Tenet Healthcare Corporation

Good morning. Welcome to Tenet Healthcare's fourth quarter 2023 earnings conference call. After the speaker remarks, there will be a question and answer session for industry. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate a line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Tenet respectfully asks that analysts limit themselves to one question each. I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. And 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 fourth quarter 2023 results, as well as a discussion of our financial outlook. Tenet Senior Management participating in today's call will be Dr. Sam Satoria, 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, tenanthealth.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. TEN 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. One item that I would like to bring to your attention related to our disclosures is a change in our segment reporting. Effective in the fourth quarter of 2023, we have combined conifer and hospital operations into one reportable operating segment, hospital operations and services. This change was made to reflect recent updates to the organizational and management structure of conifer and hospital operations. This change has no impact on tenants' consolidated revenues, EBITDA, net income, margins, or cash flows. The conifer business will continue to support and expand relationships with existing clients and generate new business, both for comprehensive end-to-end services and point solutions. To ease the transition for investors and analysts, we have included historical financial information under the new segment reporting structure on page four of our fourth quarter 2023 financial supplement. And with that, I turn the call over to Sam.

Thank you, Will, and good morning, everyone. 2023 was an exceptional year for Tenet. We recorded net operating revenues of $20.5 billion and consolidated adjusted EBITDA of $3.54 billion, which translates into an attractive 17.2% adjusted EBITDA margin, underscoring our ability to drive profitability while maintaining our commitment to quality and innovation. We finished the year strong and delivered results in the fourth quarter that were well above the expectations we set. This was driven by continued volume strength as well as cost and utilization management. Each quarter in 2023, we exceeded our performance expectations. As important as our performance, in 2023, we advanced our business transformation towards a more profitable, value-based care enterprise, building a leading specialty care platform and furthering our corporate priorities to position us with lower leverage and enhanced free cash flow opportunities looking forward. Let's start with USPI, where we had a phenomenal 2023, a year where we finally escaped COVID disruption to the business. USPI generated $1.54 billion in EBITDA, which represented 16.4% growth over 2022 and margins of 40%. USPI had 9.2% growth in same facility revenues in 2023, substantially above our long-term goal of 4% to 6% top-line growth. Joint replacement surgeries were up nearly 20% in the fourth quarter and over 15% for the year. Throughout the year, we saw ongoing strength and recovery in GI, urology, and ENT procedures. This organic growth was driven by continued expansion of service lines and growth in our population of partnered and affiliated physicians, as well as the fundamental tailwinds of patient demand for safe and convenient surgical care options. In 2023, we added 30 centers to the portfolio, furthering our goal of creating additional lower-cost sites of care for patients and physicians while delivering superior value for our stakeholders. Turning to our hospital segment, we generated $2 billion of adjusted EBITDA in 2023, which represents a 12% EBITDA margin. Acuity remains strong. with fourth quarter 2023 revenue per adjusted admission up 6.5% over prior year. Additionally, non-COVID same-store inpatient admissions were up 2.6% in the quarter and 6.2% for all of 2023. Our investments in nurse recruitment and retention have paid dividends as we have strengthened our workforce and effectively reduced contract labor spend throughout the year. By the fourth quarter of 2023, contract labor accounted for just 2.8%, of consolidated salaries, wages, and benefits, a 62% reduction from fourth quarter 2022. This best-in-class contract labor cost management performance helped drive strong results in 23, and we expect to continue to benefit from our operational discipline in the future. In summary, we are very pleased with the performance of our teams in 2023 and believe that we will carry the momentum into the new year. Let me transition to 2024 guidance. we're projecting full year 2024 adjusted EBITDA of $3.825 billion to $3.485 billion, which is an attractive 7% growth rate at the midpoint on a normalized basis. In addition, during our third quarter earnings call, we said that we would overcome various reimbursement headwinds to grow EBITDA in 2024, which this guidance reflects. First, in our industry-leading ambulatory surgery business, We anticipate adjusted EBITDA growth of approximately 9% at the midpoint of our guidance in 2024 based on our expectations of ongoing strength in demand coupled with great visibility into our pricing, 3% to 6% growth in same facility revenue, continuous improvement in our operating efficiency, and additional sites of care joining the portfolio. As we have noted, we believe that in 2023 we saw recovery in demand that included some impact from deferred volume, particularly in GI and ENT