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spk08: Good morning. Welcome to Tenet Healthcare's first quarter 2024 earnings conference call. After the speaker remarks, there will be a question and answer session for industry analysts. If you would like to ask a question at that time, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Tenant 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. Mr. McDowell, you may begin.
spk05: 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 Tenant's first quarter 2024 results, as well as a discussion of our financial outlook. Tenant 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. Tenant 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. With that, I'll turn the call over to Sam.
spk10: Thank you, Will, and good morning, everyone. We have significantly accelerated the strategic transformation of our portfolio. In the first quarter of 2024, we closed the sale of nine hospitals for pre-tax proceeds of $4 billion. This enabled us to retire debt and substantially lower our leverage ratio while continuing to invest in our leading ambulatory care program. As a result, Tenet is more capital efficient, profitable, and a value-based care enterprise. We're well-positioned to deliver high-quality specialty care in the communities we serve and to deliver exceptional shareholder value. Importantly, with our strong core performance and the anticipated contributions from completed ambulatory M&A, we expect to essentially replace the lost EBITDA from the hospital asset sales in our run rate expectations. I'll spend more time on our portfolio transformation in a minute, but first, a quick review of our quarterly results. We carried significant momentum through the first quarter of 2024. Strong revenue growth supported by the continued recovery of utilization as well as high acuity levels and favorable payer mix drove performance well in excess of our initial guidance. In the first quarter, we delivered net operating revenues of $5.4 billion, Consolidated adjusted EBITDA was $1.02 billion, which represents a 23% increase over the first quarter in 2023, and an adjusted EBITDA margin of 19.1%. In terms of performance, let's start with USPI. We had a great quarter, with $394 million in adjusted EBITDA, representing 16% growth over first quarter 2023. Service line expansion, elevated acuity, and favorable payer mix all drove this strong organic growth. Joint replacement surgeries continue to be an excellent source of growth for us and were up 21% over prior year. We also had an active start to the year in terms of our USPI development pipeline. We are proud to have grown USPI to over 535 centers in what is still a highly fragmented market with meaningful new additions this past quarter. We expect these newly acquired centers to deliver approximately 80 million of EBITDA in the first 12 months of ownership. In addition, we expect to ultimately realize the synergized EBITDA minus NCI multiple of six to seven by year three for those centers. USPI's de novo development activity also continues strong with nearly 30 centers currently in syndication stages or in construction. We are pleased to deploy capital to provide more lower-cost access points for the communities in which we operate that also generate very attractive returns. Turning to our hospital segment, adjusted EBITDA grew 28% to $630 million in the first quarter of 2024. Same-store hospital admissions grew 4.2%, demonstrating the continued recovery of utilization that we saw last year. Acuity levels remain strong within the first quarter of 2024, with revenue per adjusted admission up 8.8% over prior year. We have opened up capacity to meet demand in a number of our markets. In addition to the ongoing investment in our frontline workforce, we are proud to have recognized our many field supervisors, managers, directors, and other leaders with incremental financial and professional development rewards for their contributions to our post-pandemic recovery in 2023. We strongly believe that these management layers are critical to successful recruiting and retention initiatives. Additionally, we continue to invest in our high-acuity specialty services. Our plans to open a new hospital in Westover Hills, San Antonio near the end of the second quarter remain on track this year. Over the balance of the year, we plan to allocate more capital into our existing markets for high-acuity service line development to further drive organic growth with strong returns on capital. I'd like to take a moment to thank the special team of Tennant and Conifer colleagues who have worked tirelessly to respond to the cybersecurity attack that took place at Change Healthcare in the early part of this year. We utilize Change in some but not all of our own and our Conifer client hospitals, and we do not utilize it at USPI or with our physician business. As a result of the incident, the clearinghouse function at change impacted the ability to send claims to many payers. We have experienced some delays in near-term billings and estimate that this will only have a temporary impact to our cash flows that we expect to resolve over the course of 2024. All in all, our hospitals have had a very strong start to the year. Looking forward, we are raising our full-year 2024 adjusted EBITDA guidance to a range of $3.5 to $3.7 billion, which represents an increase of $215 million, or 6%, at the midpoint of our range over our prior guidance, which was already quite attractive. In order to ensure that we are clear, our increase in guidance reflects the structural increases in revenue reimbursement that we have earned that were not in our original assumptions for 2024, additions to our ASC portfolio, and the impact of reductions in our hospital asset sales. We are not addressing, but obviously acknowledge, the underlying organic outperformance in our business units during Q1 in our increased guidance at this stage. We are early in the year. We are very pleased with the demand that we are seeing in our network and we will address this component of our expectations for the full year in the future. We're confident in our ability to deliver on these increased