Ladies and gentlemen, thank you for standing by and welcome to the Arden Health Partners first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, press star followed by the number one on your telephone keypad. If you would like to draw your question, press star followed by the number one. As a reminder, today's call is being recorded. I will now hand today's call over to David Stieblow, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and welcome to Ardent Health's first quarter 2025 earnings conference call. Joining me today is Ardent President and Chief Executive Officer, Marty Bonick, and Chief Financial Officer, Alfred Lumsdain. Marty and Alfred will provide prepared remarks, and then we will open the line to questions. Before I turn the call over to Marty, I want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include this discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBIT-DAR. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which we issued yesterday evening after the market closed and is available at ardenthealth.com. With that, I'll turn the call over to Marty.

Thank you, Dave, and good morning. We appreciate everyone joining on the call and the webcast. We are pleased to report another solid quarter financial and operating performance results as we build a track record of disciplined execution in support of our strategic growth initiatives. Before diving into the details, I want to step back to focus on the big picture and underscore that Arden is well-positioned for multifaceted long-term growth with an emphasis on three key areas. First, we have ample opportunities to drive strong market share growth within our existing footprint, leveraging our strong physician platform and consumer-first strategy. Second, we are focused on expanding our outpatient and acute care hospital footprint and are well positioned to support this expansion with approximately $500 million of cash and a favorable least-adjusted net leverage ratio of three times. Finally, we continue to drive margin expansion through operational initiatives, leveraging our scale, supply chain efficiencies, and other cost-saving strategies. In support of our focus on execution, I'm pleased to welcome Dave Kaspers as our Chief Operating Officer effective March 31st. Dave's experience driving strategic growth at Walmart Health, Banner Health, and Target Corporation's retail healthcare business will significantly complement our executive management team. Additionally, we are in the final stages of recruiting a Chief Development Officer to support our focus on M&A activities. Turning the first quarter results, we continued to deliver against our strategic objectives. Volume growth was once again solid. Admissions grew 7.6%, driven by strong underlying growth and heightened flu season. Inpatient surgery growth of 3.4% was strong and benefited from our efforts to optimize transfer center operations to capture additional demand. Adjusted admissions increased 2.7%, which is on the upper end of our full year 2025 outlook of two to three percent. First quarter revenue increased four percent, and net patient service revenue per adjusted admission grew 1.2 percent. Those growth rates were tempered by approximately 70 basis points due to the strategic transfer of certain oncology and infusion services to a health system partner in the middle of last year. Recall we discussed this mechanical headwind during the third quarter 2024 earnings call, and we will lap that event after second quarter 2025 results. These services produced roughly $10 million of revenue, but were break-even EBITDA. Additionally, I would note that our first quarter results exclude any benefit from the 2025 New Mexico DPP program that is awaiting final CMS approval. First quarter 2025 adjusted EBITDA grew 2.5% to $98 million. In pursuit of our strategic operational excellence initiatives, we made additional progress on our supply chain during the first quarter. Supply cost is a percent of revenue declined 60 basis points year over year. We have a number of projects in the pipeline that we expect will create additional efficiencies over the next several years and continue to see an opportunity to improve margins by 100 to 200 basis points over the next three to four years through scale, supply chain optimization, and other operating cost initiatives. Also on the cost side, the growth rate of physician professional fees was 6% in the first quarter of 2025, down from 13% growth during the same period last year. While hospital-based physician subsidies remain a headwind, we are beginning to see hopeful signs that the growth rates are moderating. On the ambulatory front, we are pleased with the integration of the 18 NextCare urgent care clinics that we acquired on January 1, 2025. As the year progresses, we expect this transaction to generate additional downstream volumes in our Tulsa and Albuquerque markets consistent with our focus on high growth mid-size urban markets we expect to continue to strategically expand ambulatory access points to meet consumer demand and drive growth in terms of m a we are seeing more potential acquisition candidates as providers assess optionality in the marketplace in a more uncertain regulatory environment we are seeing increased interest in our unique joint venture model from potential academic and non non-for-profit partners that are in this exploratory phase. We will continue to evaluate these potential opportunities in a disciplined manner and have the balance sheet to move forward when a stockholder value-enhancing opportunity presents itself. In summary, we continue to successfully execute on our strategic growth priorities during the first quarter of 2025, creating strong momentum to start the year. This puts us firmly on track to meet our full year 2025 financial guidance, which we are reaffirming today. With that, I will turn over the call to Alfred.

