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Text: We're pleased to have you join us for a discussion of Tenet's second quarter 2021 results as well as a discussion of our updated financial guidance for the year.
Tenet's senior management participating in today's call will be Ron Rittenmeyer, Executive Chairman and Chief Executive Officer; Dr. Saum Sutaria, President and Chief Operating Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer.
Actual results and plans could differ materially.
Starting with as we take a look at our results, I wanted to offer somewhat of a look back on where we are, particularly in the context of what we set out to do as part of our transformation a few years back and even how that transformation is pivoted considering COVID, other challenges we have managed through, and the opportunities we've captured as recently as second corner -- quarter.
The cornerstone of our strategy remains our commitment to our four pillars of compliance, quality, service, and safety, which drives consistent improvements resulted in the performance trajectory we have noted for the last several quarters.
The results thus far have provided a solid first half of this year and you can see how we are building a truly unique and diversified operation following the strategy we discussed the last few years.
The results are in line with the strategy, which we have closely followed, which have resulted in greater diversified EBITDA streams, targeted inflection points for growth, top quality environments for our patients, and the addition of highly skilled positions covering important and high-demand specialties.
The output is greater financial strength with greater cash flow generation and a more agile setting overall at every level of the enterprise.
And importantly, we have incorporated community-based programs which have bolstered our ESG commitments, ensuring our sustainability has broad and a strong race going forward.
The second quarter in the first half of 2021 have been better than expected on many fronts.
This was largely driven by the continued commitment of our strategy, our extensive use of data and analysis which have allowed us to trace deviations quickly, take action as needed, and thus ensured a focus on execution at every level.
We've created an environment as COVID cases decreased in which doctors and patients are comfortable coming back to our hospitals and ASCs, and we continue to invest in our service lines and community relationships, which helped ensure a very accessible health system over the last year.
We certainly believe and the results support that this approach has been successful and we also believe we have more to accomplish to ensure the approach remains a solid part of our foundation going forward.
Please realize we're not claiming any victory and we're not relaxing, other than to recognize the trends remain strong and importantly consistent and underscore our commitment to continuing this development and ensure deeper roots are generated systemwide.
I would like to take a moment to comment from our perspective on the current COVID situation.
Clearly, the variance, coupled with the unvaccinated individuals has resulted in an uptick in certain parts of the country.
Our COVID inpatient numbers remain low, roughly 4% of our total cases as of now.
And while we've seen increases in selective markets, given our experience, we're really able to manage through this like we did when we were hit with other waves earlier last year.
We have sufficient PPE on hand, we have sufficient capacity across every market and facility, and we remain vigilant to any changes that occur taking appropriate action to continue to process cases effectively based on current and anticipated conditions.
Vaccinations continue to play a crucial role in bringing down the number of COVID inpatients and the number of patients once infected who become seriously ill.
We continue to support the vaccination rollout on our own employees and the public at large, advocating for and communicating the significant benefits of vaccinations and other necessary precautions to everyone in our communities.
In addition, all of our COVID-safety protocols remain in place in our field locations and have been highly effective and continuing to ensure staff infection rates remain low.
Focusing back now on the second quarter performance, there are several strategic and financial highlights, which deserve some discussion.
As you can see in the numbers, we are delivering a much stronger growth trajectory on the hospital side in terms of admissions, outpatient visits, ER volumes, and surgeries.
In particular, the higher acuity work that we have been focused on with general surgery, cardiovascular, ortho, neuro, etc.
, have been steadily progressing in key markets across the country.
For example, last week in El Paso, we announced the expansion effort to increase capacity and serving growing needs along the Eastern regions of the city.
The new project to be carried out over the next year and a half will include the addition of 30 elementary units, a third cath lab equipped to provide a higher level of care for patients with stroke symptoms, enhanced capacity to the NICU, and continued efforts to expand trauma services and robotics.
In San Antonio, we will soon move forward on our plans to build a new medical campus as the city continues to expand.
This multi-phase project is slated to begin later this year and will include medical office buildings and ASC, an acute care hospital with the potential for additional medical and retail entities in the future development phases.
We plan to invest in critical services including cardiovascular, maternity, and surgical care at a scale that is commensurate with the needs of that area.
