Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Good morning. Welcome to Tenet Healthcare Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's second quarter 2025 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saumya 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. And with that, I'll turn the call over to Saum.

Thank you, Will, and good morning, everyone. The second quarter continues our track record of strong outperformance in each of our businesses. We reported second quarter 2025 net operating revenues of $5.3 billion and consolidated adjusted EBITDA of $1.121 billion, which represents growth of 19% over 2024. Second quarter 2025 adjusted EBITDA margin of 21.3% represents a 280 basis point improvement over the prior year, driven by strong same-store growth and very efficient operating performance. USPI continues to deliver. We generated $498 million in adjusted EBITDA, which represents 11% growth over second quarter 2024. Same-facility revenues grew 7.7% in the second quarter, highlighted by a 12.6% growth in total joint replacements in the ASCs over the prior year. We added 8 new centers in the quarter, including facilities specializing in high acuity procedures such as spine, orthopedics and neurosurgery. We continue to see a robust pipeline for M&A opportunities and expect to exceed our baseline intention for $250 million of M&A spend in 2025. Turning to our hospital segment. Adjusted EBITDA grew 25% to $623 million in the second quarter of 2025. Same-store hospital admissions were up 1.6% in the quarter. Second quarter 2025 revenue per adjusted admission was up 5.2% over the prior year as payer mix and acuity remained strong. We are making significant investments to expand our network to support growth in our markets and have confidence that the demographic trends are high acuity service line priorities and our efficient operating platform can generate ongoing returns in this segment. We have also reduced overhead given we downsized our hospital portfolio. Our results in both segments exceeded our expectations and extend our track record of consistently strong fundamental execution. We continue to capitalize on our compelling valuation and have deployed $1.1 billion to repurchase 7.2 million shares in the first half of 2025. As we noted in our release, the Board of Directors has authorized a $1.5 billion increase to our share repurchase program. Turning to our full year guidance. At this point in the year, we are raising our full year 2025 adjusted EBITDA guidance to a range of $4.4 billion to $4.54 billion which represents an increase of $395 million or 10%, roughly, at the midpoint of the range of our prior guidance. The guidance increase is supported by fundamental strength in our businesses and expectations for continued growth. In summary, we continue to deliver on our commitment to a strong balance sheet and significantly improved free cash flow generation. Finally, in closing, we are committed to a culture of quality, transparency and compliance. This culture permeates our business and is reflected in the dedication of our colleagues and caregivers that go to work each day to care for our patients and communities that we serve. We are pleased that these are the values that we have instilled into our organization, which continue to drive results and outperformance. And with that, Sun will provide a more detailed review of our financial results. Sun, turning it over to you.

