Tenet Healthcare Corporation (NYSE:THC) Q1 2023 Earnings Call Transcript

Tenet Healthcare Corporation (NYSE:THC) Q1 2023 Earnings Call Transcript April 25, 2023

Tenet Healthcare Corporation beats earnings expectations. Reported EPS is $1.42, expectations were $1.16.

Operator: Good morning, and welcome to the Tenet Healthcare First quarter 2023 Earnings Conference Call. After the speaker’s remarks, there will be a question-and-answer session for industry analysts. I’ll now turn the call over to your host, Mr. Will McDowell, Vice President, Investor Relations. Mr. McDowell, you may begin.

Will McDowell: Good morning, everyone, and thank you for joining today’s call. I am Will McDowell, Vice President of Investor Relations. We’re pleased to have you join us for a discussion of Tenet’s first quarter 2023 results, as well as a discussion of our financial outlook. Tenet senior management participating in today’s call will be Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represents management’s expectations based on currently available information.

Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today’s presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I’ll turn the call over to Saum.

Saum Sutaria: Thank you, Will, and good morning, everyone. We’re off to a nice start for 2023. Strong volumes support good results in all three business units. USPI’s performance continues to accelerate given our focus on organic growth and is ahead of our expectations so far. In the first quarter, we delivered net operating revenues of $5 billion and consolidated adjusted EBITDA of $832 million, which translates into an attractive 16.6% margin. As a result of our strong performance in the first quarter, we are now raising our full year guidance, which demonstrates the confidence we have in our operations. Across our businesses, a post-pandemic environment is taking shape, COVID admissions are down, a wider range of acuity is returning to the hospitals, deferred GI procedures are returning and our workforce is starting to stabilize.

We have anticipated this for some time, and our strategy, operating efficiency and capital discipline enable us to deliver attractive performance in this environment. We had a great quarter at USPI with $340 million in adjusted EBITDA, which represents 21% growth over first quarter 2022. Same-facility cases grew 7.9% and adjusted EBITDA margins were strong at 37.6%. As I’ve said before, the continued migration of procedural services into the ambulatory setting is a sustained and significant tailwind for our business. Growth in our active physician population as well as higher acuity service line expansion, especially GI, urology, ENT and orthopedic cases, drove the first quarter volume strength. We are pleased to have our organic growth initiatives gaining traction and bearing fruit.

Our USPI development pipeline remains active and healthy. We added three new centers in the quarter. We completed two additional post-transaction buy-ups in the quarter at multiples unchanged from prior buy-ups. Progress continues in this area. As previously discussed, USPI’s M&A engine under the Tenet umbrella is an industry leading differentiator. We continue to drive post-synergy multiples for many of our acquisitions to below 5 times. We intend to invest approximately $250 million in ambulatory M&A each year and have a robust pipeline to support that level of investment. We are also energized by the level of de novo activity in the USPI pipeline with over 25 centers currently in syndication stages or under construction. USPI is the preferred partner for high quality physicians as demonstrated by our organic growth and development pipeline.

The linkage to our hospital business creates a superior platform of management talent and significant scale benefits. Turning to our Hospital segment, we generated $405 million of adjusted EBITDA in the first quarter of 2023. Same-store hospital adjusted admissions grew 6.7% and ER volumes grew 4.8% over the first quarter in 2022. On a non-COVID basis, same-store inpatient admissions were up 14%. Acuity levels remain strong, as our case mix index has grown at a 3% compounded annual growth rate since 2019. We continue to expand access to high acuity specialty services across our hospitals and enable access to cutting edge clinical technologies. In the first quarter, we maintained our focus on cardiovascular, neurosciences, specialty surgical services, trauma, and women’s health.

A few examples include a new non-invasive focused ultrasound technology to treat Alzheimer’s patients at our Delray Medical Center. Certification of our Resolute Baptist Hospital as a Joint Commission Advanced Primary Stroke Center, and the achievement of a Level I Trauma designation at our Desert Regional Medical Center, which enables us to provide total care for nearly every aspect of injury across a broad region of the southwestern United States. Our workforce is getting stronger, investments in 2022 and pay and benefits have reduced turnover, and the pace of first quarter 2023 nurse hiring continues to accelerate. This helped to further reduce our contract labor costs in the first quarter of 2023. All-in-all, our hospitals have had a nice start to the year.