Oncology is another area of focus as we recently announced a new affiliation between Memphis-based Saint Francis Healthcare and world-class West Cancer Center & Research Institute, which is an independent Comprehensive Cancer Center.
The project will include a new cancer urgent care center at Saint Francis, the first of its kind in the area as well as a specialized hospital within a hospital with dedicated oncology beds and an investment in the latest treatments all staffed by professionals trained in cancer care.
In addition, Saint Francis has the largest number of surgical robots in one location in the mid-South, which the surgeons of West Cancer will use to perform minimally invasive surgeries that can lead to shorter hospital stays and faster recoveries.
Our commitment to attracting and retaining quality physicians remains a critical element of our growth strategy.
That effort spans multiple service lines across our hospital portfolio and especially in USPI.
For example, in Palm Beach, we're completing the buildout of a large physician group, focused on general surgery with specialization of care and a team environment to best serve the larger community.
In Phoenix, we have a highly talented group of physicians in our Biltmore cardiology group and we've been working to significantly expand their in-market presence.
In Palm Springs, we're building a top-quality, multi-disciplinary orthopedics aimed for surgery, spine, and trauma group.
And with USPI, we've added more than 570 physicians joining our medical staffs during this quarter, bringing the number now that have joined to 1,100 year-to-date.
These are only a couple of examples and there's more to come.
Together with the investments I mentioned earlier on expansions, these activities are actively supporting our current performance and we see a long runway in front of us.
Finally, focusing on our hospital portfolio, as you know, we recently announced the sale of our Miami-based hospitals, which is compelling for several reasons.
We received an attractive multiple for the transaction from a credible and experienced buyer who will support continued development of these facilities.
Conifer remains the revenue cycle provider post sale.
Florida remains a very important part of our portfolio as our five Palm Beach hospitals, which continue to grow and improve, coupled with more than 40 Florida ambulatory assets ensures a very strong, viable network in our continued -- in this continually growing area.
This is supported by our successful physician recruitment efforts in the state and specifically in the Greater Palm Beach market.
As we focus investments on procedural care modernization, program ProMed progress managed service line development, market branding, and overall expansion to meet current and future community needs.
Strategically, the Miami transaction also continues the objective of diversifying our EBITDA further to our Ambulatory segment, which we project to be approximately 43% or so by the end of the year.
Our hospital portfolio is now positioned as the number one or two in 70% of our markets and with the Miami sale, that number will edge higher.
Another segment then will be USPI.
USPI had a very good quarter in line with our expectations and the mix of business continues to be weighted toward higher acuity cases in comparison to 2019.
The integration of SCD facilities has been going well and in terms of other development activity, we added four facilities to USPI in Q2.
We continue to presume the same type of opportunities we spoken about previously, and we have a healthy and strong pipeline that we're working to deploy.
That includes USPI's traditional three-way model as well as a greater two-way opportunities, both of which foster direct collaboration between USPI and local physicians.
And we are continuing our historical strong efforts on developing de novos, in which we handle all aspects from syndication to first patient.
Organic growth opportunities continue to remain substantial throughout the balance of the year and beyond USPI.
USPI has in-house, a very advanced service line and development team, and in the second quarter, for example, we added 25 new starts for service lines across the range of specialties bringing that total to 45 year-to-date.
We also remain a leader in musculoskeletal surgery and the depth of our platform across other types of procedures keeps expanding, allowing our facilities continue to hit important milestones, servicing the needs of their respective communities.
Quality remains a cornerstone of Tenet's overall mission as a company and USPI given its more intimate patient experience, continues to set a high bar in this area.
USPI's patient experience results have again earned important recognition in the last year.
For example, all but one of our eligible surgical hospitals are either four or five-star rating in the most recent age gaps survey.
Let's take a minute and talk about Conifer.
Conifer continues to deliver strong margins, remain on track with our growth plans, and we've made some opportunistic hires at all levels as our pipeline has begun to expand.
We are in the middle of a more targeted and efficient tech transformation at Conifer as well as the Global Business Center, both defining and accelerating our innovation roadmap.
Technology as an offering has moved to the forefront and become one of our main strategic pillars.
