HCA Healthcare, Inc. (NYSE:HCA) Q4 2022 Earnings Call Transcript

HCA Healthcare, Inc. (NYSE:HCA) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning and welcome to the HCA Healthcare Fourth Quarter 2022 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 a few questions. Before I turn the call over to Sam, let me remind everyone that should today’s call contain any forward-looking statements that 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 Healthcare, Inc. is included in today’s release. This morning’s call is being recorded and a replay of the call will be available later today. With that, I will now turn the call over to Sam.

Sam Hazen: Alright. Good morning and thank you for joining the call. We finished 2022 as expected with pre-pandemic seasonality demand norms driving solid volume growth. Additionally, we continue to see progress with our labor agenda. These factors helped produce solid earnings in the fourth quarter that were consistent with our guidance. We are encouraged by this outcome and believe this operational momentum should position us well for 2023. 2022 was a tale of two halves, with the first half being more about winding down from the previous 2 years of intense COVID activity and responding to the resulting challenges. The second half was more about normalization, which included strong demand and an improving labor market. Once again, I believe our people have demonstrated an impressive capability in the face of these dynamic forces and delivered for our patients, the communities we serve and other stakeholders.

Healthcare people in general are unique, but I believe HCA Healthcare people are even more special. I’ll often refer to them as can-do people, and again, this past year, I think they proved it. I want to thank them for their hard work and everything they do each and everyday for our company. Same-facility volumes across the company were strong in the fourth quarter. Admissions grew 3% year-over-year. Non-COVID admissions increased in excess of 5%. Equivalent admissions were up 5.4%, with impressive growth of 11% in the emergency room. Most of our other volume categories had solid growth metrics in the quarter also. The payer mix and acuity levels in the quarter remained at favorable levels. These factors produced revenue growth against a difficult comparison of 3% in the quarter.

With respect to our people agenda, we were pleased with the improvements we saw in key metrics. Turnover numbers for registered nurses were down 26% in the fourth quarter as compared to the previous four quarters’ average. Our turnover rate is still higher than we want, but we believe it is better than the industry average. Employee engagement scores recovered to around pre-pandemic levels. Again, our engagement is above the industry average. Our recruiting teams continue to generate results for the company. Hiring increased 6% year-over-year in 2022. And lastly, we opened our seventh Galan College of Nursing School this year. With respect to labor costs during the quarter, we experienced stable labor cost per hour with utilization of contract labor declining.

As we have detailed in the past, we have implemented a robust human resources plan. We executed well on it and expect to make further progress as we move into 2023. It remains a top organizational priority. Even with the progress, we continued this quarter to experience capacity constraints, creating situations where we were unable to deliver services in certain situations. Also in the quarter, we saw value from our portfolio optimization plan and closed two joint ventures with strategic partners; one was with our Sarah Cannon Research Institute, which we combined with McKesson’s cancer research entity. We believe the combination of these two entities will produce better cancer research and more clinical trials across the country, providing even more community-based resources for physicians and patients to fight this disease.

The second co-venture is with our CoreTrust purchasing organization. We closed on a new partnership with Blackstone. We believe this new relationship can expand our ability to offer commercial purchasing and services solutions to a broader variety of customers. We believe both of these deals achieved our strategic objectives and connected us with better platforms for success in the future. We are excited to partner with both entities. We also implemented our capital plan for the year as expected, including redeploying the proceeds from these two new joint ventures. Bill will provide more details in his comments. And finally, we announced in the last quarter a significant leadership transition that we believe will position the organization better with responding timelier to market dynamics, while also strengthening the alignment of corporate functions to our strategy.

The executives who are part of this transition are all proven HCA executives, they understand and appreciate our culture and they know how to execute. As we push ahead into 2023 and beyond, we believe the strong demand for healthcare services presents opportunity for HCA Healthcare in an otherwise challenging macro environment. We believe the company is well-positioned culturally, competitively and financially to capitalize. Our agenda next year will be focused on the following three areas. First, overcoming labor and capacity challenges. Again, we believe we have the appropriate initiatives in place to respond to these. Second, counter inflationary pressures. Again, we have numerous efforts in place to contend with these forces, while ensuring we continue to deliver high-quality outcomes to our patients.

