Ardent Health, Inc. (ARDT) Earnings Call Transcript & Summary

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ardent Health Partners Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Stefan Neely, Vallum Advisors. You may begin.

Thank you, operator, and welcome to Ardent Health Second Quarter 2024 Results Conference Call. Leading the call with me today is Ardent's President and CEO, Martin Bonick; and Alfred Lumsdaine, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDAR. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which was issued yesterday evening after the market closed and is available at ardenthealth.com. At the conclusion of our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Martin.

Thank you, Stefan, and good morning, everyone. We appreciate you all joining us today for our first earnings call as a public company and for your support as we begin this exciting new chapter. I want to particularly acknowledge our team, including the more than 24,000 team members, each of whom works hard every day to deliver on our purpose of caring for our patients, our communities, and one another. Today, I'll provide a brief summary of our second quarter financial results, share some key strategic updates and discuss our outlook for the rest of 2024. But first, I would like to take a moment to give a brief overview of Ardent in our compelling growth story. Ardent is a leading hospital operator and health care provider in 8 growing midsized urban markets across 6 states, including Texas, Oklahoma, New Mexico, New Jersey, Idaho and Kansas. We deliver care through a system of 30 hospitals and more than 200 sites of care. At our core, Ardent is committed to making health care better. We strive to achieve this goal through an operating philosophy that puts the patient, our consumer at the center of everything that we do. By creating this consumer focus, we cultivate deep and long-lasting relationships with our patients that span their entire health care journey. To aid in this, we leverage technology within our facilities and beyond to expand our relationships with patients, making care easier to access, easier to deliver and easier to experience. We believe our differentiated care delivery model creates a unique and scalable growth platform. Our strategic framework is centered around market share growth, operational excellence and disciplined capital deployment. Through this strategic framework, we believe that we are well positioned to create sustainable long-term growth and value for our shareholders and for the markets that we serve. Key to our growth strategy is a differentiated joint venture model, which enables us to build local market density in new markets while also being capital efficient. Now looking at the second quarter, our results were supported by broad-based demand growth for our services, improved payer mix and reimbursement dynamics, along with continued strategic execution. The strong demand we experienced for our services during the second quarter resulted in a 3.4% increase in adjusted admissions relative to last year. Demand trends remain favorable across both inpatient and outpatient settings as total admissions grew 5.1% year-over-year. Inpatient volume growth was supported by an increase in admissions through the emergency department, partially due to strong growth in our EMS ED volumes. Another important dynamic impacting our inpatient volumes during the second quarter was the 2-midnight rule, which we estimated drove more than a 2% increase in admissions compared to the second quarter of last year. Surgery volumes decreased 2.2% compared to the prior year period. The decrease in surgeries was due to a 0.9% decrease in our inpatient surgeries and a 2.8% decrease in outpatient surgeries. Outpatient surgeries were particularly impacted by our service line optimization efforts, which reduced volumes and select lower-margin services, such as dental, otolaryngology and ophthalmology. Our