And we recently hired a new Chief Technology Officer at Conifer, who will advance these efforts significantly.
Operationally, we continue to deliver strong cash collections on behalf of our clients at Conifer over the last year and we remain very pleased with that performance.
So in closing my remarks, the second quarter was a very tangible example of how clear and direct business fundamentals properly adjusted for the situations we face result in sustainable performance.
We are a data-driven, real-time analysis company who properly executes on a consistent trajectory and when you reflect on the last years, our results have been consistent and directionally aligned with our strategy and above all transparent.
Let's begin on Slide 6.
Following a strong first quarter, we produced another very good quarter as we generated adjusted EBITDA in the quarter of $834 million which was $109 million better than the midpoint of our expectations.
Consistent with the themes in the first quarter, each of our three business units delivered solid results in the quarter.
Our hospital and ambulatory volumes improved across the board, patient acuity remained strong, and cost continued to be well managed, all of which contributed to a sequential margin improvement in all three of our businesses.
Looking back to the second quarter of 2019, our consolidated adjusted EBITDA this quarter represents a compounded annual growth rate of about 12% and our adjusted EBITDA margin increased 170 basis points, excluding grants.
As a result of another strong performance in the quarter and some additional grant income which was not forecasted, we increased our 2021 outlook for the second time this year, which I'll discuss further in a few minutes.
I'll begin with our hospitals, which produced another very strong quarter.
Substantially, all of our 20 hospital markets exceeded our expectations for the quarter, including 14 markets that exceeded our internal EBITDA forecast by more than 10%.
Surgical volumes, ER visits, and outpatient visit volumes during the quarter returned at a faster pace, and patient acuity remains at higher-than-normal levels, and pricing yield remains strong as well.
Our case mix index in the quarter was about 10% higher than the second quarter of 2019.
These positive trends were further supported by our continuing cost control initiatives to yield further operating efficiencies to help mitigate the impact of incremental cost pressures as a result of the pandemic, such as elevated temporary contract labor and PPE costs.
Our hospital adjusted EBITDA margin, excluding grants, was 10.9% in the second quarter, which was 50 basis points higher than in the first quarter of this year and 150 basis points higher than the margin we reported in the second quarter of 2019.
As a reminder, our hospital margins do not include the results of our very strong margin ambulatory business, which is reported separately.
Turning to our ambulatory business, USPI continues to deliver on its value proposition on providing high-quality care and a consumer-friendly, low-cost environment while producing attractive financial results.
USPI generated EBITDA of $295 million in the quarter, which included $20 million of grant income.
USPI's EBITDA in the second quarter, excluding grants, represents a compounded annual growth rate of about 15% looking back to the second quarter of 2019.
Surgical volumes this quarter recovered to 100% of pre-pandemic levels, patient acuity, and revenue yield remained strong, and cost continue to be well managed.
USPI's EBITDA margin, excluding grants, of 41.4% was 190 basis points higher than the second quarter of 2019.
Also, we anticipate approximately 43% of our consolidated adjusted EBITDA in the second half of 2021 will be from our USPI business, demonstrating further progression toward our goal of approximately 50% by 2023.
Turning to our revenue cycle management business, Conifer generated $90 million of adjusted EBITDA and continue to deliver strong margins of 28.2%, which was 50 basis points higher than the first quarter.
Also, Conifer's cash collection performance for our hospitals continues to be an important contributor to our strong cash flow results so far this year.
Let's now look at volume for the quarter on Slide 8.
Our hospital and ambulatory volumes improved significantly in the quarter compared to last year due to the dramatic impact on volumes in Q2 last year due to the pandemic.
And as I mentioned earlier, volumes rebounded stronger across the board compared to pre-pandemic levels in 2019.
These volume trends demonstrate notable improvement from the trends in the first quarter of this year.
We continue to be in a strong liquidity position.
We ended the quarter with about $2.2 billion of cash on hand and no borrowings outstanding on our $1.9 billion line of credit.
We generated $123 million of free cash flow in the quarter or about $275 million before the repayment of over $150 million of Medicare advances we received last year at the outset of the pandemic.
Year-to-date, we've produced $536 million of free cash flow or about $688 million before the Medicare advance repayments.
