Q3 2025 Surgery Partners Inc Earnings Call
Greetings and 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 dhy, please go ahead.
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 Gap measure in this morning's press release.
With that, I will turn the call over to Eric.
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.
Then I will discuss in more detail. Our recent progress across our 3 Groth 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 Eva was 136.4 Million up 6.1% year-over-year.
To 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 ghee and msk procedures was relatively High, including continued growth and Orthopedics, driven by an increase in joint related surgeries while Opthalmology 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 position recruitment team. Through September 30th. Of this year, we have recruited over 500, new positions into our facilities, many of which we expect to eventually become partners.
In the third quarter, pair mixed move 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 and Commercial volumes. During Q4, we are a 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 and attractive multiples. We also sold interest in 3 ASCs at an enterprise value of $50 million of cash plus sold debt, achieving a combined double-digit effective multiples.
The most significant of these investors occurred late in the second quarter.
Our long-term growth algorithm and initial. 2025 Outlook contemplated deploying, 200 million, plus proceeds, from devest years, for a total of roughly 250 million dollars of Acquisitions this year.
We have not reached that level of deployment year-to-date, and your 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 hundred million dollars and 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 Nova facilities, remain in an important part of our growth strategy and among the highest return opportunities in our portfolio.
In the third quarter, we opened 2 new denovos with 9 currently under construction and more than a dozen in the development pipeline.
These dinovas are primarily focused on higher Acuity Specialists with a majority devoted to Orthopedics.
These facilities typically require 12 to 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 9 months, several recently opened denovos 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 share 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 funds. The facilities we are evaluating for this effort and our 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 an 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 ibida.
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 a revised outlook for our fourth quarter. We now expect Revenue in the range of 3.275 billion to 3.3 billion dollars and adjusted Ava in the range of 535 million and 540 million. During our second quarter earnings call. We implied approximately 5 million of adjusted even of pressure, tied to slower. M&a timing, today we are acknowledging incremental impacts from delayed Capital Investments and lost earnings from the 3 ascending half of the year, for which precedes have not. Yet been redeployed
We remain disciplined and competent in our abilities to deploy this Capital supported by a strong pipeline of opportunities that will align with our Short State. 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 aligned 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 pear, mix, particularly among commercial patients, which typically increase proportionally in the fourth quarter.
But 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 surgeries space and our ability to execute, we are closely tracking these Dynamics and will factor in any near to mid-term 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, in shareholder value creation well, beyond 2025.
Before I turn the call back to Dave. I want to take a moment to honor Dr. Patricia Marilyn. Who recently passed away?
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.
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'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 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 e butt off 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 to EPA stands at 369.3 million of 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 position 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 dollars 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 sew for 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 4.0% 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 4.2 times. And is 4.6 times on a balance sheet, net debt to ebita 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 with 25.4% of net revenue down 70 basis points from last year, reflecting ongoing procurement and efficiency initiatives.
GNA expenses with 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 that attracted multiples.
we also completed divestitures of 3 asc's, 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 denovo, programs continues to be a key driver of long-term value.
Pipeline. We are excited about the future of these Investments.
Our revised guidance reflects a slower ramp on recently opened denovo 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 ibida 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.
This 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 up 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.
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And our first question comes from Brian tan kill it with Jeffries.
Hey, good morning guys. Um maybe Eric as I think about, you know, 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 or procedures Ortho, versus ghee, or geographies? Um, and just just kind of 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
Hey, Brian. Uh, first of all, thanks for the question. Um, you know, obviously we, uh, We've, we've spent a lot of time looking at this, you know, in the Q3 we saw, um, to our internal inspection, some weakness on our internal, expectations of weakness on both, volumes and pear, mix. It's obviously always a big ramp going into Q4. Uh, we looked at that really, really closely relatively broad-based, um, higher government, uh, 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. Uh, but below our internal expectations and you know, some of that some of those things, you know, in in certain markets you can have a very specific story but it it was broad enough and, um, apparent enough to us that we had to react to it. Uh, we're still looking at that. We don't expect this to be a long-term Trend, but it was, uh, again material enough that we wanted to make sure we were prudent in our guide. Um, I wouldn't say it was necessarily any particular specialty. Um, as we think about this across the, the Spectrum, it was just a, you know, a broader base weakness, hard to know, right? Like what, what patients show up at
A doctor's office. Uh at any given period we we did expect that mix to flip as it always has a little bit stronger and so we're just uh we're reacting to the trends, we've seen um whether that's macroeconomic, you know, who knows? I think we're we're we're too early to say but we're certainly seeing enough that we had to react to it.