expectations. Before I turn the call over to Sun, I'd like to spend some time discussing the progress we have made in our portfolio transformation. As I mentioned previously, the transactions that we have executed on have established the dawn of a new era for tenants. We have completed three very attractive hospital sale transactions, which have generated $4 billion in gross proceeds. Within these sales, we have maintained and, in most cases, enhanced a commercial service provision relationship with the buyer. We expect these relationships will be an attractive contributor to earnings for years to come. We have a commitment to deleverage the balance sheet and have retired $2.1 billion in debt in the first quarter alone. At the end of the first quarter, our EBITDA minus NCI leverage ratio was approximately three and a half times, a significant decrease from approximately seven times that we had at the start of 2018. We have demonstrated capital and financial flexibility this year by allocating $450 million of capital towards our top priority, attractive expansion of our ambulatory business. Additionally, we've returned almost $280 million in capital to shareholders via repurchases in the first quarter alone. While our mission to provide quality, compassionate care in the communities we serve has not changed, we are essentially a new company. Our repositioned portfolio of businesses is more predictable and capital efficient, with attractive margins and free cash flow. The operational discipline that we've instilled in each of our facilities enabled by an analytics-driven culture is producing differentiated results. Our balance sheet, which was once a challenged part of the tenant's story, has been deleveraged. This provides us with a strong foundation and a significant amount of capital and financial flexibility for the future. We feel well-positioned to drive enduring value for our patients, our business partners, and in turn, our shareholders. And with that, Son will now provide a more detailed review of our financial results. Son?
spk16: Thank you, Sam, and good morning, everyone. Our financial results in the first quarter represent a strong start to the year with adjusted EBITDA coming in well above our guidance range. In the first quarter, we generated total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.02 billion, a 23% increase over first quarter 2023. These results were driven by strong same-store revenues, continued high patient acuity, favorable payer mix, and effective cost controls. Now, I'd like to highlight some key items for each of our segments, beginning with USPI, which again delivered strong operating results in the first quarter. USPI's first quarter adjusted EBITDA grew 16% compared to last year, and its adjusted EBITDA margin continues to be very strong at 39.6%. USPI delivered a 6.4% increase in same facility system-wide revenues compared to first quarter of 2023, with same facility system-wide net revenue per case up 6.8%, driven by high levels of acuity. This was partially offset by a modest decrease in surgical case volume of 0.4%, in line with our expectations. As we noted last quarter, We are expecting growth in cases to build over the year due to the significant volume performance we saw in the first quarter of 2023. Now turning to our hospital segment. First quarter hospital adjusted EBITDA grew 28%, with adjusted EBITDA margins up 240 basis points over last year at 14.4%. First quarter, same hospital, inpatient admissions increased 4.2%, and revenue per adjusted admission grew 8.8%. demonstrating strong payer mix and continued high acuity levels. In terms of continued expense management, our consolidated salary, wages, and benefits were 43.2% of net revenues in the first quarter, which was substantially lower than 45% in the first quarter of 23. And our consolidated contract labor expense was 2.9% of SW&B, a material reduction from 6% in the first quarter of 23. These reductions in costs reflect the disciplined approach that we take toward labor management. In addition to the strong operating performance in our hospital segment, our first quarter results also include $88 million of additional revenues associated with CMS's approval of increased funding for the Michigan Medicaid Hospital Rate Adjustment Program, or HRA for short. About half of this amount is related to the fourth quarter of 2023. We are the leading safety net provider of health care services for the people of southeast Michigan and the greater Detroit area, and these funds will support the care that we provide to this community. Excluding this additional funding, revenue per adjusted admissions still grew 6.1%, a very attractive result. We've had a strong start to the year in both USPI and hospitals, reflecting strong fundamental same-store revenue growth and disciplined expense management. Next, we will discuss our cash flow, balance sheet, and capital structure. We generated $346 million of free cash flow in the first quarter, and as of March 31st, we had nearly $2.5 billion of cash on hand, with no borrowings outstanding under our $1.5 billion line of credit facility. We had an active first quarter on the M&A front as well. We invested $450 million for USPI acquisitions at attractive multiples, And as Sam mentioned, we expect to deliver enhanced post-synergy returns on these acquisitions over the next few years. And finally, during the first quarter, we retired $2.1 billion of senior secured first lien notes that were previously due in 2026 and repurchased 2.8 million shares of our stock for $278 million. Thank you. Our leverage ratio as of March 31, 2024, was 2.79 times EBITDA or 3.46 times EBITDA less NCI, a substantial improvement from year-end, reflecting the proceeds that we received from our hospital divestitures as well as our outstanding operational performance. I would note that we have not yet made tax payments on the gains from the hospital sales, and the impact of these tax payments are not reflected in our current leverage ratios. Finally, We have no significant debt maturities until 2027, and all of our outstanding senior secured and unsecured notes have fixed interest rates. In the aggregate, we have