Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Introducing Tenet Healthcare. Tenet is one of the largest providers of hospital services as well as the largest provider of ambulatory surgery center services and revenue cycle management. With us today, we have Saum Sutaria, who's the CEO. We have Dan Cancelmi, who's the CFO; and Will McDowell from Investor Relations. I think Will, you have a few things to start off with.

Yes. Thanks, Kevin. Just in the course of our presentation today, we'll be making some forward-looking statements. I would suggest you refer to our cautionary statement in our most recent earnings release as well as SEC filings for the background information there. I'm just going to turn it over to Saum for a couple of opening comments.

Thanks, Will. We're pleased to be here. It's been a very good start to the year for us as we reported the first quarter. As I mentioned on our earnings call, this is an important time for us because this post-pandemic environment is starting to take shape. And we can see the momentum from a patient demand standpoint. We can certainly see the momentum in our business in the high acuity strategy that we've been pursuing, both in the hospitals and in our ambulatory surgery business, and that's very good news. We've been waiting, in some ways, for the timing of this, though expecting that it was going to come. And we're delighted that we have an operating platform in both businesses that's efficient enough to translate the volume that's returning to margin. We're seeing a broad-based demand for services, emergent services, elective services, low acuity, obviously, high acuity, given the amount of time and energy we've spent focusing our hospitals on specifically working on that market share. And similarly, USPI, we're 3 quarters in to reenergizing our organic growth approaches. We've taken some important steps to focus further on the higher acuity areas there as well like orthopedics. And I'm pleased to report that through April, we don't see any change in positive trends in both the hospital and the ambulatory surgery business from a growth perspective. Our M&A prospects, in particular on the USPI side, remain very strong. Remember, we have a very unique platform in our ability to acquire or develop centers and deliver a lot of synergies based upon the Tenet portfolio. And the pipeline is strong and our ability to consistently take assets that we acquire and drive them down in multiple is as strong as it's ever been. We feel very good about that. The further we integrate the 2 businesses, the better we do also in the area of supply chain, which is, obviously, a very important lever. As you start to get higher and higher acuity services into the ASCs, the supply cost intensity goes up, and your ability to negotiate on the supply chain side is a very important lever in the profitability of that business going forward. And finally, Conifer continues to do well. We're pleased to see third-party revenue growth in the first quarter. We're pleased to see strong margins. We have an ongoing agenda to continue to offshore and automate activities there in order to improve the performance of the business. From a corporate standpoint, we, as you know, from a capital allocation standpoint have been very clear that we think the best use of cash in the business is accretive acquisitions within the USPI business, but we remain committed, as we have been, to delevering the company. And as you know, we have a share buyback plan that's in place that we have been active in over the past couple of quarters. And so our priorities there and discipline there around capital allocation, which are a hallmark of the company have not changed. So with that, Kevin, I'm happy to take questions.

Yes. So I mean I guess one of the things that I'm trying to get an answer to throughout this week from everybody is just Q1 volumes were strong across the board for providers, for med tech companies. The managed care companies seem to say that's not a problem. But I just want to understand, and maybe just focus first on the hospital side of things, what you think kind of drove that strength? Why all of a sudden was Q1 the quarter where the low acuity started to come back in?

Right. Yes. I mean it's important to note that relative to last year in Q1, if you take out COVID, because that's really what we pay attention to, the non-COVID inpatient volume strength, which represents what we think would be ongoing demand was very strong, 14%, if I recall, for our business. And that's a very good sign. I think there's 2 or 3 things. First of all, we have gotten certainly more efficient as we've been forced to get in terms of our service levels in the intake channels that we have, the emergency department, direct admissions. We're very active in terms of our states that we operate in, in being acceptors of transfers when other hospitals are struggling. Those tend to be higher acuity cases with sicker people that we're better positioned to take care of. And other hospitals have a choice about where they end up sending those transfers. And we've been very active in our outreach to ensure that other hospitals and physicians can be comfortable that they're going to get good care and sent back. That has been helpful to us in terms of our volumes. And then I think, Kevin, there is an underlying demand piece across the industry that people are reengaging in their health care. I'll tell you as a proxy, for the last 2 years, I've talked about -- I watch our physician business, the employed physician business to look at how volumes are trending in the office relative to pre-pandemic to get a sense of are people fully reengaging their healthcare, is our office environment running at full tilt, because hospitals, ASCs, all of those things are generally downstream to the offices. And our physician -- employed physician business is seeing volume strength like we have not seen over the past couple of years. And so that suggests to me that even in the outpatient setting, in particular, our employed physician base is mostly specialists, is seeing strength. And that's a very good sign because usually, outpatient activity like that gives you a good feeling for the next 2 quarters in terms of what people may engage in from more of a hospital or ASC-based standpoint. So I do think that we're seeing reengagement. The other thing that we're seeing, of course, is some of the lower acuity work that's been deferred coming back into the facilities from a hospital standpoint. I mean I think Dan has talked about on multiple calls that the Medicare business will come back at some point. Our ability to manage cost in that environment and earn a margin -- positive margin in the company on Medicare business is important. So we welcome that back to improve capacity utilization, and it just puts a premium on disciplined cost structure.