Thanks, Marty, and good morning to everyone on the call today. As Marty indicated, Q1 of 2025 represented a very solid start to the year, and we expect to maintain our operating momentum throughout 2025. At a high level, we continue to execute across numerous key strategic initiatives during the first quarter that helped set the stage for attractive long-term growth. We captured incremental supply chain cost savings, improved transfer center operations, and integrated the NextCare urgent care acquisition. Additionally, while our earnings exposure from tariffs is minimal for 2025, we're working proactively to mitigate potential future impacts. Like many peers, we benefit from a strong relationship with our GPO partner, Health Trust and have fixed pricing for a large majority of our supplies this year. Recognizing that the tariff outlook is fluid, we estimate the 2025 EBITDA impact is no more than a mid-single-digit million-dollar amount based on the current tariffs in place. That said, I'll move on to first-quarter results, which excluded any financial benefit from the 2025 New Mexico DPP program. While CMS has not approved the renewal yet, we're encouraged by signs of a typical program approval process between the state and CMS. First quarter revenue increased 4% to $1.5 billion compared to the prior year, driven by adjusted admissions growth of 2.7% and net patient service revenue per adjusted admission growth of 1.2%. Excluding the infusion and oncology transfer that Marty mentioned, growth rates for revenue and net patient service revenue per adjusted admission were 4.7% and 1.9% respectively. From a volume standpoint, demand remains durable. Admissions growth was a very strong 7.6% and adjusted admissions increased 2.7% year over year, which we believe speaks to our strong market position and growth opportunities within our current markets. Inpatient surgery growth was a solid 3.4 percent in the first quarter, while outpatient surgeries declined 2.3 percent. Overall, we estimate year-over-year surgical volume was impacted by approximately 1.5 percent from the timing of leap year. Adjusted EBITDA increased 2.5 percent in the first quarter to $98 million, which is consistent with our expectation towards achieving full year 2025 guidance. The growth rate was impacted by a notable increase in payer claim denials when compared to the first quarter of 2024. To be clear, we aren't seeing a significant increase in denials compared to the back half of 2024, but it does create a year-over-year headwind. That said, we expect underlying EBITDA growth to accelerate as we lap this dynamic in the back half of the year. Turning to some specific line items, salaries and benefits expense as a percentage of revenue increased 70 basis points on a reported basis, but virtually all of that increase was driven by post-IPO stock compensation. We're pleased with our operational improvement around contract labor, which declined 60 basis points year over year to 3.8% as a percentage of total salaries and benefits. We continue to see strong nursing retention rates and a stable contract labor rate environment. Marty already covered our improving trends in professional fees and supplies, so I won't rehash those. Moving on to cash flow and liquidity, we ended the first quarter with total cash of $495 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the first quarter was $790 million. Cash used in operating activities during the first quarter was $25 million compared to $15 million used in the first quarter of 2024. As a reminder, Q1 is traditionally our weakest cash flow quarter, largely due to payment timing related to year-end accruals. Capital expenditures during the first quarter were $23 million, and we expect that to ramp throughout the year. Our total net leverage as calculated under our credit agreements was 1.4 times, and our lease-adjusted net leverage was three times. On a related note, I'm pleased to share that late last month, S&P upgraded our credit rating to B-plus from B, reflecting our improved net leverage and cash flow profile. This action affirms the results of our fiscal and operating strategies and will help strengthen any future financing opportunities. Overall, we remain firmly on track to achieve our 2025 financial outlook, which we are reaffirming today. With that, I'd like to turn the call back to Marty for a few final comments on the quarter before we open the call to questions. Marty?

Thank you, Alfred. In summary, we continue to make substantial progress as we execute on our strategic growth initiatives and leverage the consumer-focused platform we have built to create long-term stockholder value. We are pleased with our solid starts of 2025, underscored by strong demand trends. We continue to sharpen our focus on market share growth, taking a disciplined approach to evaluating opportunities in both the ambulatory space as well as acute care hospitals. With leverage of three times and ample cash, we will continue to assess opportunities to execute on this strategy. Finally, we remain focused on operational excellence initiatives to drive margin expansion over the next several years. I want to close by thanking our 25,000 team members and more than 1,800 employed and affiliated providers who continue to deliver exceptional care to patients across the communities we serve. Together, we are focused on making healthcare better and advancing our purpose of caring for our patients, our communities, and one another. With that operator, please open the line for questions.

