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Date

Monday, Nov. 10, 2025 at 8:30 a.m. ET

Call participants

  • Chief Executive Officer — Eric Evans
  • Chief Financial Officer — Dave Doherty

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Risks

  • Management revised full-year guidance downward, citing "near-term pressure on earnings" from delayed capital deployment, divestitures, and "a more cautious outlook on the commercial payer mix and volume in the fourth quarter."
  • Eric Evans stated, "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."
  • Dave Doherty confirmed, "interest payments for the quarter increased by $9 million compared to 2024, primarily due to the favorable swaps that matured earlier this year."

Takeaways

  • Net revenue -- $821.5 million, up 6.6% year over year.
  • Adjusted EBITDA -- $136.4 million, representing 6.1% growth and an adjusted margin of 16.6%.
  • Same facility revenue growth -- 6.3% with same facility case growth of 3.4%, and rate growth of 2.8%.
  • Case volume -- Over 166,000 surgical cases performed in consolidated facilities, up 2.1%.
  • Commercial payer mix -- 50.6% of revenues, down 160 basis points; governmental sources up 120 basis points.
  • De novo pipeline -- Two new facilities opened, nine under construction, and more than a dozen in the development pipeline, mostly orthopedic-focused.
  • ASC total joint surgeries -- Grew 16% in the quarter, 23% year-to-date.
  • M&A capital deployment -- $71 million deployed for acquisitions year-to-date; $45 million in proceeds from three ASC divestitures, plus $5 million in reduced debt.
  • Guidance revision -- Full-year revenue now expected at $3.275 billion to $3.3 billion, and adjusted EBITDA at $535 million to $540 million.
  • Liquidity -- $203.4 million in cash, and $405.9 million in revolver capacity, totaling over $600 million in available liquidity.
  • Net leverage -- 4.2x under the credit agreement, 4.6x on balance sheet basis.
  • Supply and G&A expenses -- Supply costs at 25.4% of revenue (down 70 bps), G&A at 2.7% (down from 3.8%), both reflecting efficiency initiatives.
  • Interest rate exposure -- Repriced term loan and revolver to SOFR plus 250 bps; floating rate now 4%.
  • Portfolio optimization -- Ongoing evaluation of larger surgical hospitals for potential partnership or divestiture to expedite leverage reduction and improve cash flow conversion.
  • Physician recruitment -- 500 physicians recruited year-to-date, heavily weighted toward orthopedics and higher acuity specialties.

Summary

Surgery Partners (SGRY 24.79%) lowered its full-year revenue and adjusted EBITDA guidance, attributing this adjustment to delayed capital deployment, earnings lost from ASC divestitures, and softer than expected commercial payer volumes. Management highlighted a notable shift in payer mix and volume growth below internal targets in recent months, which led to their decision to proactively recalibrate expectations for the fourth quarter. The company is prioritizing portfolio optimization efforts, focusing on divestitures or strategic partnerships for non-core hospital assets with higher capital intensity, aiming to reduce leverage and accelerate cash generation. Discussion also covered delays in ramping new de novo facilities due to construction and regulatory hurdles, though the underlying pipeline remains active with a bias toward higher-acuity, orthopedic-focused development. Capital management remains disciplined, with a robust acquisition pipeline, but unredeployed divestiture proceeds and slower deal timing are expected to weigh on in-year earnings contribution.

  • Eric Evans indicated, "We now expect revenue in the range of $3.275 billion to $3.3 billion and adjusted EBITDA in the range of $535 million to $540 million."
  • Dave Doherty noted third-quarter operating cash flow of $83.6 million, and maintained the outlook for stable maintenance capital expenditures.
  • Management explained that approximately 60% of the downward guidance revision is linked to the timing of capital deployment and unredeployed divestiture proceeds, with the remaining 40% attributed to weaker fourth-quarter commercial volume and mix trends.
  • The company delayed its inaugural Investor Day to 2026 to allow for more thorough updates on the portfolio optimization initiative.
  • Recently repriced debt lowered borrowing rates, though higher interest costs from lapsed swaps offset near-term savings and will persist into the fourth quarter.

