HCA Healthcare, Inc. (NYSE:HCA) Q1 2023 Earnings Call Transcript April 21, 2023
Operator Welcome to the HCA Healthcare First Quarter 2023 Earnings Conference Call. Today’s call is being recorded.At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.Frank Morgan Good morning and welcome to everyone on today’s call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we will take a few questions.Before I turn the call over to Sam, let me remind everyone that should today’s call contain any forward-looking statements that are based on management’s current expectations. Numerous risks and uncertainties and other factors may cause actual results to differ materially from those that might be expressed today.
More information on forward-looking statements and these factors are listed in today’s press release and in our various SEC filings.On this morning’s call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today’s release. This morning’s call is being recorded and a replay of the call will be available later today.With that, I will now turn the call over to Sam.Sam Hazen Alright. Thank you, Frank, and good morning. Thank you for joining our call. The operational momentum we had at the end of the last year continued into the first quarter of 2023. The company produced solid earnings that reflected strong demand for our services and improvements in our operating costs in particular contract labor expenses.For the quarter, diluted earnings per share excluding losses on sales of facilities grew by almost 20% to $4.93.
Adjusted EBITDA grew close to 8%. Same facility volumes across the company were strong in the first quarter, admissions grew 4.4% year-over-year. Non-COVID admissions were up 12%. Our inpatient business continued to be supported by strong acuity and a favorable payer mix. Inpatient surgeries increased 3.6%. Same facility equivalent admissions increased 7.5%. This was driven by emergency room visits, which grew 10% and outpatient surgeries, which grew 5%.Other outpatient categories also grew including outpatient cardiology procedures, which increased 7%. The demand increase was broad-based across most of the company’s footprint and service lines contributing to same facility revenue growth of 5%, as compared to the prior year.With respect to our people agenda, we saw continued improvements across virtually all metrics.
The improvement in turnover rates accelerated from the fourth quarter and we ended the quarter close to pre-pandemic levels. Registered nurse hiring also improved in the quarter. Hiring increased almost 19%, compared to the previous four quarter average. These positive results helped reduce contract labor cost 21%, compared to last year. We continue to invest in our people through compensation programs, increased training and innovative care models. We believe these programs advanced our capabilities to provide high quality care to our patients. Once again, our colleagues demonstrated a remarkable ability to adapt and deliver value across all stakeholder groups.I want to thank them for their dedication, their hard work, and their overall effectiveness.
During the quarter, we continued to experience periodic capacity constraints that prevented us from fully operating our capacity. As compared to the fourth quarter, instances where we could not accept patients from other hospitals declined 25% and represented 1.5% of total admissions in the quarter, which was down from 2% in the fourth quarter. While we are pleased with this improved trend it still remains above pre-pandemic levels.Close with this, we remain encouraged by the backdrop of strong demand that we saw in our markets. We intend to maintain our disciplined approach to executing our strategic and capital allocation plans as we push through the rest of this year. And lastly, we believe the investments we are making in our network, our people and our technology will provide us with the necessary resources to improve our services and provide high quality care to our patients.
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Given the strong results in the quarter and the favorable factors we expect with demand, you will see that we have increased our guidance for the year.With that, I’ll turn the call to Bill for more details.Bill Rutherford Great. Thank you, Sam, and good morning, everyone. I will provide some additional comments on our performance for the quarter. Adjusted EBITDA for the quarter was $3.17 billion, as compared to $2.94 billion in the prior year. As noted in our release, in the first quarter of this year, we recorded an increase in revenues of $145 million related to resolving certain disputed claims with a commercial payer that covered a six-year period.In the prior year quarter, we recorded an additional $244 million of revenues and $90 million of expenses that related to the Texas directed payment program for an earlier period.
I will also note, as it relates to prior year comparisons, we still were experiencing high level of COVID volumes in the first quarter of 2022. COVID admissions accounted for 9.7% of admissions last year, compared to about 3% this year.In addition, in the prior year quarter, we recognized approximately $190 million of COVID-related support payments versus about $30 million in this year’s first quarter. Sam highlighted our positive volume metrics in the quarter and this was coupled with good payer mix and case mix trends. Same facility managed care and other admissions grew 4.2% during the quarter, when compared to the prior year and non-COVID managed care admissions grew 11.3% versus the prior year.Non-COVID case mix improved just under 1%, as compared to both prior year and sequentially from the fourth quarter.