inpatient surgical volume trends for the quarter reflect a decrease in bariatric and gynecological cases, partially offset by growth in higher acuity spine, neurology and urology cases. Turning now to an update on our growth strategy. Our team is focused on advancing our key initiatives of targeted market share growth, operational excellence and disciplined capital allocation. When combined, we believe our strategy can allow us to achieve sustainable long-term organic revenue growth in the mid- to high single digits, adjusted EBITDA growth in the low to mid-double digits and mid-teens adjusted EBITDAR margins. Our plan to grow our market share is centered around improving access to health care within our markets. To achieve this, we are focused on investing in additional ambulatory sites of care such as urgent care centers, freestanding emergency rooms, outpatient surgery centers and physician clinics. We are also deepening our network of employee providers to widen the top of the funnel in terms of patient access. Through the first half of this year, we have acquired or opened 8 urgent care clinics and are actively evaluating numerous ambulatory investment opportunities within our existing markets. Urgent care facilities are currently our most immediate focus as they broaden our geographic footprint and access to new patients in our communities. As it relates to our provider network, we employed 1,785 providers at the end of the second quarter, an increase of 6.5% compared to the same time last year. We are currently focused on recruiting both primary care and specialty care providers to expand access in our markets to support our targeted service line growth strategies. In terms of operational excellence, as I've already mentioned, we've been very focused on service line optimization, which was an initiative we began in the second half of last year. Year-to-date, our service line optimization efforts have focused on curtailing low-margin and low-acuity cases, causing a nearly 2% decrease in our total surgery volumes and resulting in improved margins overall. We are also making strong progress in improving our supply utilization through a variety of sourcing and procurement initiatives, along with other enterprise standardization initiatives. These efforts, combined with our service line optimization initiatives contributed to the 70 basis point improvement in our adjusted EBITDAR margins relative to the second quarter of 2023. In addition, fundamental to our growth strategy is a focus on disciplined capital allocation, which includes maintaining a lean balance sheet to support opportunistic growth through investment in M&A. With the completion of our initial public offering last month, we have substantial available liquidity to pursue expansion into new and adjacent high-growth midsized urban markets. Our current pipeline of potential opportunities is robust, and we are actively evaluating potential targets that represent attractive return opportunities for growth. As we look forward to the second half of the year, we continue to expect strong demand for growth across our markets, along with continued margin expansion and strategic execution. To that end, yesterday, we initiated guidance for the full year of 2024. Alfred will provide more on our guidance in a moment, but I do want to highlight a few key elements of our guidance, which includes total revenue growth of between 6% and 9% and adjusted EBITDA growth of between 32% and 38%. In closing, I'm very proud of the hard work and commitment of our entire team, which has allowed us to reach this important milestone for Ardent. As we enter into this new chapter in growth in partnership with all of our shareholders, we are excited about the growth opportunities ahead and believe we have an exciting road map to create value for shareholders while continuing to improve access to health care in the markets we serve. With that, I'll now hand the call over to Alfred.