Industry glossary

  • ASC: Ambulatory Surgery Center—an outpatient surgical facility performing non-emergent procedures without overnight stays.
  • De novo facility: A newly built healthcare facility, constructed from the ground up rather than acquired.
  • Same facility revenue: Sales generated at facilities operated in both the current and prior comparison periods, excluding impacts from acquisitions or divestitures.
  • Payer mix: The breakdown of a company’s revenue among different types of payers, such as commercial insurers versus government programs.

Full Conference Call Transcript

Eric Evans: Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our third quarter results, reflect continued execution and consistency with our long-term growth algorithm. Then 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'll 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 periods 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 500 new positions 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 pressure and weaker than expected volume and payer mix.

That said, we continue to drive improvements through procurement and revenue cycle operating efficiencies, which 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, 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 the Noble facilities remain an important part of our growth strategy, 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 to 18 months to build, up to another year post-opening to reach breakeven, 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 breakeven 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 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 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 to $3.3 billion and adjusted EBITDA in the range of $535 million to $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% to 6%. This adjustment reflects our prudent approach as we monitor recent shifts in surgical demand and payer mix, particularly among commercial patients, which typically increase 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 health care 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: Thank you, Eric. Starting with the top line, total consolidated net revenue for the quarter was $821.5 million, up 6.6% from 2024. We've 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 MS procedures, including continued strength in orthopedics. This growth overcame 10,000 surgical cases in 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 improved cash flows going forward. The current floating rate is 4%, and interest payments for the quarter increased by $9 million compared to 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 4.2 times and is 4.6 times 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 15 times 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 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 to $3.3 billion and adjusted EBITDA in the range of $535 million to $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% to 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.

Eric Evans: Finally,

Dave Doherty: 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: Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be to pick up your handset before pressing the star keys. And, again, that is 1 if you would like to ask a question. And our first question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut: Hey. Good morning, guys. Maybe, Eric, as I think about the weakness that you called out in demand or in procedure volumes as we think through Q4. Anything you can point to? I mean, is that specific to certain kinds of procedures or certain classes of procedures, ortho versus GI or geographies? And just kinda, like, 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: Hey, Brian. First of all, thanks for the question. Obviously, we spent a lot of time looking at this. In Q3, we saw our internal expectations some weakness on our internal expectations, some weakness on both volumes and payer mix. Obviously always a big ramp going into Q4. We looked at that really, really close 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 the fourth quarter to be a growth on both cases and rate, but below our internal expectations. And 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 don't expect this to be a long-term trend, but it was again, material enough that we wanted to make sure we are prudent in our guide. I wouldn't say it was necessarily any particular specialty. As we think about this across the spectrum, it was just a broader base weakness. Hard to know, right, like what patients show up in a doctor's office. In any given period. We did expect that mix to flip as it always has a little bit stronger. And so we're just we're reacting to the trends we've seen whether that's macroeconomic, who knows.

I think we're we're too early to say, but we're certainly seeing enough that we had to react to it.

Brian Tanquilut: Yeah. Appreciate that. And then maybe just on the pullback or kinda like 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 in that area, or is that more of a company-specific decision to kinda, like, throttle back a little bit as you also look at divestitures here?

Eric Evans: Yeah. Brian, great question. We continue to be encouraged by our pipeline. We actually we've had relatively strong deal flow. We 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. And so 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.

Operator: Thank you. Of course. And our next question comes from Joanna Gajuk with Bank of America.

Joanna Gajuk: 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, you know, volumes commercial volume being weaker relative to government, or you know, anything to call out in terms of, you know, denials, or rate updates from commercial? Because, obviously, we're hearing from other types of providers pressure there. So I just wanna ask that question.