made substantial progress transforming our balance sheet and capital structure. We are well positioned with a high degree of financial flexibility and cash flow generation to support our capital allocation priorities in the years to come. Now let me turn to our outlook for 2024. For 2024, we now expect consolidated net operating revenue in the range of $20 to $20.4 billion. As Sam mentioned, we are raising our 24 adjusted EBITDA outlook range by $215 million to $3.5 to $3.7 billion, reflecting the strong start of the year. The $250 million increase is driven by the following structural changes to our guidance. First, $209 million of incremental net revenues associated with the Michigan Medicaid HRA program. Second, $30 million of incremental EBITDA from ASC acquisitions that we made in the first quarter, above what we had previously assumed in guidance. And finally, a year-over-year headwind of $24 million in the sale of two California hospitals to Adventist, which was not previously reflected in our guidance. On a normalized basis, our full year 24 adjusted EBITDA is now expected to grow 13% over last year at the midpoint of our range. Finally, we would expect second quarter consolidated adjusted EBITDA to be in the range of $835 to $885 million, and we anticipate that USPI's EBITDA in the second quarter will be 23.5% to 25% of our full year USPI EBITDA guidance at the midpoint. Turning to our cash flows, we now expect free cash flow in the range of $950 million to $1.2 billion, an increase of $75 million at the midpoint. This range includes the payment of $687 million in net taxes related to our announced divestitures. Adjusting for these tax payments, this represents $1.762 billion of free cash flow at the midpoint of our outlook, which demonstrates continued strong performance even after the loss of EBITDA from the divested hospitals. As we stated last quarter, our cash flow performance has improved substantially over the past several years, and we continue to demonstrate the ability to generate this cash flow while also deleveraging our balance sheet, making investments in our businesses, and executing on key growth plans. And finally, as a reminder, our capital deployment priorities have not changed for 2024. First, we will continue to prioritize capital investments to grow USPI through M&A. Second, we expect to invest in key hospital growth opportunities, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and or refinance debt. And finally, a balanced approach to share repurchases, depending on market conditions and other investment opportunities. We are pleased with our strong start to the year and the significant progress we have made with the portfolio. We are confident in our ability to deliver on our increased outlook for 2024 as we continue to provide high-quality care for those in the communities we serve. And with that, we're ready to begin the Q&A. Operator?
spk08: Thank you. We will now be conducting our question and answer session. If you would like to ask a question, again, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 keys. One moment, please, while we poll for questions. Our first question comes from the line of Kevin Fishbeck with Bank of America. Please proceed with your questions.
spk17: Great, thanks. So overall, I guess the quarter looks really good. The only number that still kind of looks a little bit off to me is just the same store case growth within USBI. I know you guys had a tough comp, but is there anything that you would point to that kind of indicates that return in volume as the year goes on? You guys sound confident in building. Is there anything on a, you know, case for surgical day or trends in the quarter or something that you would point to that kind of say, you know, we've got good visibility that that volume will accelerate and build as the year goes on. Thanks.
spk10: Yeah, thanks, Kevin. So first of all, let me just address the quarter. I mean, this is what we expected, right? I think in the past I had said pretty clearly that we expect volume to build through the year or as the year goes on. So this is no different than what we expected. You know, It's not worth it. It's a footnote, so I'll just be brief about it. I mean, there were a couple centers, a handful of centers that were shut down due to weather issues. We were essentially flat at the end of the day when you really look at what was same-store operating, which drove that number. But the longer-term implication of the result is actually very important in our minds in the way we were looking at the year because, you know, with last year's volume growth being so strong, I think there were all, and by the way, even for us in the business doing this Bottoms Up, there were always questions about was this volume simply deferred care that was going to be one time and then actually there would be a rebasing significantly downwards. And we didn't think that based upon our planning in the business last year when we went through the Bottoms Up planning. And we're delighted that that's correct, which is to say that having the business after a year where we grew more than twice what our typical growth rate would be, remain flat and have an opportunity to build off that floor suggests significant fundamental strength and tailwind in the demand for USPI type of services as opposed to 2023 having just been a catch-up year that was going to go away. When you look under the surface of our volumes today, All of the major service lines that we focus on, including the strength we saw in GI, experienced a bit of further growth. So the volume that was down a little bit was more in low-acuity pain-type procedures, but we saw orthopedics, ENT, GI, other bone and joint care that were focused on, shoulders, obviously the attractive urology partnership we have, all growing. So I think the fundamentals look good. The comps are hard through the year. We think they get a little bit better as the year goes on. But our fundamental belief is that the ability to grow off of last year is really what the first quarter affirmed, as opposed to that have been just purely one-time deferred activity in 23. We view it as a good news story.