I appreciate that and maybe just on the pull back or kind of like relatively low level of spend on Acquisitions. Is that a matter of just dealing or is that evaluation? I mean what do you see in that in that area? Or is that more of a company specific decision to kind of like throttle back a little bit as you also look at the investors here.
And so we we feel good about it, it is a matter of timing. Um, and it is about a robust being quite disciplined. We don't see any reason. We don't get back to our normal m&a flow, as we move forward,
Thank you.
Of course.
And our next question comes from Joanna, good with Bank of America.
Hi, good morning, thanks for taking the question. So just maybe to follow up on.
The payer mix commentary—just to make sure—is it just a, um, you know, volume commercial volume we could relate to government? Or, you know, anything to pull out in terms of, you know, denials or rate updates from commercial? Because, obviously, we hear from other types of providers some pressure there. So, I just want to ask that question.
Maybe high level. Also 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, that's not what we're pointing to here. It's just really the commercial flip and growth. Uh, trend is not as quite as strong as we expected. Um, 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 um, you know, a very, 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.
And right, in terms of the magnitude of things, if you can help us. So there's a couple of things. There's the light and acquisitions. You also mentioned the vestures, right? And then obviously, the cautious outlook for the commercial mix and volume. So, is there any way to break it out? You know, when we look at the annual say number in terms of the IBA, it looks like $20 million or so cut to that midpoint versus the last quarter commentary about, you know, being in the lower half of the range. So, kind of break it down. Can you break it down for us or at least, you know, kind of scale from highest to lowest in terms of the impact? Thank you.
Sure. If you think about that full 20 million dollars of pressure, you're pointing to, I would say, you know, the majority of it, let's call it. 60% of that is is uh, development or Capital timing related. Uh, what that's related to Acquisitions. Uh, that's related to not redeploying. Uh, money that we, we had from devest all that timing related, nothing. We're concerned about their at all. Uh, so kind of the majority of its that. The rest of it is this, you know, Trend change that we, we are acknowledging. We saw on third quarter and we're continuing to see as we head into the fourth quarter, just being prudent on uh, you know, that that slight change in kind of that mix. Uh, but you know, it it is primarily timing related and the recent kind of trend change. We don't see it as anything. Long term. I'll reiterate, you know, this is a business where we expect, uh, to continue to be a double digit Growth Company over time, uh, but we are reacting to both the kind of sickle nature of m&a this year and this slightly slightly weaker Trend entering the fourth quarter. I don't know David.
If you'd add any specifics to that. Um, yeah, I might, um, I might just remind, uh, remind folks that on our second quarter call. We did note this, this slower pace of m&a and how that would have an impact on our on our full year guidance. Um, you know, that other thing as Eric pointed out a little bit earlier, we did divest of those 3 as uh, and what we typically do when you, uh, when you have proceeds, like that is about fionn dollars in total of net proceeds for us, that gets added to our Target for m&a this year. So, so if you were to look at our original guide of 200 million dollars, uh, implied for the year, uh, that number now becomes 250 million. It clearly, we've only done 70 million dollars through this morning. Um, 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. Um, denovo's, reaching Break, Even difficult, um, to, um,
Uh, to exactly pin down when that's going to happen. But there were some construction, delays, some regulatory pressures um uh that were inside there again. That's, that's pure time. And those have a great trajectory and again the best use of capital and I would say this on the on the second half um or kind of the the 40% or so. Um of that guidance, uh, draw down.