Conifer continues to perform well for its clients and deliver strong margins. Ongoing technology automation and offshoring initiatives support that performance. Third party revenue was up 3.8% in the quarter, and cash collection performance was strong in the quarter, helping to drive Tenet’s days outstanding in accounts receivable down by two days from year end. Conifer continues to ramp up commercial activities with a strong sales pipeline for 2023. Looking forward, we are raising our full year 2023 adjusted EBITDA guidance by $50 million at the midpoint to a range of $3.21 billion to $3.41 billion. Our management discipline, operational excellence, and ongoing investments in talent have enabled a strong start to the year, and we remain focused on accelerating performance across our businesses.

At USPI, strong margins, organic growth tailwinds and inherent capital efficiencies generate significant free cash flow. Continuing to add centers with strong margins and attractive post-synergy multiples remains a great use of cash for investments to enhance Tenet’s free cash flow. These cash flows will enable us to further grow, deleverage the balance sheet, and return capital to shareholders in the future. And with that, Dan will provide a more detailed review of our financial results. Dan?

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Daniel Cancelmi: Thanks, Saum, and good morning, everyone. Our financial results in the first quarter were strong with our USPI and Hospital’s adjusted EBITDA and same-store volumes and revenues well above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $832 million above the high end of our first quarter guidance range. Our results were driven by strong same-store revenues and volumes, continued high patient acuity for non-COVID patients, and effective cost control. Now, I’d like to highlight a few key items for each of our segments. Let’s start with USPI, which delivered strong growth and continue to provide high quality care to our patients. In the quarter, USPI produced a 7.9% increase in same facility surgical cases compared to last year, with strong growth in GI, urology, ENT and orthopedic cases.

Surgical cases were 107% of pre-pandemic levels in the quarter. USPI’s adjusted EBITDA grew 21% compared to the first quarter of 2022 and its margins continue to be very strong at 37.6%. We are pleased with USPI’s excellent start to the year. This strong performance is a testament to the attractiveness of the portfolio and value that we provide to our stakeholders. Turning to our acute care hospital business, first quarter same-hospital adjusted admissions increased 6.7% compared to the first quarter of last year and total same hospital inpatient admissions increased 4.3%, while non-COVID admissions increased 14%. Our labor management continues to be very effective despite the cost pressures, especially temporary contract nurse staffing costs.

On a consolidated basis, contract labor costs were 6% of SW&B, a significant decline from 7.3% in the fourth quarter 2022. Total hospital costs were well managed in the quarter, as these costs were 2.7% lower than first quarter 2022 on a per adjusted admission basis. When you exclude the impact in the prior year from a $69 million gain on sale of medical office buildings. SW&B costs per adjusted admission were down 5.4% compared to first quarter last year. Our SW&B costs as a percent of revenue were 45% in the quarter compared to 46% in the first quarter of 2022 and 46.2% in fourth quarter last year. Our case mix and revenue yield remain strong as we continue our strategic focus on investments in higher acuity, higher margin service lines. Our case mix index in the quarter has grown at a 3% CAGR since 2019 before the pandemic.

Our hospital’s first quarter results included $27 million of insurance proceeds received related to last year’s cybersecurity incident. As we previously disclosed our guidance reflected 10 million of these recoveries in the quarter, which were received in January. As a reminder, in the first quarter of last year we recorded a $69 million gain on the sale of medical office buildings as well as $31 million of Texas Medicaid revenue that related to 2021. Let’s now turn to Conifer, which again delivered a solid quarter. Conifer produced first quarter adjusted EBITDA of $87 million and a strong margin of approximately 27%. Also, Conifer generated 3.8% growth in revenue from external clients compared to the first quarter last year. Overall, we’re off to a good start to the year in each of our businesses.

Now, let’s review our cash flows, balance sheet and capital structure. At the end of the quarter, we had $766 million of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $214 million of free cash flow in the quarter. As a reminder, the first quarter’s oftentimes our softest cash flow generating quarter due to certain annual working capital requirements such as our annual 401(k) matching contributions for our employees and annual incentive compensation payments. Conifer produced a strong cash collection performance in the first quarter, which resulted in a two-day improvement in our days in AR. Also, during the quarter, we repurchased approximately 906,000 shares of our stock for $50 million as part of our 1 billion share repurchase program.