spk08: All right, great. Thanks. Thank you. Our next question comes from the line of Justin Lake with Wolf Research. Please proceed with your question.
spk11: Thanks. Good morning. Just a couple quick numbers questions. First, the first quarter obviously was really strong. I appreciate the conservatism. I'm not kind of assuming that continues through the year. But I just want to make sure we understand how much better was it versus your internal forecasts You know, when you adjust for everything going on in terms of deals and the ASC purchase and the asset sales. And then secondly, post the asset sales, I think you had said that you were going to pay down debt here with those proceeds. Is that still the intent? And if so, can you give us an idea where you think those leverage ratios kind of would be on a normalized basis at the end of the year post the debt repayments? Thanks.
spk10: Yeah. Hey, Justin. It's Tom. I'll take the first one. I'll pass to Son. The results, the core results were significantly better than our expectations for the quarter. And that's true in the hospital segment and the USPI segment. Both demonstrated, so if you just start with USPI and even building off Kevin's question, the net revenue strength was substantial. And that, you know, is related to acuity and pricing, obviously, which drove a net revenue result above what our typical, you know, guidance expectations would be. So we felt pretty good about that. And I think I've covered that piece of it. On the hospital side, similarly, the volume strength was good. The mix was good. The acuity was up again over this period of time. And I'm referring to it, you know, in the absence of some of the reimbursement or supplemental payment changes. In the absence of that, it was strong across the board. So we thought the core performance was quite a bit better than we expected for the quarter.
spk16: Thanks, Tom. And then, Justin, on your second question around debt and leverage, maybe I'll take it in reverse order. So you're right, as I mentioned in my script, You know, the leverage ratios as of March 31 will have to – will probably change, right, as we pay down debt. And we mentioned about $687 million related to that – of tax, excuse me. And then in terms of year-in ratios, you know, we're not prepared to address that specifically yet. But as you can imagine, you know, based on our guidance, you know, we feel comfortable with the ranges that we're expecting. It'll depend ultimately on the eventual capital allocation decisions that we make throughout the course of the year. And as I said in my prepared remarks as well, our capital allocation strategies and priorities have not changed. And then finally, in terms of debt pay down, you know, our hospital divestitures, as Sam mentioned, have done a great job of deleveraging tenant. In terms of actual tactically paying down debt, you know, we paid down our 26 note, as we just mentioned. And then our next... note is really February of 2027, which is almost actually three years from now, right? So we'll obviously stay committed to paying down debt, but we'll take our time and look at the optimal way to execute on that. Thanks for the question.
spk08: Thank you. Our next question comes from the line of Stephen Baxter with Wells Fargo. Please proceed with your question.
spk13: Hi, thanks. For the hospital business, it'd be great to get some more color on the sources of acuity and payer mix in the quarter. I guess what's driving that and maybe how much of it's coming from the exchanges and any type of quantification on where your exchange mix sits after the significant growth we've seen over the past couple of years would be great. Thank you.
spk10: Yeah, sure. A few thoughts for you. One is that I think it's important to note that the volume strength was very broad-based. Different markets, different We've obviously talked historically about markets that recovered more quickly and less quickly from COVID, but the volume strength was pretty broad-based. I also indicated that we are now beginning to add some capacity back thoughtfully in different markets, which we're pleased to see that we can accommodate without eroding our cost performance. So an important part of our story for the quarter is was maintaining our cost discipline even as we added the capacity, which helped with the margin expansion. The service line acuity, especially the procedure-based work, was good. We saw a lot of strength in a number of markets in high acuity, kind of ICU care type of medical admissions. And then to your last point, which I'll spend a minute on, we did see significant strength in the exchange population over prior year. And I think this is probably – and by the way, the Medicaid business was down a little bit. So I think some of this is related, obviously, to the short-term phenomenon that we're probably seeing a bit from redeterminations and the effect they're having now. You know, for us, I've pointed out before, we've had a broad-based contracting strategy to be in network with exchange plans around the country in our markets. And so I think that probably helps us with respect to the ability to serve those patients for those that pick up exchange coverage.
spk08: Thank you. Our next question comes from the line of Peter O'Chickering with Deutsche Bank. Please proceed with your question.
