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

Thank you. for standing by. My name is Lacey and I will be your conference operator today. At this time, I would like to welcome everyone to the Ardent Health second quarter 2026 earnings conference call. Our lines have been placed on mute to prevent any background noise. After the speakers... There will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Please limit yourself to one question and one follow-up. Thank you. I would now like to turn the call over to Dave Stidler.

Senior Vice President of Investor Relations. You may go ahead. Thank you, operator, and welcome to Arden Health's second quarter 2026 earnings conference call. me today is ardent president and chief executive officer dave caspers and chief financial officer alfred lumsane dave and alfred will provide prepared remarks and then we will open the line to questions before i turn the call over to dave i want to remind everyone that 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 Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion non-GAAP financial measures, including adjusted EBITDA. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release and supplemental earnings presentation, which were both issued yesterday evening after the market closed and are available at ardenthealth.com. With that, I'll turn the call over to Dan.

Dave, thank you and good morning. I want to begin by thanking our 25,000 team members for the way they continue to adapt, improve how we operate, and deliver high-quality care to our patients and communities we serve. To frame today's discussion, I'll focus my comments on three areas. First, where we stand, including the strength of our current platform. Second, where we're going, including my priorities and the opportunities ahead. And third, what you can expect from me. Let's start with where we stand. The Arden platform is built on a strong foundation with clear opportunities to improve our performance. With 30 hospitals and over 280 sites of care, attractive markets growing two to three times faster than the US average and strong joint venture partners, we are well positioned to capture market share. Over the past two years, we have broadened our access points and strengthened partnerships by acquiring and or building over 25 urgent care and ASC facilities. These investments expand our ability to care for patients across the most appropriate care setting while also targeting volume growth. In addition, strategic partnerships, specifically with Ensembl and Epic, are strengthening our revenue cycle and clinical capabilities. IN THE FUTURE. IN SHORT, WE ARE WELL POSITIONED IN SHORT, WE ARE WELL POSITIONED IN SHORT, WE ARE WELL POSITIONED BUT THERE IS MORE WORK AHEAD. Since transitioning into this role, I've leaned into areas where I see the greatest opportunity to optimize and accelerate performance. and I want to share the progress already underway. I'm encouraged by the momentum of our impact program. On the cost side, I'm pleased with improvements in SWB, which grew just 0.7% year over year as we reduced contract labor spend by 42%. We have taken deliberate action to build a more efficient enterprise by intentionally redesigning our structure and standardizing how we operate. Impact is more than a savings program. It's also designed to increase our agility and transform care. We accomplished that in part by leveraging technology with our strong clinical engine. Engine is a strategic collection of assets, including our partnership with Epic and Ensemble, our virtual care platform, and our growing AI capabilities. It's the backbone that makes standardization and efficiency possible while empowering our people to deliver consistent, high-quality, personalized care across the network. Our virtual care rollout with HelloCare AI is an early proof point. In Texas and Idaho, our first markets to go live, virtual nurses completed 58% of discharge in June. and we reduced the hours spent monitoring patients by 18%. Looking ahead, it positions us to capture additional volume and better manage capacity so we can deliver the right care at the right time in the right setting. supplies, we are beginning to harvest gains by consolidating vendors, renegotiating contracts, and streamlining physician preference items. On the IT front, we are rationalizing our application portfolio to eliminate any redundancy and reduce waste. to revenue, we are taking a more disciplined, data-driven approach to payer contracting, using price transparency data to identify where our rates lag the market as we work through our contract portfolio. In many instances, our rates rank below the 50th