Yes. So I guess when you said that the trend -- sorry, still staying on the hospital side, in April remained strong. Do you -- are you thinking about it from an absolute volume perspective? Or are you thinking about it from a year-over-year growth perspective? Because it feels to me like on the hospital side, what happened last year was COVID spiked, non-COVID dropped, COVID dropped, but non-COVID didn't quite pick up in March the way that it used to in normal peaks and valleys. So it feels like the non-COVID had an easier comp in Q1 than it will have in Q2 or Q3 or Q4. So like the year-over-year growth of that stays the same off of tougher comps, that's different than utilization is back and it stays at that level.

Yes. Let me make 2 points there. One is I don't disagree that the non-COVID comp was easier based upon the amount of COVID we saw a year ago, 14% is still incredibly robust, right? I mean that's a significant volume challenge to facilities that have to do something very different than if you were just taking care of respiratory illness because it hits the operating room, it hits the procedural areas like cath labs and other things in a very different way than COVID volume would. And so I think that I would just say it was stronger than we expected. We knew the rebound was going to come at some point. It was stronger than we expected. To answer your question directly on what we're seeing into today, it's on a non-COVID volume basis we're seeing strength continuing into this quarter already.

And its year-over-year, Kevin.

Okay. All right. And so then, I guess, let's pivot to the USPI because there may be slightly different drivers or dynamics to that. So last year, I guess, USPI underperformed. Can you talk a little bit about what that -- what kind of drove the underperformance? And then why it's coming back so well this year?

Yes, let's just start with, and maybe you can cover kind of some of our growth numbers from last year. But I think USPI underperformed some very aggressive expectations that we put out there, but USPI was still from a volume and net revenue standpoint within our range that we would say from a long-term standpoint. So let's take that off the table for a second, and then we'll go into what's going on this year.

That's right. Overall volumes last year grew 2%. And our long-term expectations are 2% to 3% on a same-facility basis. And EBITDA growth was approximately almost 17%. So very strong growth. Admittedly, it was below very high expectations that we had. And I mean, USPI has continued to demonstrate over the past 6, 7 years, revenue growth and EBITDA growth of double digit, 11% to 13%. So it was a good year. Last year, very strong -- continue to have very strong margins. It was just -- we -- in terms of the third quarter performance, they were below our expectations, and COVID had an impact on that, the impact of COVID on patients and our employees in the third quarter. And the pace of buy-ups under the second SCD transaction we're just at a different pace than the first transaction. Some of that had to do with some delays in -- supply chain issues, but also the stage of the maturity of the second transaction centers compared to the first transaction. The first transaction, those centers were at a more mature stage. The second transaction, more of a combination of mature centers but also centers in development. And we've said this a number of different times, we don't want to force a buy-up in terms of relationship with the physician. They need to be comfortable on where the center is at and it's maturity stage. And forcing something down doesn't make sense in the long term.

So looking forward, if you think about the volume strength at USPI this year, there's a few things I would say. First of all, qualitatively, I think what we assumed would happen last year, which was a totally unimpacted year from a COVID standpoint in the ambulatory surgery business, obviously didn't happen. But this year qualitatively is a bit of what we expected last year. The point to take away from this is that we don't think necessarily about the USPI business having year-to-year or quarter-to-quarter trends. This business has a sustained and long tailwind of growth on a multiyear basis given the setting in which these surgeries are happening, in which new procedures are coming into that environment, in which physicians are getting comfortable getting into ambulatory surgery centers as a place in which they can do their work. And so from a long-term standpoint, nothing about last year versus this year outperforming, for example, changes our view that this business has a nice tailwind of organic growth. And then you obviously couple that with a very unique M&A engine, and we think we have a lot of opportunity to scale in a fragmented market, which is why strategically, we are absolutely not changing directions in terms of what we're doing. And we think it has a lot of potential to create significant free cash flow value for shareholders and obviously, resources to help us deploy capital back into USPI, but also delever at the same time. So it really -- our focus there has not really changed. Look, from a growth standpoint coming into this year, one of the nice things is that we have been focused strategically on certain areas, right? We wanted to have the return of the GI business come back into the facilities. We wanted to see our platform investment, first of its kind in really scaling up urology as a big growth opportunity in the ASC business succeed. And it is based upon the numbers we saw in the first quarter, we have a very unique opportunity there across the country to grow that. And then obviously, our strategy going back 3 or 4 years was that we were a large player in orthopedics. SurgCenter was a very strategic acquisition because it was 90% roughly orthopedics. And so we solidify the leadership position in what we think is going to be the biggest growth vehicle in ASCs over the coming decade, which is the orthopedics area. And so our bone and joint work, including hip and knee replacements, in the first quarter were quite strong in the ASC business. So we want to continue to grow in some of those types of services because that's where we're providing a tremendous amount of value to all the stakeholders, government and commercial entities, because we're doing that work at a fraction of the cost it can get done in a more expensive setting.