spk15: Hey, good morning, and great job on the quarter. On the hospital segment, margins on the last quarter were guided to be about 10.9% at the midpoint, and now they're guided to be 12.1%. So excluding the 60 basis points of margin improvement from Michigan, can you bridge what sort of made those margins sort of go up? Was it the asset sales in California or did it just help bridge that margin delta? And then a quick numbers question for you. You talked about the A&R of EVA coming from these asset sales. What was the revenue contribution from these ASCs for the year?
spk10: Thanks. I'll take the first one, Pito, and thanks for the support. The margin strength is I mean, it's multiple fold. I think you covered many of the areas there. Obviously, I would start with the importance of maintaining cost discipline, which we have done. The second is just volume and improvement in capacity utilization improves margins. The third is related to the mix and the payer mix in particular. both Medicare and commercial business, including commercial exchanges, being stronger in the quarter. And then obviously there are the service line opportunities where we're focused, which for obvious reasons can be accretive to margins given some of the high acuity work that falls into those categories. So those are the things that really drove the performance. Because of the balance on the asset sales, you know, higher significantly, some of them being significantly higher margin markets than others, I'm not actually sure that the, and I, to be honest with you, would have to go look for sure, but my general impression from what I looked in the past is I'm not actually sure the divestitures were that accretive to margin. Go ahead, Sunn.
spk16: Yeah, that's correct. And, Pito, on your second question about the AAC acquired revenues, as Sam mentioned, the first 12-month equivalent of EBITDA is about $80 million. We obviously, in our guidance, have nine months of that in fiscal 24. And I would assume sort of standard USPI EBITDA margins for that book of business.
spk04: Great. Thanks so much.
spk08: Thank you. Our next question comes from the line of Jason Casorla with Citi. Please proceed with your question.
spk04: Great. Good morning. Thanks, and congrats on the quarter. I just wanted to really quickly ask about the free cash flow expectations, you know, EBITDA up 200. Free cash flow seems only to be up 100 million. You know, what's driving that differing outlook? Is it just related to the divestiture and the nuances that move with that or timing elements? Just to make sure we're good on that in the free cash flow side. Thanks.
spk16: Hey, Jason, thanks for the question. This is Son. Yeah, I would say with the EBITDA, you know, we obviously tax effect that addition. And then, as we mentioned, we have additional taxes that we expect to pay on the California to hospital divestitures as well. So those are probably the two most important factors there. Thanks for your question.
spk08: Thank you. Thank you. Our next question comes from the line of Ben Hendricks with RBC Capital Markets. Please proceed with your questions.
spk14: Great, thank you very much. Just a quick question on the medical fee headwind that you called out. Just wanted to see how that is trended quarter to quarter, trended versus your expectations, and how we should think about that through the end of the year. Thank you.
spk16: Hey, thanks for your question on the professional fees. So as we said before, for full year 24, we're pleased to see moderation in the rate of growth and change here. We're still assuming about 8% to 10% range for fiscal 24 guidance. I will also add that in Q1, we saw it be flat sequentially versus our last quarter. And then for Q1 24 versus Q1 of 23, we saw about 9% to 10% increase. So thanks for your question.
spk08: Thank you. Our next question comes from the line of Josh Raskin with Nefron Research, LLC. Please proceed with your question.
spk03: Hi, thanks. Good morning. Can you talk about Detroit Medical Center and specifically if the new subpayment program changes the way you think about that market? I think it might be helpful to hear about capital projects that have come online for DMC and then if your plans change going forward in terms of investment. And then just lastly on the numbers, is that still low $2 billion in terms of revenue?
spk10: Yeah. Hey, Josh. So the Detroit Medical Center is a very large multi-asset complex academic, you know, health science center that kind of goes all the way from the center of Detroit all the way out into the suburbs with, you know, with multiple hospitals and includes the Children's Hospital of Michigan and the Rehabilitation Institute of Michigan, both of which are facilities that have not just statewide but regional draw. So it's a large, complex facility. academic health science center across a pretty broad geography, multiple trauma programs, etc. Now, the other thing that the Detroit Medical Center is importantly for that community is, you know, the largest safety net provider in southeast Michigan and in Detroit in particular, both for the under and uninsured in that community. So, The Detroit Medical Center has always had multiple objectives in terms of the patient population that it needs to continue to serve on a broad basis. And our strategy there has been to invest in accomplishing all of those missions together. We've been working on improvements in the supplemental payment programs in the state for years. This doesn't really come out of the blue, if you will, for us in the sense that a lot of effort has gone in among multiple stakeholders, including the leaders at the DMC in working with the state on finding ways in order to help the portion of the mission that provides increasing access and access to care for the under and uninsured portion of the mission at the DMC. And I think what we see here in the improvements essentially brings Michigan to par with the way other states have managed ensuring that that access continues to be made available for that population. So your question on how we look forward at the DMC is one that we'll address in the market over time. But again, I would point you back to the comment that I made that we have always operated the DMC and made investments to focus on being successful in the multiple missions. I think what changes is more the return that we generate from those investments improves more so than there's going to be some wholesale change in our strategy.