percentile, and we believe we can drive them higher given our strong market positions while improving contract terms and yield. We're already seeing evidence this strategy is creating meaningful improvement. An early proof point is a June renewal with a key payer in one market where outpatient payments were materially below market benchmarks. The new contract improved both rate and terms, and we now expect stronger economics from this agreement. We estimate this will add between $5 and $10 million to this year's adjusted EBITDA that wasn't in our previous guidance. We've also brought greater structure and dedicated leadership to how we grow, organizing around our highest value service lines, such as cardiology and women's and children's. This work is guided by Capacity IQ, the framework we introduced last quarter to match demand with capacity across our system. directing capital, physician recruitment, and assets to where we see the strongest growth and returns. It's an area you'll hear more about going forward. That's where we stand. Now this is where we're going. My focus is on delivering more consistent financial results, growing EBITDA, deploying capital effectively, and executing against our targets in a way that supports long-term shareholder value. At a high level, our three-part growth strategy is unchanged. It remains focused on number one, strengthening EBITDA margins through operational excellence. Two, accelerating strategic growth in core markets and services, including new ways to optimize how we reach and engage customers at scale. And three, pursuing disciplined M&A. Within this strategy, sharper operational execution is my highest priority. We will continue to manage through the healthcare head and tailwinds, but as an operator, I am laser focused on the performance that we can directly influence. How we staff, how we contract, how we allocate capital, how we standardize, and how we hold ourselves accountable. As part of that, we are building a culture that works as one team aligned around one plan and delivering with one standard. While we have made meaningful progress standardizing operations across the enterprise, I see additional opportunity to reduce variation and strengthen consistency in our execution. As As such, I am keenly focused on the executive level KPI driven decision making, reducing unwanted variation and strengthening our accountability. Carrying forward our impact savings momentum is a top priority. Impact is not a one-year project. It's a multi-year strategic imperative and it is building momentum. We have increased our 2026 savings target twice from 40 million originally to the 55 million target established in the fourth quarter of 2025 earnings call to now over 70 million expected to be realized this year. year. We will continue to evaluate our portfolio and take action where we see opportunities to sharpen our focus and improve our margins. That will entail assessing and evaluating all aspects of our operations. And if an asset or service line is not the right long-term fit, we will act thoughtfully and with discipline. An example of this is our intentional service line rationalization work in the second quarter. We moved lower margin procedures, including ENT and ophthalmology, out of the hospital to free up capacity for higher margin service lines. As we wrap up, I want to be clear about what you can expect from me. First, we will push Arden to be more nimble and faster while maintaining our strong commitment to patient care, quality and safety. We will measure what matters, focus on fewer but more important priorities and pivot quickly as necessary when circumstances change. Our response to the second quarter volumes is a testament to this approach. We quickly flexed staffing and implemented additional non-clinical actions that support our confidence to reaffirm our 2026 adjusted EBITDA guidance. That agility reflects the strength of our team and our ability to execute consistently with speed. Secondly, I recognize the importance of delivering on our financial commitments to the investment community. Consistency and credibility matter, and you can expect us to remain focused on disciplined execution and accountability. And And third, you can expect me to bring steady leadership and rigorous operational discipline with consistency. which ultimately supports long-term shareholder value creation. We have the right leadership team, operating model, and market positions to advance our strategy. And now our focus is delivering consistency over time. I'm enthusiastic about the opportunity ahead and look forward to working with our team members, providers, partners, and the investment community.