Since the inception of the program in the fourth quarter last year, we have repurchased approximately 6.8 million shares or about 6% of our then outstanding shares for $300 million at an average price of about $44 per share. Our March 31 leverage ratio was 4.19 times EBITDA, slightly up from 4.1 times the year end 2022. And as a reminder, we have no significant debt maturities until the third quarter of 2024 and have approximately 1.6 billion of secured debt borrowing capacity available if needed. Let me now turn to our outlook for this year. As Saum mentioned, we are raising our 2023 adjusted EBITDA outlook by $50 million to $3.21 billion to $3.41 billion, or $3.310 billion at the midpoint reflecting the strong start to the year. This $50 million increase includes a $20 million raise for USPI and a $30 million raise for our hospitals.

Additionally, we now expect net operating revenues to be in the range of $19.8 billion to $20.2 billion. Also, we expect full year adjusted diluted earnings per share from continuing operations to now be in the range of $4.92 to $6.09. Regarding our second quarter outlook, we expect consolidated adjusted EBITDA to be in the range of $765 million to $815 million. And we anticipate that USPI’s EBITDA in the second quarter at the midpoint will be approximately 23% to 24% of our full year 2023 USPI EBITDA guidance of $1.465 million at the midpoint of our range. Turning to our cash flows for 2023. From a cash flow perspective, we are targeting another strong year of free cash flow generation and now expect free cash flow in the range of $1.1 billion to $1.35 billion for 2023, an increase of $25 million over our previous expectations.

Our free cash flow generation has improved substantially over the past several years. We have significantly reduced our leverage and pushed out debt maturities and we expect our business to continue to drive strong cash flows while executing on our growth plans. As we’ve mentioned previously, these cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of shareholders. As a reminder, our capital deployment priorities have not changed. First, we continued planning on allocating approximately $250 million of capital annually to grow our USPI surgery center business; second, enhancing our hospital growth opportunities, including the continued focus on higher acuity service offerings; third, evaluating further opportunities to retire and/or refinance debt; and finally, share repurchases depending on market conditions and other investment opportunities.

And with that, we’re ready to begin the Q&A. Operator?

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Brian Tanquilut from Jefferies. Your line is now live.

Brian Tanquilut: Hey, good morning, guys, and congrats to the good quarter. I guess my question is just how much improvement do you think you have left to bring down temp labor? I know you’re reinvesting some of that in wages for your permanent employees. But as we think about temp labor and maybe SLB as a whole, what do you think is the remaining opportunity for that embedded in your guidance and even as we look into next year? Thanks.

Saum Sutaria: Hey, Brian, it’s Saum. Good morning. We do expect some additional moderation in our contract labor spend as we move through the year. The operators have done a really phenomenal job, managing this, obviously a very difficult environment. Our recruiting and retention measures have been improving, which is helping to mitigate some of the incremental costs associated with contract labor. So we are expecting some additional moderation as we move through the year. But as we’ve said when we released our guidance in February for this year, we are not expecting our contract labor to get back to pre-pandemic levels certainly that won’t happen this year.

Operator: Thank you. Next question is coming from Pito Chickering from Deutsche Bank. Your line is now live.

Pito Chickering: Yeah, good morning, guys. Thanks for taking my questions. A great quarter. For guidance, you beat the midpoint of the first quarter guidance by $57 million. You raised 2Q by $50 million above The Street, but only raised the full year by about $50 million. So, just curious, should we read sort of into the implied back half of the year guidance reduction? Is this conservatism something that The Street was missing or simply did The Street misunderstand the seasonality for the back half year versus the first half year?

Daniel Cancelmi: Hey, Pete, it’s Dan. Good morning. Now, you shouldn’t read it into anything of that. Listen, we off to a good start to the year. We beat by $57 million, and we’ve raised our guidance by $50 million. So we’re optimistic and we’re encouraged by the trends that we’ve seen and that shouldn’t read anything into it.

Pito Chickering: Great. Thanks so much.

Operator: Thank you. Next question is coming from Justin Lake from Wolfe Research. Your line is now live.

Unidentified Analyst: Hey, guys, thanks for the question. This is Austin on for Justin really strong core on the volume side, both in USPI and the Hospital. Just curious, you guys had kind of talked previously some service line flexing in the hospitals and then some COVID driven interruptions in USPI. Were any of those still present in the 1Q here or are we kind of at a clean comp going forward? Thanks.

Saum Sutaria: Hey, it’s Saum. On the Hospital side, as Dan was just talking about with one of the prior questions, as the contract labor rates come down, and I indicated a little bit in my comments, it opens up the ability to improve access for services. We know the demand has been there, it’s always been a bit about whether that demand at scale was serviceable with very high contract labor costs. And, I think, in particular, as the contract labor rates come down, it makes it easier to make decisions about utilizing contract labor versus the full time labor from the perspective of opening up that hospital capacity to take in more volume. And, obviously, imperative in that is that we to have discipline in our overall cost structure, productivity, length of stay, things that we’ve talked about for the past few years during the pandemic.

