Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

All right. Good morning. I want to thank everyone for joining us. This is Kevin Fischbeck. This -- thanks for joining us at this virtual health care conference. It's my pleasure to introduce Tenet Healthcare. Tenet is one of the largest hospital companies in the United States. They are also the largest ambulatory surgery center company in the United States. Presenting today, we have a few people from the company. We have Ron Rittenmeyer, who's the CEO. We have Dan Cancelmi, who is the Chief Financial Officer. We also have Saum Sutaria, who's the President and CEO; and Regina Nethery from Investor Relations is here. So I think they're going make a couple of quick prepared remarks, and then we'll jump into Q&A. So Ron?

All right. Thanks, Kevin. I appreciate everybody joining us for this virtual conference. I thought I'd start with a quick recap. Many of you attended, I'm sure, the earnings call, so it might be a bit redundant but I'll try to just hit some high points. As we closed out 2019 as you'll recall, I think we had a very good position. Our investments in people, policy changes, capital, et cetera, were really beginning to show the results across all 3 businesses, very strong. And we had more to do, and we knew that, especially around our portfolio adjustments in terms of hospital adjustments and then more acquisitions on the ambulatory side. But we were heading in that direction. Through Q1 in early March, we were on target. As you may recall, we said in the first 2 months through February, we were ahead of guidance by about $40 million. Admissions were positive, up about 1.1%. Outpatient visits were up 5.5%. Emergency room visits up 6%, surgeries on a solid trend, all looking very good. USPI had -- was in a very good position, similar type of improvements. Due to their service line expansions, they were seeing a higher acuity procedure mix and had really done a really good job ramping up some of the acquired and de novo centers for 2019. Conifer, strong client revenue growth, was looking very good, again better fees. And their ongoing efficiencies were looking really good. Then we entered -- as we begin to enter late February, we realized the pandemic was beginning to take shape. We took some early actions. We didn't have -- as nobody really knew how big of an impact this was going to have, but we went ahead and acquired and did some forward buying of PPE. We didn't know what the need would really be, but we went out and bought ahead. We got our operations team together. We developed the ventilator management system because we knew that could be an issue, cleared supply plan for rapid resupply. And then we have our own Tenet resource staffing agencies, so we spent a lot of time looking at a staff deployment plan in case we needed to add extra people in certain hospitals. We already had protocols for infectious disease management. But given what we were hearing and leading and listening to, we designed and deployed additional clinical protocols and contingency PPE utilization plans to tighten up how we were going to engage in dealing with what appeared to be a very highly infectious disease situation. And that was based on what we were hearing in early days from CDC. We built an analytical tracking system immediately to monitor nationwide PPE usage and inventory for all of our hospitals and locations. We did a ventilator and testing capacity, which we would be required to report every day to a command center that we stood up. We have -- normally have a command center for national disasters, but we turned the command center into a COVID-19 command center, and it was led by our Chief Medical Officer and included our nursing, pharmacy, supply chain leadership as well as our incident command leader. And we established within a few short days tracking and monitoring of these important items. And we actually included things like the number, by hospital, of positive and negative cases, persons under investigation, COVID discharges and deaths coupled with the closed process so that every day, we could engage every hospital and group across the enterprise as -- in a call that allowed one source of information, and they received the same precise recommended actions. It also allowed us to have a very thorough and effective open and sharing of learning best practices and also what we were doing with each other. It turned out to be an incredibly effective method and incredibly effective tool. And our CMO and his team did a tremendous job. As you know, shelter-in-place and suspension of elective surgeries began to quickly roll out between the 15th and 22nd of March. We saw the number of PUI cases jump from less than 400 to 1,000 between March 15th and the 26th and then a strong confirmation of positive cases. And the number of PUIs then continued to increase daily. We did have significant increases in Detroit, Massachusetts, Florida and Southern Cal. And each system did respond. They were never overwhelmed, but they were really stressed. Other markets felt some of those strains. And obviously we didn't. We went through some type of preparation because we didn't know whether there was going to be a surge, although we kept anticipating, based on the information we were given, that there would be a new surge in many locations. Fortunately, that did not happen. But we still had to require coverage and be able to respond to spikes and issues if they presented. All in all, I would say that we did a great job. The teams were on top of it, and we really never had a situation that I would consider to be out of control like we watched on the news. We quickly realized also though at the same time, the drop in volume and a serious financial impact on the business. We started a new staffing strategy for our headquarters in nonclinical operations, and that led us to furlough about 10% of the