Surgery Partners, Inc.

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 Duarte. 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 GAAP 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 algorithms. 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 will also provide some additional color on our ongoing strategic portfolio optimization process before concluding with some commentary on our outlook for the remainder of the year. First, let me provide highlights from our third quarter earnings. Net revenue was $821.5 million, up 6.6% year over year. Adjusted EBITDA was $136.4 million, up 6.1% year-over-year. Adjusted EBITDA margin was 16.6%. Same facility revenue grew 6.3%. These results are a testament to the focus of our colleagues and physician partners who serve our communities with valuable, high-quality, and convenient care. Our team continues to deliver on our mission to enhance patient quality of life through partnership. Starting with our organic growth. In our consolidated facilities, we performed over 166,000 surgical cases in the third quarter. Volume growth in GI and MSK procedures was relatively high, including continued growth in orthopedics, driven by an increase in joint-related surgeries, while ophthalmology procedures were slightly lower this quarter. Growth in total joint surgeries in our ASD 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 September 30th of this year, we have recruited over 500 new physicians into our facilities, many of which we expect to eventually become partners. In the third quarter, payer mix moved modestly with commercial payers representing 50.6% of revenues, down 160 basis points year over year, and governmental sources, primarily Medicare, up 120 basis points. While these changes fall within normal quarterly variability, we are also observing softer than expected same facility volume growth in recent months. Although volumes remain positive and generally in line with industry trends, they have trailed our internal expectations, prompting us to adjust our fourth quarter outlook. Given our typical seasonal lift in commercial volumes during Q4, we are monitoring this closely and refining expectations accordingly. Margin performance was stable, with cost discipline and reduced incentive-based compensation offsetting inflationary pressures and weaker-than-expected volume and payer mix. That said, we continue to drive improvements through procurement and revenue cycle operating efficiencies that will contribute to margin expansion moving forward. Moving to capital deployments. 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 three ASCs at an enterprise value of $50 million of cash plus sold debt, achieving a combined double-digit effective multiple. The most significant of these divestitures occurred late in the second quarter. Our long-term growth algorithm and initial 2025 outlook contemplated deploying $200 million plus proceeds from divestitures for a total of roughly $250 million of acquisitions this year. While we have not reached that level of deployment year to date, and in-year earnings contributions will be lower than originally anticipated, our disciplined approach prioritizes long-term value over short-term gains. Importantly, the near and mid-term M&A pipeline remains robust, with well over $300 million in opportunities under active evaluation. We are focused on deploying capital strategically in the months ahead and anticipate a return to our normal levels of annual capital investment moving into 2026. Our investments in de novo facilities remain an important part of our growth strategy and among the highest return opportunities in our portfolio. In the third quarter, we opened two new de novos with nine currently under construction and more than a dozen in the development pipeline. These de novos are primarily focused on higher acuity specialties with a majority devoted to orthopedics. These facilities typically require 12 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 nine months, several recently opened de novos have turned profitable, while others are still ramping and have not reached break-even as quickly as anticipated, primarily due to construction and regulatory approval delays. While this timing creates modest near-term pressure on earnings, these investments are strategically positioned in high-growth markets and are expected to be highly accretive and profitable moving forward. we remain confident that the current pipeline will drive meaningful value creation and reinforce our long-term double-digit growth algorithm. Now I'd like to spend a moment updating you on our portfolio optimization review. As we shared during our second quarter earnings call, we have initiated a strategic portfolio review designed to enhance our flexibility, streamline our portfolio, and self-fund our long-term growth algorithm. Today, we want to provide additional color on the types of assets under evaluation and the objectives of this process. Our focus is on selectively partnering or divesting facilities that can expedite leverage reduction, accelerate cash flow generation, and sharpen our focus on our core ASC service lines. The facilities we are evaluating for this effort are primarily larger surgical hospitals that provide services beyond our short-stay surgical focus. Often, these facilities are more capital-intensive and also carry higher levels of finance lease obligations, which adversely impact cash flow conversion. We are currently in active discussions on a small number of assets, which we believe will be accretive to shareholder value and demonstrate the financial benefit to the company with reduced leverage and increased cash conversion as 8% of EBITDA. Given the timing of these discussions and the long-term value creation it will generate, we will not be in a position to share material details during a December investor day. To ensure we provide the most comprehensive and meaningful update on our portfolio optimization efforts, we have made the decision to shift our inaugural investor day to the spring of 2026. At that event, we will share greater detail on these portfolio optimization efforts, as well as additional details on our long-term growth drivers and outlook for the business. As we look ahead to the remainder of 2025, we are revising our full-year guidance to reflect timing-related impacts of capital activity and the revised outlook for our fourth quarter. We now expect revenue in the range of $3.275 billion 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 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 and shareholder value creation well beyond 2025. Before I turn the call back to Dave, I want to take a moment to honor Dr. Patricia Maryland, who recently passed away. Pat served on our board with distinction. Her thoughtful counsel and unwavering dedication to advancing access and equity in healthcare inspired us all. We are profoundly grateful for her contributions and the legacy she leaves behind. With that, I'll turn the call back to Dave for a detailed financial review.