As we previously discussed, we began to repay the advances as scheduled in April this year.
Our leverage ratio at the end of the second quarter was 4.17 times adjusted EBITDA and 4.86 times adjusted EBITDA minus NCI expense.
Also, we refinanced $1.4 billion of notes during the quarter, which will result in $13 million of future annual cash interest savings and we realized over $100 million of cash proceeds during the quarter from the sale of our urgent care centers, a medical office building, and some other property.
Let's now move to Slide 10, which highlights key cash flow sources and uses during the quarter.
We've provided this information since the beginning of the pandemic to illustrate that we're generating net positive cash flows when you exclude non-routine cash received or used related to stimulus funding and cash inflows and outflows from non-routine transactions, such as early retirement of debt, acquisitions or asset sales.
Turning to Slide 11, let's review our updated 2021 guidance.
This slide shows the key factors that have contributed to us raising our 2021 adjusted EBITDA outlook twice this year.
As you can see on the slide, we raised our guidance, $100 million after the first quarter due to our strong performance and grain income that we were able to recognize, which was not assumed in our original guidance.
Similar to the first quarter raise, we are again increasing our 2021 guidance primarily as a result of our outperformance in the second quarter.
The other item to call out is that we are assuming the sale of our Miami-area hospitals will be completed during the third quarter which will result in about $55 million of earnings being removed from our previous guidance.
Our adjusted EBITDA outlook for 2021 is now projected to be $3.200 billion at the midpoint, which is $200 million higher than our original outlook at the beginning of the year.
Since we are assuming that the sale of our Miami hospitals will occur on August 1st this year, we removed approximately $22 million of Miami EBITDA from our Q3 EBITDA outlook and approximately $167 million of revenue.
After normalizing for the Miami sale, the midpoint of our Q3 EBITDA is slightly above the current EBITDA consensus for Q3 and the midpoint of our revenue outlook for Q3 is also in line with the current consensus for Q3.
For the last five months of the year, we removed $55 million of EBITDA from our outlook due to the planned sale and we removed about $418 million of revenue from our outlook due to the planned sale.
Listen, that's a lot of numbers but we believe it's important to point out our Q3 guidance is in line with current Q3 consensus after you normalize for the planned sale of Miami hospitals.
And to reiterate, we've raised our full-year 2021 guidance for the second time this year with our full-year EBITDA midpoint now $200 million higher than the start of the year.
I want to point out that our updated outlook includes a pre-tax book gain of about $400 million for the anticipated sale of the Miami hospitals, but this gain is not -- it's not included in our adjusted EBITDA or adjusted earnings per share guidance.
As for cash flows for the year, at the midpoint, we anticipate generating free cash flow of about $1.275 billion and adjusted free cash flow of $1.400 billion this year at the midpoint before taking into consideration the repayments we anticipate making in 2021 of approximately $700 million for Medicare advances and the deferred payroll tax match.
While we have -- we will have to repay the Medicare advances and the taxes this year, we have already sufficiently reserved for that amount in our balance sheet cash.
Free cash flow for the year of $1.275 billion before the repayment of the advances and the taxes, less expected cash NCI payments of $470 million results in positive net cash flows of about $800 million this year.
Also, I wanted to mention our income tax payments for 2021 are anticipated to be approximately $150 million.
The increase in expected tax payments in the back half of the year is due in large part to the about $50 million of federal and state taxes related to the gain on sale of our Miami hospitals.
I do want to remind you that utilization, net operating loss carry-forwards for -- from the two most recent years are limited to 80% of taxable income for 2021 tax filing purposes.
The underlying free cash flow generation of the company has significantly improved over the past several years and we continue to maintain sufficient liquidity to continue to invest in growth opportunities.
Our strong second quarter results together with our ongoing enhanced operational execution increases our confidence that we are on the right strategic path in our ability to deliver consistent results.
Their teamwork and level of devotion continues to be exceptional.
I really don't have any other closing comments.
I think we've covered the waterfront here.
So I think we ought to just move to questions in the time remaining.

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tenet healthcare- fy 2021 adjusted ebitda outlook range now $3.150 billion to $3.250 billion (previously $3.000 billion to $3.200 billion.

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