Eric Evans: Maybe high level. I mean, always 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 in growth trend is not as quite as strong as we expected. 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: And right, in terms of the magnitude of things, if you can help us. So there's a couple of things. So there's the light in acquisitions, the also mentioned divestitures. Right? And then, obviously, the cautious outlook for the commercial mix and volume. So is there any way to break it out when we look at the annual, say, number in terms of your 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. So 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 the impact? Thank you.

Eric Evans: 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. So kind of the majority of it is that the rest of it is this trend change that we are acknowledging we saw in the 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. But it is primarily timing related.

And the recent 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 quarter. I don't know, Dave, if you'd add any specifics to that.

Dave Doherty: Yes. 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 is, Eric pointed out a little bit earlier, we did divest those three ASCs and what we typically do when you when you have proceeds like that is about $50 million of total net proceeds for us. That gets added to our target for M&A this year. So you were to look at our original guide of $200 million implied for the year, that number now becomes $250 million. And 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. So to Eric's point, that's a really big component of it. De Novo is reaching breakeven. Difficult to exactly pin down when that's gonna happen, but there were some 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. And I would say this, on 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. And as we 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. So 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.

So 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% to 6%. We now are pushing that down by 100 basis points. So we do expect the end of the year same facility revenue to be somewhere at the midpoint of that long-term growth algorithm rate. So still good, still within our range, but lower than the loftier expectations that we had going into the year. So there we go.

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

Dave Doherty: Yes. I mean, 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 the best that we did at the very end of the fourth quarter. And I think in our fourth quarter earnings call, we talked about that having an annual contribution rate of somewhere around $11 million of earnings. So you're jumping over both the divestitures the fourth quarter. We've been doing that all year. So that's going to have a slightly higher impact in the fourth quarter. Because those divestitures occurred in December. Plus these three divestitures that occurred in the middle part of this year.

And again, 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 that you would like to have which again is just a matter of timing.

Joanna Gajuk: Great. Thank you.

Operator: You're welcome. And moving next to Benjamin Rossi with JPMorgan.

Benjamin Rossi: Hey. Good morning. Thanks for the question. Just 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 kinda how you're thinking about de novo efforts going into the 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? And then how are you kinda prioritizing geographies or markets here for your new openings?

Eric Evans: Yes, Ben. Appreciate the question. So 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, you know, eighteen months to syndicate. Takes another twelve to eighteen months to build and then a year, a year or so to get to cash flow. Flow breakeven. But we love these opportunities. And we do expect we're going to have double-digit of those development in 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 are 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 they're moving stuff out of the which is a great position to start from. And with great groups of docs, we have a good visibility of who signed up, what cases they'll bring. So it continues to be a new lever to our growth engine going forward. Obviously, the start-up portion of this is you got to make investments, you got to get to a run rate. And so we're working through that right now.

So when we talk about 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 and right now, the government's obviously been delayed in clearing some of those, which creates a little bit of pressure. But 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. So there's a lot to like about the ultimate value creation of investing in de novo facilities.

Benjamin Rossi: Thanks for the additional comments there. Just as a follow-up, maybe as we're thinking about your typical 4Q seasonality, I think over the last couple of years, there's been some discussion just on health care 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, how maybe that behavior has changed as we've seen, you know, a higher cost backdrop. Have you seen any signs of that impact being blunted in this kinda 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, like, the 4Q going into 1Q? Thanks.

Eric Evans: 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, 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. And 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, really wants, always wants their patients to choose that right place for high value care in physicians. They love our environment because we're a time machine for them and also give them a chance to be an investor and own in our side of the business. So we like our long-term position. We think even if there are changes in plan design, value position positions us well for whatever changes there. So I guess to hedge a little bit on your answer to your question, hard to say at this point.

We don't 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: Understood. Thanks for your time.

Eric Evans: Thank you.

Operator: And Matthew Gilmore with KeyBanc Capital Markets has our next question.

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

Eric Evans: Yeah. So we'll be, you know, obviously, we're careful 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 that 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?

So the ones that maybe are a little broader, where you can make a case that perhaps there's a better natural owner. And 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.