spk03: And the revenue size?
spk10: We don't report on the revenue size of our individual markets, and I'm not sure that there's any reason to do that here. Okay. Thanks.
spk08: Thank you. Our next question comes from the line of Whit Mayo with Learing Partners. Please proceed with your question.
spk12: Thanks. Good morning. Maybe you hit on some of this, but the 45 centers that were acquired, can we just maybe get a little bit more color on those? I'm sure there's a Backstory I presume this was a larger transaction or these in hospital markets potential JV partners the mix just just any Additional color would be helpful.
spk10: Thanks Yeah, no problem. Thanks with yeah, the the 45 centers comprise Centers all across the nation The vast majority of them are new markets to USPI places where we don't have necessarily centers today A broad base of, you know, there's orthopedics, there's GI, there's ophthalmology. I mean, typical service lines that you would end up seeing in the ambulatory space. You know, I would say that some of the centers have tightly affiliated partnerships with physicians. Some of the centers are, you know, and in some cases health systems, and some of the centers are more what I would describe as stand-alone, you know, stand-alone centers with independent groups that have over periods of time come together, bought equity, and created a partnership that we bought into. I believe in all of the centers we bought up to consolidating positions and So there's no, quote, buy-up strategy that will be required in these centers in the future. I don't know. I'll stop there. I think that covers it. Appreciate it. Thanks.
spk08: Thank you. Our next question comes from the line of A.J. Rice with UBS. Please proceed with your question.
spk09: Hi, everybody. It looks like in your bridge that you're assuming organic growth in the ambulatory business of about four, EBITDA growth of about 4%. Obviously, as you said, you've got a little tougher comp perhaps this year on the case buying side, but you're still expecting that to be slightly positive. I guess just given the strength of the revenue per case that you saw in the first quarter, is there any reason, is that a conservative number? Is there any reason to think that your revenue per case, given the investment and mix, et cetera, that you've done, would start to moderate? And then I might also, on the USPI, ask, a lot of the peers are talking about this calendar effect at the end of the first quarter, Easter, spring break, that that maybe hit in late March and affected some of the elective outpatient-oriented procedures. Did you see that? Did you have any early read on April if you did?
spk10: Yeah, hey, AJ, just a couple of things. Look, we have a lot of moving parts and pieces this quarter, including things impacting our guidance. So what we ended up doing was increasing our guidance to be consistent with the structural revenue and asset ownership, both additions and subtractions, to the portfolio that we could forecast looking ahead to 2024. Look, as I said, we're really pleased with the demand we're seeing across the board in the businesses. We recognize the core underlying outperformance net of all those other items, and we haven't really touched our guidance to acknowledge that performance yet. Again, lots of moving parts and pieces. I think with the underlying performance, we'll come back and address that on future calls. We'll hopefully be in a position where we really need to address that on future calls. But there's nothing in the environment right now that we're seeing that's concerning. And again, I would say up to today, we're pleased with the demand we're seeing in the business. Okay. The calendar effect question, I don't know if you want to address that, Son, or I don't. I mean, yes. I mean, of course, we spend a lot of time, you know, in particular because USPI, you know, functions on a workday, weekday, workday type of schedule focused on those issues from year to year. It does cause some effect on the business and the volumes that are there. So I guess I would say we're a little bit used to it, that that happens. And yes, this year it did have some effect in that arena. I would reiterate the longer-term message around the volumes. We are really pleased with the fact that what we saw in the first quarter helped to give us even more confidence that 23 was not just a one-time rebound year. It was a year in which we can build upon that volume strength, unnaturally high volume strength from last year. And as the year progresses, look to build volume growth off of, you know, what were some very tough comps from 23. But again, fundamentally, the first quarter gives us a great sense of relief that, you know, we've established that there is
spk06: strength and the tailwinds for this business are real thank you and our next question comes from the line of andrew mulk with barclays please proceed with your questions hi good morning just wanted to follow up on the 45 ascs that you acquired in the quarter i think you said in your prepared remarks that you're expecting 80 million dollars of eva contribution from these centers When I look at the acquisition and development activity line in your ASC bridge, I think the revision was closer to $30 million over three quarters. I'm not sure if there was any contribution in the quarter. So if so, that implies a pretty material step up in 1Q25. Just want to make sure I'm understanding about this business and the cadence of synergies that should materialize in 2025. Is that the right way to think about it? Thanks.