At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Ann Hines with Mizzouho. Annie, your line is open. There's no response from that line. We'll go to the next question. Your next question is from Mitt Mayo with Lee Week Partners.

Hey, thanks. I'm still trying to get a feel for the seasonality of this business, and when I exclude the supplemental payments from the fourth quarter of last year, it looks like EBITDA may have declined, call it 20% or so. So is that a normal sequential decline? And you referenced stronger flu and the volumes look really good. So I would have expected to see, you know, better than normal sequential growth. So I'm trying to put this sort of in perspective with normal seasonal patterns to the way your earnings develop.

Sure. Thanks for the question, Whit. This is Alfred. Yeah, I would say it's not, you know, abnormal. There's obviously any number of puts and takes. You know, from our perspective, the strength of the flu season is not a certainly drive some lower acuity and some, you know, clearly, you know, we mentioned a pair of denial is some amount.

Okay. And maybe just to follow up on the elevated denials, I presume that that's MA. And what I'm hearing, I guess, is this is a continuation of what you saw from last year. Or are there new changes in payer behavior or dispute resolution? Any changes with length of stay on MA? Just any additional color might be helpful. Thanks.

I think what you're hearing is very consistent, a continuation of last year, middle of the year. You know, a couple things we would have been a continuation of a slowdown in payments, even on clean claims. There's maybe been a length of time impacting.

Your next question is from a line of Anne Hines from Mizuho.

Hi, I'm sorry about that. I had some technical difficulties.

Maybe just on the supply chain initiatives can you tell us like why you actually have so much opportunity versus your peers are you involved in a gpo and maybe if you really can dig into like the type of opportunities you have that will create that type of margin expansion that would be very helpful yeah and this is marie thanks for the question um we do participate with health trust as our gpo partner and very similar to our peer group and so that helps us with our day-to-day contracting but the utilization within our service lines is where we still see opportunity for improvement this is a you know an ongoing journey that we have and have continued to see improvement as we've gone through both certification as well as i'm looking at physician preference items and most notably the action we took last summer by partnering with one of our academic institutions to move some of oncology infusion services the drug costs for those services have varying reimbursements based upon the geographies and markets that we're in and so we continue to see opportunities to further you know address those drug costs use with in concert with our partners as well as just general position preference items that we're continuing to negotiate across key service lines as we're seeing volumes improve I'm great and then it sounds like underlining emission growth was better than your expectations besides flu are there any other areas that you would call out thanks yeah this is Marty again so we've had a big focus around our transfer centers and making sure both from an internal efficiency that we've got good bed turnover through like stay initiatives and optimizing the transfer centers that we have regionalized across the company and so i think uh you are seeing that the strong impact of the flu is the principal reason that we have coming through there but um you know as we've gone through service line rationalizations that helped lead to an increase in our inpatient surgeries and again the focus on the transfer centers of bringing in cases from across our regions uh into our tertiary center so

those the combination of those activities is what's driving that growth and this is alfred and i would just to add that, you know, again, we believe it's also a representative.

Your next question is from the line of Craig Hattenbach with Morgan Stanley.

Thank you. Marty, can you just build on the commentary of just durability of demand? Any areas of care where you're seeing that most pronounced and anything to note in terms of how broad-based this is versus market-specific?

Yeah, Craig, this is Marty. So, just as building on what alfred said you know we've referenced before the strength of our markets growing on average you know about three percent a year and so we see that as very durable we know that there's some commentary between the payers and the providers uh in terms of whether there's pent-up demand we don't subscribe to that theory um the strength of our markets coupled with the strength of our performance that gives us strong conviction that we will continue to see a strong volume growth you know we accentuate that by the operational improvements we're making to be able to service that growth. But the strength of the market that we're in gives us good conviction that these volumes are durable from a positive growth rate perspective.

Got it. And then just as a follow-up on the COO hire, just any areas of strategic focus for him and then also kind of experience he brings the organization as you continue to look to scale the business?

