Thank you.

Eric Evans (CEO)

Sure. If you think about that full $20 million of pressure you're pointing to, I would say the majority of it, let's call it 60% of that, is development or capital timing related. What that's related to acquisitions, that's related to not redeploying money that we had from divestitures. All that's timing related. Nothing we're concerned about there at all. Kind of the majority of it's that. The rest of it is this trend change that we are acknowledging we saw in third quarter and we're continuing to see as we head into the fourth quarter, just being prudent on that slight change in kind of that mix. It is primarily timing related, and the recent kind of trend change, we don't see it as anything long-term.

I'll reiterate, this is a business where we expect to continue to be a double-digit growth company over time, but we are reacting to both the kind of fickle nature of M&A this year and this slightly weaker trend entering the fourth quarter. I don't know, Dave, if you'd add any specifics to that.

Dave Doherty (EVP and CFO)

Yeah, I might just remind folks that on our second quarter call, we did note this slower pace of M&A and how that would have an impact on our full-year guidance. The other thing, as Eric pointed out a little bit earlier, we did divest of those three ASCs. And what we typically do when you have proceeds like that is about $50 million in total net proceeds for us. That gets added to our target for M&A this year. If you were to look at our original guide of $200 million implied for the year, that number now becomes $250 million. Clearly, we've only done $70 million through this morning, so there's just not enough time in the balance of the year, despite the fact that the pipeline does remain strong. To Eric's point, that's a really big component of it. de novo is reaching break-even.

Difficult to exactly pin down when that's going to happen, but there were some construction delays, some regulatory pressures that were inside there. Again, that's pure timing. Those have a great trajectory and, again, the best use of capital. I would say this: on the second half, or kind of the 40% or so of that guidance drawdown, would be related to Q4 volume, particularly related to that all-important mix shift in the commercial framework. As Eric pointed out, it's really just early signs from the late part of the third quarter. As we've obviously marched into the fourth quarter with good line of sight and good communication with our physician partners, this is just us being prudent in there.

Again, to Eric's point, 3.4% same facility case growth in the third quarter, pretty strong, consistent with where we thought that was going to be and consistent with what others are seeing in the marketplace. However, inside of that, it's just the pace of growth that you would expect to see on the commercial volume side. We think that gives you about 200 to 300 basis points of pressure in the fourth quarter. Still going to be net positive, but what that means for us is our original second quarter viewpoint on how we were going to end the year at the upper end of our long-term guidance range of 4%-6%. We now are pushing that down by basis points. We do expect the end of the year, same facility revenue to be somewhere at the midpoint of that long-term growth algorithm rate.

Still good, still within our range, but lower than the loftier expectations that we had going into the year. There we go.

Joanna Gajuk (Equity Research Analyst)

Yeah, and if I may, just to make sure, and divestitures, any comment on the three ASCs in terms of the quarter or the guidance, but also annualized number, how should we think about it? Thank you.

Eric Evans (CEO)

Yeah, I mean, you can assume that we sold those at a pretty decent multiple inside that year. Higher double-digit multiples is, I think, how we think about that. We also had divestitures that we did at the very end of the fourth quarter. I think in our fourth quarter earnings call, we talked about that having an annual contribution rate of somewhere around $11 million of earnings. You are jumping over both the divestitures from the fourth quarter. We have been doing that all year. That is going to have a slightly higher impact in the fourth quarter because those divestitures occurred in the last week of December, plus these three divestitures that occurred in the middle part of this year.

I think it's a double whammy for us, Joanna, because not only do you lose those earnings, but you haven't redeployed the cash in those accretive earnings that you would like to have, which again, is just a matter of timing.

Joanna Gajuk (Equity Research Analyst)

Okay, thank you.

Eric Evans (CEO)

You're welcome.

Operator (participant)

Moving next to Benjamin Rossi with JPMorgan.

Benjamin Rossi (Equity Research Associate)

Hey, good morning. Thanks for the question. Just kind of picking up that de novo comment you made. It seems like activity there is going to move forward despite maybe a slower ramp on some of these recently opened de novo facilities. I know you just mentioned the construction timing, but could you just walk us through kind of how you're thinking about de novo efforts going into next year and maybe how we should be thinking about the cadence of openings as you kind of target those nine new facilities and additional dozen in development? How are you kind of prioritizing geographies or markets here for your new openings?