With that, I'll turn the call over to Alfred. Thanks, Dave, and good morning, everyone. Thank you for joining us on the call today. I'm very pleased with how our team responded to a challenging volume environment in the second quarter. Surgeries were down materially in April and May before rebounding with modest growth in June. Our leaders managed through these dynamics with discipline, focusing on the controllables, and as a result, delivered strong results and cash flow. As I'll discuss later, we've taken the necessary actions to maintain our full year 2026 adjusted EBITDA guidance despite a softer volume outlook. I'll begin with second quarter results. We reported revenue of $1.62 billion and adjusted EBITDA of $115 million. In early June, we indicated that the business experienced broad-based volume softness during April and May, with surgeries and admissions down 5% and 2% respectively, compared to the prior year. These trends improved in June with surgeries and admissions returning to modest growth. the full second quarter, surgeries and admissions declined 2.9% and 1%, respectively. And although July volumes are still below our original expectations entering this year, like June, they are improved from April and May volumes. During the second quarter, we executed two initiatives that are already beginning to benefit our financial results. First, as Dave mentioned, we successfully negotiated a key payer contract renewal in one of our markets effective June 1st that is now expected to generate earnings above our original 2026 plan. Importantly, the improved rate and terms are part of our broader strategy to enhance our revenue yield through payer contracting. Second, we streamlined our structure to reduce managerial layers at both corporate and field locations. We expect these actions to generate $15 to $20 million of additional savings this year, with a full annualized impact of $30 to $35 million. As a result, we're increasing our 2026 impact program savings target to at least $70 million, up from $55 million communicated previously. These actions are almost entirely non-clinical in nature and are intended to improve accountability and speed our execution. collectively the pair contracting and structural actions help mitigate some of the volume related earnings pressure in the second quarter, and the associated earnings improvement will be at full run rate as we enter the third quarter. In terms of the other key metrics, second quarter adjusted admissions increased 2.5% year over year. Net patient service revenue per adjusted admission decreased 3.9%, reflecting the benefit in the second quarter of 2025 from recording two quarters worth of the New Mexico DPP program, as well as the surgery decline that produced a lower acuity service mix. From a payer standpoint, our exchange admissions declined 8% year over year, and we saw a corresponding increase in self-pay. But these trends were manageable and largely contemplated in our original guidance. As they've also noted, we manage our labor expense very well during the second quarter, with SW&V growing a modest 0.7% year over year. In addition, we reduced our contract labor spend by 42% year-over-year, and contract labor as a percentage of SW&B improved to 2.2% in the second quarter from 3.8% a year ago. As expected, year-over-year professional fee growth slowed. point four percent compared to twelve point nine percent in the first quarter and supplies increased 3.3 percent year over year payer denial trends were consistent with the previous two quarters we continue to work closely with our revenue cycle partner ensemble to drive targeted denial management recovery efforts and we see additional opportunities to improve yield going forward. Moving on to cash flow and liquidity, we're pleased with the robust operating cash flow of 197 million dollars generated in the second quarter compared to 117 million dollars a year ago. Our first half, 2026 operating cash flow, was $137 million, up 47% from $93 million in the first half of 2025. Capital expenditures during the second quarter were $39 million, and we expect that to ramp through the year. Additionally, we repurchased $13 million of stock in the second quarter, leaving the company with a remaining authorization of $34 million at June 30, 2026. We ended June with total cash of $724 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the second quarter was $992 million. And we finished the quarter with total net leverage of 0.8 times and lease adjusted net leverage of 2.6 times. Our strong balance sheet gives us flexibility, and our capital deployment approach remains return-driven and disciplined, with a clear preference for high-margin service line, ambulatory growth, and operational investments. Turning to our guidance, we're maintaining our outlook for full year 2026 revenue and adjusted EBITDA, and I'll provide some additional context around each of those. For revenue, we're now biased towards the lower end of our $6.4 to $6.7 billion range. This view reflects the weaker second quarter volumes and assumes these trends remain below our original expectations in the second half of the year, despite the volume improvements in June and July. We remain confident in our adjusted EBITDA guidance range of $485 to $535 million. Our outlook now incorporates a headwind of approximately $25 million from lower volumes in the second quarter and lower volume expectations for the rest of this year. We expect to fully offset this headwind with 20 to 30 million dollars from the two actions I discussed earlier. Just to reiterate those actions, we expect $15 to $20 million of higher impact program savings this year from workforce reductions and $5 to $10 million of higher than expected earnings from payer recontracting. We have full visibility into both of these items since they were both executed during the second quarter. From a timing standpoint, we recognized only a small amount of the 20 to 30 million dollars of expected impact in the second quarter. Since the associated earnings benefit will be at full run rate entering the third quarter, we expect to be able to fully offset the projected earnings impact of lower volumes in the second half of the year. As a result, we would expect third quarter adjusted EBITDA to improve from the $115 million in the second quarter and approach the first quarter adjusted EBITDA of $124 million. Finally, we're reaffirming our original $35 million exchange headwind for this year. So far, actual development compared to key assumptions has been encouraging. Volume declines have been less pronounced than expected, and our data indicates that those losing exchange coverage are not all moving to self-pay. Instead, we're seeing some trends that indicate a material portion of impacted individuals other insurance coverage. We're continuing to monitor these dynamics, of course, but overall, we remain confident in the $35 million net impact for the year. So as I wrap my prepared remarks, it's clear this industry has been through some overall very fluid dynamics this year. Navigating industry crosswinds requires discipline, planning, and decisive execution. This leadership team will continue to take swift and deliberate actions to position Ardent to deliver in the near term, while also building a stronger company for the long term. With that, I'll turn the call back today for concluding remarks. Thank you, Alfred. I want to leave you with three key takeaways.

