Tenet Healthcare Corp (THC) Q1 2019 Earnings Call Transcript
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Tenet Healthcare Corp
(NYSE: THC)
Q1 2019 Earnings Call
April 30, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Tenet Healthcare Q1 2019 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mr. Brendan Strong, Vice President of Investor Relations. Please go ahead, sir.
Brendan Strong -- Vice President, Investor Relations
Good morning, Emma. Thank you, everyone. The slides referred to in today's call are posted on the Company's website. Please note the cautionary statement on forward-looking information included in the slides. In addition, please note that certain statements during our discussion today constitute forward-looking statements. These statements relate to future events including, but not limited to statements with respect to our business outlook and forecasts, in future earnings and financial position.
These forward-looking statements represent management's current expectations, based on currently available information, as to the outcome and timing of future events but, by their nature, address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward-looking statement. For more information, please refer to the Risk Factors discussed in Tenet's most recent Form 10-K and subsequent SEC filings. Tenet assumes no obligation to update any forward-looking statements or other information that speak as of their respective dates and you are cautioned not to put undue reliance on any of these forward-looking statements.
I'll now turn the call over to Ron Rittenmeyer, Tenet's Executive Chairman and Chief Executive Officer. Ron?
Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer
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've 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. For sharpening our organizational structures, to continue to refine, simplify and effectuate change with our leadership remaining resolute about execution. We are also continuing to maintain acute awareness of issues that may arise, so that we can address them more expeditiously and with the finer point. I am very pleased with our progress in 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 want to add some perspective on the quarter. We delivered another strong quarter above consensus and 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 in the high-end of our outlook range. Our hospitals delivered results consistent with our expectations. We are 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 play 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 that 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 the 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 EBIT -- 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 declined for Conifer, whereas as we've discussed previously, impacted primarily by divestitures by Tenet and other customers, that 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 the new commercial leader that which we are working on now.
On a strategic review, we continue to work as we've discussed on the exclusive basis regarding the potential transaction. As you may recall, we started this exclusivity shortly before the Q4 earnings call, which was approximately 9 weeks to 10 weeks ago. And these discussions are continuing. We have qualified third-party advisors 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, we'll 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's 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?
Daniel J. Cancelmi -- Chief Financial Officer
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 UK 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 five, 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% for 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 lower level expense growth. If we exclude the $38 million increase in our practice as well as the $11 million of increased costs on our risk-based contracting business in California, cost per adjusted admission only increased 2.5% in the first quarter.
Moving to our Ambulatory business on Slide six and Slide seven. In our surgical business, revenue grew 4.2% on a same-facility systemwide 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 non-surgical business, which represents our urgent care centers and freestanding imaging centers, revenues increased 4.3%. Non-surgical 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 eight. 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. As expected and previously discussed, Conifer's revenue declined 13.6% in the first quarter, primarily due to hospital divestitures by Tenet and other Conifer clients. The vast majority of these were in-sourced by the customer, including a sizable one that occurred on December 31st. Moving to our outlook, we are reconfirming the key components of our outlook for 2019. Including our views on revenue and EBITDA by segment, adjusted EPS and adjusted free cash flow. Additional details on our 2019 outlook are contained on Slides nine through Slides 12.
I also want to reiterate my fourth quarter call comments regarding the California Provider Fee program. As you may recall, the current program expires on June 30th of this year. For modeling purposes, please note that we do not anticipate recognizing any revenue under the program in the third quarter of this year. As a result, approximately $65 million of this revenue should be shifted into the fourth quarter, which means, we are assuming about $130 million of revenue from this program will be recognized in this year's fourth quarter. If the accounting criteria for recognizing this revenue under the new program or not met as of year end, then we would record the $130 million of California revenue next year, plus a full year revenue from the program in 2020.
In summary, Tenet delivered solid financial results with EBITDA in the upper half of our outlook range for the quarter, and EPS was above the high end of our range. Volume growth strengthened in our hospital business, USPI continues to deliver strong and consistent operating results, Conifer is driving meaningful margin improvement and we have reiterated our outlook for 2019.
Let me now turn the call back to Ron.
Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer
Thanks, Dan. I'd like to close this out by just saying that we -- as Dan pointed out and as I've said, we had a very good quarter. But we're not sitting back on that and we're going to move forward as strongly as we have in the past. We continue to execute well. I think we're beginning to see the benefits of the plans we've been implementing and talking about, positive traction on volume in our hospitals and outpatient facilities, maintained very tight expense control across the enterprise and that will continue, and on the Conifer's strategic review we remain in exclusivity regarding a potential transaction and as bullish as that as that was in the past. And we are reconfirming our outlook for 2019. So net, I think we had a great quarter.
With that, I'll now turn it over to the operator for questions. Emma, I'll turn it over to you and Brendan so.
Questions and Answers:
Operator
Lovely, thank you. (Operator Instructions) We'll take our first question today from Ann Hynes from Mizuho Securities.
Ann Hynes -- Mizuho Securities -- Analyst
Hi, good morning. Could you let me know, one thing that stood out is that the acute care business over tough comps, still posted positive admission trends. I don't think you said in your prepared remarks what the one less day had on that. So if you can let me know what admissions -- adjusted admissions and maybe same-store revenue in acute care was -- if you had to adjust for the one day? And secondly, obviously, a reacceleration of admissions is the big focus for you guys this year, if you can go into a couple of near-term actions you're taken to even improve it further? Thanks.