Eric Evans (CEO)

Yeah, Ben, appreciate the question. We are obviously very excited about our de novo, growing de novo capabilities. It's a very accretive way for us to put capital to work. It is quite time intensive. Typically takes 18 months to syndicate. It takes another 12-18 months to build, and then a year or so to get to cash flow break-even. We love these opportunities, and we do expect we're going to have double digit of those in development at any given time. We continue to have a really strong pipeline with our team talking to physicians. There's a lot of things to like about these. They're primarily higher acuity facilities. A lot of them are purpose-built orthopedic facilities.

They offer us the opportunity to kind of reset our discussions with payers because they're often moving stuff out of the hospitals, which is a great position to start from, and with great groups of docs. We have good visibility of who's signed up, what cases they'll bring. It continues to be a new lever to our growth engine going forward. Obviously, the startup portion of this is you got to make investments. You got to get to a run rate. We're working through that right now. When we talk about these delays, I mean, construction has been a little bit challenging at times in certain parts of the country. Certainly, the regulatory delays are around licensing. Right now, the government's obviously been delayed in clearing some of those, which creates a little bit of pressure.

Ultimately, we're really, really excited about the de novo opportunities. We continue to see that pipeline remain quite strong, both with health system partners and independent docs. Again, the ones with independent docs provide us opportunities over time to buy up. There is a lot to like about the ultimate value creation of investing in de novo facilities.

Benjamin Rossi (Equity Research Associate)

Thanks for the additional comments there. Just as a follow-up, maybe as we're thinking about your typical fourth quarter seasonality, I think over the last couple of years, there's been some discussion just on healthcare consumer pricing and benefit design. And when you kind of compare your typical patient behavior during the fourth quarter, given the deductible reset at the end of the year, maybe that behavior has changed as we've seen a higher cost backdrop. Have you seen any signs of that impact being blunted in this kind of higher cost world with any of your patient tracking? Or are you seeing any noticeable changes in how patient behavior is maybe shifting around that deductible reset from the fourth quarter going into the first quarter? Thanks.

Eric Evans (CEO)

Yeah, I mean, it's hard to comment on that from a macro perspective right now. What I will say is, given the trends we've seen, we're certainly hedging against trying to understand what is happening with that consumer behavior. We are seeing a little bit, like as we've talked about and acknowledged, we're seeing a little bit weaker commercial trend this year. Hard to say whether that's around specific plan design. I mean, what we do love about our space, and we talk about this a lot, is we're one of the few places where all three parts of the industry, all three major consumers prefer us because of our value position. The patient has a better experience. They have a much lower cost. Obviously, the payer frequently really wants, always wants their patients to choose that right place for high-value care.

Physicians love our environment because we're a time machine for them and also give them the chance to be an investor and own in our side of the business. We like our long-term position. We think even if there are changes in plan design, our value position positions us well for whatever change is there. I guess to hedge a little bit on your question, hard to say at this point. We do not have enough data to say whether that's the case or not, but we're certainly seeing a little softer trend, as we said, going into Q4.

Benjamin Rossi (Equity Research Associate)

Understood. Thanks for your time.

Eric Evans (CEO)

Thank you.

Operator (participant)

Matthew Gillmor with KeyBanc Capital Markets has our next question.

Matthew Gillmor (Director and Equity Research Analyst)

Hey, thanks for the question. I wanted to see if there was any additional comments on the portfolio review process. Just curious about just what you're seeing in terms of the nature and depth of discussions and the pacing. Just anything to report there?

Eric Evans (CEO)

Yeah, so we'll be obviously careful about how much detail we give on this. As we put in the, as we said in our prepared remarks, we are certainly on our way in a couple of markets. We do believe that there's real opportunity for us to move forward on transactions that will create real value acceleration when it comes to free cash flow and deleveraging within our portfolio. We are focused, as we said in the comments, a little bit giving you a little bit more detail. We're focused on those markets that are probably farthest from the puck of our short-stay surgery ethos, right? The ones that maybe are a little broader, where you can make a case that perhaps there's a better natural owner. We're off and running on those processes. We know they're very valuable markets, very valuable facilities within the marketplace they serve.