workforce, including 3% of our hospital field operations. But we did ensure that at every -- all through this, we maintained the staffing coverage to handle the actual and potential demand for COVID-19 patients as well as staffing necessary to respond to any emergencies that would be presented in our hospital. So we never touched the staff that were in those areas. And in fact, we bolstered them. We took action to furlough and flex down teams at USPI. We closed over 100 facilities, and we reduced the hours and days in the balance of our facilities. We maintained a minimal staff. As you know, CMS recommended that in many of our locations at USPI prepare to handle any overflow from hospitals driven by a need to serve emergencies if that developed, which fortunately did not. But given the reductions in the hospital units not directly in COVID, we redeployed personnel also if possible. We shut down certain service lines to ensure we maintain adequate coverage and space available. And then we had nurse volunteers that went to Arizona, Detroit and actually some from USPI that went up to New York to help out with the crisis. By the end of March, ER traffic and admissions had decreased by 35%, hospital surgeries by 50%, USPI surgical volume by 75%, really driven by the shelter-in-place orders and the potential patient apprehension of contracting a virus in a medical facility. Increased cases in -- COVID cases in Detroit, Florida and Mass required to use a premium time. And we also had to use, as I said, USPI hospital volunteers, nurses to help us. We added temporary staffing as we needed and made sure they were available. And we took all these actions in supporting specific locations. And we also continued to acquire PPE. We spent a lot of time doing that regardless of pricing, which, in many case, was 7x higher than our normal contracted price. The global business center in Manila, lockdown occurred on March 15. 900 associates were sent home. Within a very short period of time, they were back up and running, fully functional, and they performed at about 98% of their prelockdown levels. So we're very pleased with how that worked. As of today, we're carefully coordinating the recovery effort across geographies in compliance with state and local orders, and we're continuing to treat COVID patients in our hospitals. During the last few weeks, we've engaged in the planning detail step to reopen elective surgeries and to open our hospitals to our patients and our communities. The plan is focused on every physician; how they will reengage with their respective practice, including how they plan to prioritize cases; how that fits into a methodical ramp-up in OR schedules and procedures in diagnostic screening, all the while balancing staffing and support units to effectively have a labor plan that mirrors the demand curve, a labor plan that engages with the physicians to ensure their needs are met and balanced with the needs of the patients and the facilities and not letting us get ahead of ourselves in bringing in staff until when needed. We've begun to resume elective procedures. Early read is promising. We expect it's going to take several months to bring USPI up to pre-COVID volumes in hospitals. It's really going to be a balance on how quickly COVID cases fall, how effectively we can rebalance the surgical volume and how well we reach into our community to reassure the patients and the overall community that the hospital is open and safe. ER volumes, we believe, are going to need an additional focus and therefore, we have initiated a detailed marketing campaign around safe COVID to reinforce that our ERs are ready. They're ready to move. They're -- we highlight our trauma levels and skills and that they're safe and open. We're going to tailor each of these campaigns to each community. And we'll reengage the community around the concept of a community built on care that's been so successful. It's early for us to make predictions on speed and the curve of the restart, but we're engaging at every level. We want to bring our services back to pre-COVID positions. And we've taken steps to ensure we have adequate bed capacity in case of a surge in COVID cases and have access to in-house COVID testing in all of our markets. The question stands around whether or not we have to get ready for another pandemic surge? We obviously don't know that. But as with everyone else, we're thinking about it, and we do have a plan. And we believe it will assist us in responding more succinctly and effectively in every market. The plan really is to be tailored in every market to the demographics and learnings from their situation, on deployment of people, supplies and support. So as a framework, we're going to isolate COVID patients in markets where we have multiple facilities utilizing a designated COVID facility to receive patients. Testing, treatment, admissions or send home orders to self-isolate will be coordinated in the prime location -- primary location. Where we have fewer locations, we'll designate a specific winger floor that can quickly adapt to the COVID patient load and provide the care, isolated from the balance of the facility. Our belief is we can maintain safe, clean facilities that do treat normal patients and do not treat COVID cases, allowing us to provide the ongoing and reliable care the communities expect while ensuring we can respond to COVID cases and they're direct and effective in every community. It also ensures the USPI surgical centers should remain open and functioning, allowing the normal flow of patients to continue to receive the needed medical care and life-saving actions those facilities provide. So that, I think, is the essence of what we covered, the high points. From a financial point, I thought I'd pass that over to Dan to make a few comments. And then he'll give it back, and we'll close it and get moving on questions. Dan?