Yeah, Dave's about one month on the job with us and is doing a great job really just helping to again complement the existing executive team that we've put together we've got great subject matter expertise across our hospitals our health services and our corporate services dave's background with both the consumer retail focus will accentuate our consumer growth strategies as we go through the markets and just to focus on in a continued focus on integration and optimization of the entire platform we've talked about the centralized centralized services that we've created in the years leading up to the IPO last summer, but we also said that we know that we've got 100 to 200 basis points of margin expansion to achieve over the next several years, and Dave will be a key focus in driving that performance improvement coupled with the expected growth that we will see in new market or new hospital growth complementing our existing markets. that integration activity will be paramount to making sure we can extract value from any transactions and making those accretive for the company until he'll have purview over the execution of our ongoing initiatives as well as that integration of new activity and growth into the system.

Your next question is from the line of Ben Hendricks with RBC Capital Markets.

Great. Thank you very much. Just wanted to get an update on the expansion initiatives or the strategic initiatives you called out, specifically expanding your outpatient and acute footprint. Just any update on how conversations are going with potential new market opportunities and sellers in those markets? How are they thinking about valuation amid the uncertainty on the Medicaid policy changes and kind of just what you're seeing in terms of seller appetite? Thanks.

Yeah, Ben, this is Marty again. Thanks for the question. We continue to focus on a multi-part growth strategy. The first, we always said, was going to be inside of our markets. While we've got very strong inpatient market share, we know that there's still a lot of outpatient development work to be captured. Again, the acquisition we did with the NextCare, UrgentCare assets in our Albuquerque and Tulsa markets, the 18 urgent care centers we bought as a great indicator of that continued focus that we're going to have of strengthening the access points in our market, strengthening our positions in those markets and building out a more robust footprint, first and foremost. On the second part, in terms of new markets or new hospital growth, I would say the pipeline continues to build. Since going public, our visibility has taken a new stage and we've got more inbound calls coming from academic partners in particular that have taken note of the model that we have and have a desire to grow inside of their respective regions but may not have the balance sheet or the integrating operating experience to expand into new regions and see ardent as a good target partner so i'll say the conversations and the pipeline are growing which is the reason that we're focusing on bringing in a dedicated chief development officer into the company to be able to capitalize on those opportunities in terms of valuations you know you You've certainly seen some headline valuations that are above historic norms and averages. I would characterize those as largely sort of one-off strategic acquisitions for certain existing systems in a given geography. We believe that the overall valuations will continue to trade somewhere in the normal sense of where this industry has historically been. and any acquisition that we focus on is going to have to be something that we see as accretive to the company in the near term, call it the first 24 months, where we can see ads and purchase price synergies that will help us to delever a transaction and make it accretive for shareholders.

Great. Thanks for the caller.

Your next question is from the line of Joanna Gadget with Bank of America.

Hi, good morning. Thanks so much for taking the question. So So I guess a follow-up on that comment around, I guess, related to the prior question. So you mentioned that there's interest to, it sounds like, receiving from the non-profit and academic centers to partner. So can you give us a sense of those preliminary, you know, are these, you know, systems waiting essentially to see what's going to happen or are they kind of ready to kind of, you know, do something right now? So, essentially, what I'm asking is sort of, you know, are you close to getting something done? Should we expect something this year? Or is this more kind of like next year when the dust sells? Any kind of indication, I guess, would be helpful.

Yeah, Joanne, this is Marty. And I'll try to chime in if there's additional. But, you know, we've been pretty open that, you know, we went public with the expectation of growth. We believe we've got a strong operating model that would be valuable to enter into new markets where we could create a partnership and you know create something more valuable for that target seller than that they were able to achieve on their own we don't have anything definitive to announce today obviously and we will appropriately message that when there is but i would say that there's a mix of conversations going on with potential near-term opportunities as well as exploratory conversations about what future growth can look like in a given geography you know we are focusing on a mix of hospital acquisitions that would be both complementary to our existing markets or state footprints or in as well as new and so you know we're just encouraged by that the pipeline of growth and again the reason why we're bringing on dedicated chief development officer to help you know nurture those relationships conversations and bring those to fruition but we've been saying we've been hopeful that we will see some type of a transaction whether that's a tuck-in or a new market, you know, still in this calendar year.

Thank you. If I may, on the New Mexico DPP, like you said, you know, no approval yet, but there's some approvals coming out, so any indication, like, would you assume to get this finalized by the end of Q2? I mean, we're already in May. Thank you.