But we're 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. So lots of good starts there. Obviously, 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. That 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'll 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 Gilmore: Got it. I appreciate that. And then 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 maybe you were gonna wait and see in terms of the payer mix dynamics. But any other high-level things to think about for modeling purposes for '26?

Eric Evans: Yeah. I think it's probably too early for us to get into risk opportunities 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 doesn't change when you think about our modeling as far as the opportunity we have in this space. So there's nothing I would point out today that's kind of a burning issue. But certainly, we'll be coming back for 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 completely sell out. Another option is that we partner. We partner and we stay in the partnership that's accretive. So there are multiple options we're considering in that portfolio review process.

Matthew Gilmore: Got it. Thank you.

Operator: Of course. And as a reminder, that is star one if you would like to ask a question. And we'll go next to Ben Hendrix with RBC Capital Markets.

Ben Hendrix: Hey. Thank you very much. Just most of the questions have been answered, but just a quick follow-up on that last comment you made about the types of facilities you're looking to partner with. So 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. Some more color there. Thank you.

Eric Evans: I think what I would say, I mean, obviously, we're a partnership company. I would say that we are 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. And so 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. And 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 much, but we across the country, 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: 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. So we're going to try to maximize the value of these 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 gonna be impacted by the ability to reduce leverage and improve cash flow conversion of adjusted earnings which are obviously of paramount importance. So if you do a sale, it's very easy to see how all of those things will manifest. Again, assuming that 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 improve cash flows as it comes to a different kind of relationship with commercial payers, and continued management fees that kind of sit inside there. And then 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. So all of those things will go into the evaluation process as we think through what makes sense and where it makes sense.

Ben Hendrix: Thank you very much. And just one on the slower ramp of de novos, I appreciate it. You mentioned it's mostly timing-related, construction delays, licensing, etcetera. But to the extent that there's any of this volume pressure kind of driving that ramp, what is that contributing to the ECOLA? Thanks.

Eric Evans: 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 the kind of checking the boxes of all the construction and regulatory things that happen in that process. So that would not be a material driver of any of that trend we talked about.

Ben Hendrix: Thank you very much.

Eric Evans: Of course.

Operator: Our next question comes from Andrew Mok with Barclays.

Andrew Mok: Hi. Good morning. 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? And do you have a sense whether this issue is driven more by the ACA exchanges or employer-based coverage sense?

Eric Evans: Hey, Andrew. Thanks for the question. Look, we started to see this in the third quarter. I mean, can see that we had some pressure in the third quarter that showed up even though our volumes were strong. We definitely that mix puts pressure on margin accretion and we were flat margin we start to feel that a little bit in the third quarter. Continued in the fourth quarter at a consistent basis to that pressure. So again, I don't want to overread into this. I clearly, we're making an adjustment because we see it, but it's hard to know. You know, we don't necessarily see a systemic at this point. But, you know, again, wouldn't wanna overread to that.

And your second part of your question, I'm sorry, was health insurance. Health oh, health insurance changes. You know, 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 ER access points that drive some of that. So you know, could it be could it be some pressure there? It could be, but I don't think that's a material part of our business. So probably not the biggest pressure point.

Andrew Mok: Great. And following the guidance revision, can you share thoughts on where you expect free cash flow to land in Q4 and the year? Thanks.

Dave Doherty: Yeah. Well, as you know, we 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. Think about the third quarter here, nearly $20 million higher than the same time last year. Which is reflective of the improving in 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. So 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're seeing the benefits of those.

And we continue to see improvement in those 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 was also 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 comes 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. So I would say operating cash should continue to be relatively stable. Maintenance-related capital expenditures, we're not expecting any material change inside there. And then the distributions that go to our physician partners is the one that is most challenging for you to look at 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.

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

Sarah James: 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: Hey, Sarah. Good morning. Thanks for the question. Look, we're really pleased with our position 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 you know, that is true in general. But we're quite happy with the recruitment pace and we expect to finish the year strong.