Okay. Thanks, Ron, and good morning, everyone. As Ron mentioned, up until mid-March, we were on pace for a very strong quarter. Through February, our adjusted EBITDA was $40 million better than budget, and all 3 of our business units were ahead of plan at that point. It was continuing the performance improvement that we had produced over the past several years with continuing solid volume and pricing growth and higher acuity growth and as well as continuing tight cost management. However, due to the effects of the pandemic in the back half of the month, we estimate that our adjusted EBITDA in the quarter was negatively impacted by approximately $125 million. And if you're following the slides on the website, I'm on Slide 9. But due to the fact that our performance was very strong through the middle of March and the quick actions that we took, our adjusted EBITDA ended up only down about 6% compared to last year. Slide -- up next, go to Slide 11, which outlines the volume declines in the back half of March due to COVID-19. As you can imagine, the volume trends worsened in April as the governmental shelter-in-place orders took hold and the guidance to restrict elective care also took hold as well as patients being somewhat reluctant to seek care in facilities. The statistics were quite startling from -- compared to normal trends that you see in pre-COVID, admissions were down 25% in the back half of March, down about 1/3 in April, hospital visits dropped about 60% in April, hospital emergency department visits dropped about 50% in April and hospital surgeries were also off a little over 50% in April as well. And when you turn to USPI, their system-wide surgical cases fell about 50% in the back half of March and were down about 80% in April as we closed or scaled back capacity in all of our facilities, as Ron mentioned. From a cash flow perspective for the quarter, cash flows did improve despite the headwinds from the pandemic. We did defer about $75 million of 401(k) matching contributions at the end of March. We wanted to preserve our liquidity at that point. But we do intend to fund the 401(k) match to our employees in the second quarter. From an EBITDA by segment perspective, Slide 12, you can see, when you add the numbers up through February, we're off to a strong quarter. We had generated over $450 million of EBITDA. And we felt very comfortable that we were going to produce a very, very strong full first quarter until we saw the impact from the pandemic. And again, the performance that we were generating at that point enabled us to be in a much stronger position to confront these unfortunate times. From a liquidity perspective, Slide 13, a couple of updates in here. As of yesterday, we had approximately $2.4 billion of excess cash available compared to the $2.2 billion we disclosed last week. And we also continued to have $1.9 billion of available capacity on our line of credit facility as we do not have any borrowings outstanding at this time. We talked last week about 2 very important actions we took in April to enhance our liquidity, including issuing $700 million of secured notes, which we used to pay down the outstanding borrowings on our line of credit. And second, we amended our revolver in April to increase our borrowing capacity from $1.5 billion to $1.9 billion. On this slide, you see various large receipts and disbursements in April. One of the larger receipts obviously was the $1.5 billion of Medicare advances that we received. After a 4-month grace period, we will have to begin repaying those advances starting here in August. Our hospitals will have up to a year, in other words, this -- next March to repay the advances interest-free. And their surgery centers will have up through this November to repay the advances on an interest-free basis. From a grant perspective, here's another update. So last week, we talked about we had received $345 million of grants from the recent stimulus legislation related to the initial $50 billion that had been distributed of the $175 billion of aid earmarked for health care providers. We have also received -- so this is the update. We've also received $150 million of additional grant funds for our hospitals that treated a large number of COVID-19 inpatients. And we also received $22 million of grant funds for our rural and critical access facilities. So last week, we talked about we had received, at that point, $345 million. Since that time, we've received about another $172 million. So when you add it all up, we're about -- we've received about $517 million of grant funds so far. And as we've talked in the past, those funds will not have to be repaid as long as we satisfy the terms and conditions of the grants. In terms of other liquidity items, you can see on the slide, we still are optimistic we'll be able to complete the sale of our Memphis facilities for $350 million proceeds this year. And we expect to receive additional funding of the $125 billion of grant aid that has not yet been fully distributed. Last thing I'll just mention is due to the actions that we have taken in response to this situation, to reduce our spend and the fact that we have been collecting and we will continue to collect on accounts receivables generated from higher revenue levels before COVID-19 took hold, we do not anticipate, do not anticipate a material cash burn in the second quarter even if we exclude the Medicare advances and the grant funds so far. So ultimately, as I mentioned last week, that depends on how the impact from the pandemic unfolds over the next several months. But that's our thinking at this point, not a material cash burn in the second quarter. So that's all I wanted to highlight.

