Surgery Partners, Inc. Q3 FY2025 earnings call

• Organic growth: Focus on GI, MSK, and orthopedics; investments in robotics and physician recruitment. Over 500 new physician positions added.
• Margin performance: Stable due to cost discipline and reduced incentive-based compensation offsetting inflationary pressure.
• Capital deployment: Deployed ~$71 million in capital for acquisitions in 2025, sold interest in three ASCs for $50 million in cash plus sold debt. Near and midterm M&A pipeline robust with over $300 million in opportunities.
• Portfolio optimization: Evaluating selectively partnering or divesting facilities to expedite leverage reduction, accelerate cash flow, and focus on core ASC service lines. Inaugural Investor Day shifted to 2026.
• De novo efforts: Opened two new de novos in Q3, with nine under construction and more than a dozen in development, primarily for higher acuity specialties like orthopedics.

Net revenue was $821.5 million, up 6.6% year over year. Adjusted EBITDA was $136.4 million, up 6.1% year over year with an adjusted EBITDA margin of 16.6%. Same facility revenue grew 6.3%. In organic growth, over 166,000 surgical cases were performed in Q3. Volume growth in GI and MSK procedures was high, with orthopedics seeing growth due to joint-related surgeries, while ophthalmology was slightly lower. Total joint surgeries in ASC facilities grew 16% in Q3 and 23% year-to-date. Payer mix saw commercial payers at 50.6% of revenues, down 160 basis points year over year, and governmental sources (primarily Medicare) up 120 basis points.

Revised full-year 2025 guidance: Revenue range $3.275 billion to $3.3 billion, adjusted EBITDA range $535 million to $540 million. Adjusted for timing-related impacts of capital activity and revised Q4 outlook. Same facility revenue growth for full year now expected to align with midpoint of 4% to 6% target range.

• Softness in same facility volume growth in recent months, trailing internal expectations.
• Delayed capital investments and lost earnings from ASC divestitures not yet redeployed.
• Potential impact of macroeconomic factors and commercial payer mix trends on future results.

Q: Brian Tanquilut asked about weakness in Q4 volumes, specific to procedures or geographies?

A: Eric Evans said it was relatively broad-based, with lower commercial growth and higher government payer mix than expected, reacting to trends but not expecting long-term trend.

Q: Joanna Gajuk asked about divestitures and impact on EBITDA?

A: Dave Doherty said majority of ~$20 million EBITDA cut was timing-related (acquisitions, divestitures not redeployed), with recent trend change also contributing.

Q: Benjamin Rossi asked about de novo efforts?

A: Eric Evans said de novo is accretive but time-intensive, with strong pipeline and focus on higher acuity specialties.

Q: Ben Hendrix asked about portfolio review?

A: Eric Evans said evaluating partnerships/divestitures to accelerate deleveraging and free cash flow, considering multiple options.

Q: Andrew Mok asked about payer mix timing?

A: Eric Evans said saw pressure in Q3, continuing in Q4, hard to determine if systemic or driven by specific insurance types.

Q: Whit Mayo asked about excluding M&A from guidance?

A: Dave Doherty said will address by Q4 call, recognizing challenge of predicting M&A timing.

Q: Bill Sutherland asked about divestitures and ophthalmology softness?

A: Dave Doherty said divestitures were ASCs, ophthalmology variance isolated, not fundamental.

Q: Ryan Langston asked about capital budget and divestiture criteria?

A: Dave Doherty said no major changes in maintenance capital, divestiture criteria include deleveraging and free cash flow improvement.