Thank you, Marti, and good morning to everyone joining us on the call today. As Marti indicated, we're pleased with our second quarter results, which reflected both improved revenue realization and margin expansion. Our total revenue for the quarter was $1.5 million, an increase of 7.5% compared to the second quarter of 2023. As Marti noted, the growth in our total revenue was the result of increased volumes and better rates, partially due to improved payer and service mix. Our net patient service revenue mix for the second quarter reflects a 70 basis point reduction in Medicaid revenue mix, offset by a 55 basis point increase in managed care and a 55 basis increase in Medicare, which includes managed Medicare. Our net patient service revenue mix for the second quarter reflects a 70 basis point reduction in Medicaid revenue mix offset by a 55 basis point increase in managed care and a 55 basis point increase in Medicare, which includes managed Medicare. Of note, these changes in payer mix reflect the ongoing Medicaid redeterminations. So far, we've seen approximately 2/3 of our redetermined patients stay within government coverage and approximately 20% convert to commercial plans. In addition, our total revenue for the second quarter reflects a $13 million increase in our supplemental revenues due to the implementation of the Oklahoma DPP program, which became effective on April 1 of this year. Adjusted EBITDA for the quarter was $122 million compared to $102 million in the second quarter of 2023. Adjusted EBITDAR margin before noncontrolling interest as a percentage of net revenue was 12.7% during Q2 of 2024 compared to 12.0% in Q2 of 2023. As Marti discussed, our adjusted EBITDAR margins benefited by improved surgical mix, the impact of our cost reduction efforts as well as the overall improvement in our payer mix. The comparison of adjusted EBITDA to the prior year is also impacted by approximately $8 million in benefits from government stimulus funds recognized in the second quarter of last year. Specifically relating to our expenses for the second quarter of 2024, I'd highlight that our contract labor expense declined by approximately $7 million year-over-year or 22% as we continue to see a normalization of contract labor utilization and rates across each of our markets and continued improvements in our nursing retention. As a percentage of total salaries and benefits, our contract labor expense for Q2 of 2024 was 4.3% compared to 5.7% for Q2 of last year. In total, for the second quarter of 2024, salaries and benefits were $624 million or 42.4% of total revenue compared to $598 million or 43.7% of total revenue in the second quarter of last year. Our supplies expense for the quarter was approximately $259 million or 17.6% of total revenue compared to $253 million or 18.5% of total revenue in the second quarter of last year. This 90 basis point decrease in supplies expense as a percentage of revenue reflects improvements in our supply chain performance from a number of supply expense initiatives that our team has been implementing this year. Professional fees for the second quarter of 2024 were $272 million or 18.5% of total revenue compared to $235 million or 17.1% of total revenue in the prior year period. A majority of the increase in professional fees relates to higher hospital-based physician subsidies compared to 2023. So far in 2024, we continue to see some pressure in certain specialties such as anesthesia and radiology. But overall, we believe that the subsidy dynamic has largely normalized relative to the significant increases we saw throughout 2023. Other operating expenses for Q2 were $115 million or 7.9% of total revenue compared to $109 million or 7.8% of total revenue in Q2 of last year. The decrease in other operating expenses primarily reflects an approximately $7 million benefit from a sale of aged patient accounts receivable in Q2 of this year. Moving now to cash flow and liquidity, we ended the second quarter with total cash of $335 million. Cash provided by operating activities during the second quarter was $120 million compared to $43 million during the second quarter of 2023. The increase in cash from operating activities compared to the prior year reflects our improved profitability and higher cash flow resulting from changes in net working capital. Capital expenditures during the second quarter were $39 million compared to $34 million in the second quarter of last year. The increase in CapEx was primarily driven by an $8 million increase in growth CapEx relating to medical imaging equipment and surgical robots. At the end of the second quarter, our total net debt outstanding was $758 million. During the quarter, we repaid $100 million of outstanding borrowings under our term loan would be using cash on hand while simultaneously increasing capacity under our undrawn revolving credit facility by $100 million. At the end of the second quarter, our total available liquidity was $624 million. When factoring in the $209 million of net proceeds from the initial public offering in July, our net debt would have been $549 million and total available liquidity would have been $832 million at the end of the second quarter on a pro forma basis. As of June 30, 2024, our total net leverage, as calculated under our credit agreement, was 2.3x and our lease-adjusted net leverage was 4.0x. Pro forma for the net proceeds of the IPO, our lease-adjusted net leverage was 3.6x. I'd like to turn now to recap our full year 2024 financial guidance, which we announced in our press release yesterday afternoon. Total revenue of between $5.75 billion and $5.9 billion; adjusted EBITDA of between $415 million and $435 million. Net income attributable to Ardent Health Partners of between $163 million and $182 million, implying full year EPS of between $1.23 and $1.37. Finally, capital expenditures of between $170 million and $185 million. Our guidance for the year reflects total adjusted administration growth of between 4.0% and 4.5% compared to 2023 and net patient revenue per adjusted admission growth of between 3.0% and 4.0%. Our guidance also reflects an adjusted EBITDA impact of approximately $27 million from the Oklahoma DPP program. As it relates specifically to our expectations for the second half of the year compared to 2023, we expect to see continued volume and rate growth across our markets, supported by our focus on sustainable operational excellence and margin improvement. Before opening the call up for questions, I also want to provide a quick update on the New Mexico-directed payment program. This supplemental program has been approved by the state and signed into law by the Governor of New Mexico. As of August 5 of this year, the program has been submitted to CMS for its approval, which historically takes on average, 120 to 140 days. We'll continue to keep you posted on any material updates to the status of this program going forward. Now with that, operator, I'd like to open up the line for questions.