Thank you, Saum, and good morning, everyone. We delivered strong results in second quarter of 2025 with adjusted EBITDA well above the high end of our guidance range, driven by strong fundamentals, including same-store revenue growth, continued high patient acuity, favorable payer mix and effective cost controls. We generated total net operating revenues of $5.3 billion and consolidated adjusted EBITDA of $1.21 billion, a 19% increase over second quarter 2024. Second quarter adjusted EBITDA margin was 21.3%, a 280 basis point improvement over prior year. I would now like to highlight some key items for each of our segments, beginning with USPI, which again delivered strong operating results. In the second quarter, USPI's adjusted EBITDA grew 11% over last year, with adjusted EBITDA margin at 39.2%. USPI delivered a 7.7% increase in same-facility system-wide revenues, with net revenue per case up 8.3% and case volumes down 0.6%, reflecting our continued disciplined shift towards higher acuity services. Turning now to our hospital segment. Second quarter adjusted EBITDA was $623 million, with margins up 300 basis points over last year at 15.6%. Same-hospital inpatient admissions increased 1.6% and revenue per adjusted admissions grew 5.2%. Our consolidated salary wages and benefits was 41% of net revenues, a 140 basis point improvement from the prior year. And our contract labor expense was 1.9% of consolidated SWB expense. This improvement has been driven by our data-driven approach to capacity and labor management and disciplined operating expense controls. Finally, we recognized a $79 million favorable pretax impact for additional Medicaid supplemental revenues related to prior periods in the second quarter of 2025. This includes the recently approved program in Tennessee. As a reminder, our second quarter 2024 results included a $30 million favorable pretax impact for additional Medicaid supplemental revenues related to prior year. Next, we will discuss our cash flow, balance sheet and capital structures. We generated $743 million of free cash flow in the second quarter. And as of June 30, 2025, we had $2.6 billion of cash on hand with no borrowings outstanding under our $1.5 billion line of credit facility. Additionally, we have no significant debt maturities until 2027. And finally, during the second quarter, we repurchased 4.6 million shares of our stock for $747 million. And year-to-date through June 30, we have repurchased 7.2 million shares or $1.1 billion. Our leverage ratio as of June 30, 2025 was 2.45x EBITDA or 3.11x EBITDA less NCI, driven by our outstanding operational performance and continued focus on financial discipline. We are very pleased with our ongoing cash flow generation capabilities and remain committed to a deleveraged balance sheet. We believe we have significant financial flexibility to support our capital allocation priorities and drive shareholder value. Let me now turn to our outlook for 2025. For 2025, we now expect consolidated net operating revenues in the range of $20.95 billion to $21.25 billion, an increase of $300 million over prior expectations. As Saum mentioned, we are raising our 2025 adjusted EBITDA outlook by $395 million at the midpoint to $4.4 billion to $4.54 billion, reflecting the strong fundamental performance of our business. At the midpoint of our range, we now expect our full year 2025 adjusted EBITDA to grow 12% over 2024. At USPI, we are now expecting 2025 adjusted EBITDA of $1.99 billion to $2.05 billion, a $70 million increase over prior expectations. In addition, we have increased our assumption for same-facility USPI revenue growth by 100 basis points to 4% to 7% for 2025. In hospitals, we are raising our '25 adjusted EBITDA outlook range by $325 million at the midpoint to $2.41 billion to $2.49 billion. Additionally, we are lowering our assumption for same-hospital adjusted admissions growth by 50 basis points to 1.5% to 2.5% for 2025. Finally, we expect third quarter '25 consolidated adjusted EBITDA to be in the range of 22.5% to 23.5% of our full year consolidated adjusted EBITDA at the midpoint. We expect third quarter 2025 USPI EBITDA to be in the range of 23.5% to 24.5% of our full year USPI adjusted EBITDA at the midpoint. Turning to our cash flows for 2025. We now expect free cash flows in the range of $2.025 billion to $2.275 billion. Distributions to noncontrolling interest in the range of $780 million to $830 million, resulting in free cash flow after NCI in the range of $1.245 billion to $1.445 billion, an increase of $195 million at the midpoint of our range from prior outlook. Turning now to our capital deployment priorities, we are well positioned to create value for shareholders through the effective deployment of free cash flow and our priorities have not changed. First, we will continue to prioritize capital investments to grow USPI through M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt. And finally, we'll continue to have a balanced approach to share repurchases, depending on market conditions and other investment opportunities. As Saum noted, our Board of Directors has recently authorized a $1.5 billion increase to our share repurchase program. We continue to deliver consistent growth and have disciplined operations, which has translated into outstanding financial results. We are confident in our ability to deliver on our increased outlook for 2025 as we continue to provide high-quality care for those in the communities we serve. And with that, we're now ready to begin the Q&A. Operator?

[Operator Instructions] My first question comes from A.J. Rice with UBS.

I might just ask about 2 aspects of the backdrop in Washington. The proposed rule on outpatient hospital care as the elimination of potentially of the inpatient-only rule. Can you just comment on what you think that might mean for your hospital and ASC business if that were to go through? And then just any updated figures on the public exchange volumes, how that contributed to the quarter, what you're seeing year-to-year? And do you have any updated thoughts on what the outlook for next year might be if the enhanced subsidies go away?

A. J., it's Saum. So thanks for the questions. The first one, obviously, enabling additional innovation in the ASCs is positive for the USPI business. I think about it this way, which is one is the reimbursement -- allowable reimbursement and certainly, this move is positive. At the same time. It takes work and experience in higher acuity ASC procedures to actually be able to successfully move those things from an inpatient setting to an outpatient setting. And as you know, the patient selection criteria and expertise makes a big difference there so that you're doing the right things clinically. Those are all areas in which we're pretty advanced as an ASC operator and platform. So I think it plays to our advantages. I think it represents an opportunity for the future for sure. And I also think it gives us a platform to work with physicians to build the right protocols for many of these things to move into that more freestanding setting with the right patient selection. Sun, do you want to comment on the update on our exchange volumes? I would say just as a summary statement there, A.J., obviously, the efforts to lobby for their extension. And importantly, the critical role they play in supporting small businesses and employees of small businesses in America is an added benefit of the exchanges that is obviously part of the discussion today.