The the pace of growth that you would expect to see on a commercial volume side. Um, so we think that gives you about 200 uh 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 we do expect the end of the year, same facility Revenue uh to be somewhere at the midpoint of that long-term growth algorithm rates so still still good still within our range but lower than the uh loftier expectations that we had going into, um, going into the year. Um,
So, there we go.
Yeah, and if I may uh just to make sure and the visitors any comment on that 3 as in terms of the quarter or the guidance but also annual life number. How should we think about it? Thank you.
Yeah, they they, I mean, you can assume that we, we sold those at, a pretty decent multiple. Um, uh, inside that year, higher, double digit multiples is, I think, um, how we think about that, uh, we also had the best teachers that we did at the very end of the fourth quarter. And I think in our uh, fourth quarter earnings call, we talked about that having an annual contribution rate of somewhere around 11 million dollars, uh, of earnings. So you're jumping over.
Uh both the Devastators from the fourth quarter, we've been doing that all year. Um um so that's going to have a slightly higher impact in the fourth quarter uh because those divestitures occurred in the last week of December uh plus these uh these 3 devesa because
Uh, not only do you lose those earnings but you haven't redeployed the cash in those accretive earnings that you would, um, that you would like to have. Which again um is just a matter of timing.
Great. Thank you.
Welcome.
And moving next to Benjamin Rossi with JP Morgan.
Hey.
For the question, just, uh, kind of.
Comment, you made it seems like activity. There is going to move forward despite maybe a slower ramp on some of these recently opened Nova facilities.
I think I just mentioned the construction timing, but could you just walk us through?
how you're thinking about denovo efforts going in the next year and maybe how we should be thinking about the Cadence of openings, as you kind of Target, those 9 new facilities and additional dozen in development and then how you kind of prioritizing geographies or markets here for your new openings
Yeah, I've been appreciate the question. Uh so we very excited about our denovo. Um, uh, growing denovo capabilities, it's a you know, it's a it's a very accretive way for us to put Capital to work. It is quite time-intensive, uh, typically takes, you know, 18 months to Syndicate, you know, takes another 12 to 18 months to build and then a year, uh, a year or so, to get to cash flow, cash flow Break Even, uh, but we love these opportunities and we do expect, you know, we're going to have double digit of those, in development. At any given time, we can continue to have a really strong Pipeline with our team, talking to positions. These, you know, there's a lot of things to like about these. They're they're primarily higher Acuity facilities, a lot of them are purpose-built Orthopedic facilities. Um, they are they offer us the opportunity to kind of, you know, reset our discussions, uh, with payers because they're often, you know, they're moving stuff out of the hospitals which is a great position to start from. Um, and with great groups of docs, you know, we we have a good visibility of who signed up what cases they'll bring. So continues to be uh, another, 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. Um, and so we're working through that right now. So when we talked about these delays, I mean, construction's been a little bit challenging at times in certain parts of the country. We certainly, the regulatory delays are around licensing and, you know, 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 um, excited about the de novo opportunities. We can 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. Uh, so there's just, there's a lot to like, about the ultimate, um, you know, value creation of investing in denovo facilities.
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 like the 4 CE going into 1 Q. Thanks.
Yeah, I mean, it's it's, it's hard to comment on that from a, from a macro perspective, right. Now what I will say is, you know, given the trends we've seen, we're certainly hedging against trying to understand. You know, what is happening with that consumer Behavior? We are seeing a little bit like, as we've talked about and acknowledge, 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 talked about this a lot is we're 1 of the few places where all 3 parts of the industry. All 3, major consumers prefer us because of our value position. You know, we're we're the patient has a better experience. They, they have a much lower cost, obviously, the payer frequently, uh, really, really wants our always wants their patients to choose the right. But uh, place for high value care and Physicians, you know, they love, 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, you know, we like our long-term position, we think, even if there are changes in plan design, you know, our, our value position positions, as well, for whatever changes there. Uh, so I guess that to hedge a little bit on your answer or your question hard to say at this point, it's that we don't have.