spk16: Andrew, I'll try to address the different parts of your question. So first of all, In Sam's comments, he mentioned 80 million. That is a first 12 months of ownership number. So in our 24 guidance, we have nine months contribution. And I would assume that as happening in Q2 through Q4. The other piece I would say is that when we posted original guidance in our last call of $71 million of acquisition and development activity for USPI, Obviously, some of the activity that we accomplish in Q1 goes towards that. So what you're seeing with our new number of 101 in acquisition development activity for USPI calculates that and assumes that a lot of the acquisition activity in Q1 goes towards the original guidance. So that's part one. Part two is we won't comment on 2025 impact yet. But what we feel confident in is that over the long term, over the next three-year outlook, that we will work hard to achieve six or seven times multiple EBITDA minus NCI for that acquisition. Thanks for your question.
spk10: Yeah, this is an attractive portfolio of assets. Again, diversity of service lines, nice opportunities to realize improvement in performance over the first three years. that will build and grow earnings, and importantly EBITDA minus NCI as well. And as I indicated, all consolidated from the beginning, not creating a buy-up set of work plans related to buy-ups. So we like the portfolio of assets that we picked up and will digest over the course of the year.
spk08: Thank you. Our next question comes from the line of Sarah James with Cantor Fitzgerald. Please proceed with your question.
spk01: Thank you. So a couple times today you've touched on your strategy of growing off of a new higher base for USPI volume. I'm wondering if you've done any analysis on that to see were there just stronger market trends or did you guys gain share? And if it is share gain, Are you able to tell, was that due to partnerships and referrals or growing catchment area or just sort of what was behind it? Thanks.
spk10: Yeah, thanks, Sarah. So a couple things. I mean, the ASC environment is not necessarily as a general market as data-rich as some of what you see on the hospital side, right? So we, too, have to use proxies to understand and forecast where we're going with the business. Obviously, the number one thing we do is we do bottoms-up, center-by-center business planning every year that is built upon our understanding of our strategies, how successful they are, polling the physician partners, et cetera. I mean, it's a pretty simple but relatively comprehensive process. And, you know, when you look at that And then you also, as I indicated in our fourth quarter call, just simply measure how busy some of these individual physicians were in 2023. I think I may have even noted, you know, some of these people worked incredibly hard to take care of patients at a level of productivity that we have not seen them, you know, deliver in prior years. Of course, you're left with the question, despite our best efforts at forecasting and whether or not a significant portion of what we saw last year, especially being post-pandemic, was simply one-time deferred care. So that's why I elaborate on it because in the first quarter, we sort of knew from our bottoms-up planning that we believed volume growth would build over the year. Of course, there was always a risk that, you know, that planning wasn't entirely accurate and there would be a volume retreat based upon... deferred care being the real reason for the growth last year. And that's why I comment on it, because I'm not as focused on quarters individually. I'm focused on the broad-based tailwinds that drive USPI and our ability to drive earnings growth over a longer period of time. And that's maybe why I elaborate on that point a few times, because it gives us more confidence that we are building, you know, solidly for the long term. The only other statistic that we're able to look at across the board is our rate of addition of new physicians and being able to measure how they ramp up. And so one of the reasons we had a little bit of confidence this year that we would see growth as the year went on was despite a busy year last year, we did add physicians to the USPI portfolio, and it usually takes them 9 to 18 months to ramp into their comfort level in an ASC. And so we thought, okay, based upon those additions, we ought to see some growth above and beyond where we were in the latter part of the year. So I don't know, maybe that's more color than you wanted, but that's kind of how the planning for this business shapes up.
spk01: That's very helpful. Thank you.
spk08: Thank you. Our next question comes from the line of Kyle Sternick with JPMorgan Chase & Company. Please proceed with your questions.
spk07: Thanks. I wanted to ask you about the 45 centers. Were there any large portfolio deals in that quarter or in that part of the 45? I know you mentioned that the additions were pretty broad-based across markets. And just any other color on sort of what the QE or case mix is for those centers, and maybe more broadly just what you're seeing in terms of the M&A pipeline?
spk10: Yeah. Hey, Cal. So a few things. One, The centers were, in fact, as I said, broad-based geographically. A majority of the centers did come through a single transaction for multiple centers. We just closed the deal, right? So assessing the case mix and the acuity and all that stuff, other than what we learned in diligence that gave us comfort is not really something I'm prepared to talk about in any great detail. Our priority and focus, of course, is continuing to acquire assets at attractive multiples, adding value to them from a quality, safety, compliance, growth standpoint to increase access to lower-cost care in the communities in which we acquire them using the USPI management skills and ultimately improving the returns to the levels that Sun and I described in a typical fashion by year three. We think these things will be very nice additions to the earnings for USPI. In terms of the broader M&A pipeline and de novo pipeline, they both remain strong. We anticipate continuing to progress through that agenda as the year goes on. That's great. Thank you.