We do expect to have strong interest in those. Part of why we pointed to the delayed investor day, obviously, is we want to be a little bit farther along in that. It's important we have more to talk about when it comes to that portfolio optimization work we're doing. We are quite encouraged with that opportunity, and we do see it as a way to accelerate our balance sheet strengthening, accelerate our ability to self-fund our core ASC growth, and move even closer to being a pure-play company. Lots of good starts there. Obviously, I can't go into details about markets or specific timing. It's a little bit fickle. You can imagine a lot of these assets are going to be in markets where it's going to be local, regional systems, many of them nonprofits.

It's a little bit hard to predict timing, but we're certainly encouraged about the opportunity and believe we have great assets. I'd remind everyone that all of these are high-value assets. We don't have to do anything with them. We're going to be very, very disciplined around making sure that they truly do accelerate what we're trying to accomplish relative to deleveraging and free cash flow.

Matthew Gillmor (Director and Equity Research Analyst)

Got it. I appreciate that. As a follow-up, I thought I'd ask if there's any headwinds or tailwinds to think about for 2026. From your comments, it sounded like maybe you were going to wait and see in terms of the payer mix dynamics, but any other high-level things to think about for modeling purposes for 2026?

Eric Evans (CEO)

Yeah, I think it's probably too early for us to get into risk and opportunity for 2026. We're obviously monitoring this recent trend to see if it's something more systemic. No reason to believe it is, but we'll watch that closely. I mean, I think our core model and our core beliefs don't change when you think about our modeling as far as the opportunity we have in this space. There's nothing I would point out today that's kind of a burning issue, but certainly, we'll be coming back with a lot more detail as we go into our fourth quarter call.

One other thing I'd just say, Matt, going back to your portfolio question, the other thing that we are closely looking at in our portfolio optimization opportunities, it doesn't necessarily mean when we have something that we're looking at doing a transaction with that we would completely sell out. Another option is that we partner. We partner and we stay in in a partnership that's accretive. And so there are multiple options we're considering in that portfolio review process.

Matthew Gillmor (Director and Equity Research Analyst)

Got it. Thank you.

Eric Evans (CEO)

Of course.

Operator (participant)

As a reminder, it's star one if you would like to ask a question. We'll go next to Ben Hendricks with RBC Capital Markets.

Ben Hendricks (VP)

Hey, thank you very much. Most of my questions have been answered, but just a quick follow-up on that last comment about the types of facilities you're looking to partner with. I guess, am I reading that right that you're looking for more partnerships with maybe broad-based facilities with broad-based capabilities, and you may be more willing to kind of retain those specialty facilities like spinal hospitals and facilities like that? A little more color there. Thank you.

Eric Evans (CEO)

Yeah, I think what I would say, I mean, obviously, we're a partnership company. I would say that the markets that we are looking at to accelerate all the things we've talked about are all very attractive markets with, we think, bright futures. To the extent that there's a partner where they can bring some of those broader capabilities and we can stay in and be a manager, we're certainly very open to that. That's going to be probably a possibility in some of these transactions. I don't think that's different necessarily than history. We haven't talked about that that much, but across the country, we have a number of partnerships with health system partners where it makes sense. Although still largely an independent company, we are very, very open to whatever the market dynamics are. I don't know if Dave, would you add anything?

Dave Doherty (EVP and CFO)

Yeah, maybe just a couple of things on this. Just as a reminder, as we look at this portfolio optimization, part of the driver for this is focusing on what's important to our shareholders. We're going to try to maximize the value of any optimization efforts, which start with, are they great assets, and can we truly get the value that we believe is out there? It's also going to be impacted by the ability to reduce leverage and improve cash flow. Conversion of adjusted earnings, which are obviously of paramount importance. If you do a sale, it's very easy to see how all of those things will manifest, again, assuming that the price is right.

If you do a partnership-based model, you will still retain access to a very strong market, access to a greater physician base, a greater network of patient catchment area off the backs of that partner, and potentially improved cash flows as it comes to a different kind of relationship with commercial payers and continued management fees that kind of sit inside there. Importantly, because of the nature of those types of partnerships, in order to get there, you'll likely move to an unconsolidated position, which will remove that all-important leverage factor. All of those things will go into the evaluation process as we think through what makes sense and where it makes sense.

