HCA Healthcare, Inc. (NYSE:HCA) Q2 2023 Earnings Call Transcript

HCA Healthcare, Inc. (NYSE:HCA) Q2 2023 Earnings Call Transcript July 27, 2023

HCA Healthcare, Inc. misses on earnings expectations. Reported EPS is $4.21 EPS, expectations were $4.22.

Operator: Welcome to the HCA Healthcare Second Quarter 2023 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Frank Morgan: Good morning, and welcome to everyone on today’s call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks, and then we will take questions. Before I turn it over to Sam, let me remind everyone that should today’s call contain any forward-looking statements, they are based on management’s current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today’s press release and in our various SEC filings. On this morning’s call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA is included in today’s press release. This morning’s call is being recorded, and a replay of the call will be available later today. With that, I’ll now turn the call over to Sam.

Sam Hazen: Good morning. Thank you for joining the call. The company produced solid earnings in the second quarter. These results reflected continued strong demand for our services and healthy operating margins. Across most areas of our business, we maintain the operational momentum that we experienced over the past 3 quarters. We believe this strength should continue into the second half of the year. Accordingly, we updated our earnings guidance for 2023 to reflect this outlook. Against the difficult comparison to the second quarter of 2022, diluted earnings per share increased to $4.29. Same-facility volumes across the company were strong. Admissions grew 2.2% year-over-year, inpatient surgeries increased 1.8%, same facility equivalent admissions increased 3.7%.

This growth was driven by emergency room visits, which grew 3.7% and outpatient surgeries which grew 3.3%. Other outpatient categories also grew, including outpatient cardiology procedures, with increased 5%. The growth in volumes was broad-based across the company’s divisions and diversified within most service lines. Additionally, volumes were supported by strong acuity growth of 1.6% and a favorable payer mix from commercial adjusted admissions growth of 5%. These factors drove an increase in same facility revenue of 6.3% as compared to the prior year. In the quarter, we continued to invest in our people, and as a result, we saw improvements across virtually all key labor metrics. Turnover continued to decline for nurses and trended at an annualized rate of 17%.

Nurse hiring remained strong in the quarter and for the year has increased by 9% as compared to last year. These positive results helped reduce contract labor costs 20% compared to the second quarter last year. During the quarter, we improved available bed capacity. Instances where we could not accept patients from other hospitals declined and represented 0.8% of total admissions, down from 1.5% in the first quarter. We believe the significant investments we are making in our networks, our people and our technology agenda will provide us with the necessary resources to improve our services and provide even higher quality care to our patients. As we look to the future, we remain encouraged by both the backdrop of strong demand that we expect in our markets and our overall competitive positioning within them.

HCA Healthcare will continue to use its disciplined operating culture to execute our strategic and capital allocation plans. I want to thank our colleagues for their dedication and their overall effectiveness. So let me close with this. I want to speak to a recent event that we take very seriously. On July 10, we announced that we had recently discovered a list of certain information with respect to some of our patients was made available by an unknown and unauthorized party on an online forum. We have confirmed that the list does not include clinical information, payment information or other sensitive information like passwords, driver’s license or social security numbers. Our forensic investigation is ongoing, but this event appears to be a theft from an external storage location that was exclusively used to format e-mail messages.

We are in the process of notifying all affected patients in accordance with our legal and regulatory obligations. And not unexpectedly, we have been named as a defendant in multiple class action lawsuits. This incident has not caused any disruption to our day-to-day operations nor do we believe it will materially impact our business or financial results. HCA Healthcare believes the privacy of its patients is a vital part of its mission and remains committed to maintaining the security of their personal information. With that, I will turn the call to Bill for more details on the quarter’s results.

Bill Rutherford: Great. Thank you, Sam, and good morning, everyone. I will provide some additional comments on our performance for the quarter. Consolidated net revenue increased 7% to $15.86 billion from $14.82 billion in the prior year period. This was driven by 4% growth in equivalent admissions and 2.9% increase in revenue per equivalent admission. We remain pleased with our team’s management of operating costs even with the backdrop of inflation. Our consolidated adjusted EBITDA margin was 19.3% in the quarter. During the quarter, we completed our transaction to acquire a majority stake in the Valesco joint venture and we are now consolidating the operations of this venture. This reduced our consolidated margins approximately 30 basis points in the quarter.