spk08: Thank you. Our next question comes from the line of Brian Tanquillit with Jeffrey. Please proceed with your question.
spk02: Hey, good morning, guys, and congrats on a solid quarter. Maybe some, my question for you, as I think about revenue per case related to all the comments you made on USPI, right, I mean, obviously it was strong this quarter, but if we think about the mix of ortho contained to grow the impact of the new ASDs that you just acquired, and maybe the comment you made about payer rate bumps. How should we be thinking about your view on the sustainability of, or the right level of revenue per case growth, number one, and maybe some color you can share with us on the payer rate bumps comment you made earlier when you prepared, Brian. Thanks.
spk10: Yeah, sure. Well, I mean, I think the number one driver of revenue per case is obviously the mix, acuity, right? I mean, it's It's the case mix and acuity. And strategically, our objective is to grow that. It's also important just because the more that we grow in that dimension, the more we're creating value for the system by reducing the cost of similar care that could be done in a more expensive setting, which is obviously important to our payer and government reimbursement stakeholders. So that's how we think about that and why we are focused on that. The exit of low acuity business helps that statistic in net revenue per case, but it also, over time, helps us create some more capacity in our ASCs. As I've talked about, it's always a headwind to same-store growth. When you lose or move out or whatever low-acuity pain cases where you can do 10 of them in the same time you can do one joint surgery, that is what it is. And, you know, we obviously are going to continue down the path of our service line mix improvements that we believe in, regardless of the impact on same store. It's obviously our objective to continue to build the same store, however, as we've said in our guidance. From a mix perspective, even in the ASC business, I think that some of the benefit of the exchange population growth. We're seeing that flow through. It's not just the hospitals. We're seeing that flow through in the ASC business. What's different in the ASC business is there isn't as much Medicaid. So you're not seeing the reduction necessarily like you would in the hospital segment. and the growth in the exchange business. But you are seeing the exchange segment growth on the ASC side.
spk18: And it's not just the impact of the acquisitions. Does that dilute it? Or how should we be thinking about that?
spk10: Yeah, that's a good question. And I mean, other than providing the numbers around, I mean, again, we just closed on a lot of these centers in the past quarter. And most of them, frankly, were towards the end of the quarter to Sun's point around They really are an impact in Q2 through Q4 as opposed to having had any impact in Q1. The centers we acquire, generally speaking, will be lower margin and dilutive to earnings from a margin standpoint until USPI fully implements its program of improvements. which is how the year three multiples can be forecast over time. That obviously comes with earnings improvement and therefore margin improvement. And so that's definitely the case. We haven't gotten into them enough to know whether there are some that we're going to need to do some partnership restructuring or other things. We'll provide more visibility as we get into it. you know, next quarter in terms of what impact it may have on volumes, earnings, any refinement to the earnings. But we feel pretty good about the projection that we've given on these centers for the first 12 months of EBITDA and also what the long-term impact or benefit to the company will be. Thank you. Thanks.
spk08: Thank you. And our next question comes from the line of Ann Hines with Mizuho Securities. Please proceed with your question.
spk00: Hi, good morning. So I just want to focus on divestitures. Obviously, they've been a very nice source of debt repayment on the acute care side. How do you view divestitures going forward? And can you remind us what goes into decision-making on whether to strategically keep or divest a hospital or a market? Thanks.
spk10: Yeah, I mean, so, and I appreciate the question. I think that, you know, strategically... Our choices about divestitures are dependent upon a few different things. Obviously, one is, does it impact our overall corporate strategy in a positive or negative way? Or do we have the ability to provide leadership and ongoing growth in the markets that we were serving based upon our business model capital needs and other things that those assets may have and what we might forecast the return on those capital investments may be versus other things that we could spend the money on. And then finally, the ability to generate proceeds that fully value what we've built in these assets, which is, again, what we were focused on because these assets underwent a lot of work over the last five years and we wanted to ensure that we captured full value for them in our transactions. That's how we think about those are the criteria that we've thought about. As I've said before, we're very comfortable with the portfolio we have today and the positions that we hold today and our ability to build and grow in the markets that we're in. Thank you.
spk08: And we have reached the end of the question and answer session. And this also concludes today's conference. And we do thank you for your participation. And you may disconnect your lines at this time.
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