[Operator Instructions] Your first question comes from the line of Jason Cassorla of Citi.

Great. And congrats on the quarter. I just wanted to ask about '24 EBITDA guidance and what it implies for the back half of the year. If we add back that $63 million of cybersecurity headwind in the fourth quarter of '23, it seems like '24 guidance implies that second half EBITDA would basically be flat at the midpoint year-over-year. That comes after meaningful growth year-to-date in the Oklahoma DPP benefit, I guess, you have the range out there, but just any color in terms of how you're approaching EBITDA guidance and maybe what the puts and takes are and that we should be thinking about for the second half?

Sure. I appreciate the question. Yes, you're correct. If you look at just the midpoint of guidance, it would apply pretty modest year-over-year growth relatively flat if you adjust out for cyber. Obviously, we're just out of the gate in terms of guidance. We clearly had some benefit in Q2 from a couple of things from a timing perspective. We had a sale of [indiscernible] that was a relatively small amount. But usually, we expect those types of events to happen in the back half of the year. So there's just a little bit of timing going on as well as some supplemental activity. We're early in our -- obviously, in our public co history and our expectations are to have guidance that we fully meet. So we haven't done anything in terms of modifying guidance at this point. And again, I would point to real timing activity as well as if you look at last year, the Oklahoma DPP program was scheduled to go live originally in October of '23. They postponed the go-live until April of this year. But as a consequence, they provided -- Oklahoma provided a refund of the shop tax and that hit in Q4 of last year. So that was kind of a one-timer in the back half of the year.

Okay. Great. And then maybe just as a follow-up, I was just hoping you can give a little bit more color around your ambulatory expansion. I know -- I think you guys have previously suggested a $20 million, $25 million kind of annualized spend there. I guess, can you just give us a sense on the pipeline timing around that ambulatory expansion, what that look like? And maybe just how you're -- perhaps how you're balancing any opportunity to kind of pull that forward or accelerate that spend would be great.

Yes. As we said, we implemented through our urgent care platform by 8 facilities in the first half of this year. We expect to see meaningful growth in the second half on urgent care as well. We've got a number of de novos and acquisitions targeted acquisitions in the pipeline, but nothing definitive to say, but I would expect to see growth in the second half of this year based upon what's in our pipeline.

Your next question comes from the line of Scott Fidel of Stephens.

For the first question, just -- I appreciate the update on the redeterminations and the comment around 20% shifting over to commercial. Just interested if you could share with us what your exchange admissions contributions were in the second quarter to admissions growth and what you're budgeting for the full year for that as well?

Yes. Exchange volumes overall were up fairly significantly, basically from an admin perspective, about 1/3 year-over-year. However, for us, it's still a relatively small contribution from a revenue perspective, just over 3% of our revenues. So the volumes are still relatively modest overall. Even though on a year-over-year basis, it is growing. And clearly, a big part of that growth has been the redetermination.

Okay. Got it. And then as a follow question. I thought it might just be helpful if you could walk us through in a little more detail. I've actually got a couple of questions on this already. Just around sort of the sequencing of the Oklahoma DPP and sort of how that builds into the full year expectations. As you highlighted in the release, you had around $13 million in the second quarter. You're assuming $27 million for the full year. So that would sort of imply one more sort of similar payment. But maybe if you could walk us through, is this something that you would expect quarterly or biannually? Or is there some conservatives of just around that sort of processing of Oklahoma DPP revenues over the course of the year would be helpful.

Good question, Scott. And I think that partially was a component of the answer to Jason's question as well. And I know it is a little bit, I'll say, confusing. We're expecting the program is live, went live on April 1. We'll expect relatively consistent revenue impact from that. We said $13 million in Q2. We would expect relatively consistent revenues in the coming quarters. There is, of course, a tax component to that. So the net is smaller than that, call that $10 million, $11 million. From a year-over-year perspective, we did have this shop tax [ repeat ] fund in Q4 of last year. And that's why the full year impact, it's not as simple as taking 3x the $13 million for the rest of the year. However, going into next year, we'll also, from a Q1 perspective, we'll get a full quarter impact of the program in Q1 of next year on a year-over-year basis. So again, that's why it's not as simple, just that shop tax, I'll call it, refund last year makes it not as simple as taking 3x the Q2 impact. Hope that makes sense.