First, operational execution and consistency are our top priorities. We moved quickly to respond to a softer volume environment and have taken actions that position the company to deliver on our commitments. Second, we have a strong platform with attractive markets, leading positions, and meaningful opportunities to improve performance as we continue to standardize operations and drive growth. Third, we have the right team, strategy, and financial strength to execute on our plan and create long-term value for shareholders. With that, I'll turn the call over to the operator for questions and answer session.

I'd like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Anne Hines with Mizuho Securities. Please go ahead.

Great, thank you. Just on the payer contract changes on the outpatient side, how many more markets do you think you have opportunities to get to market rates?.

This is Alfred Anderson, you know, and it's a difficult one to give you kind of a uniform answer. I mean, I would say we have opportunity across all of our markets that. I think we have talked in the past that our revenue integrity function was somewhat siloed, and I call the revenue cycle management component was not fully integrated with the contracting component. And now we have integrated those. We've brought in new leadership. We've taken a much data and market driven approach and candidly just being more thoughtful and uh i'd say you know strong in our position that we need to be paid fairly in our markets and so i would say that there is opportunity across most of our markets for improvement.

Thank you. And just as a follow-up on the surgery, your inpatient surgery has declined. much more than outpatient, which is kind of the opposite of what we're seeing with other hospitals. What was driving that decline?.

A couple of things. This is Alfred again. I would say, yes, clearly our inpatient was a much steeper decline. I think clearly the inpatient-only list did have an impact. When we look across our markets, we saw a majority of the inpatient decline was a shift from inpatient to outpatient. So with that and a majority of that shift was procedures that were on the coming off of the inpatient only list. If there's good news embedded in there, I would say that when we quantify the economics underlying that shift, it's actually a very modest impact from the move You know, we would put it in the quarter, you know, maybe between one and $2 million of net impact. So overall, very modest.

Great, thank you. Thank you. Our next question comes from the line of Jason Casorla with Guggenheim. Please go ahead.

Great. Thanks and good morning. Maybe just a follow up on the volume side. Obviously, it's great to hear that you had some recovery in June and July. Was that broad based or was that recovery within Selective Service Lines? And then the second half expectation, are you assuming that for the second half of the year, second half, you're running at the second quarter run rate or where you ended up in June and July. And then I guess it's difficult to predict the macro, but based on how you're seeing pressures on visit conversions. to procedures and surgeries, would you consider 2026 as effectively an easy comp or more of a baseline for you to grow off of? Thanks.

Got you. Hey, Jason, this is Alfred. In terms of, and I think I've got the components of your question. The first was, you know, was the recovery that we saw broad based? And I would say absolutely, essentially across all of our volume metrics, we saw improvement in the June and July timeframe compared to the April and May timeframe. So a very, very broad based, really again across all of our volume metrics. In terms of how we think about the rest of the year, June and July, we really are assuming the quarter volumes and projecting that out rather than the June and July. taking that in isolation and you know again we're going to be cautiously optimistic we'd love to see the type of volume improvement that we've seen in June and July extend through the year but again we want to take a prudent approach as we Work on our cost structure in the organization and again going back to the actions that we took inside of the quarter we were very quick to to off of the weakness in volumes in April and May to take what I would call decisive action to ensure that we've got the appropriate cost structure, regardless of what the volume environment that we were faced. And then I apologize, I forgot the third part of your question.

Thanks. Yes. Just if you think given what you've seen volume trends this year, is this representing more of an easy comp for you or do you think this is like the new baseline for which you kind of normally grow off of? So any thoughts there for next year?.