Thanks, Dan. So anyway, I'd just summarize it by saying I think that our pre-COVID-19 performance was very, very good, very strong. We expected it to have a great year. But more importantly now that we're in this situation, we think we've run this as well as can be. We took aggressive action on cost. We -- on the people we did furlough, we covered their health care costs, as Dan mentioned. We provided matching to their 401(k). We stay in touch with them. And we will bring them back according to volume and demand needs, and they know that. The people that we retained, worked very hard and have worked 7 days a week pretty much supporting the hospitals, and I'm very proud of the team. We clearly bolstered our balance sheet and liquidity. And we got some support from the CARES Act, although we think there needs to have been more and still should be. Because again, we were forced to shut down and forced to keep the lights on 24/7 in case something happened, which, in many cases, did not for us. We focused on cash. We've cut CapEx back but not to the point where we're not doing the things we need to do to grow the volume and keep the business. That is -- it is CapEx that we will probably have to spend down the road, and some of it was for growth -- future growth. But having said that, at the same time, I think we, very thoughtfully, went project by project. Saum and his team did a terrific job with that. We've cut on vendor spend. We've eliminated any discretionary items. And I think we've taken the appropriate actions. And we're very aware of addressing anything that we did to ensure that on an ongoing basis, we stay on top of it. Look, I think the operational turnaround and discipline in the last 2 years was actually instrumental in making our response effective. And the way I look at this is the same team that drove the performance improvements, is the same team that's here today. We've taken it through the beginning of the pandemic. We will see it through the other end of the pandemic. And we will run it just like we ran it through the turnaround to do the right thing all the way through. So Kevin, with that, those were kind of our opening and hopefully, summary remarks. And then we'll pass it on to you to decide how you want to handle questions.

Sure. So I guess one of the main questions, I appreciate your comment about it's difficult to kind of gauge the pace of return. But you did make some comments that kind of implied that you thought USPI might get back to normal before the hospital business. I don't know if you can give any color on your thought of the base. And I guess, are you ready? And [ you're getting facts ] on your side of that volume coming back. I've got a question coming in through Veracast about, do you have enough PPE, for example? Or any other dynamics you think of that might restrict how quickly volumes come back?