Yes. Thank you, Saum. Just to add, obviously, health care exchange remains an important part of our business. For second quarter of '25, we saw about a 23% increase in admissions year-over-year, and we saw about a 28% increase in revenues from exchange year-over-year. In the second quarter, our exchange volume now represents about 8% of our total admissions and about 7% of total consolidated Tenet revenues.

Our next question comes from Josh Raskin with Nephron Research.

I was wondering if you could just give some more specifics on the outperformance in the core results, and I'm specifically looking at the incremental $70 million on the USPI side, the increase in guidance. And then within that, is there anything Tenet has done specifically to improve your ability to sort of document categorize patients as you submit claims? Are there new systems, new technologies, new vendors or partners and obviously, anything relating to AI? I'd be curious if there's new things that you're doing within there.

Josh, well, going -- kind of going backwards, we have -- there -- USPI has its own significant revenue cycle capability. We think it's an industry-leading capability. It's an environment that mostly serves our own ASCs, but certainly serves ASCs beyond that. We're pretty busy in advancing a lot of those capabilities. I mean, it is not difficult for me to say that some of the improvement in our results over the last few years has been related to real standardization, technology deployment, better reporting and certain advanced analytical tools that we have deployed into the ASC environment. Not surprising, given our focus in revenue cycle as a company that we have done that, and it's certainly paying dividends in terms of how we work in that environment, both on the retail collection side, as you can imagine, these are elective procedures, but also on the wholesale collection side, all the way from authorization back through document -- accurate documentation and more efficient management of the AR through technology and offshore capabilities. So we're really pleased with the platform that's being built for ASC revenue cycle within USPI. Sun, do you want to comment on the nature of the guide?

Yes, sure. Josh, in the first half and the second quarter, I think both consistent themes, we've seen high acuity, good case mix, good payer mix good growth in some of our key case lines, service lines, including ortho and total joints. So all the trends that we've discussed previously, I think, continue in USPI for second quarter. That's why you saw the strong net revenue overall growth of 7.7%. And as well as a strong net revenue per case. So -- and then I think good operating expense management. So we demonstrated a 39.2% EBITDA margins in second quarter as well. So I think all those trends probably for both Q1 and Q2, which resulted in about a $50 million increase versus our prior guidance. And then our general expectation is for those trends to continue into the second half, which is part of the guidance raised for the remaining full year. I think we also remain positive on our M&A activity in terms of contribution. As Saum noted in his opening statement, we expect to exceed our $250 million baseline assumption for USPI M&A. So I think all those things contribute to the guidance raise.

Our next question comes from Andrew Mok with Barclays.

Just wanted to ask about the volumes. There's a little bit of a deceleration there in both the inpatient and adjusted admissions in the quarter. You took down the guidance by, I think, 50 basis points were volumes impacted by any discrete items in the quarter or anything else to kind of call out driving some of the deceleration for the quarter and the full year?

Well, first of all, I think the guidance is just simply reflecting the math that would play out for the rest of the year. Now it was a strong quarter. I mean we had strong volumes, the right acuity and mix and very much reflects the focus on our service lines as we have prioritized them. So I don't think there's anything particularly unusual other than seasonality.

Our next question comes from Matthew Gillmor with KeyBanc Capital Markets.

I wanted to ask about payer contracting. There's a lot of different dynamics creating pressure on payers. Has there been any discernible shift in terms of your negotiations with payers? Are you still getting the normal updates you'd expect? And is there anything to report with respect to denial activity?

Yes. Well, a couple of things. First of all, obviously, different parts of the sector at various times, certainly go through their ups and downs. And I think our philosophy, most importantly, with the health plans, both the national plans and state-based plans is to work consistently to create value in what we do in our level of pricing in our negotiations and also to create predictability for both sides over a multiyear period. I mean, I think that's ultimately what's probably most important on both sides so that each party can then manage their own operations. And we have extended that philosophy over the last few years into the next wave of contracts. I think most people were aware that there are a number of contracts that are coming up, and we're not seeing anything unusual and certainly no change in our guidance with respect to the way that we have been negotiating our contracts. But again, I think that's because we're committed to the value that we provide there, both from the standpoint of our highly efficient ambulatory business, but also working in an environment with reasonable and predictable rate increases so that we can focus on managing our own operations. Look, the denial's activity, and it's really not just denial, it's kind of the disputes, documentation requests, denials, et cetera, have ramped up over the past few years post-COVID to levels that are, I would argue, not acceptable in some cases. And we have adapted. Obviously, this is part of Conifer's job is to adapt and learn to respond to those things. In the early days, the responses were driving up expenditures. Today, as we have evolved and realized this is a new normal, we have, of course, deployed more technology, more automation, trained up more offshore staff and other things to be able to respond to those types of requests and activities in a more efficient, and I would argue more effective manner. We track things like our yield relative to the volume or dollars that were disputed or denied. And I think Conifer is doing well there for both ourselves and for our clients. relative to the overall industry. You can see it in our results, and I think that translates across the board. And so this is a constant battle with respect to what's appropriate there. And obviously, we welcome both regulation and other things that would support a reduction of some of that what we consider inappropriate activity.