I think really tough to say. We're in, as I mentioned in my prepared remarks, a really fluid environment. with from a volume standpoint, and I think underlying that is economic uncertainty as well as some of the changes with of course the exchange as one example, so difficult to predict the volume going forward again. I come back to what I just mentioned is that we want to be sure we have for success regardless of the volume overlay. And again, we're going to be hopeful for the future, but prepared for the current.

Jason, this is Dave. I want to build upon what Alfred mentioned. I couldn't agree more about how pleased we are with our team's agility and their action around impact. We will and do continue to plan to have the right projects and opportunities lined up to ensure our success either way. On that note, we are somewhat encouraged by what the top of the funnel holds. And I think inside of your question, the conversion language that you mentioned is very accurate. And it is very important for us to meet the consumer where they are with the solutions that will help them at this particular time for us to keep their trust. So when they are ready to do what will be necessary, we're ready to take care of them.

If there's good news, this is Alfred again, again, just tailgating off what Dave said. If there is good news embedded in here, it's that we are firm believers you can't defer care forever and that there would be pent-up demand built for the future.

Got it. Thanks. Very helpful. Maybe this is a follow-up. It sounds like professional fees and denial trends were in line with your expectations in the quarter. I know you'll comp the big step up in those headwinds, so to speak, next quarter. But I guess, you know, looking back over the past couple of years, you've seen some pretty big step ups in both denial and denial. and professional fees developing around the second quarter or third quarter timeframe, or at least when you've called it out. So I guess in that context, it's a dynamic environment, but are there any like benchmarking or contracting or anything else that gives you visibility or confidence that you won't see like a further stepped up pressure for professional fees or denials at this point?.

Thanks. Sure. Thanks for the question. Yes, as you said, very, very difficult to predict the future. But what we do know is it with starting with professional fees is that we are seeing those very much in line with our expectations this year. We are expecting the year over year trend of increase to be decreasing in the back half of over the front half. So, and as we've said in the past, we've seen a full reset of essentially all of those contracts. And so again, we would expect that rate of increase to slow. In terms of denial trends, I think that's a little bit harder to predict. You know, it goes a lot off of payer behavior. As we've mentioned, we're working on our payer contracting to strengthen contract terms to improve, you know, our our ability to enforce and improve those denial trends and working very closely with ensemble on a number of initiatives, you know, strengthening our joint operating commissions and our payer governance. We're leveraging AI to help identify denial patterns and prioritize high value opportunities, et cetera. So there's a whole litany of work we're doing together to position us to improve off of our current, right? And again, we have not seen so far this year any evidence of escalation of those denial trends it's been very stable.

Adding on and building on just a bit, in the prepared comments, you heard very specific language around operational rigor. And that rigor and the results in pro fees represent the work that we've been underway and an example of keeping pro fees well under control has to do with. lately managing operating rooms and the costs associated to those operating rooms. And as you saw in our results, that balancing act between managing the right volume in and managing pro fees is critical and just kind of putting a bow on it that to me is what represents operational excellence and rigor.

Great, thank you. Your next question comes from the line of Matthew Gilmore with KeyBank. You may go ahead.

Thanks for the question. Maybe starting off on the service line rationalization, I guess I was hoping you could help us think through the broader strategy there and just the service lines that you are targeting and what the opportunity is as you're moving some of the lower value service lines away from your health systems. And then Alfred, can you just give us a sense for how we should expect that to impact the surgical metrics, especially on the outpatient side as you execute that recommendation?.

rationalization. You bet. This is Dave, and thank you for your question. We've stood up a team that we call products and services who are leveraging the tools that we referred to in the previous quarter called Capacity IQ. That team is. A collection of individuals who have led service lines in the past. Real estate, construction, M&A. to name a few. And those teams are using the tools at a system level and market level to ensure that we are looking at every asset and service line and doing the right work to optimize margin and meeting the customer and market where its needs are and where the margin opportunity is. I think it's a little early to be able to tell you what that is going to bring for specific value and specific changes. What we're encouraged by is the clarity we're getting on our key service lines. lines as you heard mentioned in the earlier remarks around cardiology women's and children And you'll see us focus in in those areas, strengthen our service lines, strengthen the consumers journey in that, and able to really manage and improve standardization across the financials. As we do that. So for now that's that's where I'd like to leave it and we will continue quarter by quarter to shape exactly what those actions are but no more We're very excited to have that team in place. We're seeing some of the fruit of their work now.

