Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Good morning, and welcome back to day 2 of the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'll be moderating today's session. It's my pleasure to welcome Tenet Healthcare CEO, Ron Rittenmeyer; CFO, Dan Cancelmi; COO, Saum Sutaria; and Head of Investor Relations, Regina Nethery. Thanks, again, to all for your flexibility and participation, given the extreme circumstances.

All right. Why don't we start with the coronavirus since it's so topical? Recognizing the inherent uncertainty of the situation, most investors are looking for some sort of framework for how we should think about hospitals in the context of community transmission. So to start, can you comment on your 13 hospitals in California, given the high number of confirmed cases there? Are there any early takeaways from your experience dealing with the coronavirus in the state and any read-through to volume, utilization or elective procedures so far?

Okay. Let me do it a different way. I appreciate your question, and I'll try to get to that. But I think we ought to put it in context for the corporation and then move into the definitiveness or the specifics that you're trying to get to because we have hospitals in other locations besides California. So across our 65 acute care hospitals and our numerous surgery centers and urgent cares, we -- I would say that as background, we started weeks ago preparing for this. We have a very detailed preparation process that we put in place. We -- at this stage, I would say we have adequate coverage on all the appropriate safety items, whether it's N95 mask, surgical masks, gowns, et cetera. We have distributed those appropriately to our hospitals. We balanced our inventory based on where we see need and size. And we have put a fully detailed responsive -- response program in place. Throughout our system, we have seen numerous patients enter with questions, and we've tested those patients. And those that have been patients under investigation, we have immediately quarantined, obviously masked, followed all the CDC requirements, and we probably have less than a dozen cases, I would say, throughout our entire system at this stage that we would consider either patients that are still being investigated or patients that have identified as positive and are being quarantined in the hospital. Many people end up being quarantined, as you know, at home. We have set up triage centers at all of our hospitals. So that if there is an increase in volume, we will be able to handle that external of the ERs. So we have set up external triage centers up to and including doing testing in people's cars. So if you can visualize this, we've laid out parking lots in anticipation of being able to immediately switch to a triage process, where you would be able to check temperatures, do swabs, et cetera, without the person actually leaving their car and then directing them home for self-quarantine until we could get the results back and then deciding next steps based on the acuity at that point of the individual. Because some of these cases have proven to be not as severe as others, as you can imagine. So quarantine at home is still a very viable and appropriate process. We've limited access to the hospitals. We are shutting down various hospitals relative to entry points and limiting entry points. We are -- HCA, I think, mentioned yesterday that they're setting up a system where they're creating lanes for people to come in based on what the situation is. We're doing the same thing. So we actually took their idea, give them credit for that and have begun to use that. We do a daily call, sometimes more than one, with all of our operating people in the field, specifically our chief medical officers across the entire network. And we review what's going on, best practices, what's changed. We stay in touch with CDC on a continual basis. So fundamentally, we have notified all of our employees of these facts. Yesterday, we put out a detailed letter to all our employees, going through everything we're doing, just to be sure they all get that. And in addition, we have daily meetings to review current status. Your question about the California hospitals, in general, we've obviously seen people come in and surface issues that they believe are cases. Some of those cases are still under investigation, but we've not seen anything that I would say would be disruptive to our normal operations at this stage. We're very careful and very aware that our normal operations have to continue. That's why we're there. And therefore, we have gotten ahead of all of that, I think, for the most part. We do -- we are very focused on people when they come in and what their situation is. We plan to tighten up access of visitors. It's an unfortunate thing, but we have to do that. And beyond that, I think, let me ask Saum to comment a little bit on the clinical side. So that's my start-up overview. Saum?

