TENET HEALTHCARE CORP Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Strong Q1 Results: Tenet reported net operating revenues of $5.2 billion and consolidated adjusted EBITDA of $1.163 billion in Q1 2025, representing 14% growth over 2024. Adjusted EBITDA margin was 22.3%, a 320 basis point improvement from the prior year.
• Capital Deployment: Tenet is well-positioned to create value for shareholders through effective capital deployment. The company intends to invest approximately $250 million annually in M&A in the ambulatory space. In Q1, six new centers were added, including a partnership with ChoiceCare Surgery Center in Midland, Texas.
• Balance Sheet and Cash Flow: Tenet generated $642 million of free cash flow in Q1 2025, had $3 billion of cash on hand as of March 31, 2025, and no borrowings outstanding under its $1.5 billion line of credit facility. The net debt to EBITDA minus NCI ratio was 3.1.
• Share Repurchases: Tenet repurchased 2.6 million shares of its stock for $348 million in Q1 and plans to be an active repurchaser of shares going forward.

Segment Performance

• USPI: In Q1 2025, USPI's adjusted EBITDA grew 16% to $56 million, representing 16% growth over Q1 2024. Adjusted EBITDA margin was 38%. Same facility system-wide revenues increased 6.8%, with net revenue per case up 9.1% and case volumes down 2.1% due to shift toward higher acuity services.
• Hospital segment: Adjusted EBITDA was $707 million in Q1 2025, up 12% from Q1 2024. Same store hospital admissions rose 4.4%, and revenue per adjusted admission increased 2.8%. Consolidated salary, wages, and benefits were 40.6% of net revenues, a 260 basis point improvement from the prior year.

Guidance

• Tenet is not addressing the underlying outperformance in its business units during the first quarter and will address full-year expectations in the future.
• Reaffirmed full-year 2025 guidance provided in February. Expect second quarter consolidated adjusted EBITDA to be in the range of 24% to 25% of full-year consolidated adjusted EBITDA at the midpoint. USPI's EBITDA is expected to be in the range of 24.25% to 25.25% of full-year USPI adjusted EBITDA at the midpoint.
• Expect free cash flows in the range of $1.8 to $2.05 billion, distributions to NCI in the range of $750 million to $800 million, resulting in free cash flow after NCI in the range of $1.05 billion to $1.25 billion for 2025.

Risks

• Healthcare policy uncertainty, which could materially impact the company's business strategy.
• Potential shocks from policy changes in Washington could require contingency planning, though not currently a top priority for the company.

Question and Answer

• Q: Understand guidance posture and USPI revenue per case growth A: Tenet is not addressing guidance early in the year. On USPI, revenue per case growth is due to contracting platform, acuity, and strategic opportunities to shift to higher acuity services.
• Q: Pipeline of potential acquisitions for USPI A: The pipeline for potential acquisitions in the ambulatory space looks healthy. Tenet intends to invest $250 million annually in this area, with a focus on centers that can benefit from USPI's service line diversification capabilities.
• Q: Hospital segment margins and acuity/payer mix A: The hospital segment has strong acuity and payer mix. Expense management, including salary, wages, and benefits, contributed to better margins. Exchange admissions grew 35% in Q1 2025, with revenues from exchange accounting for ~7% of total consolidated revenues.
• Q: Labor management and sustainability A: Tenet focuses on recruiting and retention of its own workforce for better care delivery. Contract labor is fine where it is, but emphasis is on retaining staff familiar with the company's environment.
• Q: Ambulatory rate momentum and M&A A: Rate momentum in the ambulatory space is expected to continue due to the shift to higher acuity services in lower cost settings and effective contracting strategies. The pipeline for M&A in the ambulatory space is healthy.
• Q: Q1 beat drivers and recession concerns A: Q1 beat was due to strong exchange patient growth, high acuity, and effective cost controls. There is no clear indication of front loading of volumes due to recession concerns.
• Q: Tariffs and procurement A: Tenet is engaged with HealthTrust, and there is no additional commentary on supply spend location or differences in procurement between ambulatory and hospital segments.
• Q: Healthcare policy and managed care A: Priorities include operating discipline, cost control, engaging in policy dialogue, and contingency planning. Managed care contracts typically have a 3-year cycle, and there is no reason to change time frames for negotiations.
• Q: Joint replacement market evolution A: The joint replacement market is evolving with HOPD strategies, physician comfort, and insurer incentives. There is still runway for the shift of joint replacements to outpatient settings.
• Q: Hospital margin expansion and volumes A: Margin expansion in the hospital segment is due to operating discipline, payer mix improvement, and portfolio transformation. Operating leverage can be achieved through better cost structure and asset utilization.