and more to come. And the second part, this is Alfred, Matt, the second part of your question in terms how do we think that will impact our surgical volumes across the back half of the year? As we mentioned, we're really not baking into our assumptions that significant improvement we're taking second quarter and really expecting to be at that volume level across the back half of the year. So you can think of, you know, that would mean surge and decline and the low single digit range, you know, similar to what we saw in Q2. And as Dave indicated, a lot of work happening across getting the service lines optimized, focusing on the higher profitability lines we're adding. We've got a number of physician starts slated and one individual market. We have over 20 specialists scheduled to start over the back half of the year. So again, it's it does take time to get this fully optimized because of the time to wind things down, wind things up, and you can end up with a little bit of. I'll say disassociation like we saw in Q2, but we're very confident in the strategy.

Great. And then on the exchange topic, it sounded like you're trending better than the $35 million you've baked in, at least for the first half of the year. But I was curious in your mind, you know, what you thought would cause the exchange headwind to grow in the back half. You know, maybe there's just a healthy dose of conservatism in there as well. But just wanted to get your sense for how that may trend to the back half of the year.

Sure. Thanks, Matt. This is Alfred. Yes, we, you know, I think we always expected the trends to grow throughout the year. You know, maybe we didn't foresee some of the macroeconomic pressures that might cause somebody to, you know, come off and not pay their premium and and loose coverage. But we certainly saw that growth from Q1 to Q2 and again, remain very comfortable with our original assumption set and the $35 million impact and hopefully potentially there could be some conservatism in there, but that's how we'd like to, you know, we're just trying to be thoughtful and planful because, you know, this is an area that, you know, is developing as we speak.

Fair enough. Thank you. Your next question comes from the line of Ben Hendrix with RBC Capital Markets. You may go ahead.

Thank you very much. I was hoping you could provide a little more detail on some of the mix, pair mix dynamics that you saw in the quarter. You mentioned migration from exchanges to uninsured, and that's consistent with your peers. But wondering if you were able to pick up a notable number of members in other group employer plans or other types of coverage.

Here. Hey, Ben. This is Alfred. Yes, obviously, you know, we're not immune from the dynamics that that their peers have all reported on in terms of the exchange pressure and the growth in self pay volumes, which we clearly have seen. say, you know, potentially again, as we just look across the peer set, seems like in the markets we're in, there's been a little bit less pressure on the loss of exchange lives. And maybe a little different than what we've heard others say. We have certainly seen some amount as we look at our data a material amount of individuals who've lost HICS coverage go into other forms of coverage, both commercial and governmental programs of coverage. So, you know, that gives us a little bit of, you know, a one called optimism, but the movement seems to be a little bit better what our underlying assumptions were. Now, when we look at our payer mix, I mean the the most of the pressure this year has been in the coverage areas that carry the high higher copays and deductibles. I mean that. To me, speaks to economic pressure and again, potentially some pent up demand because when we look at the top of the funnel, we look at our stats related to urgent care visits and physician clinic visits. We're actually seeing very nice growth in those areas. It's not translating its way through to the higher acuity procedures specifically, or most announced in those coverage in those payer categories that carry the high higher deductibles. So that that does to us speak to some amount of macroeconomic pressure and potential pent-up demand.

Great, appreciate that. And just a real quick follow-up on your outpatient contracting commentary. noted opportunities for continued contracting benefits in other markets. Just wanted to get a sense of how much of a gating item that is for continued ASC development and build out of those capabilities in the other markets. Thanks.

Sure, it you know, I think it goes hand in hand. You know, as you change the mix of sites of care, you've got to have it tightly coordinated with your payer contracting strategies for sure. So, yes, I'd say it very much goes hand in hand.