We believe this transaction not only mitigates business risk with the Envision bankruptcy proceedings but will also further support alignment between our hospital-based physicians and our hospital care teams on improving quality, patient satisfaction and efficiencies. When you consider this transaction and the $145 million payer settlement we recognized last quarter, our adjusted EBITDA margins have remained consistent between the first and second quarters. So let me speak to some cash flow and capital allocation metrics as they remain a key part of our long-term growth and value creation strategies. Our cash flow from operations increased $845 million in the quarter from $1.63 billion in the prior year to $2.475 billion this year. Capital spending was just over $1.2 billion.

We paid $164 million in dividends and repurchased $915 million of our stock during the quarter. Our debt to adjusted EBITDA leverage ratio remains near the low end of our stated leverage range of 3 times to 4 times. As noted in our release this morning, we are updating our full year 2023 guidance as follows: We expect revenues to range between $63.25 billion and $64.75 billion. We expect net income attributable to HCA Healthcare to range between $4.9 billion and $5.255 billion. We expect full year adjusted EBITDA to range between $12.3 billion and $12.8 billion. We expect full year diluted earnings per share to range between $17.70 and $18.90, and we expect capital spending to approximate $4.7 billion during the year. So with that, I’ll turn the call over to Frank and open it up for Q&A.

Frank Morgan: Thank you, Bill. [Operator Instructions] Bailey, you may now give instructions to those who would like to ask a question.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from A.J. Rice with Credit Suisse.

A.J. Rice: Maybe just — I know Sam in his prepared remarks said that performance was solid across divisions. I wondered, there’s been some discussion this quarter about Florida and Texas had come back early and had enjoyed strong volume. Now the rest of the country is rebounding. I wonder if you could comment on that. There was also a discussion from some of the managed care guys about particularly seeing strength in Medicare, Medicare Advantage and some pent-up demand being unleashed there. I wondered if you would comment on whether you’re seeing any of that as well.

Sam Hazen: As I mentioned in my comments, our volume growth was broad-based across our divisions. I think we had 13 out of 16 divisions in the company that had admission growth and adjusted admission growth. We clearly have some divisions that don’t perform the same pretty much every quarter, but it was fairly broad-based across top line metrics, admissions, adjusted admissions, payer mix improvements and so forth. So a fairly consistent performance. We did have a couple of divisions that struggled, but one was isolated in Florida. The other one was isolated more out west in the Midwest. And so for the most part, we were really pleased with the overall performance that we had across the geographies of the company. And it’s interesting, I was looking at something yesterday.

We have, from an admission standpoint, almost 72% of our hospitals have greater than 2% admission growth for the year. And this includes a little bit of pressure from COVID in the first part of the year from a comparison standpoint. We have very significant performance from the surgery standpoint as well, where almost 50% of our hospitals have inpatient surgery growth above 2%. So really consistent portfolio performance that speaks to the strength of our markets, I think the competitive positioning of our facilities and then the ongoing network development and physician development that we have as part of our core strategy.

Operator: The next question comes from the line of Ben Hendrix with RBC Capital Markets.

Ben Hendrix: With regard to your updated guidance, can you provide some more color on what you’re assuming for SWB, supplies and other operating expense, particularly professional fees through the second half versus what you’ve seen thus far this year? And then anything to call out that would alter typical cadence through the second half?

Bill Rutherford: Yes, Ben, this is Bill. Let me start. I think our updated guidance reflects what we’re observing in the market on our year-to-date performance, which continue [Audio Gap] in the growth opportunities. I think net-net, when I think about the margin profile of the company between the first half and the second half of the year, we’d expect the margin profile to be slightly better in the second half of the year. I think our salary, wages and benefits as a percent of revenue were running mostly where they’re running year-to-date. Same with supplies. We have seen a little pressure on the professional fees. And we don’t think that same pressure will exist in the balance of the year but will be able to meet us through that.

Operator: The next question comes from Whit Mayo with Leerink Partners.

Whit Mayo: Maybe just a question around labor. I think I heard you say, Bill, that contract labor improved maybe 20% year-over-year. Did it change much throughout the quarter? Just trying to get a sense of maybe the exit rate and expectations for the second half of the year?