Edited Transcript of THC earnings conference call or presentation 30-Apr-19 1:00pm GMT

Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [3]

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Thank you, Brendan, and good morning. As you can see in the materials we posted yesterday, we had a solid start to the year. We have successfully implemented several changes that are and will continue to positively impact our performance. We are continuing to make improvements in our operations that are having a positive impact. We're sharpening our organizational structures to continue to refine, simplify and effectuate change, with our leadership remaining resolute about execution.

We're also continuing to maintain acute awareness of issues that may arise so that we can address them more expeditiously and with a finer point. I am very pleased with our progress and the continued improvements in our performance that will set the stage for the balance of the year. Before I turn this over to Dan, I wanted to add some perspective on the quarter.

We delivered another strong quarter above consensus in adjusted EBITDA, adjusted EPS and revenue. We generated adjusted EBITDA of $613 million or $13 million above the midpoint of our outlook. Adjusted EPS of $0.54 was well above consensus and the high end of our outlook range.

Our hospitals delivered results consistent with our expectations. We were pleased that the volume growth meaningfully improved in the first quarter despite a much milder flu season, and we are optimistic about delivering even stronger volume growth as the year progresses.

Looking out over the Hospital portfolio, we are seeing positive momentum in many of our key markets and in specific service lines where we are prioritizing investment. We believe this is due in part to our alignment of marketing and community outreach efforts to meet growing patient demand and on our focus on chronic disease patients who have a greater need for our services.

We believe we have opportunities for margin improvement in our Hospital business through a combination of improved cost management and equally important, leveraging our cost base as we grow our revenue base. The strategic investments we are making to grow and enhance our service offerings will place some near-term pressure on our Hospital margins but are improving our competitive positioning as we go forward. So we see these investments as a targeted and important move.

As we move throughout the year, our expectation is that we will make continued progress on margin improvements in all other business areas, particularly given the targeted initiatives we have in place to grow volumes and continue to improve expense control, coupled with increased accountability.

I've used the term pointed before to describe the way we think about cost management, meaning we are targeted on where we see opportunities versus a broad-based approach that is less specific, tying back to overall organizational effectiveness. I'm confident we have the right initiatives in place to carry us forward and better serve our communities, with these programs now becoming part of our DNA across the broader organization.

USPI had a great quarter, with a strong growth in surgical volumes. Revenue per case for all of Ambulatory was up nicely, with growth of more than 3%. USPI had very healthy EBITDA gains of 12%, which is an area of consistent strength for that segment.

Conifer also had another strong quarter, driving continued improvements in adjusted EBITDA. Conifer delivered $99 million of adjusted EBITDA in the quarter, with solid EBITDA margins of 28.4%. And comparing that to Q1 2018, this is more than 400 basis points of margin improvement on top of really strong results at Conifer in the first quarter of last year, when we really started to transform Conifer's performance trajectory. The revenue declines at Conifer were, as we have discussed previously, impacted primarily by divestitures by Tenet and other customers, and will be further highlighted in Dan's remarks. We remain very focused on sales growth at Conifer through our business development and marketing teams and with the upcoming addition of a new commercial leader, which we are working on now.

On the strategic review, we continue to work, as we've discussed, on an exclusive basis regarding a potential transaction. As you may recall, we started this exclusivity shortly before the Q4 earnings call, which was approximately 9 to 10 weeks ago. And these discussions are continuing. We have qualified third-party advisers as well as members of our team engaged in this effort, and beyond that comment, I cannot set a date for announcing the next step or comment on the progress. Those discussions are ongoing and as we said before, there can be no assurance that these negotiations will result in a transaction.

We remain committed to delivering the best outcome for Conifer, Conifer customers and for Tenet shareholders. And before I turn it over to Dan to provide additional details on our results for this quarter, I just want to mention that we are reconfirming our 2019 outlook for revenue, adjusted EBITDA and adjusted EPS. Dan?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [4]

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Thanks, Ron, and good morning, everyone. We generated $613 million of adjusted EBITDA in the quarter, above the midpoint of our outlook range. Adjusted EPS was $0.54, which was above the high end of our range for the quarter.

Our Hospital segment generated $337 million of EBITDA, which was consistent with our range of expectations. Ambulatory EBITDA was up 12% to $177 million, and EBITDA less facility-level NCI was $112 million, up 9.8% after adjusting for the divestiture of Aspen, our former U.K. business. Conifer's EBITDA was $99 million, with margins up 410 basis points to 28.4%, and adjusted free cash flow was an outflow of $148 million.

The first quarter is typically a softer cash flow-generating quarter for us, and we anticipate much stronger results as we move through the year.

Turning to Hospital volumes. As shown on Slide 5, our performance meaningfully improved in the first quarter, especially given the difficult flu season comparison. Adjusted admissions grew 0.6%, and admissions were essentially flat. Revenue per adjusted admission increased 1.3%, and we continue to benefit from a modest increase in acuity compared to strong acuity growth in last year's first quarter. Expenses increased 4% per adjusted admission compared to last year. As anticipated, malpractice expense contributed to this growth as we continue to resolve larger cases. Increased malpractice will also remain a source of pressure in the second quarter.

Looking forward to the second half of the year, stronger expense management combined with more favorable malpractice comparisons should result in a lower level of expense growth. If we exclude the $38 million increase in malpractice as well as the $11 million of increased cost on our risk-based contracting business in California, cost per adjusted admissions only increased 2.5% in the first quarter.

Moving to our Ambulatory business on Slides 6 and 7. In our surgical business, revenue grew 4.2% on a same-facility system-wide basis, with cases up 2.8% and revenue per case up 1.4%. On a same business day basis, surgical volumes were up 4.5%. In the nonsurgical business, which represents our urgent care centers and freestanding imaging centers, revenues increased 4.3%. Nonsurgical visits declined 1.8%, primarily due to lower flu-related visits in our urgent care centers, and revenue per visit increased 6.3%. EBITDA in the Ambulatory segment grew 12% to $177 million, and EBITDA less facility-level NCI increased 9.8%. Both of these growth rates exclude the $7 million of EBITDA and EBITDA less NCI that Aspen generated in the first quarter of last year.

Let me now transition to Conifer on Slide 8. Conifer continues to deliver higher margins on a lower revenue base, which was consistent with our expectations. Once again, Conifer's EBITDA performance was incredibly strong, with EBITDA of $99 million and margins up 410 basis points.

Conifer's EBITDA was up 12.5% once you adjust for the $10 million of customer termination fees in the first quarter of last year.