Tenet Healthcare Corporation New 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We are pleased to have you join us for a discussion of Tenet's third quarter 2026 results, as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, 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, tenethealth.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. Tenet 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 will turn the call over to Saum.

Thank you, Will, and good morning, everyone. Third quarter net operating revenues were $5.6 billion, and consolidated adjusted EBITDA was $1.355 billion. Adjusted diluted earnings per share increased 80% to $6.64 in the third quarter of 2026 compared to the prior year. More importantly, after adjusting for one-time items related to contract transitions that generated adjusted EBITDA of $147 million that was not reflected in our previous guidance, the core business continued its strong growth trajectory in 2026 with an adjusted EBITDA margin of 21.8% and 10% growth in adjusted EBITDA over third quarter 2025. We continue to manage through payer mix shifts and enrollment declines in the exchanges and execute on our technology-enabled growth and expense management plans that support our margin strength. Our strong performance is driving significant free cash flow that we continue to deploy for the benefit of shareholders.

Year to date, we have deployed over $1.6 billion for share repurchases. Turning to our segments. USPI generated $537 million in adjusted EBITDA, which represents 9% growth over third quarter 2025. Same-facility revenues grew 4.5% as our high acuity strategy continues to yield benefits and is highlighted by our strongest quarterly performance this year with 12.8% same-store growth in total joint replacements in the ASCs over prior year. USPI also had a very successful quarter in development, with over $100 million of investments in the third quarter alone. We remain the preferred acquirer of assets in this space and continue to have an attractive pipeline of partnerships interested in joining USPI. Additionally, we have commenced patient care at four de novo centers to date. Turning to our hospital segment. Our performance in the quarter was driven by 3.2% adjusted admissions growth and strong margin performance from sustained expense efficiencies.

The investments that we have made in support of our high acuity strategy continue to pay dividends and drive incremental growth. Excluding the contract transition benefits that I mentioned, adjusted EBITDA grew a very attractive 11% over third quarter 2025, again, producing results ahead of our expectations. We are pleased with our performance in both operating segments, which continue to generate strong same-store revenue growth, attractive margins, and robust free cash flows. Turning to guidance for the rest of 2026. We began the year with attractive growth expectations and delivered an outsized and competitively differentiated increase to our guidance when we reported our second quarter results.

At this point in the year, we are raising our full year 2026 adjusted EBITDA guidance to a range of $5.05 billion-$5.2 billion, which represents an increase of $195 million, or 4% at the midpoint of the range, over our increased guidance after the second quarter. The guidance increase is supported by our continued expectations for strong fundamental performance, as well as the one-time items in the back half of the year. Notably, over 40% of our total guidance increase for this year is from fundamental outperformance. I'd like to now spend a few minutes discussing some early thoughts on 2027. After excluding the impact of the transition activities at Conifer, we expect our enterprise to deliver overall adjusted EBITDA growth in 2027. This assumes the current known regulatory frameworks. The value of our diversified business mix support our belief in this outcome for 2027.

We are still conducting business planning, so details will come after the fourth quarter as usual. We are sizing further potential exchange headwinds and the estimated impact of Medicaid work requirements. USPI should not be materially impacted by these, and we expect same-store revenue growth, consistent margins, and further expansion of the asset portfolio in our ambulatory business. In the hospital segment, we currently see healthy patient demand that would support same-store volume growth and a stable operating environment supported by disciplined cost controls in 2027. To help you bridge the years, we now expect various transition activities at Conifer to total $450 million of adjusted EBITDA in 2026. We do not expect these contributions to recur in 2027, and I will reiterate that this is an estimate depending on how the transitions proceed operationally. We will provide an update following our fourth quarter results.

