Yahoo Finance Tenet Healthcare Corporation (NYSE:THC) Q1 2024 Earnings Call Transcript
Tenet Healthcare Corporation (NYSE:THC) Q1 2024 Earnings Call Transcript April 30, 2024
Tenet Healthcare Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to Tenet Healthcare's First Quarter 2024 Earnings Conference Call. After the speakers’ remarks there will be a question-and-answer session for industry analyst. [Operator Instructions] Tenet respectfully asks that analysts limit themselves to one question each. 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 morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We are pleased to have you join us for a discussion of Tenet's First Quarter 2024 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; and Sun Park, 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 represent 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 will turn it over to Saum.
Saum Sutaria: Thank you, Will, and good morning everyone. We have significantly accelerated the strategic transformation of our portfolio. In the first quarter of 2024, we closed the sale of nine hospitals for pretax proceeds of $4 billion. This enabled us to retired debt and substantially lower our leverage ratio, while continuing to invest in our leading ambulatory care program. As a result, Tenet is more capital efficient, profitable and value-based care enterprise. We are well positioned to deliver high-quality specialty care in the communities we serve and to deliver exceptional shareholder value. Importantly, with our strong core performance, and the anticipated contributions from completed ambulatory M&A, we expect to essentially replace the lost EBITDA from the hospital asset sales in our run rate expectations.
I'll spend more time on our portfolio transformation in a minute. But first, a quick review of our quarterly results. We carried significant momentum through the first quarter of 2024. Strong revenue growth supported by the continued recovery of utilization, as well as high acuity levels and favorable payer mix drove performance well in excess of our initial guidance. In the first quarter, we delivered net operating revenues of $5.4 billion. Consolidated adjusted EBITDA was $1.02 billion, which represents a 23% increase over the first quarter in 2023 and an adjusted EBITDA margin of 19.1%. In terms of performance, let's start with USPI. We had a great quarter with $394 million in adjusted EBITDA, representing 16% growth over first quarter 2023.
Service line expansion, elevated acuity and favorable payer mix all drove the strong organic growth. Joint replacement surgeries continue to be an excellent source of growth for us and were up 21% over prior year. We also had an active start to the year in terms of our USPI development pipeline. We are proud to have grown USPI to over 535 centers in what is still a highly fragmented market with meaningful new additions this past quarter. We expect these newly acquired centers to deliver approximately $80 million of EBITDA in the first 12 months of ownership. In addition, we expect to ultimately realize the synergized EBITDA minus NCI multiple of six to seven by [year three] (ph) for those centers. USPI's de novo development activity also continues strong with nearly 30 centers currently in syndication stages or in construction.
We are pleased to deploy capital to provide more lower cost access points for the communities in which we operate that also generate very attractive returns. Turning to our hospital segment. Adjusted EBITDA grew 28% to $630 million in the first quarter of 2024. Same-store hospital admissions grew 4.2%, demonstrating the continued recovery of utilization that we saw last year. Acuity levels remained strong within the first quarter of 2024 with revenue per adjusted admission up 8.8% over prior year. We have opened up capacity to meet demand in a number of our markets. In addition to the ongoing investment in our frontline workforce, we are proud to have recognized our many field supervisors, managers, directors and other leaders with incremental financial and professional development rewards for their contributions to our post-pandemic recovery in 2023.
We strongly believe that these management layers are critical to successful recruiting and retention initiatives. Additionally, we continue to invest in our high acuity specialty services. Our plans to open a new hospital in Westover Hills, San Antonio near the end of the second quarter remain on track this year. Over the balance of the year, we plan to allocate more capital into our existing markets for high-acuity service line development to further drive organic growth with strong returns on capital. I'd like to take a moment to thank the special team of Tenet and Conifer colleagues who have worked tirelessly to respond to the cyber-security attack that took place at Change Healthcare in the early part of this year. We utilized Change in some, but not all of our own and our Conifer client hospitals, and we do not utilize it at USPI or with our physician business.
