Tenet Healthcare Corporation (NYSE:THC) Q3 2023 Earnings Call Transcript

Tenet Healthcare Corporation (NYSE:THC) Q3 2023 Earnings Call Transcript October 30, 2023

Tenet Healthcare Corporation beats earnings expectations. Reported EPS is $1.44, expectations were $1.2.

Operator: Good afternoon. Welcome to Tenet Healthcare's Third Quarter 2023 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

Will McDowell: Good afternoon 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 third quarter 2023 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; Dan Cancelmi, Executive Vice President and Chief Financial Officer; and Sun Park, Executive Vice President. Our webcast this afternoon 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 represent management's expectations based on currently available information.

A medical professional in a hospital wearing protective apparel supplied by the healthcare solutions company.

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 afternoon everyone. We continue to deliver strong results in 2023. In the third quarter, we generated net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $854 million. This translates into an attractive, almost 17% margin. These results were driven by sustained volume growth and effective cost control across each of our businesses. USPI had another very strong quarter with $370 million of adjusted EBITDA, which represents 16% growth compared with third quarter 2022. Same-facility revenues grew 7.9% and adjusted EBITDA margins remained robust. USPI had attractive volume growth in high acuity service lines, including mid-teens growth in total joint replacements in the ASCs over third quarter 2022.

We also delivered ongoing strength in GI, urology, and ENT procedures. We remain focused on attracting high-quality physicians who choose to practice in our low-cost, high patient satisfaction setting of care. This, coupled with tailwinds from increased patient demand for ambulatory surgery care will support continued organic growth. We also remain committed to scaling our portfolio. During the quarter, we added 6 new centers, the majority of which were focused on higher-acuity orthopedic services. These included centers in Nevada, Maryland, Texas, and Florida, all with leading regional musculoskeletal specialists. Our acquisition pipeline remains robust with attractive opportunities. We also have a healthy de novo development pipeline of more than 30 centers currently in the syndication stages all the way to being under construction.

Notably, de novo centers have effective EBITDA multiples in the low single-digits, making them a very attractive use of capital that further advances the site of service value-based care, which USPI uniquely delivers. Turning to our Hospital segment, we generated $401 million of adjusted EBITDA in the third quarter 2023. Our patient acuity levels remained strong with revenue per adjusted admission up 3.2% over third quarter 2022. Additionally, on a non-COVID basis, same-store inpatient admissions increased 4.5%. Our hospitals continue to enhance access to higher-acuity services for the benefit of our patients. For example, our Arizona Heart Hospital was the first in Arizona to implant a new device to reduce stroke risk and our Palm Beach Gardens Medical Center expanded its robotic surgical capabilities.

We will continue to increase patient access to cutting-edge specialty care across the communities we serve. Our third quarter results lend further credence to our hospital strategy of being focused on acuity rather than all things to all people. We continue to make significant progress improving nurse retention and accelerating hiring. This has resulted in a substantial reduction in contract labor usage to 3.1% of consolidated SW&B, which is the high end of pre-pandemic levels. Given our progress in hiring and retention, the reductions in contract labor did not come at the expense of further capacity reductions. We reached these levels in advance of our own projections through disciplined data-driven processes. We will balance the utilization of contract labor for nurses with our targeted strategies to increase capacity to support patient demand for high acuity services.

In the fourth quarter, as demand rises, it is possible we will invest additional resources to ensure access, continuing to employ the same discipline we have used in contract labor utilization over the past two years. We continue to manage cost pressures from medical fees. Medical fees, while higher than last year, remained relatively flat from Q2 to Q3 2023. As I noted through the pandemic, we began a process of restructuring our staffing contracts market-by-market, which includes decisions on in-sourcing services where that is most beneficial. This has helped to mitigate the magnitude of expense increases in our business. Again, as patient demand rises into the winter, we anticipate some increases in costs from our current run rate to ensure access to our specialty services, but this will not change our longer term discipline nor our make versus buy strategy.