Yes. I mean the only thing I would add to that from a clinical operations perspective are that where we have cases that need care, we have all of the adequate equipment supplies, isolation, negative pressure and other capabilities available to do that. We're finding the care of these patients, where they exist, is very similar to the type of care we provide to other individuals that may come in with moderate to severe illness from a respiratory standpoint that require similar type of isolation. The staff is very well trained to do this. We're putting extra effort into protecting our staff and physicians from further exposure, obviously, given the nature of this virus. But again, I think many of them are falling right into a pattern after the initial hours of care of these patients into a routine that they're used to from the standpoint of being able to take care of these folks. Obviously, many of the patients who come in have other medical illnesses beyond just the effect of the coronavirus. So it's important to note that the specialty capabilities and other things that exist in our hospitals plays an important role in all of the other conditions that have to be dealt with, with somebody who may have what started with a pure respiratory illness and has effects in other end-organ systems. We feel well stocked from a supply standpoint. We have good protocols in place as to when to use certain supplies. And then finally, to the point that Ron made, we recognize that we're there, and we must be there to serve the community on a broad range of other emergency and elective clinical needs. And we're spending a lot of time, both with our physicians and our staff, ensuring that our doors remain open for that access for patients, again, for both emergency and elective care that was planned, which can still be done very safely in the hospitals. The last thing I would say is the planning efforts will evolve over time. I mean this started out 6 weeks ago with a lot of low-acuity, worried well-type stuff. That's really a matter of dealing with triage more than anything else and beginning to get the message out, that people who are ill, but not acutely ill can stay at home until they have a need to be in a hospital-based setting. The second component of this is more recently in the last, call it, 2 weeks, where you start to see inpatients -- 1 or 2 inpatients at most in any given facility and the capabilities and capacity to care for those patients found with the preparation we've done, as I said, is pretty straightforward, and we feel comfortable we're handling that the right way, both for the patients and protecting our employees. Obviously, there is a possibility, and I don't know that it's just California that there are regions of the United States, in particular, that may have significant spikes in cases. We haven't seen that yet due to containment efforts. But right now, all of our planning is going into figuring out how we might deal with significant spikes as they occur.

Okay. So that's helpful. So at this point, are there any changes to the way you're thinking about the annual or first quarter EBITDA guidance, even directionally within the range you've given?

Well, I mean, I think we're a little early to make those statements. The only thing that I'll let Dan speak to the noncash, nonoperational med mal interest actuarial numbers, but that is really tied to the bond pricing, but Dan can talk about that in a second. But we have not expended, I would say, material money at this point in extra labor, extra supplies. I mean we already had a fair amount of the supplies on hand. We've obviously built up our supply basis. But again, I would say, and Saum, I think you would agree, it's not -- that part of it's not been significant. And I don't think we have seen -- it's hard to decipher at this stage whether we're seeing a falloff on any surgical -- discretionary surgical type of stuff just because we just haven't felt that in terms of any material basis. So you want to comment?

Yes. I mean, I think 3 or 4 things. One is 6-plus weeks ago, we forward bought supplies that we needed. We continue to do that with suppliers. And are our experience so far has been the suppliers that have been fair. We've not experienced, especially in our supplies arena, any gouging from the suppliers. I give them credit for doing that in a fair manner. We have been thoughtful about procuring the supplies we need to continue to serve the communities and all of the other emergency, elective, surgical and cardiac care that's prevalent in our hospitals, in particular, so that we're well stocked there. We feel comfortable from a pharmaceutical standpoint as well at this stage that we're in good shape there. And to Ron's point, there has not been any material expenditure. There's been expenditure, but not material expenditure on having to play catch-up on supplies, either for safety or patient care.

And Andrew, this is Dan. So just to reinforce what Ron and Saum said. We are not changing our guidance for this year at all at this point. We have made some investments obviously and making sure we have ample supplies and obviously monitoring the supply chain very, very consistently on a day-to-day basis to make sure we're adequately stocked. From a -- Ron mentioned, the treasuries obviously have been dropping this year. So we'll have to see how the changes in the treasury rate move as we -- throughout the year. As you are aware, we discount our actuarial liabilities for malpractice and workers' compensation. Those adjustments that we recognize, as the treasuries move up or down, go through expense, but it's noncash in nature. It's nonoperational. And so we'll see how would treasuries do as we go through this year. Just a point of reference, we do use the 7-year treasury rate to discount those liabilities. There's -- the 7-year treasury, as everyone is aware, has come down this year about a little over 100 bps. And we talk about this each quarter and give people the transparency into the movement in that and what it means to our expenses each quarter. So we'll see how that goes. One point of reference, as the treasuries move up or down 10 bps, that normally equates to around $3 million of additional expense or a reduction in expense if the treasuries go up. So you can do the math. Treasuries obviously have come down so far this year. Again, nonoperational in nature...