As a result of the incident, the clearinghouse function and change, impacted the ability to send claims to many payers. We have experienced some delays in near-term billings and estimate that this will only have a temporary impact to our cash flows that we expect to resolve over the course of 2024. All-in-all, our hospitals have had a very strong start to the year. Looking forward, we are raising our full year 2024 adjusted EBITDA guidance to a range of $3.5 billion to $3.7 billion, which represents an increase of $215 million or 6% at the midpoint of our range over our prior guidance, which was already quite effective. In order to ensure that we are clear, our increase in guidance reflects the structural increases in revenue reimbursement that we have earned that were not in our original assumptions for 2024, additions to our ASC portfolio and the impact of reductions in our hospital sales -- hospital asset sales.
We are not addressing but also acknowledge the underlying organic outperformance in our business units during Q1 in our increased guidance at this stage. We are early in the year. We are very pleased with the demand that we are seeing in our network, and we will address this component of our expectations for the full year in the future. We are confident in our ability to deliver on these increased expectations. Before I turn the call over to Sun, I'd like to spend some time discussing the progress we have made in our portfolio transformation. As I mentioned previously, the transactions that we have executed on -- have established the dawn of a new era for Tenet. We have completed three very attractive hospital sale transactions, which have generated $4 billion in gross proceeds.
Within these sales, we have maintained, and in most cases, enhanced a commercial service provision relationship with the buyer. We expect these relationships will be an attractive contributor to earnings for years to come. We have a commitment to deleverage the balance sheet and have retired $2.1 billion in debt in the first quarter alone. At the end of the first quarter, our EBITDA minus NCI leverage ratio was approximately 3.5 times, a significant decrease from approximately 7 times that we had at the start of 2018. We have demonstrated capital and financial flexibility this year by allocating $450 million of capital towards our top priority, attractive expansion of our ambulatory business. Additionally, we have returned almost $280 million capital to shareholders via repurchases in the first quarter alone.
While our mission to provide quality, compassionate care in the communities we serve has not changed, we are essentially a new company. Our repositioned portfolio of businesses is more predictable and capital efficient with attractive margins and free cash flow. The operational discipline that we have instilled in each of our facilities, enabled by an analytics-driven culture is producing differentiated results. Our balance sheet, which was once a challenged part of the Tenet's story has been deleveraged. This provides us with a strong foundation and a significant amount of capital and financial flexibility for the future. We feel well-positioned to drive enduring value for our patients, our business partners and in turn our shareholders. And with that, Sun will now provide a more detailed review of our financial results.
Sun?
Sun Park: Thank you, Saum, and good morning, everyone. Our financial results in the first quarter represent a strong start to the year with adjusted EBITDA coming in well above our guidance range. In the first quarter, we generated total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.02 billion, a 23% increase over first quarter 2023. These results were driven by strong same-store revenues, continued high patient acuity, favorable payer mix and effective cost controls. Now I would like to have key items for each of our segments, beginning with USPI, which again delivered strong operating results in the first quarter. USPI's first quarter adjusted EBITDA grew 16% compared to last year, and its adjusted EBITDA margin continues to be very strong at 39.6%.
USPI delivered a 6.4% increase in same-facility system-wide revenues compared to first quarter of 2023, with same-facility system-wide net revenue per case, up 6.8%, driven by high levels of acuity. This was partially offset by a modest decrease in surgical case volume of 0.4%, in-line with our expectations. As we noted last quarter, we are expecting growth in cases to build over the year, due to the significant volume performance we saw in the first quarter of 2023. Now turning to our hospital segment. First quarter hospital adjusted EBITDA grew 28% and with adjusted EBITDA margins up [240] (ph) basis points over last year at 14.4%. First quarter same-hospital inpatient admissions increased 4.2% and revenue per adjusted admission grew 8.8%, demonstrating strong payer mix and continued high acuity levels.