Have enough to say that, whether that's the case or not. But we're certainly seeing a little softer Trend as we said going into Q4.
Understood, thanks for your time.
Thank you.
And Matthew Gilmour with KeyBanc Capital Markets has our next question.
Hey, thanks for the question. I wanted to see if there was any additional comments on the portfolio review, process. Just curious about your, um, just what you're seeing in terms of the nature and um, depth of discussions and and the pacing, um, just anything to report there.
Yeah, so we'll be, uh, you know, obviously we careful about how much detail we give on this. As we, as we put in the, uh, as we said, in our prepared remarks. All we are certainly, um, on our way, in a couple of markets, uh, we do believe, uh, that there's real opportunity for us, uh, to, um, 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 you know of giving you a little bit more detail. We're focused on those markets that are probably far less from the puc of our short stay surgery, ethos, right? So the ones that maybe are a little broader uh, where you can make a case that perhaps there's a better natural owner and we're we're off and running on those processes. We know they're very valuable markets, uh, very valuable facilities, within the marketplace, they serve. Uh, we do expect to have strong interest in those, uh, part of why we pointed to the delayed investor day. Obviously, as we, we want to be a little bit farther along than that, it's important. We have, uh, more to talk about when it comes.
Comes to that portfolio, um, optimization work we're doing, but we're quite, we're quite encouraged with that opportunity. And we do see it as a, a way to, um, accelerate our balance sheets balance sheet strengthening, um, accelerate our ability to self-fund our core ASC growth, um, and, uh, move even closer to being a peer play company. So lots of good starts there. Um, 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, you know, going to be in markets where it's going to be local Regional systems. Many of them are nonprofits. Um, that it's a little bit harder to predict timing, but we're, we're certainly encouraged about the opportunity and believe, uh, we have great assets. I'd remind everyone that, you know, all of these, um, 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, uh, accelerate what we're trying to accomplish relative to deleveraging and free cash flow.
Got it, I appreciate that. Um and then as a follow-up I 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're going to wait and see in terms of the the payer mixed Dynamics, but any other um, high level things to think about for modeling purposes for 26.
Yeah, I think it's probably too early for us to get into risk and opportunity for 2026. We're obviously monitoring this, uh, this recent Trend to see if it's something more systemic. No reason to believe it is but we'll watch that closely. Um, 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. Uh, so, um, there's nothing I would point out today. That's that's, 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 1 1, other thing. I just say, Matt going back to your portfolio question, you know, the other thing that we are closely looking at um in in our portfolio, authorization opportunities is, 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, uh, we partner and we stay in in a partnership that's a creative. And so there are multiple options. We're considering in that portfolio review process.
Got it. Thank you.
Of course.
like to ask a question and we'll go next to Ben Hendricks with RBC Capital markets,
Hey, thank you very much. Just uh, most of my questions have been answered but just a quick follow-up on that last comment. Uh, you me about the types of facilities you're looking to partner with. Um so I guess am I reading that, right? That you're looking for more Partnerships with maybe broad-based uh facilities with broad-based capabilities and you may be more willing to kind of retain those uh specialty facilities, like spinal hospitals, and uh and and and and uh facilities like that, some more color there. Thank you.
Yeah, 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, um, to accelerate all the things we've talked about are all very attractive markets with with, we think Bright Futures. And so, you know, to the extent that there's a partner where, you know, 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. Uh, I don't think that's different necessarily than history. We haven't talked about that that much, but we, you know, across the country we have a number of Partnerships with health system Partners where it makes sense, although still largely an independent company. Uh, we are very, very open to, uh, whatever the market dynamics are. I don't know that. Dave, would you add anything? Yeah, maybe maybe just a couple of things on this. Just as a reminder, as we as we look at this portfolio, optimization part of the driver for this um, is uh, is focusing on what's important to our shareholders. So we're going to try to maximize the value of these.