And noncash.

Noncash.

It is what it is, and we'll just have to manage through that. We -- obviously, we're going to try to, from a performance standpoint, step over some of that. But having said that, that's -- we have no control over these movements, and they're so dramatic. Normally, they're not significant, and we can manage through it both ways. But in this market, obviously, it's very hard to lock in on. So from a number standpoint, on a -- from a document standpoint, I mean from an EBITDA standpoint, it shows up, but it's noncash, nonoperational. Our operations remain, I think, running very, very well. So hopefully, that answers it.

Okay. That's helpful. Based on your experience with other disruptions, such as viruses or even natural disasters, are you able to comment on how these events have historically impacted utilization?

I think it depends on -- you can jump in it, but I think it depends on the location and what the event is. Obviously, floods are more damaging. Hurricanes, we tend to bounce back fairly fast because we're ready for them, and we can prepare for them. Viruses, I mean we deal with the flu every year, and we've dealt with severe flu seasons and not severe flu seasons. So I think normally, we anticipate it, and we are able to manage it fairly effectively. The news media around this and the current panic around the fears are what drives the irrationalness to a degree of where we are at this point. So clinically, Saum?

Yes. I mean I would just say 2 things. One is, it is not typical for patients who need elective procedures, surgical or cardiac or other type of procedures to undergo those procedures if they have respiratory illness -- acute respiratory illness at the time, right? So if you need a hip surgery and you happen to have the flu, you would delay that scheduled surgery, but you would continue to have that surgery a couple of weeks out when you're better. And it's very common for elective procedures to be somewhat delayed in the first part of the year as people undergo whatever cycle they may have in respiratory illness. So we're used to that in the winter season, things that get canceled and delayed 2 weeks until people are better. And so they're deferrals, they're not cancellations, is the way we look at that from the standpoint of a respiratory illness. And the second thing I would say is, look, in this situation, the real issue is the fear of contagion more than it is the actual fear of the number of people who have been exposed to the disease that potentially would be canceling elective surgery. There are still under 1,000 cases in the United States or around 1,000 cases in the United States. And that number may grow, but it will still be a fraction of the number of cases that are often canceled, deferred or moved for a couple of weeks due to the flu or other respiratory illnesses people have in the winter. Operationally, we're set up to handle that. We're really set up to repurpose capacity when it is freed up at the last minute because of those sorts of things. But here, it's the fear of contagion that I think is more of the issue. And we'll see how that plays out. It's too early to tell what effect that will have, and whether that effect will be even remotely similar across different facilities in the U.S.

Okay. That's extremely helpful. Hopefully, that puts things in perspective a bit. Let's move on to your normal course of operations. Over the last 2 years, you've implemented significant changes to reposition the company for sustainable growth, including $450 million of cost reductions to be realized through 2020. Despite the significant progress, you've noted a few times that you're not done here. Why don't you highlight some of the key cost initiatives you've already implemented? And as we look ahead, what areas of the enterprise present opportunities for additional cost savings that could be harvested over the next few years?

Yes. Dan will take that, Dan?

Yes. So just -- let me just frame what we've been focusing on in the past couple of years and then some of the areas of focus going forward. So you may recall, at the outset of 2018, we put a target out there for cost efficiencies of $150 million. We raised that shortly thereafter to $250 million. And in '18, we realized close to $200 million of that. Now as we began 2019, we increased our target to another $200 million. So the total program, $450 million. We've realized about $300 million of that through the end of 2019, and we're going to realize another $150 million this year. So we do get the question, are there more opportunities out there? Yes, there are. And it's really across the 3 business units. We're obviously always looking to streamline processes without sacrificing any service levels to our patients. We do expect to realize the $150 million additional savings this year that take us up to $450 million. We continue to apply tight cost controls, and we're going to continue to generate additional cost efficiencies. And it's really -- when you just go through the P&L, it's really across the board. We're continuing to focus on unnecessary administrative or overhead costs, focusing on consistent labor standards across the organization, focusing on ensuring our premium pay and contract labor levels are as efficient as possible. Obviously the supply chain, continue to focus on opportunities there. And the other operating expense category. There's -- we believe, there's more to do there. We've been renegotiating various contracts with vendors, rationalizing vendors. Oftentimes, as the company grew through the year through acquisitions, we may have had vendor contracts in a number of different facilities or businesses and maybe too many at times, and we need to rationalize them and renegotiate terms and the service level. So we've been doing that, and that's going to continue. As we've talked about, we recently consolidated our 3 headquarters here in Dallas into 1 location obviously in addition to eliminating duplication, obviously increases communication, reduces time from when the decisions made to action and implementing it. And we think it builds a stronger team to support our field operations. So that's sort of a high-level overview. We've done a pretty good job managing costs, and we feel confident in our ability to continue to do so.