Yes, it does. Okay. That helps -- explain that. Okay.

Your next question comes from the line of Whit Mayo of Leerink Partners.

Can you maybe spend just a minute on the service line optimization? I think you've kind of framed some of the impacts that you saw on surgical trends, calling out dental, ENT, ophthalmology. Just how much did that contribute to the decline? And how much do you think that weighs on the metrics for the year? Do you annualize this next year? Is this an ongoing initiative? Just maybe any color would be helpful.

Yes. I think I'll start and then let Marti jump in. From our perspective, when we look at the surgical decline, essentially -- and there's always puts and takes, right? But it essentially covers all of it. And we've also seen pressure, and I think that is a broad industry dynamic as well on our bariatric cases, unrelated to our service line optimization. But I think if we look just at how much of the year-over-year decline did that service line optimization impact, it was effectively the entire amount of the decrease.

Yes, actually, slightly more than that. We saw surgical growth when you net in the additions, so we were focusing on taking out some lower-level cases, dental, ophthalmology, ENT. If you look at just those 3 categories, that would be weigh about 117% of the decline. So we backfilled that with higher acuity cases. We also have been focused on our oncology programs. We closed an OB program last year in one of our Texas markets. And so all of those things are continuing to play out, and we'll see the rest of that impacts, basically cycle out as we go through the balance of this year.

And maybe just [indiscernible], I think contract labor, you framed around 4.3% as a percentage of total [ SWB ] this quarter, down from 5.7% if I get the numbers right. What are you budgeting for in terms of the rest of the year? Do you think you make additional improvements from current levels? Or is this a steady state that you would expect?

I would say it's closer to steady state with the -- I wouldn't expect the same kind of quarter-over-quarter decreases that we've seen as we go forward. We're still very focused. Average hourly rate has come down nicely. And we are still very focused on utilization. And of course, from a quarter-over-quarter, we would expect seasonally Q4 to be our strongest from a volume perspective. And so there will be more utilization potentially. So I think we're too -- we'll call it the new normal. We still focus on getting back to pre-pandemic levels, but we're getting much closer to that. So I don't think we'll see the kind of step functions down that we've seen last several quarters.

Yes. That being said, we are seeing strong recruitment and retention for our team members. And as that trend continues, we do expect, as Alfred said, to get back towards pre-pandemic levels around those rates, but again, not the significant step down that we saw.

Okay. Maybe just to clarify that point, just -- I mean, if I take the second quarter, the 4.3% of SWB, that's you're kind of run rating that in terms of like your guidance for the rest of the year, you're not assuming a material or a modest level of improvement?

Not assuming a modest -- I mean, not assuming a material level of improvement...

Your next question comes from the line of Craig Hettenbach of Morgan Stanley.

Great. Thanks for the color on the timing of New Mexico. On supplemental payments more broadly, can you just talk about your confidence and expanding that and really a contribution to margins as we go forward?

Yes. I think at a macro level, we view these programs as pretty consistent and enduring. I think now with New Mexico and Tennessee with their DPP program, something like 44 states have a program in place. So we think relatively predictable. Now obviously, New Mexico has not been approved by CMS yet, and we'll be back, obviously, once that approval has happened. But yes, I think from a -- we think it is -- the amounts historically have been largely quite predictable.

Got it. And then just a follow-up question on the strong adjusted admissions growth. Can you share any insights or color by some of the markets like maybe some markets that are trending above?

Yes. It's been pretty consistent throughout our markets. Obviously, the 2-midnight rule has been a tailwind in this, and that's been consistent across all of our markets. So I don't think there's anything at an individual market level that I would particularly point to.

Your next question comes from the line of Kevin Fischbeck of Bank of America.