Yes. So I guess when you think about the volume growth for the industry, I guess, maybe you can answer both on the hospital side and the surgery center side. One of the things we're trying to figure out is, yes, we're back above 2019 levels, but we're not necessarily back above what you would have thought 2019 should look like if we trended it forward. So like if you're 107% above in USPI, you would have thought 2% to 3% growth. So you would have thought you should be 8% to 12% above by 2023. So we're not even -- we're not back to that trend line yet. So is that the right way to think about it, that there still is -- there's some opportunities?

Well, the right way to think about it is roughly 1 million to 1.2 million people die prematurely. I mean I don't -- there's no other way to characterize it other than that. And those people would have been, generally speaking, multiple chronic illness type of people that were unfortunately affected by the pandemic in the most negative way, and they probably would have created demand over the next 5 years. I mean, actuarially, they probably would have had some period of time in which it was a more smooth mortality line than it ended up being. I think for our industry, the tailwind will come. The population -- aging population is still growing. The population with chronic illness is still growing. And I think as we move further and further away from the pandemic and that population of that sick in the last 5 years of life repopulates after those premature deaths, I think that's going to be another tailwind for the provider industry in terms of demand that we see returning to the environment. And that's why I'm bullish about a high acuity strategy in the hospitals over the next 5 years because those services are going to be necessary. They were necessary pre-pandemic. They're going to be even more necessary now. And as hospitals have diverged into all things to all people type of hospitals and hospitals that are really focused on taking care of the sickest of the sick and getting their operations and technology right to do that, we think that's going to be an advantage in the acute care hospital side. And then obviously, the USPI side, as I said, there's a demand tailwind there that will continue to grow, I think.

Yes. It sounds like you've got our mortality note. So we go into that ourselves. I agree with that 100%. I guess when we think about the Q1 EBITDA performance, Q1 was strong. Your guidance doesn't really seem to assume that this persists. It sounds like that the volume strength you're seeing continuing into April so far. Labor -- you've seen some progress on labor. So why isn't the Q1 beat more -- why are you assuming that could -- that persists at this point?

Well, we exceeded our EBITDA guidance in the first quarter by roughly $57 million. And we raised our guidance by $50 million. So we effectively raised our guidance for the first quarter beat. And USPI was raised $20 million, in the hospitals we raised $30 million. Listen, we're off to a good start to the year, all businesses -- all 3 of the businesses. And obviously, we're very encouraged, but it's early, and we'll continue to watch the trends, and we'll update the guidance appropriately when we get to the end of the second quarter and see where we're at.

Okay. So I'm over 3 so far this morning, trying to get people to raise guidance at our conference, but it sounds like you all will in Q2. So that's good. As far as labor costs, how do you think about that? Where are we in the normalization there? It seems like there's clearly improvement off of last year, but it also still feels like we're still in a tight labor environment. So like how much longer do we have to go before -- and what is the new normal? Is there -- should we expect higher labor cost for a while?

Well, we've certainly made some progress in the first quarter. And just stepping back, our operators have really done a phenomenal job managing labor through the past several years. I think it's fair to say our contract labor management has been best-in-class. We saw in the fourth quarter, as an example, our contract labor costs were about 7.3% of our SW&B. And first quarter, it was roughly 6%. So certainly progress. And as we move through the fourth quarter, we saw monthly sequential improvement. Listen, I mean 6% -- we're still assuming some moderation as we move through this year. Availability of that type of labor and the bill rates have come down. They're not at the levels where, certainly, we would want them to be, and we're not expecting to return to our contract labor percentages as -- that we saw before the pandemic, which were roughly 2% to 3%. We're not assuming that happens this year. We don't even know at this point whether that would be the case next year, but what we are very encouraged by is there continue to be some moderation in the rates. And that will enable us -- as those rates continue to moderate, it will enable us to open up more capacity because the economics will make more sense in terms of staffing certain lower acuity services to be able to generate a margin. We made some very conscious decisions last year to manage our capacity based on the level of -- the cost of that contract labor, and it just didn't make sense to stop certain services at the levels we otherwise would have preferred to. So in terms of continued moderation this year, and that obviously assumes there's not another significant spike, but we're obviously very pleased to see where at least the trend line is heading.