In terms of continued expense management, our consolidated salary, wages and benefits were 43.2% of net revenues in the first quarter, which was substantially lower than 45% in the first quarter of 2023. And our consolidated contract labor expense was 2.9% of SW&B, a material reduction from 6% in the first quarter of '23. The reductions in costs reflect the disciplined approach that we take towards labor management. In addition to the strong operating performance in our hospital segment, our first quarter results also include $88 million of additional revenues associated with CMS' approval of increased funding for the Michigan Medicaid Hospital Rate Adjustment Program, or HRA for short. About half of this amount is related to the fourth quarter of 2023.
We are the leading safety net provider of healthcare services for the people of Southeast Michigan and the Greater Detroit area, and these funds will support the care that we provide to this community. Excluding this additional funding, revenue per adjusted admissions still grew 6.1%, a very attractive result. We've had a strong start to the year in both USPI and hospitals, reflecting strong fundamental same-store revenue growth and disciplined expense management. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $346 million of free cash flow in the first quarter. And as of March 31, we had nearly $2.5 billion of cash on hand with no borrowings outstanding under our $1.5 billion line of credit facility.
We had an active first quarter on the M&A front as well. We invested $450 million for USPI acquisitions at attractive multiples. And as Saum mentioned, we expect to deliver enhanced post-synergy returns on these acquisitions over the next few years. And finally, during the first quarter, we retired $2.1 billion of senior secured first lien notes that were previously due in 2026 and repurchased 2.8 million shares of our stock for $278 million. Our leverage ratio as of March 31, 2024, was 2.79 times EBITDA or 3.46 times EBITDA less NCI, a substantial improvement from year-end. Reflecting the proceeds that we received from our hospital divestitures, as well as our outstanding operational performance. I would note that we have not yet made tax payments on the gains from the hospital sales and the impact of these tax payments are not reflected in our current leverage ratios.
Finally, we have no significant debt maturities until 2027 and all of our outstanding senior secured and unsecured notes have fixed interest rates. In the aggregate, we have made substantial progress transforming our balance sheet and capital structure. We are well positioned with a high degree of financial flexibility and cash flow generation to support our capital allocation priorities in the years to come. Now let me turn to our outlook for 2024. For 2024, we now expect consolidated net operating revenue in the range of $20 billion to $20.4 billion. As Saum mentioned, we’re raising our 2024 adjusted EBITDA outlook range by $215 million to $3.5 billion to $3.7 billion, reflecting the strong start of the year. The $250 million increase is driven by the following structural changes to our guidance.
First, $209 million of incremental net revenues associated with the Michigan Medicaid HRA program. Second, $30 million of incremental EBITDA from ASC acquisitions that we made in the first quarter, above what we had previously assumed in guidance. And finally, a year-over-year headwind of $24 million in the sale of two California hospitals to Adventist, which was not previously reflected in our guidance. On a normalized basis, our full year '24 adjusted EBITDA is now expected to grow 13% over last year at the midpoint of our range. Finally, we would expect second quarter consolidated adjusted EBITDA to be in the range of $835 million to $885 million and we anticipate that USPI's EBITDA in the second quarter will be 23.5% to 25% of our full year USPI EBITDA guidance at the midpoint.
Turning to our cash flows, we now expect free cash flow in the range of $950 million to $1.2 billion, an increase of $75 million at the midpoint. This range includes the payment of $687 million in net taxes related to our announced divestitures. Adjusting for these tax payments, this represents $1.762 billion of free cash flow at the midpoint of our outlook which demonstrates continued strong performance even after the loss of EBITDA from the divested hospitals. As we stated last quarter, our cash flow performance has improved substantially over the past several years and we continue to demonstrate the ability to generate this cash flow while also deleveraging our balance sheet, making investments in our businesses and executing on key growth plans.
And finally, as a reminder, our capital deployment priorities have not changed for 2024. First, we will continue to prioritize capital investments to grow USPI through M&A. Second, we expect investee hospital growth opportunities, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt and finally, a balanced approach to share repurchases depending on market conditions and other investment opportunities. We are pleased with our strong start to the year and the significant progress we have made with the portfolio. We are confident in our ability to deliver on our increased outlook for '24, as we continue to provide high-quality care for those in the communities we serve. And with that, we're ready to begin the Q&A.
Operator?
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