Um, any optimization efforts which, uh, which start with, uh, are they great assets and can we, uh, can we truly get the value that we believe is out there? Um, but it's also going to be impacted by, uh, the ability to reduce leverage and improve cash flow conversion of adjusted earnings, uh,
which are obviously a Paramount importance. So, 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? Um, if you do a partnership based model, um, you will, uh, you will still retain access to a very strong Market um, uh, access to a greater physician base, um, uh, a greater Network um, of uh, patient catchment area off the backs of uh that partner um and potentially improved cash flows, as it comes to a different kind of relationship with commercial payers uh 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 a unconsolidated position, which will remove that, all-important, leverage Factor. So all of those things will go into the evaluation process. Um, as we um, um, as we think through what makes sense and where
Where it makes sense.
Thank you very much and just 1 on the slower ramp of denovos. I appreciate it. Uh, you mentioned, it's mostly, uh, timing related construction, delays, uh, licensing, Etc. But uh, to the extent that there's any of this volume pressure, kind of, uh, kind of driving that ramp. Uh, what what what is that contributing to the EA, thanks.
Yeah, I wouldn't I wouldn't contribute any of that to to those delays. I mean those facilities actually have syndicated Partners. We know what, what cases they plan to bring. It's really just a matter of getting them open and the the kind of the checking the boxes of all the construction and and Regulatory things that happen in that process. So that would not be uh, material driver of any of that uh Trend. We talked about
Thank you very much.
Of course.
Our next question comes from, Andrew mock with Barclays.
Hey good morning. Can you help us understand the timing of this payer mix issue 1? That it first emerged and has it accelerated sequentially into into the fourth quarter and do you have a sense? Whether this issue is driven more by the ACA exchanges or employer based coverage, thanks.
Hey Andrew. Thanks for the question. Um, look, we started to see this in the third quarter. I mean, clearly you can see that, uh, you know, we had some pressure in the third quarter that showed up, even though our volumes were strong. Uh, you know, we we definitely that mix puts pressure on margin accretion and we were flat margins and we start to feel that a little bit in the third quarter. It continued in the fourth quarter at a consistent uh, ba basis to that pressure. So, again, I don't want to overeat into this. I mean, clearly we're making an adjustment because we see it, uh, but it's hard to know, you know, we don't necessarily see a systemic at this point. Uh, but um, you know, again wouldn't want to over redo that and your second part of your question. I'm sorry. Was
Pressure. There could be but I don't think that's material probably part of our business. So probably not the biggest pressure point.
Great. And following the guidance or Vision can you share thoughts on why you expect free cash flow to land uh, in Q4 and and the year, thanks.
Yeah. Well, as you know, we don't, um, we don't give guidance on free cash flow, uh, Having learned that lesson on kind of the, um, the intense variability, that kind of sits inside there. But cash flow, this quarter, um, uh, and all year has been pretty strong on an operating cash flow basis. So, she's you think about that third quarter here? Nearly 20 million dollars higher than, uh, than the same time last year? Um, which is, you know, reflective of the, you know, 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, uh, in the quarter of those interests cost pressure points will continue into the, um, into the fourth quarter until we fully lapse those going into 2026. Uh, we are in a slightly better position. Uh, we remind you that we did, do the re-pricing of our Term Loan and our revolving credit facility, those those rates are now 25 basis points and 75 basis points improved um over the pro
Prior, um, uh, loans that we had in place.
Um, so that pressure from interest rates will slightly persist um, uh, into the fourth quarter. Uh, 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. Um, and we continue to see Improvement in those, uh, spending on transaction and integration costs. They were a little bit lower than what we had, uh, expected into the third quarter, um, about 5 and a half million dollars, lower sequentially, 17 million dollars lower than the, you know, the elevated level of spend in the third quarter. Um, we expect that to continue to improve year-over-year. Uh, 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, uh, should come down and should remain relatively consistent with what we saw in the third quarter. Uh, the challenge for us is really just where distrib.