Ben Hendricks (VP)

Thank you very much. Just one on the slower ramp of de novos. I appreciate it. You mentioned it's mostly timing-related, construction delays, licensing, etc. To the extent that there's any of this volume pressure kind of driving that ramp, what is that contributing to the delay? Thanks.

Eric Evans (CEO)

Yeah, I wouldn't contribute any of that to those delays. I mean, those facilities actually have syndicated partners. We know what cases they plan to bring. It's really just a matter of getting them open and kind of checking the boxes of all the construction and regulatory things that happen in that process. That would not be a material driver of any of that trend we talked about.

Ben Hendricks (VP)

Thank you very much.

Eric Evans (CEO)

Of course.

Operator (participant)

Our next question comes from Andrew Mok with Barclays.

Andrew Mok (Director)

Hi, good morning. Can you help us understand the timing of this payer mix issue? When did it first emerge, and has it accelerated sequentially into the fourth quarter? Do you have a sense whether this issue is driven more by the ACA exchanges or employer-based coverage spends?

Eric Evans (CEO)

Hey, Andrew. Thanks for the question. Look, we started to see this in the third quarter. I mean, clearly, you can see that we had some pressure in the third quarter that showed up. Even though our volumes were strong, definitely that mix puts pressure on margin accretion, and we were flat margins, and we started to feel that a little bit in the third quarter. It continued in the fourth quarter at a consistent basis to that pressure. Again, I do not want to overread into this. I mean, clearly, we are making an adjustment because we see it, but it is hard to know. We do not necessarily see this as systemic at this point. Again, would not want to overread into that. Your second part of your question, I am sorry, was health insurance. Oh, health insurance exchanges.

Look, we ultimately, as a business, because we're elective, we don't really see a ton of health insurance exchange business. A lot of that's access points that drive some of that. Could it be some pressure there? Could be, but I don't think that's a material part of our business, so probably not the biggest pressure point.

Andrew Mok (Director)

Great. Following the guidance revision, can you share thoughts on where you expect free cash flow to land in Q4 and the year ahead? Thanks.

Dave Doherty (EVP and CFO)

Yeah. As you know, we don't give guidance on free cash flow. Having learned that lesson on kind of the intense variability that kind of sits inside there. But cash flow this quarter and all year has been pretty strong on an operating cash flow basis. You think about that third quarter here, nearly $20 million higher than the same time last year, which is reflective of the improving and underlying cash flow generated by the core business growth and working capital improvements that helped more than offset the $9 million of pressure that we have on the interest cost in the quarter. Those interest cost pressure points will continue into the fourth quarter until we fully lapse those going into 2026. We are in a slightly better position. Remind you that we did do the repricing of our term loan and our revolving credit facility.

Those rates are now 25 basis points and 75 basis points improved over the prior loans that we had in place. That pressure from interest rates will slightly persist into the fourth quarter. However, we do continue to focus and see benefits on working capital from our focus on revenue cycle investments. That standardization effort is taking hold, and we are seeing the benefits of those. We continue to see improvement in that spending on transaction and integration costs. They were a little bit lower than what we had expected into the third quarter, about $5.5 million lower sequentially, $17 million lower than the elevated level of spend in the third quarter. We expect that to continue to improve year over year. Fourth quarter of last year was also elevated levels of spending related to that acquisition activity last year.

That number should come down and should remain relatively consistent with what we saw in the third quarter. The challenge for us is really just where distributions to our physician partners come out. That's all a factor of working capital balances that sit at each facility and the nature of those facilities and the level of ownership interest that we have out there. I would say operating cash flow should continue to be relatively stable. Maintenance-related capital expenditures, we're not expecting any material change inside there. The distributions that go to our physician partners is the one that is most challenging for you to look at in any particular quarter and fundamentally why we're not going to give guidance for the fourth quarter. Generally speaking, it should continue to improve, though.

Andrew Mok (Director)

Great. Thank you.

Operator (participant)

We'll go next to Sarah James with Cantor Fitzgerald.