And third, accelerating growth with our winning plays. This agenda continues to leverage capital investments in outpatient facilities, clinical equipment for our physicians and service line expansion. On top of our 2023 agenda, we are also making investments in our long-term plan, which includes four primary elements: the first one is advancing our clinical systems and digital capabilities; second is transforming care models with innovative solutions; third is expanding our workforce development programs; and fourth, is investing capital in our networks to expand their offerings. These efforts are pressuring our results some in the current year, but we believe they are necessary in creating a platform for ultimately optimizing our networks so they can deliver even better patient care in the future.

Let me close with this. The last 3 years have been an extraordinary experience for everyone at HCA Healthcare. There has been no rest nor retreat for our people and it was truly a challenge like no other. I strongly believe however that our Board, our management teams and our caregivers have shined through it all. We went into the pandemic with two priorities, to protect our people and to protect the organization so we could continue providing high-quality healthcare to the communities we serve. I believe strongly that we showed up, we delivered on these priorities and we did it the right way. I am proud of HCA Healthcare and I am even more proud of our people. The future for our company is even brighter because of the past 3 years and what we learned.

Now we will move into 2023 and the years ahead with greater purpose, with a renewed agenda to drive growth and with more confidence in our ability to deliver value for all of our stakeholders. With that, I will turn the call to Bill and he will discuss the quarter’s results in more detail and our 2023 guidance.

Bill Rutherford: Okay. Thank you, Sam and good morning everyone. I will provide some additional comments on our performance for the quarter and the year then discuss our €˜23 guidance. We finished the year with good volume metrics. Our fourth quarter same facility admissions increased 2.9% over the prior year. For the full year, our same-facility admissions were up 0.5%. Excluding COVID admissions, our same-facility admissions grew 5.4% in the quarter and were up 3.4% for the year. For the full year, COVID admissions accounted for 5.2% of our admissions versus 7.8% in the prior year. Same-facility emergency room visits increased 11.4% in the quarter as compared to the prior year and were up 7.6% for the full year. Our same-facility outpatient surgeries were up slightly in the quarter from the prior year, but increased 5.6% sequentially compared to the third quarter.

Same-facility inpatient surgeries were basically flat as compared to the prior year. Both were impacted by 1 less business day in the quarter. Our same-facility revenue per equivalent admission was down 2.6% in the quarter from the prior year as this was influenced by the drop in COVID activity. Sequentially, our non-COVID revenue per equivalent admission increased approximately 3.7% as compared to the third quarter. Our case mix increased just under 2% sequentially from the third quarter and our payer mix remained stable as well. We remain pleased with our team’s management of operating costs even with the backdrop of higher inflation rates. Our consolidated adjusted EBITDA margins were 20.5% in the quarter and right at 20% for the full year.

We continue to focus on our labor plans and supporting our teams, while appropriately managing contract labor and premium pay programs. Our total labor cost as a percentage of revenue improved both sequentially and when compared to the prior year. In addition, our supply cost trends have remained very consistent during the year and we are pleased with these results. Other operating expenses have been subject to some inflationary cost pressures when compared to the prior year, but has run fairly consistent as a percent of revenue throughout 2022. Our cash flow and capital allocation are a key part of our long-term growth and value-creation strategies. Our cash flow from operations was $8.5 billion in 2022. Our capital spending was just under $4.4 billion for the year, which was slightly higher than our initial expectations due to some year end real estate and information technology purchases.

We paid dividends of about $650 million and we repurchased $7 billion of our outstanding stock during the year. Our debt to adjusted EBITDA leverage ratio was near the low end of our stated leverage range of 3x to 4x. For full year 2022, we realized approximately $1.2 billion in proceeds from sales of facilities and healthcare entities. So, let me speak to our 2023 guidance for a moment. As noted in our release this morning, we are providing full year €˜23 guidance as follows. We expect revenues to range between $61.5 billion and $63.5 billion. We expect net income attributable to HCA Healthcare to range between $4.525 billion and $4.895 billion. We expect full year adjusted EBITDA to range between $11.8 billion and $12.4 billion. We expect full year diluted earnings per share to range between $16.40 and $17.60.