Finally, I want to point out that over the last two years, we have successfully settled over 30 labor union contract negotiations. These require a delicate balance between understanding our employees' needs and our ability to have a cost structure to deliver affordable care for our patients. We will continue with our strategy to balance those two aspects. Before I turn my attention to Conifer, I'll make a few comments about our views on the GLP-1 receptor agonist potential impact on our business. These products are very early in their life cycle of impact. They have extraordinarily high costs, an expanding list of side effects, patient tolerance issues and concerns about lean muscle loss, which translates into an unknown long-term safety profile.

We believe that this means adoption among populations which could benefit is still, and likely to be for some time, low. Additionally, these products require sustained consumption. The underlying conditions of diabetes or the related root causes of obesity are not cured. Given this, we see no reason to alter our current focus on taking care of patients with multiple chronic illnesses, and we see no reason to alter our capital plans in moving care into convenient ambulatory settings. The high acuity strategy in the hospitals is subject to less demand elasticity and the capital-efficient business model we've designed to take care of the most complex needs of patients will endure. The aging of the population, the growing burden of chronic illness, the population shifts into many of our markets, and the continued impacts of service and technology innovation that occur outside of the pharmaceutical sector provide a significant tailwind for the important role that hospitals and ASCs will continue to play.

Turning to Conifer. Our Conifer business continues to deliver strong margins and provide high-quality services to its clients. This performance has been supported by ongoing automation and offshoring initiatives and third quarter EBITDA margins were over 26%. We recently renewed our long-standing relationship with one of our larger physician revenue cycle management clients and are slated for additional renewals by the end of the year. Before I turn the call over to Dan, I want to reiterate the strength of our portfolio of businesses and the ongoing performance they have produced. While we continue to navigate a challenging environment, our strategic focus on higher-acuity services, agile approach to managing operating expenses, and effective capacity management all play a pivotal role in delivering these durable results.

As a result, we are again raising our full year 2023 adjusted EBITDA guidance to a range of $3.365 billion to $3.465 billion. We're still formulating plans for 2024 and we'll take the time to see what a fourth quarter looks like in the post-pandemic environment before getting specific about our guidance for next year. From a capital deployment perspective, our priorities are consistent; USPI expansion at very attractive post-synergy multiples and investments in the growth of our high acuity strategy in the acute care segment. Those two priorities help to reduce leverage through earnings growth and free cash flow generation. We maintain an opportunistic balance in this public market trading environment between our desire to pay down debt more directly and the very attractive valuation of our equity.

I will remind you that we have all fixed rate debt and no maturities due until 2026, providing a great deal of predictability relative to other companies that may have a similar level of leverage. And with that, Dan will now provide a more detailed review of our financial results. Dan?

Daniel Cancelmi: Thanks Saum and hello everyone. Our financial results in the third quarter were strong with USPI and our Hospital's adjusted EBITDA well above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $854 million, above the high end of our third quarter guidance range. Our results were driven by strong same-store revenues and volumes, high patient acuity, and very 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 volume and earnings growth. In the third quarter, USPI produced a 7.9% increase in same-facility system-wide revenues compared to last year, with case volumes up 4.1% and net revenue per case up 3.7%.

And USPI's adjusted EBITDA grew 16% compared to the third quarter of last year. Adjusted EBITDA minus NCI expense increased 12% and its EBITDA margin continues to be very strong at 39.3%. We are pleased with the continued strength of USPI's performance as we grow this business, both organically and inorganically in attractive markets across the country. Turning to our acute care hospital business. Same-hospital inpatient admissions increased 0.6% compared to the third quarter last year, while non-COVID admissions increased 4.5%. In fact, year-to-date, non-COVID admissions are up 7.6% over last year. Our labor management continues to be very effective, especially temporary contract nurse staffing costs. On a consolidated basis, contract labor costs were just 3.1% of SW&B in the quarter, a significant decline from 4.3% in the second quarter of this year and 7.4% in the third quarter of last year, a year-over-year decline of almost 60%.