Our next question comes from Justin Lake with Wolfe Research.

First, I just wanted to follow up on A.J.'s question. I do understand that the industry is lobbying for an extension of these subsidies and how important that could be to a lot of folks. But is there a framework that the company can share with us in terms of how to think about the potential impact to 2026 earnings if those subsidies do go away and then sticking with that DC stuff. Maybe you can give us an update on the provider tax run rate you're seeing in 2025 versus I think the previous guidance was about $1.1 billion. And have you analyzed and have anything to share with us in terms of the impact of if that the bill that just passed, it does get rolled out what the impact to DPP could be over time as a provider taxes?

So we don't have any comments about 2026 at this stage. And certainly, all of the work and effort is focused on helping stakeholders realize again how important the exchanges are for families who utilize them, including those that came off of Medicaid from a Medicaid redetermination standpoint over the last few years. It's very much my belief that because of the existence of the exchanges and the subsidies for the people who don't have very high income levels as Medicaid redetermination proceeded, the exchanges were a critical safety net for the individuals who needed health care insurance to have a landing spot, and it created what I consider a pretty smooth Medicaid redetermination process because of the availability of those insurance options for individuals and families that needed it. And -- so that, in addition to the fact that the exchanges represent critical support for small businesses that are unable to provide broad-based insurance coverage options to their employees, which supports, obviously, a very large part of the economy represents 2 of the most important prongs of the conversation around why it's important to extend these subsidies, not the least of which is that it affects red states more than blue states, given the nature of the administration in Congress today, that's also an important fact. So look, I think the work is ongoing in that area. I think it's important, and I think it's important to more than just our industry. It affects other parts of our sector, but it also affects the macro economy through the support for small businesses, which helps to make them more competitive in the U.S. economy at large. The current situation in Bill that passed a lot of the impacts, as you know, have been pushed out pretty far into the very, very end of '27 or really '28 from that standpoint. And we really don't have any insight into how this will be implemented. There are new legislative proposals that have already come up attempting to rescind some parts of OBBB, which are in play in Congress. And I think it's just -- it remains an area of significant uncertainty. And we don't have any sort of projections to provide from that standpoint, especially because we're talking about, again, as I said, out to 2028. Sun, do you want to cover -- there was a question in there about the DPP programs.

Yes. Let me just clarify that, Justin. So for Q2 of '25, we recorded about $350 million of total Medicaid supplemental payments. So for the first half of this year, we're at about $675 million range. Now we have pointed out some one-timers. So once you normalize for that in the first half of the year, our run rate for the full year is right around the $1.1 billion, $1.2 billion range that we previously discussed.

Our next question comes from Sarah James with Cantor Fitzgerald.

I just wanted to circle back to what went on with the volume guide down. I understand seasonality and just the math of the quarter impact on the year. But what actually changed in this quarter or in your view of the year? Are there certain segments or any...

Well, the most important thing that we would be focused on that happened in the second quarter was, as I said earlier, the strength and success of our high acuity strategy that has been in place for multiple years, continuing to demonstrate in this market, the ability to generate revenue and earnings across our hospital portfolio. I mean that's really, at the end of the day, that's the most notable and important trend in the second quarter, which is that, that strategy continues to deliver results.

Our next question comes from Stephen Baxter with Wells Fargo.

Just to follow up on Justin's question. I just wanted to ask about the jump-off point for EBITDA this year. Is it as simple as we're moving the out-of-period Medicaid supplemental EBITDA, I think it's $70 million -- $79 million this quarter and $40 million with the first quarter? Or are there any other meaningful areas to consider whether they're Medicaid supplemental payments or other sort of onetime contributors that you should think about as for bridging into 2026?

We're not making any comments about 2026 nor are we commenting on headwinds and tailwinds yet for the following year.