To our physician Partners comes out. That's all a factor of uh, working capital, uh, balances it. 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 flow, should continue to be relatively, stable, maintenance, related, Capital, expenditures were not expecting any material change inside there. Um, and then the distributions that go to our physician Partners, um, is the 1 that is
Most challenging for you to look at at any particular quarter and and fundamentally why we're not going to give guidance for the fourth quarter. Generally speaking, it should continue to improve though.
I think you.
We'll go next to Sarah James with Cantor Fitzgerald.
Thank you. Um, 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 benefits from that? Uh, 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 acute Ortho than your historical cohorts?
Hey, Sarah, a good good, uh, morning. Thanks for the question. Uh, look, we're really pleased with our position recruiting, uh, teams efforts again this year. As we mentioned, we're over 500, uh, positions recruited to our facilities here today that continues to be a big part of our same store growth story. Uh, that mixes about the same as we talked to May certainly higher on on the orthopedic recruiting than the overall mix, which is, which is really helpful. You know, sometimes in those new positions, join your initial mix can be a little higher in Medicare so that you know, that is true in general. Uh but we're we're we're quite happy with the recruitment Pace. Um and we expect to finish the year strong we're seeing. This is normally the the kind of 1 of the strongest parts of the year of adding new docs. We're seeing that continue.
And as you guys will recall, that's, you know, part of our growth engine is these new docs. Come in. Uh we get you know roughly a doubling of their business in year 2. We continue to see that kind of movement in year 3. Uh it's important that we stay really strong on this area because there always is some level of attrition as you can imagine. So something we're really really focused on but Sarah that really hasn't changed. We're still still certainly more focused on those uh higher Acuity procedures. You continue to see that show up in our total joint. Counting all reiterate that you know we grew 60% year-over-year this month. We're of 23% for the quarter in our asc's and that continues to be a big part of that is finding new Physicians to join us and bring those cases to our asc's.
Oh, as I said, that's what I say: quarter. Yeah. Sorry. Quarter in year. Yep.
Perfect.
And if I could just double click on that.
next extension that with
And these are coming on with higher dollar procedures, you typically have a higher Medicare mix, um, as they on board. So how much an impact did that have on the mix, uh, situation that you've been talking about today? Yeah, that's probably not the big driver. I mean, honestly, that's 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 the trend driver.
Thank you.
Yep.
Moving on to what Mayo with Lee rink partners.
Hey thanks Emily, go, 1, question. I know that you guys are just moving into the budget and planning process. But Dave, do you think maybe about excluding on announced m&a from the guidance, given the challenges of timing factors Etc? Just a lot of companies don't include m&a in their guys, so just wanted to take your temperature on how you're thinking about that now.
Yes. Yes, they're very fair question, uh, with and clearly something that has proven difficult over the past couple of years with very different stories, on level of m&a, spend, uh, with uh, with EXA, Advanced kind of spend in 2024 and obviously relatively lower in 2025, and it is difficult to predict the challenge that we have is, is reiterating that the company's long-term growth algorithm, which does, um, does rely on Acquisitions as about a third of our growth will come from, uh, from inside there. But, um, you can be assured, we're asking that same question internally. Um, and uh, 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, um, that's helpful to know.
Okay, thanks a lot.
Thanks a lot.
We'll go next to Bill Sutherland with the Benchmark Company.
Hey, thank you. Good morning. All. I was just uh, wanting to get a little more uh, color or or, or granularity. I guess on the Investments. You've done both late last year. And then um, Mid mid year, are they? They all asc's
And, um, are they just pure sales or are they partnering as well?