We are pleased with the results of this highly attractive Conifer transaction, as the total value generated from the contract sale will now increase to approximately 15x 2025 adjusted EBITDA minus NCI. In summary, we have a transformed portfolio of businesses with strong underlying fundamentals, disciplined operations, and a business mix which is diversified from many of the reimbursement headwinds that are affecting the industry. Finally, I will again reiterate our commitment to returning free cash flow to shareholders via repurchases, especially at our attractive valuation multiple in light of recent comparable multiples for combination ASC hospital platforms. For more details on our results, I will now turn it over to Sun.

Thank you, Som, and good morning, everyone. We again delivered strong performance in the third quarter of 2026, generating total net operating revenues of $5.6 billion and consolidated adjusted EBITDA of $1.355 billion. Third quarter adjusted EBITDA margins were driven by strong revenue performance and disciplined operating expense management with continued progress on the efficiency initiatives that we outlined at the beginning of the year, as well as favorable transition items as described in the earnings release. I would now like to highlight some key items for both of our segments, beginning with USPI. In the third quarter, USPI adjusted EBITDA grew 9.1% over third quarter 2025 at $537 million, with adjusted EBITDA margins at 39.2%. Same-facility system-wide revenues increased 4.5%, with net revenue per case up 6.1% and same-facility case volumes down 1.5%, reflective of our high acuity focus.

Turning to our hospital segment, same hospital adjusted admissions rose 3.2% in the quarter as demand remained healthy. Revenue per adjusted admission increased 0.2% year-over-year in the quarter, primarily due to strength in commercial employer revenues offset by the impact of reduced exchange volumes. Exchange admissions and revenues declined 18% from third quarter of 2025 and represented about 5.5% of consolidated net operating revenues in third quarter of 2026. We recognized $32 million of out-of-period supplemental Medicaid revenues in the quarter. This compares to $38 million of out-of-period supplemental Medicaid revenues that we had in the third quarter of 2025. I would note that year to date, there is $124 million of favorable out-of-period supplemental Medicaid revenues related to prior years.

Finally, we recognized a net benefit of $147 million associated with the timing of revenue recognition and various transition activities related to Conifer in the third quarter of 2026. This amount is comprised of two items. First, our net operating revenues increased by $97 million due to revenue recognition timing. It is important to note that this is simply a timing shift between the third and fourth quarters, and as such, does not impact our full year 2026 revenues associated with the transitioning contract. Second, we recognized $50 million of EBITDA from various transition activities, including expense reductions that took place earlier than we had originally anticipated. All in all, our operating discipline and strategic focus enabled us to deliver another strong quarter despite the patient coverage challenges that the industry is facing. Next, we will discuss our cash flow, balance sheet, and capital structure.

We generated $1.1 billion of adjusted free cash flow in the third quarter, which brings us to $2.5 billion of adjusted free cash flow year to date. As of September 30, 2026, we had $2.67 billion of cash on hand with no borrowings outstanding under our line of credit facility. As previously announced, we issued $2 billion of senior unsecured notes that mature in 2034. We used the proceeds from the notes to retire $2 billion of notes that would have been due in 2027 and 2028. We now have no significant debt maturities until 2028. Finally, during the third quarter, we repurchased 970,000 shares of our stock for $255 million. Year to date, we have repurchased 8 million shares of our stock for $1.615 billion.

Our leverage ratio as of September 30, 2026, was 2.11 times EBITDA, or 2.58 times EBITDA less NCI, driven by our strong operational performance and financial discipline. We remain committed to maintaining a de-leveraged balance sheet and believe that we have significant financial flexibility to support our capital deployment priorities and continue to drive shareholder value. Let me now turn to our outlook for 2026. For 2026, we now expect consolidated net operating revenues in the range of $22.05 billion to $22.45 billion, an increase of $50 million at the midpoint of the range over prior expectations. As some have mentioned, we are raising our 2026 adjusted EBITDA outlook range by $195 million at the midpoint to $5.05 billion to $5.2 billion, reflecting the increased EBITDA expectations associated with our transition activities, as well as the additional out-of-period supplemental Medicaid revenues that we recognized in the quarter.