Sarah James (Managing Director and Equity Analyst of Healthcare Services and HCIT)

Thank you. Back in May, you talked about your recruiting mix of surgeons being higher in high-acuity ortho and ortho than historical cohorts. So I'm wondering now that they've had a chance to start ramping, are you seeing any benefit from that? How do you think about the timeline of new surgeons ramping, and has the mix continued throughout the year to be higher in the high-acuity ortho than your historical cohorts?

Eric Evans (CEO)

Hey, Sarah. Good morning. Thanks for the question. Look, we're really pleased with our physician recruiting team's efforts again this year. As we mentioned, we're over 500 physicians recruited to our facilities year to date. That continues to be a big part of our same-store growth story. That mix is about the same as when we talked in May, certainly higher on the orthopedic recruiting than the overall mix, which is really helpful. Sometimes when those new physicians join, your initial mix can be a little higher in Medicare, so that is true in general. We're quite happy with the recruitment pace, and we expect to finish the year strong. This is normally kind of one of the strongest parts of the year of adding new docs. We're seeing that continue. As you guys will recall, that's part of our growth engine is these new docs come in.

We get roughly a doubling of their business in year two. We continue to see that kind of movement in year three. It's important that we stay really strong in this area because there always is some level of attrition, as you can imagine. So something we're really, really focused on. Sarah, that really hasn't changed. We're still certainly more focused on those higher acuity procedures. You continue to see that show up in our total joint count. I'll reiterate that we grew 16% year-over-year this month. We're up 23% for the quarter in our ASCs. That continues to be a big part of that is finding new physicians to join us and bring those cases to our ASCs.

Sarah James (Managing Director and Equity Analyst of Healthcare Services and HCIT)

Great. That's the.

Dave Doherty (EVP and CFO)

16% for the quarter. 23% for the year.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Yeah. Oh, I said what did I say?

Dave Doherty (EVP and CFO)

This month and quarter.

Eric Evans (CEO)

Oh, quarter. Yeah. Sorry. Quarter and year. Yep.

Sarah James (Managing Director and Equity Analyst of Healthcare Services and HCIT)

Perfect. If I could just double-click on that mix comment again. You mentioned that with new surgeons, and these are coming on with higher dollar procedures, you typically have a higher Medicare mix as they onboard. How much of an impact did that have on the mix situation that you've been talking about today?

Eric Evans (CEO)

Yeah. That's probably not the big driver. I mean, honestly, that's the case all the time with new surgeons. I don't think that's that much. I mean, there could be something there, but not a lot. I don't think that's the trend driver.

Sarah James (Managing Director and Equity Analyst of Healthcare Services and HCIT)

Got it. Thank you.

Eric Evans (CEO)

Yep.

Operator (participant)

Moving on to Whit Mayo with Leerink Partners.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Hey, thanks. I've only got one question. I know that you guys are just moving into the budget and planning process. Dave, do you think maybe about excluding unannounced M&A from the guidance given the challenges of timing factors, etc.? Just a lot of companies don't include M&A in their guide. Just wanted to take your temperature on how you're thinking about that now.

Eric Evans (CEO)

Yeah. Yeah. It's a very fair question, Whit, and clearly something that has proven difficult over the past couple of years with very different stories on level of M&A spend with advanced kind of spend in 2024 and obviously relatively lower in 2025. It is difficult to predict. The challenge that we have is reiterating the company's long-term growth algorithm, which does rely on acquisitions as about a third of our growth will come from inside there. You can be assured we're asking that same question internally, and we will have an answer for you by the time we give our fourth quarter earnings call. I appreciate the fact that you're thinking about that the same way. That's helpful to know.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Okay. Thanks a lot.

Eric Evans (CEO)

Thanks, Whit.

Operator (participant)

We'll go next to Bill Sutherland with The Benchmark Company.

Bill Sutherland (Director of Research)

Hey, thank you. Good morning, all. I was just wanting to get a little more color or granularity, I guess, on the investments you've done both late last year and then mid-year. Are they all ASCs, and are they just pure sales, or are they partnering as well?

Dave Doherty (EVP and CFO)

Yep. Bill, thanks for the question. All of the divestitures that we talked about are ASCs. A couple of them were simply closures that were out there, end of relatively small assets that sat inside there. A couple of them were sell-downs into deconsolidated positions, which happens from time to time. That was basically the nature of those divestitures.

Bill Sutherland (Director of Research)

Okay. In the stuff that you're currently thinking about or working on, would that include the Idaho hospital?