Yep, Bill, thanks for the question. Uh, all of the, uh, the vestures that we talked about are asc's a couple of them, um, were, uh, were simply closures, um, that were out there and of relatively small assets that sat inside there, a couple of them were sold Downs into a Dal time. Um,
Uh, and that was basically the nature of those divestitures.
Okay. And now, um, in the um,
In the stuff that you're currently thinking about or, or working on. Would that include the Idaho Hospital?
Hey Bill it's Eric. Uh look we're not going to be talking about any specific markets um you know we're giving guidance on kind of the types of things that we're going to pursue. Uh but as far as specific markets, we won't be uh clarifying that until we have something specific to announce.
Hello, I'm understood.
Uh, and then lastly, just thinking about why ophthalmology might be softer, is it? Um, is it more of a, uh, discretionary kind of, uh, procedure? Oh, in general, I'm thinking of cataracts and things like that.
Yeah, so Bill it's a great question. I would just say if you look at our overall Ophthalmology, um we did have a fair amount of our investors were an Ophthalmology. So if you're looking kind of year-over-year, there's some there's some changes there. We still are growing and Opthalmology. Uh, we did not mention it, as quite as strong as msk and GI this quarter, you know, look, we see those variances across service lines, it's still positive. Um, I I wouldn't read too much into that, at this point. I mean, opthalmologist has been a really strong grower for us over the last several years. Uh, but your point is 1. We'll watch and carefully. I don't know. Dave, if you'd add anything to that. Yeah, just to just to clarify something, you're, you are looking at the Consolidated U case volume that we saw a year ago. So you are seeing a decrease, um, in the third quarter that is all attributable to the diverse teachers. If you were to look at it on the same facility basis, which I know we don't disclose. Um, that growth was actually, uh, just under 1% on the same facility basis. Uh, so it is growing, uh, to Eric's point but obviously, that's lower than our growth algorithm would suggest um, and our field
Experienced a retirement, in 1 case, a very high volume doctor um that uh that retired and then some short-term disability um maternity leave Etc. Um, those are short-term in nature, the fundamental operations, um, still makes sense, but you've got to recover from those so, somewhat isolated to those things. Again, not fundamental at this point.
That's helpful, thanks.
You're welcome.
And our final question from today comes from Ryan Langston with TD Cowen.
Good morning, thank you. How should we think about the capital budget? I guess on the maintenance side, are 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?
Yes, no. There's no major changes that we're kind of expecting, uh, 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. Um, and um, increase communication with our physician Partners, on when it makes sense, uh, for us to, um, uh, plan for and execute on any, um, any maintenance related Capital expenditures. So we feel pretty good about, um, how we budget those and the Run rate that you're seeing uh quite frankly for the past 6, quarters should be consistent um for the foreseeable future at this point.
Got it. And then I think I heard you say, you got a 15 time, sort of all in multiple for a particular asset, but other than just, the, I guess attractive multiple that you could 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. Yeah, it's a great question. Uh, so as we talked about here, 1 of the criteria we're using right now is, is looking at facilities that, um, give us the opportunity to de-lever faster and increase free cash flow faster, right? So those tend to be the larger more complex facilities that maybe maybe go beyond our course. Sure, say surgical ethos, in other cases, it's really Market specific. Uh, so we'll look at the overall, uh, Market the, 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 denovos and our acquisition plans. And so you know obviously we're in the business of growing our surgical counts. Like we we'll be opportunistic and thoughtful around the right business decision in
Any given market and the ones we sold are appropriate example of that. Um, and Ryan, maybe his last question. I'll wrap up and just say, thank you all for your time this morning. Uh, again, want to say thank you to our colleagues in physician Partners really, really proud of the high value care. We offer in the marketplace where the last independent uh, freestanding kind of short stay surgical company in the country. We play a very important part in the uh the Health Care 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 uh value to our show.
Shareholder, thank you again for the time this morning. We'll be back in touch at the end of the Q4 call. Thanks.
And ladies and gentlemen, thank you for your participation.
Include today's teleconference, you may disconnect your lines and have a wonderful day.