TENET HEALTHCARE CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Results Overview: Third quarter net operating revenues totaled $5.1 billion. Consolidated adjusted EBITDA was $978 million, a 15% increase over Q3 2023, with an adjusted EBITDA margin of 19.1%.
• Portfolio Transformation: The sale of Alabama hospitals on September 30 was completed at high multiples. The current hospital portfolio has an enhanced return profile, more attractive geographies, and higher expected returns on invested capital. Conifer retained and expanded relationships with acquirers of the hospitals.
• Cash Flow and Balance Sheet: $829 million of free cash flow was generated in Q3. As of September 30, $4.1 billion in cash was on hand with no borrowings under the $1.5 billion line of credit. 795,000 shares were repurchased for $124 million in Q3. The leverage ratio improved to 2.2x EBITDA or 2.8x EBITDA less NCI.

Segment Performance

• USPI (Ambulatory Surgical): Adjusted EBITDA was $439 million in Q3 2024, representing a 19% growth over Q3 2023. Same-facility revenues grew 8.7%, with adjusted EBITDA margin at 38.5%. Orthopedic volumes were strong, with total joint replacements in ASCs up 19% y-o-y. Six new de novos were opened in the quarter, and nearly 20 centers are in syndication or under construction.
• Hospital Segment: Adjusted EBITDA was $539 million in Q3 2024, up 11% y-o-y. Same-store hospital admissions increased 5.2%, and revenue per adjusted admission grew 3.3%. The segment benefits from a strong utilization environment and continued investments in expanding the network.

Guidance

• Full-year 2024 adjusted EBITDA guidance was raised to a range of $3.9 billion to $4.0 billion. Consolidated net operating revenues are expected to be in the range of $20.6 billion to $20.8 billion. USPI's adjusted EBITDA guidance is $1.76 billion to $1.80 billion, and the Hospital segment's adjusted EBITDA guidance is $2.14 billion to $2.20 billion.
• Free cash flow for 2024 is expected to be $975 million to $1.225 billion. Guidance for 2025 will be provided in February, considering normalizing items and continued growth.

Risks

• Managed Care Behavior: Impact of the two-midnight rule in Medicare Advantage and managed care denials. Administrative costs from disputes and denials have increased significantly. The two-midnight rule adoption in Medicare Advantage is still underway, with an impact on admissions estimated at 50-100 basis points.
• Hurricane Impact: Facilities were impacted by hurricanes, though most centers are now operational, with ongoing efforts to recover from the devastation.

Question and Answer

Q: Just a couple of quick clarifications. I think the ASC segment guidance for USPI implies a drop sequentially in EBITDA that would obviously be seasonally very unusual. So I’m just curious if there’s anything to call out there. And I think cash flow, if you could just tell us what the total tax payments in 4Q are going to be. And then just my real question would be, could you just talk about changes or any changes that you’re potentially seeing from managed care behavior?

A: There’s three questions there. For USPI EBITDA, we reported $439 million in Q3 and our guidance currently implies $500 million at the midpoint for USPI in Q4. In terms of tax payments, as we put in our investor presentation, we have $875 million of total deal payments for the year, of which we expect to pay about $700 million in Q4 in addition with our kind of standard other tax payments. On the managed care side, the process of adopting fully the two-midnight rule in the Medicare Advantage market is still underway. I don’t think it’s been fully adopted. And at least for us, we have seen probably somewhere between 50 and 100 basis points contribution to our overall admissions growth, but certainly short of and with more work then there should be if the two-midnight rule was fully adopted.

Q: I was wondering if you could provide a little bit more detail on your 2025 comments, specifically around growth in SS volumes next year. Is that the degree to which you see those continuing to kind of outpace historical trends? Is there any moderation assumed in there? And just your general thoughts on that momentum.

A: We continue to see a strong demand environment. As we’ve talked about before, we do believe that the demand recovery, especially in the Hospital segment, around the country continues as kind of the replacement of the early mortality that occurred from COVID in that demand environment. And we don’t know when that’s going to slow down to a more normal range. But currently, we still see that robust demand environment.

Q: Maybe I’ll use Josh’s approach. One clarification and then one question. Clarification being around the 1% USPI same-facility volume growth. That’s a step-up from the first half. But you sort of alluded to maybe there was a little bit of impact from hurricanes in there. Just wondered if it was. And I know long-term, you have a transition you’re making toward higher acuity procedures that it’s helping on the revenue per case side but hitting a little on the volume side. Are you still in the midst of that? And what’s the path to get back to 2% to 3%. And then I just want to ask on your capital deployment.

A: As we said at the beginning of the year, given the extraordinary comps from 2023, we thought we would move into positive volume territory later in the year, and that’s kind of the pattern that you’ve seen, right, from Q1, Q2, Q3. We’ll see what happens with Q4, given the point that I made in the prior question related to the hurricane impact. And yes, we continue to focus on growing higher acuity, which drives net revenue per case. It also drives extraordinary value in the system from an overall lowering the cost of care standpoint. And we continue to look for opportunities where those transitions can happen in an orderly fashion to migrate certain lower acuity, higher volume type of activities out of the ASCs. I think that will continue for the next couple of years. As we’ve had said from the beginning, it was a multiyear plan to kind of move some of those things out. Look, you’re right about capital deployment. Obviously, we’re very cognizant of the free cash flow generation looking forward. One clarification, obviously, given the cash we have on our balance sheet, we’ve delevered, but the debt paydown opportunities are still ahead of us, which Sun and team will structure in very much the right way. The second point I would make is despite our guidance, if you look at our history for the last five or six years, even before being in this position, we’ve deployed more than our "$200 million to $250 million" in capital into USPI given the larger deals that we’ve done, including the deal that we did in the first quarter of this year for 45 ASCs, plus what we’ve done otherwise. And so we continue to believe accelerating spend at USPI is the single most accretive thing to creating value within the company. And of course, as I noted in my comments and Sun did in his, we have, in fact, accelerated relative to the trend over the last few years, given our deleveraging and cash positions our ability to return value back to shareholders. So I think they’re very consistent. Your points are very consistent with our comments with the helpful added nuance that we have the flexibility to be more proactive and aggressive on each one of those dimensions at this point looking forward.