Our consolidated SW&B costs as a percent of revenue were just 45.2% in the quarter compared to 46.4% in the third quarter last year and 250 basis points lower than the 47.6% reported in Q3 2019 before the pandemic despite the significant inflationary pressures since then. Medical fees were flat sequentially compared to the second quarter of this year and were $34 million higher than the third quarter of 2022, consistent with our expectations. Overall, these costs are up 15% year-to-date. And finally, our case mix and revenue yield remain strong as we continue our strategic focus on investments in higher-acuity, higher margin service lines. I want to reiterate what we've communicated previously, our hospital strategy has focused on growing higher-acuity volumes, which is working, better margins, stronger ability to manage costs, and more capital-efficient to generate the earnings growth.

Let's now turn to Conifer, which again delivered a solid quarter. Conifer produced third quarter adjusted EBITDA of $83 million and a strong margin of 26.3% and continued its strong revenue cycle performance for our hospitals and its other clients. Now, let's review our cash flows, balance sheet, and capital structure. At the end of the quarter, we had over $1 billion of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $327 million of free cash flow in the third quarter and just over $1 billion year-to-date, bolstered by Conifer's strong cash collection performance. Our September 30th leverage ratio was 4.08 times EBITDA. As a reminder, all of our outstanding senior secured and unsecured notes have fixed interest rates and we have no significant debt maturities until 2026.

We believe our strong free cash flow generation and capital deployment actions will continue to provide us financial flexibility to support our growth initiatives and further deleverage the balance sheet. Let me now turn to our increased outlook for this year. As Saum mentioned, we are raising our 2023 adjusted EBITDA outlook range by $30 million to $3.415 billion at the midpoint of our range, reflecting our continued strong performance. This $30 million increase includes a $10 million raise for USPI and a $20 million raise for our Hospitals. This is the third time we've raised our EBITDA guidance this year, which is now $155 million or 5% higher than our initial guidance we shared at the beginning of the year. Additionally, we now expect net operating revenues to be in the range of $20.3 billion to $20.5 billion, an increase of $100 million at the midpoint over previous expectations.

Turning to our cash flows for 2023. We now expect free cash flow to be in the range of $1.125 billion to $1.350 billion. Now, I'd like to spend a minute discussing 2024. We are still conducting our 2024 business planning processes and evaluating key assumptions, and therefore, it is premature at this point for us to provide specifics on 2024 guidance. However, we do want to give you some context for our current thinking about next year. Our starting point assumes that we will continue to produce organic volume growth in our key service lines, increase patient acuity, benefit from better than historical contract negotiations, and effectively manage costs with a specific expectation for full year additional contract labor savings. And given the robust pipelines at USPI, we will have further contributions from M&A and de novo development center openings.

These factors, in addition to an ongoing post-pandemic recovery for health care services provide tailwinds into next year. Our starting point also assumes some rather obvious points in this year's results, such as the absence of further grant income and cybersecurity proceeds. In addition, we anticipate completing our sale of the San Ramon Hospital, subject to regulatory approvals. The termination of COVID-related government funding programs as well as the new regulations related to workers' compensation and personal injury reimbursement in Florida, and health care wages in California represent around $100 million in headwinds in aggregate. However, thus far in our planning, we expect our earnings growth opportunities will more than offset these headwinds.

I would reiterate Saum's point that the current environment for recovery in health care services is positive and we feel well-positioned to continue our success. We look forward to completing the planning and sharing guidance with you for 2024 in February on our earnings call. We are pleased with our strong performance so far this year and have confidence in our ability to deliver on our increased 2023 adjusted EBITDA guidance of $3.415 billion at the midpoint of the range. And with that, we're ready to begin the Q&A. Operator?

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