Eric Evans (CEO)

Hey, Bill. It's Eric. Look, we're not going to be talking about any specific markets. We're giving guidance on kind of the types of things that we're going to pursue. As far as specific markets, we won't be clarifying that until we have something specific to announce.

Bill Sutherland (Director of Research)

Understood. Lastly, just thinking about why ophthalmology might be softer, is it more of a discretionary kind of procedure in general? I'm thinking of cataracts and things like that.

Eric Evans (CEO)

Yeah. Bill, it's a great question. I would just say if you look at our overall ophthalmology, we did have a fair amount of our divestitures were in ophthalmology. If you're looking kind of year over year, there's some changes there. We still are growing in ophthalmology. We did not mention it is quite as strong as MSK and GI this quarter. Look, we see those variances across service lines. It's still positive. I wouldn't read too much into that at this point. I mean, ophthalmology has been a really strong grower for us over the last several years. Your point is one we'll watch carefully. I don't know, Dave, if you'd add anything to that.

Dave Doherty (EVP and CFO)

Yeah. Just to clarify something, you are looking at the consolidated case volume that we saw a year ago. You are seeing a decrease in the third quarter. That is all attributable to the divestitures. If you were to look at it on the same facility basis, which I know we do not disclose, that growth was actually just under 1% on the same facility basis. It is growing to Eric's point, but obviously, that is lower than our growth algorithm would suggest. Our field checks in that particular market are really isolated to some unique pressure points in select facilities where we had either experienced a retirement, in one case, a really high-volume doctor that retired, and then some short-term disability, maternity leave, etc. Those are short-term in nature. The fundamental operations still make sense, but you have got to recover from those.

Somewhat isolated to those things, again, not fundamental at this point.

Bill Sutherland (Director of Research)

That's helpful. Thanks.

Dave Doherty (EVP and CFO)

You're welcome.

Operator (participant)

Our final question from today comes from Ryan Langston with TD Cowen.

Ryan Langston (Director and Senior Analyst of Healthcare Research)

Good morning. Thank you. How should we think about the capital budget, I guess, on the maintenance side? Is there any big step-ups that are going to be required across the portfolio here over the near term, or anything else we should be thinking about there?

Eric Evans (CEO)

Yes. No, there's no major changes that we're kind of expecting. Over the past few years, we have really spent a lot of time with our physician partners to analyze the lifecycle of each of the pieces of equipment that sit in our facilities and increase communication with our physician partners on when it makes sense for us to plan for and execute on any maintenance-related capital expenditures. So we feel pretty good about how we budget those, and the run rate that you're seeing, quite frankly, for the past six quarters should be consistent for the foreseeable future at this point.

Ryan Langston (Director and Senior Analyst of Healthcare Research)

Got it. I think I heard you say you got a 15-time sort of all-in multiple for a particular asset. Other than just the, I guess, attractive multiple that you could get for some of these facilities you're looking to sell, what other criteria do you use to evaluate and then ultimately just make the decision to sell? Thanks.

Eric Evans (CEO)

Yeah. It's a great question. As we talked about here, one of the criteria we're using right now is looking at facilities that give us the opportunity to delever faster and increase free cash flow faster, right? Those tend to be the larger, more complex facilities that maybe go beyond our core source, say, surgical ethos. In other cases, it's really market-specific. We'll look at the overall market, the opportunity to either partner or sell and make a decision on whether that's the best natural owner or not. In general, look, we're planning to grow our facilities rapidly in the coming years between de novos and our acquisition plans. Obviously, we're in the business of growing our surgical count. We'll be opportunistic and thoughtful around the right business decision in any given market. The ones we sold are a perfect example of that.

Ryan, maybe as the last question, I'll wrap up and just say thank you all for your time this morning. Again, want to say thank you to our colleagues and physician partners. Really, really proud of the high-value care we offer in the marketplace. We're the last independent freestanding kind of short-stay surgical company in the country. We play a very important part in the healthcare system. We think we're part of the answer on cost reduction, and we're very, very excited about our positioning to continue to grow and deliver value to our shareholders. Thank you again for the time this morning, and we'll be back in touch at the end of Q4 call. Thanks.

Operator (participant)

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.