Yeah, this is Marty again. On the DPP programs, we are starting to see a number of analysts noting that renewals of other states happening. We remain convicted that these programs are durable, you know, from our conversations at Washington DC with elected officials. They know the importance of these programs to the states. Again, these DPPs were started under the first Trump administration and I think the sense that we're seeing these other state approvals come through are consistent with our conversations that we're having with the elected officials both in the state and CMS that it's just a matter of processing through these and you know we are expecting approval that the timing we are hopeful for to see a Q2 approval but obviously we can't control that and this is Alfred Joanne the only thing I would add is that you know we text in New Mexico the indications are your next question is from the line of Matthew Gilmore with KeyBank hey thanks

one of the asked about exchange volumes in payer mix I think the presentation made reference to strength with exchange volumes can you provide some details in terms of the magnitude of the growth in the quarter and maybe update us in terms of the percent of revenue that's tied to exchanges versus i think the 3.6 you talked about for 24. sure matt this is alfred um you know like uh all of our peers for example admissions in the quarter grew 40 percent uh in q1 that's a combination of improvement in our additional enrollment in exchanges as well as new plans that we have was significant and you know today q1 we're operating in the mid single digits as a percent that's helpful and then um following up on the comment around the moderation and professional expenses that i was hoping you could sort of unpack that a little in terms of the hospital-based physician expense you know where are you seeing improvement and you know, are you confident and comfortable that that'll be sort of a durable moderation? Any additional details there would be great. Thanks.

Yeah, Matt, this is Marty. You know, we have expected to see as we, you know, we could get guidance earlier in the year that this was still going to be an inflation that was north of, you know, sort of general inflation. And, you know, we've modeled that as such, and we are seeing, you know, that continue. And we are encouraged that it is moderating from the peak in 23, the rates came down a bit in 24, the growth, I should say, came down a bit in 24. We expect that to continue to moderate 25, but still be above normal inflation level. So while Q1 was slightly ahead of where we thought things might be, we know, just given some of the uncertainty, uncertain specialties, radiology is one that has been a bigger growth area as well as continued pressures in anesthesiology that we expect to see some continuation of this trend going throughout the end of the year as we had forecasted and guided early in the year.

As a reminder to ask a question, press star, followed by the number one on your telephone keypad. Your next question is from a line of Benjamin Rossi with J.P. Morgan.

Great. Thanks for the question. To start there, is there anything else for surgery offerings? And then in reaffirming your guide, what puts and takes are you factoring into reaching the lower end or upper end of your 2025 pricing guidance of 2.1 to 4.4% year over year? Thanks.

Hey, Ben, it's Alfred. I'll start with the first part of your question on the NPR per AA growth, 1.2%. You touched on a piece of it, the service mix and acuity. We continue to see commercial rate increases of the other items that we're dragging. And then the last thing is...

And then as a follow-up on the transfer center operations, you mentioned the improvements to your transfer center more broadly on a regional basis.

Can you just walk us through those efforts and your approach more broadly to inpatient capacity and related patient throughput during this elevated patient utilization backdrop yeah then this is marty um so we have regionalized our transfer center operations and as you all know we have one instance of epic as our electronic health record and really our clinical operating system that helps us drive and have visibility in terms of where we have capacity opportunities you know taking the technology and the organization of those services it's allowed us to have a very you know seamless process for outlying rural regional hospitals to be able to transfer patients into our networks and help us to drive that volume to the most appropriate setting so not only are we trying to maximize volumes coming into our tertiary hospitals but our secondary hospitals which may not have gotten the original call we're able to relocate those patients where we've got the appropriate clinical mix of physicians and services to service those patients and manage capacity and demand across the broader network and so before that that was all happening um you know on a one-off basis and if you call hospital x and they had availability that accepted now you're calling the market and the market is helping to distribute those patients more effectively across our footprint which is helping us to see increased pull through when those transfers are getting placed in one of our hospital beds.

And Ben, this is Alfred. I want to go back to the first part of your question because you asked about the, you know, kind of what key one that we had. You know, I would just point you back to your professional fee. And then, of course, tariffs we've touched on, relatively minor, but certainly not something.

At this time, there are no further questions. I will now have a call back over to management for closing remarks.

Thank you, everybody, for your time and attention. We appreciate the support of ARDENT and our performance. If there's any follow-up questions, please refer those to Dave Stieblow, Head of Investor Relations. Thank you, everybody.

This concludes today's call. Thank you for joining. You may now disconnect your lines.