This is [ Joanna Gajuk ] filling in for Kevin today. If I may, just first follow up on the discussion around the supplemental payment programs. I understand we're waiting for the New Mexico and you're saying it's broadly, I guess, accepted program across 44 different states. But I guess as we thinking going into elections and what might happen, like the different scenarios in terms of the outcome and how this could impact the Medicare supplemental payment program in particular, right, if Republicans were to take over and try to kind of go after Medicaid what was speaking. And then I guess how much is at risk in your states when it comes to the supplemental payment programs.

Yes. I mean it's a good question and everybody's got that same question on their minds. The way in which we've looked at it, as Alfred said, with the approval of New Mexico, the 44 states that have these live. If you go back to the inception of these programs, they started back in 2016 under the Trump administration and then have continued to grow under the Biden administration. And so given that this is now a widespread across the country, we feel that there's significant durability. CMS has also published guidance that has to be achieved by 2028 in terms of how these -- how they're going to try to standardize and normalize these programs across the country. So I think that also gives us some visibility in terms of how the government is thinking about these programs as a contributing funding source for these lower-income patients. And so we have good reason to believe that regardless of the election outcomes that you should have durability.

Right. And what do you think about the concept of some of these states when they expanded the supplemental payment programs they -- when would the rate increase all the way up to commercial rates and some states are raise the rates but more kind of in line with Medicare. So would you say that those things that went with higher rates all the way to commercial will be more at risk when it comes to potential program changes?

I think it's just too early to know what the platforms need, neither of the candidates have really established any firm guidance on this. And so I think anything that we would say is just complete speculation on that part.

If I may ask a question on a separate topic. So you talked about your, I guess, managing your balance sheet, but also looking at potential acquisitions. You talked about you actively validating the pipeline. So can you talk about your plans, should we expect a transaction within the next 12 months? And I guess how many different assets are you looking at? What types of assets you're looking at when it comes to targeting expansions?

Yes. I mean we've got a robust pipeline of activity is everybody knows that there's sort of a tale of 2 cities going on in the health care world. There are systems like ours that are performing well and still a lot that are struggling. And so we're in conversations with a number of different opportunities that are attractive. We're going to be very picky in terms of where -- which markets we go into, that fit our criteria of those midsized urban markets, good growth profile in some place where we can get a significant foothold in those markets. At this point, we don't have anything definitive to discuss, but we're encouraged by the pipeline that we have and are hopeful to see an opportunity arise in the not-too-distant future. But that being said, it's too early to put anything definitive out there.

Your next question comes from the line of Timothy Greaves of Loop Capital Markets.

If I could, I wanted to go back to total surgeries and decline there. It seems like the service line optimization in the move away from lower acuity services to higher ones is the reason for it. I just wanted to kind of like go into more of what is the depth of services that you guys offer in the higher acuity versus lower acuity services? And maybe further in on that, how much of the split -- what is the split between the lower versus higher surgeries do you guys give?

We're full service providers, absent high-end transplants. We do a full complement of mix of surgeries, orthopedics, neurosurgery, general surgeries, et cetera. And so the surgeries that we've taken out, as you said, tend to be higher volumes, but not as a percent of the total, but they're just -- they're quicker turnaround cases. And so you see a bigger numeric impact than you went for some of the higher acuity cases that take more time. And so as we said, the delta that we saw in terms of the surgery decline was fully captured in terms of taking some of those lower-margin services out, not all but making progress around those and then backfilling with some of those higher margins. So Alfred, anything you...

No. I think it's difficult to give a precise answer or a precise definition of lower acuity and higher acuity, right? Because even within categories of something like orthopedics, there are lean, I will say, lower acuity orthopedics and higher orthopedics, to Marti's point, the lower acuity, clearly are a higher volume and for having the OR time freed up for higher acuity surgeries and really focusing on growing those types of surgeries, spine, orthopedics has been a significant focus.

This concludes our Q&A session. I will now turn the conference back over to Marti for closing remarks.

Thank you, everyone, for your support of Ardent as we enter into this exciting new chapter for the company. We believe we've got a strong foundation for profitable growth, and we look forward to keeping you apprised of our progress. And with that, that concludes our call today. Thank you.

This concludes today's conference call. You may now disconnect.