services. Our initial assumption for volume growth assumes that volume will build as the year progresses, reflecting the historically high same-store case growth that we saw in the first quarter of 2023. We are very confident in the long-term growth rates of this business. USPI will continue its commitment to expanding its family of lower-cost ambulatory surgery centers. We have consistently acquired centers that attract evaluations and achieve post-synergy multiples to below five times, while improving our quality and delivering a 96.6% overall patient experience score under our management. We intend to invest approximately $200 to $250 million each year and have a robust pipeline to support that level of investment. We also have a healthy de novo development pipeline of more than 30 centers currently in the syndication stages or under construction. We believe adding centers with strong margins and attractive post-synergy multiples remains the most effective use of our cash for investments to enhance tenants' earnings and free cash flow. Turning to our hospital segment, we are expecting adjusted EBITDA growth of approximately 5% on a normalized basis at the midpoint for 2024. This projected growth is expected to be driven by 1% to 3% adjusted admissions growth and continued operating discipline. Having captured much of the value from contract labor rationalization last year, in 2024, we plan to continue to strategically open up capacity to meet growing demand in a number of our markets, leveraging our previous capital investments. Additionally, our hospitals continue to enhance access to higher acuity services for the benefits of our patients and communities that we serve. For example, our Brazo Arrowhead Hospital just opened its new neonatal intensive care unit. This state-of-the-art expansion increases our bed capacity to support services for preterm babies and high-risk pregnancies by 75% at this facility. We are also particularly excited about the progress of our new Westover Hills Hospital in San Antonio, a project that reflects our strategic and disciplined approach to expansion. We expect that this facility will be completed and begin to serve patients in the second half of 2024. Located in a highly attractive and growing market, Westover Hills is another example of our thoughtful expansion strategy that we have been executing for a number of years. This 100-bed facility will focus on higher acuity services such as cardiovascular and surgical care for the people in that community. Finally, Conifer recently announced the continuation of our partnership with Dartmouth Health through a new multi-year agreement. Conifer will continue to serve as the exclusive provider of end-to-end revenue cycle management services for Dartmouth Health's hospitals, physician services, and other related entities. We also added a new partnership with Conifer's value-based care business unit, which will be providing analytics and operational support services for capitated risk arrangements. All in all, our full year 2024 adjusted EBITDA guidance of $3.285 billion to $3.485 billion represents attractive growth following a very successful 2023. Before I turn the call over to Sun, I'd like to highlight the continued progress that we have made transforming our portfolio of businesses. Building upon the highly successful and accretive sale of the Miami hospitals in 2021, In the past few months, we've announced the following transactions that demonstrate our agility in optimizing our businesses. First, the completed $2.4 billion sale of three coastal South Carolina hospitals and expansion of our conifer services to Novant Health. Next, the formation of a joint venture with NexCare, which operates dozens of high-quality urgent care locations and a telehealth operation in Arizona. This immediately increases patient access to our network in this geography with low-cost sites of care that are complementary to our health system footprint. And finally, the $975 million sale of four hospitals and related operations in Orange County and L.A. County to UCI Health that we expect to close in the spring of 2024, subject to customary regulatory approvals, clearances, and closing conditions. This deal will also include a contract for conifer services. It is important to note that these sales were completed in very attractive EBITDA multiples, evidencing the strength of our assets and the quality of care they provide in their communities. Collectively, these transactions will substantially improve our leverage position. On a pro forma basis, proceeds from these recent transactions have the potential to lower our leverage ratios by approximately 0.6 turns resulting in a debt-to-EBITDA ratio of approximately 3.3 times or 4.2 times on an EBITDA minus NCI basis. This is on top of the post-tax proceeds of $1.1 billion from our Miami hospital transaction in 2021 that we used to pay down debt. Tenet is entering a new era, with a greater proportion of our performance coming from our highly efficient ambulatory surgical business and a reduced debt profile, we are well-positioned to continue to expand free cash flow further over time. We are mindful of what got us here in the last five years, operating excellence, disciplined capital allocation with a focus on ROIC, an analytics-driven culture, and a continuous improvement mindset. As a result, we will have significant financial and capital flexibility to increase shareholder value over the long term. And with that, I will turn the call over to Son to provide a more detailed review of our financial results and 2024 guidance. Son?