Continuing to remain focused on that so that we can generate strong margins as we open up the capacity, even if some of the work that returns is lower acuity. On the USPI side, I’m really pleased with the volume strength. This is not – we’ve talked over the last couple of three quarters about things that were going on in the business, certain types of low acuity business that we were strategically and otherwise having reductions in that affected it. This quarter demonstrated growth in the services that we want to grow. Strong return of GI services, orthopedic strength was strong. And in particular, I’ve commented about pain before, the volume strength is not coming from pain that business was flat year-over-year. So this isn’t a volume recovery based upon kind of, so to speak, engineering certain service lines that we were dampening our interest in, but it is actual strength in many of the areas.

And I think most importantly, breaking through significantly the pre-pandemic volume levels is a really important marker for USPI and the ASC industry, because it suggests that there will be strength going forward.

Operator: Thank you. Next question is coming from Calvin Sternick from JPMorgan. Your line is now live.

Calvin Sternick: Yeah. Hi, good morning. I wanted to ask about some of the SCD II centers and how the integration is progressing there? I know you talked about the slower position bias last year and the ramping of some of the de novo in developing centers. So just curious how that’s trended so far just to sort of understand some of the progress.

Saum Sutaria: Thanks. Yeah, no, good question. Good update. As I indicated, the buy-ups continue the progress and the buy-ups continue at multiples that are not changed from any of the prior multiples. So that’s good. And the centers that were in-development, as I kind of described them somewhere from the point of having broken ground to just having opened. We expect all of them from that original transaction number two to be opened up this year, and that’s a good thing. Those partnerships are still strong and intact. So, I think, we’ll see positive movement. Like I said a last time, we were about a year behind the original plan, but the original plan is still the original plan.

Operator: Thank you. Next question is coming from Kevin Fischbeck from Bank of America. Your line is now live.

Kevin Fischbeck: Great. Thanks. Just wanted to ask about your views about the volumes in the quarter. It sounds like the volumes were stronger than we were looking for. It sounds like maybe they were even stronger than you guys were looking for. Is there something that you would point to as to why all of a sudden 2023 is the beginning of this volume rebound? And maybe to go back to that earlier question about the guidance, because it is kind of you raised for the beat, it sounds like it’s conservatism, but is there any reason to believe, either based upon how volumes progressed through Q1 or so far in Q2, that these higher volume numbers wouldn’t persist?

Saum Sutaria: Yeah, this is Saum. So a couple of things, I think, the volume strength at this point, we really have our information and what we’ve read publicly about HCA’s information. I think there is some industry recovery going on as we kind of enter this post-COVID, post-pandemic anyway environment, where people are getting more comfortable returning to healthcare. We know that from our physicians’ offices. They’re now all pretty. The ones that we employ and run are now all running at full throughput in the outpatient environment. Obviously, that helps to create demand. I think that we’ve in our case gotten much more effective and efficient with our ER throughput and operations across the board. That was a big focus area last year that we didn’t talk much about.

But with the staffing shortages, having adequate throughput, having fast track setups in our ERs and things to improve that throughput is important to be able to service the demand. And then for us, in particular, I think that as we get into this post-pandemic environment, hospitals are going to naturally be able to hold onto and deliver when they have put in the right infrastructure, doctors and technology for higher acuity services that don’t have a substitute location to go to. And for us, that’s an important piece of the recovery puzzle across the board. Look, the other thing from a Tenet portfolio perspective, as we indicated, our portfolio has a pretty broad range of exposure to markets that handled states, that handled COVID differently.

And we always had a little bit more recovery to go in some of the states that were more locked down. And I’m pleased to see that we’re seeing some volume strength in those markets as well. At USPI, I think, there’s a couple of things, one is we put a lot of focus and reengineered some of our processes, incentives as well as service line priorities in the third quarter and fourth quarter of last year, going into this year to focus a bit more on. Some of the things that we wanted to grow rather than just some of the things that we were trying to optimize out as a low acuity service. And I think getting that balance right has helped create some momentum at USPI with respect to organic growth. There’s really no reason that I see looking forward at this point that that should change.

And I’ll just add my commentary to the guidance. Look, we’re pleased to have delivered a good quarter, and we’re pleased to have raised our guidance at this point in time. We’re optimistic about the future, and we’ll revisit as we look forward, depending on what the results look like.