We're seeing this is normally the kind of one of the strongest parts of the year of adding new docs. We're seeing that continue. And as you guys will recall, that's part of our growth engine as these new docs come in. We get, you know, 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. You can imagine. So something we're really, really focused on. But, 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 to our 23% 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: 60% of 23 for the year.

Eric Evans: Yeah. Oh, as I said, that's what I say. Month and quarter. Quarter. Yeah. Sorry. Quarter and year. Yep.

Sarah James: Perfect. And if I could just double click on that mix comment again. So 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. So how much of an impact did that have on the mix situation that you've been talking about today?

Eric Evans: Yeah. That's probably not the big driver. I mean, honestly, the case all the time with new surgeons. And so, you know, 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: K. Thank you.

Eric Evans: Yep.

Operator: Moving on to Whit Mayo with Leerink Partners.

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

Dave Doherty: Yes. Yes. Very fair question, Whit. And clearly something that has proven difficult over the past couple of years with very different stories on the level of M&A spend with advanced kind of spend in 2024 and obviously relatively lower in 2025. And it is difficult to predict. The challenge that we have is reiterating the company's long-term growth algorithm, does rely on acquisitions as about a third of our growth will come from inside there. But 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.

But I appreciate the fact that you're thinking about that the same way that's helpful to know.

Whit Mayo: K. Thanks a lot.

Eric Evans: Thanks, Whit.

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

Bill Sutherland: Hey, thank you. Good morning, all. I was just, wanted to get a little more color or granularity, I guess, on the divestments you've done both late last year and then year. Are they all ASCs? And are they just pure sales or they're partnering as well?

Dave Doherty: Yeah. 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. And that was basically the nature of those divestitures.

Bill Sutherland: Okay, and now in the stuff that you're currently thinking about, or working on, would that include the Idaho hospital?

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

Bill Sutherland: Understood. And then lastly, just thinking about why ophthalmology might be softer. Is more of a discretionary kind of procedure? In general? I'm thinking of cataracts and things like that.

Eric Evans: Yeah, so Bill, a great question. I would just say if you look at our overall ophthalmology, we did have a amount of our divestiture in ophthalmology. So if you're looking kind of year over year, there's some change there. We still are growing in ophthalmology. We did not mention it as 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 been a really strong grower for us over the last several years. But your point is one will watch carefully. I don't know, Dave, if you'd add anything to that?

Dave Doherty: Yes. Just to clarify, something. You are looking at the consolidated case volume that we saw year. So 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 don't disclose, that growth was actually just under 1% on a same facility basis. So it is growing to Eric's point, but obviously that's lower than our growth algorithm would suggest. And 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 very high volume doctor, that retired.

And then some short-term disability maternity leave, etcetera. Those are short-term in nature. The fundamental operations still make sense, but you've gotta recover from those. So somewhat isolated to those things, again, not fundamental. At this point.

Bill Sutherland: That's helpful. Thanks.

Eric Evans: You're welcome.

Operator: And our final question from today comes from Ryan Langston with TD Cowen.

Ryan Langston: Morning. Thank you. How should we think about the capital budget, I guess, 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?

Dave Doherty: Yes. No, there is 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 life cycle of each of pieces of equipment that sit in our facilities, and increased 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: Got it. And then I think I heard you say you've got a 15x sort of all-in multiple for a particular asset. But other than just the, I guess, attractive multiple that you get for some of these facilities you're looking to sell, like, what other criteria do you use to evaluate and then ultimately just make the decision to sell? Thanks.

Eric Evans: Yeah. It's a great question. So 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? So those tend to be the larger, more complex facilities that maybe go beyond our core, short-stay surgical ethos. In other cases, it's really market-specific. So we'll look at the overall market, the opportunity to either partner or sell 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 in so obviously, we're in the business of growing our surgical count, but we'll be opportunistic and thoughtful around the right business decision in any given market. And the ones we sold are a perfect example of that. And Ryan, maybe as the last question, I'll wrap up and say thank you all for your time this morning. Again, I 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 at a 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. So thank you again for the time this morning and we'll be back in touch at the end of Q4 call. Thanks.

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