Okay. Great. Shifting to the Ambulatory segment. USPI has been a tremendous asset for you, and it's now roughly 40% of your pro forma EBITDA. Your 2020 guidance assumes another year of double-digit top and bottom line growth. Can you speak to the underlying strength in that business and the continued runway for growth via CapEx and M&A?

Yes. It's obviously a very strong business for 2 reasons. One is that the market, in particular, from the standpoint of elective ambulatory care and surgical care, in particular, is expanding in terms of the diversity of services that are available to patients in that environment. But the other reason is that USPI enjoys a very, very unique position in that market because of the long-standing strength of its physician partnerships that have been very successful for clinicians who led the way there to build that business together with USPI and also the ability to participate with health system partners that are all looking at ability -- their ability to improve patient experience and move patient care into a lower-cost setting and us being a very, very credible and strongly valued partner in that solution in many, many markets beyond the Tenet markets. And then as parenthetically to that, we feel the same way from a Tenet hospital standpoint. So the opportunity to build, acquire diversified service lines, bring new physicians into existing centers, all of those things represent expansion opportunity for the USPI platform. We're very bullish about it. Each of those 4 categories has more opportunity than could possibly be captured in a short period of time, given how fragmented the market is, and how quickly we see procedures developing in the outpatient setting. So again, I think you characterized it very well. It's been a great business for us. It will be a great business for us.

Okay. Great. Last topic I want to talk about here is cash flow. After considering USPI, M&A and Memphis divestiture proceeds, it looks like you'll have somewhere in the ballpark of $400 million to $600 million of excess cash. Are there other uses of cash that we should consider at this distance? Or do you think that's a good number to think about when it comes to debt paydown?

This is Dan. Let me address that. Yes, your numbers are in the ballpark. Let me just sort of frame it. We've obviously been very, very focused on driving improved free cash flow generation. In '18, we generated adjusted free cash flow of about $600 million. We increased that to $760 million last year, and we're targeting $875 million for this year. So let's start with the $875 million. So we will generate, based on our guidance, $875 million of adjusted free cash flow. We will make investments, as we talked about on our call a couple of weeks ago, from a restructuring perspective and to resolve a legal matter. Those investments are a little over $200 million. So you take $875 million, you remove about $213 million at the midpoint of our guidance for the investments in restructuring and the legal matter. From that, we will distribute roughly $360 million of -- to our partners and our various joint ventures, particularly in the USPI business. That's very common. So $875 million minus the $213 million, we subtract the $360 million of NCI payments. And then we anticipate $350 million of proceeds from the sale of our Memphis facilities, that gets you about $650 million of cash. And then we anticipate investing somewhere between $150 million and $175 million in USPI ambulatory acquisitions or de novo investments, that gets you down to around, I don't know, $500 million. So when we think about those available proceeds, certainly, reducing debt is a key priority of the organization. And we do have various tranches that are callable this year at reasonable premiums. And so we're certainly looking at that. We've talked quite a bit. We have some higher rate, unsecured notes that are callable this year, the rate's 7%. So that's obviously something we could look at as well. So certainly, between reducing our debt and investments in projects or with very, very good returns or ambulatory investments, that's how we're, at least, at this point, thinking about allocating capital.

Okay. Well, we are out of time here. So let's end it there to stay on schedule. Once again, I'd like to thank Ron, Dan, Saum and Regina for their flexibility and participation today. Enjoy the rest of the virtual conference.

Thank you.