This contributed to our non-COVID inpatient revenue per admission increasing 2.2%, as compared to the first quarter of last year. We remain pleased with our team’s management of operating cost even with the backdrop of higher inflation.Our consolidated adjusted EBITDA margin was 20.3% in the quarter. Labor cost as a percentage of revenue improved both sequentially and when compared to the prior year and our supply costs continue to trend favorably as well. We have discussed previously other operating expenses have been subject to some inflationary cost pressures and increased approximately 20 basis points as a percentage of revenue, when compared to the prior year.So let me speak to some cash flow and capital allocation metrics as they remain a key part of our long-term growth and value creation strategies.
Our cash flow from operations increased $458 million in the quarter from $1.35 billion in the prior year to $1.8 billion this year.Capital spending was just under $1.2 billion. We paid $175 million in dividends and repurchased just under $850 million of our stock during the quarter. Our debt-to-adjusted EBITDA leverage ratio remains near the low end of our stated leverage range of 3 times to 4 times.As noted in our release this morning, we are updating our full-year 2023 guidance as follows. We expect revenues to range between $62.5 billion and $64.5 billion. We expect net income attributable to HCA Healthcare to range between $4.75 billion and $5.16 billion. We expect full-year adjusted EBITDA to range between $12.1 billion and $12.7 billion.
And we expect full-year diluted earnings per share to range between $17.25 and $18.55. And lastly, we expect capital spending to approximate $4.6 billion during the year.I will mention that our updated capital spending guidance is based on opportunities we believe exist to continue to invest growth agenda, and it also considers some land acquisitions we are planning for future development. In addition, we are seeing some inflationary increases in construction costs that we have factored into our guidance as well.Finally, I will mention, in early April, we closed on a transaction to increase our ownership interest in the Valesco joint venture with Envision. We will consolidate this venture, beginning in the second quarter and expect the venture will generate approximately $1 billion of annual revenues with no material impact to adjusted EBITDA.So with that, I’ll turn the call over to Frank, and we’ll open it up for Q&A.
We look forward to your questions.Frank Morgan Thank you, Bill. As a reminder, please limit yourself to one question so that we may give as many as possible an opportunity in the queue to ask a question.Rob, you may now give instructions to those who would like to ask a question.
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Question-and-Answer Session Operator [Operator Instructions]
And your first question comes from the line of A.J. Rice from Credit Suisse. Your line is open.A.J. Rice Hi, everybody. Maybe obviously, there’s a lot of positive trends this quarter, both on the volume side, as well as what you’re seeing particularly expenses with labor. When you sit here and look at the rest of the year, I know your updated guidance and updated a little further than just the beat in the quarter.
What are the variables that you see could swing either more positive or negative? Are there open questions with respect to how labor trends the rest of the year? Or how volume trends the rest of the year? Or maybe some other metric that I’m not highlighting that you see as putting you at different points within the range, or offering variability? Can you maybe flash that out a little further?Bill Rutherford Yes. A.J., this is Bill. I’ll start and Sam can add in. I think as we said in our comments, we believe there is momentum that we’re seeing in the market. We saw that late ‘22, but we are fortunate that continued into the first quarter. We continue to see good volume expectations in the market. You saw our same-store admissions. Our non-COVID volume was pretty robust, emergency room activity remains busy.
So we feel reasonably positive on our volume outlook that we’ve given.Our revenue per unit, we’re pleased with. We’re pleased with the payer mix trends in acuity and case mix. They are stable and maintained in the levels that we anticipated. And then on the cost side, we believe the teams have managed cost very well. We knew that labor improved throughout ‘22. Obviously, first quarter of last year was a high mark — high watermark for us in labor, so we’re pleased with where it is today. We hope there’s continued improvement to be made, especially around the utilization of contract labor. And so generally, we’re feeling pretty good about the cost metrics.There are some inflationary cost trends we’re seeing, as I mentioned in other operating that tends to show itself around our professional fees and some of those fixed-cost items that we don’t have as much input over.