And we expect capital spending to approximate $4.3 billion during the year. So, let me provide some additional commentary on our guidance. Our 2023 adjusted EBITDA guidance is impacted by several governmental and policy changes. In 2022, we recognized approximately $280 million in COVID support mainly from DRG add-ons, removal of sequestration cuts and HRSA reimbursement for uninsured COVID patients. We expect very little revenue from these programs in 2023. Also, as discussed in our first quarter release, we recognized $244 million of revenues and $90 million of expenses related to the Texas directed payment program that was for the last 4 months of 2021. This program that started on September 1, €˜21 was not improved until the first quarter of 2022.

In addition, we estimate the impact of the 340B related payment reductions to be between $50 million and $100 million. Adjusted for these items, the midpoint of our 2023 adjusted EBITDA guidance would be in the middle of our historical 4% to 6% growth expectations that we have had over time. Within our guidance, we expect our same facility equivalent admissions to grow approximately 2% to 3% and our revenue per equivalent admission to grow approximately 2%. Depreciation is estimated to be about $3.1 billion and interest expense is projected to be around $1.975 billion. Interest expense will be impacted by both higher rates and anticipated draws under our revolving credit facilities. Finally, our fully diluted shares are expected to be about $278 million for the full year and cash flow from operations is estimated to range between $8.5 billion and $9 billion.

Also noted in our release this morning, our Board of Directors has authorized a new $3 billion share repurchase program. This will be in addition to the approximate $1.5 billion remaining authorization we had under the previous program at the end of the year. In addition, our Board has declared an increase in our quarterly dividend from $0.56 to $0.60 per share. With that, I will turn the call over to Frank and we will open it up for Q&A.

Frank Morgan: Thank you, Bill. Devin, you may now give instructions to those who would like to ask a question.

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Q&A Session

Operator: Our first question comes from Justin Lake with Wolfe Research.

Justin Lake: Thanks. Good morning. Just a couple of numbers questions here. I appreciate all the detail you have given. So first, just all thinking about 2023, can you talk us a little bit about what you are expecting for labor expense and maybe delineate the cost on permanent labor versus hopefully the downward trend maybe give us €˜22 versus €˜23 million on labor? And then couple of things, exchanges and redetermination, right, exchange growth has been big redeterminations could be a tailwind at least according to our estimates. Curious what you have assumed there on payer mix and kind of impacts from that on 2023 guide as well? Thanks guys.

Bill Rutherford: Yes. Justin, this is Bill. Let me start. So as it relates to labor cost, I think as a percentage of revenue, we will keep it on an as-reported basis, flat with where we ran for the full year of this year. We continue to expect improvement in the utilization and cost of contract labor as we go through the balance of the year. And so I think that’s a good output for us. Relative to payer mix, we think payer mix for now will mostly remain stable. We are encouraged with what we are seeing with the enrollment in the health insurance exchanges and we believe the enrollment in our states, are probably a little bit higher than what we see as a nation. And so we think we have contemplated that within the context of our overall range, but we are encouraged with some of the payer mix trends.

Operator: Our next question comes from A.J. Rice with Credit Suisse.

A.J. Rice: Hi, everybody. Thanks for the outlook commentary and so forth. Maybe because you have got about a $600 million range on the EBITDA range you are looking at. Can you maybe talk a little bit about what are some of the swing factors? Do you see those mainly as top line swing factors that would get you to the high or low end or is there expense management, open questions in your mind? And specifically on the labor, you have got quite a bit of a decline in the contract labor from what you spent in €˜22 versus presumably the run-rate for €˜23. How much of that are you baking into the guidance versus how much are you saying you have got to redeploy to support permanent labor?

Sam Hazen: A.J., this is Sam. I think on the guidance, I mean, we have got 2.5%, I believe, on either side of the midpoint. The top side of that range I think is achievable if our volume and labor agenda happens maybe a little bit better than what we anticipate. The low side of that range would be greater inflationary pressures and maybe some more challenges in a tenuous labor market. Those are sort of the big variables, if you will, in the equation. I mean, it’s a fairly big number to begin with and again, the 2.5% range on either side of the midpoint we think is not unreasonable. So to consider it to be very wide seems maybe to not fully appreciate some of the variables inside of it. With respect to labor, yes, we have made significant investments in our people.