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?

Romaset/Shutterstock.com

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?

See also 16 Best Utility Stocks to Buy Now and 15 Biggest SaaS Companies in the World.

To continue reading the Q&A session, please click here.