But generally speaking, we think our revised guidance and our outlook reflects our view for the balance of the year.A.J. Rice Okay.Bill Rutherford Thanks, A.J.Operator And your next question comes from the line of Whit Mayo from SVB Securities. Your line is open.Whit Mayo Hey, thanks. I was just wondering if you guys could unpack some of the growth that you’re seeing in outpatient surgeries between the ASCs and HOPD, and maybe comment on any particular pockets of strength or weakness across some of those surgical service lines? And it’s kind of a corollary to this question two is just the supply cost look very good even with the surgical growth. So if you could maybe elaborate on that dynamic, that would be helpful. Thanks.Sam Hazen Whit, this is Sam, Thank you for your question.
We had strong activity in both settings. Our surgical volumes in our hospital outpatient units were up actually slightly more than what was inside of our ambulatory surgery centers. Across all service categories within both settings, we saw really solid volume growth. So it was broad-based, as I mentioned in my comments. We continue to invest in both. We have a more significant investment in our ambulatory surgery center development pipeline with a number of new developments, as well as some possible acquisitions that are complementary to the networks that we have across the company. So we’re really pleased with our surgical activity. We are also very pleased with our inpatient surgical activity, as we’ve seen growth in both our emergency surgeries, as a result of our emergency room activity, as well as elective surgeries across different disciplines.The only category that was down actually our C-sections where we didn’t have as much obstetric volume as we did in other parts of our business.
And so if you normalize for that dynamic, we were actually up more significantly in the more acute categories of our service lines. So very solid result for us from a surgical volume standpoint. Our supply costs have continued to perform incredibly well. We have a great supply chain capability in our company, and we utilize it to leverage best practices, contracting, logistics, inventory management and so forth. And we continue to maintain even with increased acuity, increased surgical activity, good metrics around our supply cost.Operator And your next question comes from the line of Justin Lake from Wolfe Research. Your line is open.Justin Lake Thanks. Good morning. I wanted to follow-up on the labor side. I think you said temp labor costs were down 21% year-over-year.
Can you confirm that for me? And then just give us a little color in terms of the percentage of hours — nursing hours that came from temp labor — you know, temp labor as a percentage of SWB or temp labor as a percentage of SWB dollars. And anything else, kind of, in terms of trends that you’re expecting in temp labor through the year that’s implied in guidance? Where do you expect to come out-of-the year on some of those metrics? Thanks.Bill Rutherford Yes. Thanks, Justin. This is Bill. So yes, I’ll confirm, our contract labor was down about 20% year-over-year. And again, we’ll continue to be pleased with the trends in there. It’s really rooted in the fact that our recruitment is up and turnover is down, so a lot of effort in that front.For the quarter, our contract labor was about 7.1% of our SWB.
That compares to about 9.5% last year, and we were running mid-7s through the last half of ‘22, so good trends. You know, as a contract labor as a percent of hours was about 10.3%, where this time last year, we were 11.5%, almost 11.6%. So again, continued improvement in that area, really just rooted by a lot of efforts we have in the recruitment and retention.As we go through the year, we hope we’ll continue to see favorable trends in that I hope and we can get in that 6.5% to 7% by the time we finish this year. So a lot of the effort continues by the teams to focus on that.Operator Your next question comes from the line of Ben Hendrix from RBC Capital Markets. Your line is open.Ben Hendrix Thank you. Could you comment a little further on the same-facility revenue per admission and the equivalent admission comps?
It looks like maybe lower year-over-year rates in the outpatient volume offset inpatient rate growth. Perhaps you could flush out the dynamics there for the first quarter and how that could play out for the balance of the year. Thank you.Bill Rutherford Yes. I’ll make a first step, Ben. I think, first, you have to recognize on the year-over-year comparisons, the COVID activity has a significant influence on the year-over-year comparisons. When our COVID emissions went from 9.7% last year to 3%, and COVID revenue per admission runs much higher than our non-COVID, is really influencing the as reported. So why in my prepared remarks, I talked about our non-COVID revenue per admission was 2.2% growth. We’ve seen sequential improvement in case mix.I think overall, I’d say we’re pleased with where the performance is and our acuity in our payer mix and the revenue yield we have when we look at sequentially especially on that.