So I'll start and then hand it off to Saum. But I would say that I'm very comfortable that we're very buttoned up from a PPE standpoint. We don't see that as a risk. Obviously, we're continuing to buy and continuing to build inventory, but we're very comfortable where we are now. When people say do you have adequate? I mean it's an undefinable term, but I think we are prepared for coming back. We have adequate or we have sufficient inventory, and we continue to build it. So we'll continue down that path. And I believe that we will -- we have built a very, very effective system by physicians to understand their load, how fast they're coming back to provide the right kind of staffing. So I think we're very ready to come back. I think the question is, is the market ready to come back? Are the patients ready to come back? Are the doctors ready to come back? That's the area where we're mostly engaged. So let me hand it off to Saum who can talk a little bit more in details.

Thanks, Ron. I think you've covered the highlights there. First of all, our PPE capacity is -- what I'll just say is multi-month. So whether it's PPE capacity, infrastructure, ventilators, et cetera, none of those are bottlenecked for us at this point. Both the hospitals and USPI are prepared to come back. We've created, as Ron described, COVID-care and COVID-safe zones and have protocols in both settings in order to allow patients to come back safely and allow physicians to come back safely and the staff to continue. Over the period so far in the pandemic, medically necessary and urgent procedures continue to be performed in many of our ambulatory surgery centers. For example, thousands of those procedures have been performed without a single known transmission of COVID occurring during that setting. That gives us some degree of comfort that our protocols are working. We are similarly assessing the situation for medically necessary and urgent procedures that were performed in the hospital that were non-COVID related. And I can tell you that we're likely going to have a very, very low rate of transmission there as well. So we feel very good about the protocols that are in place. The main thing that really is a gating factor at this point is patient comfort, and that gets back to the -- both marketing plan, communications and other protocols that we are now sharing more with the public and with our staff about how we're going to approach much of this care. And secondly, it's the physician offices beginning to ramp up. Obviously, the physician offices running at full steam and getting those operations functional are important to generating a pipeline for people that need care in the hospital setting or the ASC setting. In our own practices that we have, we are ramping that up significantly. We supported that with telehealth, and we have created collateral material about the safety of our hospitals for our physician partners who are not employed. And so we feel pretty good about that. Look, the volumes are ramping back up. I would anticipate that USPI is going to be running above 50% of normal from being down over 80%. And the hospital volumes are ramping up. In the hospitals, it's highly variable by market depending on how much COVID penetration is still there in the hospitals and the obvious sense of comfort or lingering discomfort with elective care coming back. But we anticipate through the month of May that will improve everywhere and should have a good ramp up as Ron described, which is being worked on physician by physician.

Okay. Great. And then I guess as we think about the longer-term growth of the company, you get through COVID, but it does look like COVID is creating a recession. How do you think about Tenet's ability to grow during a recession, the puts and takes around payer mix, volume pressure and then maybe any cost offsets that you see?

Saum, do you want to address that?

Yes. Sure. Look, Kevin, I mean I think there are recessions that are more traditional, and then there -- we don't know what the shape of this recession, if there is going to be one, will actually be. I mean under normal historical recessionary periods, there are usually 3 things that are unique about the health care sector. The first is that it is often a sector that is more insulated and continues to grow, though the mix -- number two would be that the mix changes, though that can sometimes be tempered through COBRA coverage. For example in '08, '09, there was extensive COBRA support coverage provided. And then the third thing is that oftentimes in recessions, capital spend is more restricted. And in some cases, capacity comes off-line at a more accelerated pace. Now how that plays out this time around? I think it's frankly too early to really tell. What I know is that we have built a platform that is efficient but also one that, as you saw in the back half of the month of March and you will see for April, has flexed effectively from a cost standpoint based upon all the real-time data and analytics that we've put in place. We've got good market diversification. We have a strong ambulatory platform. And we are believers that during this period and beyond, that ambulatory environment will grow. There may be an additional push in the near term as some consumers may be more comfortable in an ambulatory surgery-type environment, for example. We have yet to see how that will balance out. But all of those things have been built into the platform here at Tenet, and we think that will serve us well in the downturn on a relative basis.

All right. And then maybe just last question here. How do you think about the long-term implications of COVID, if any? I mean is there anything that you're doing in response to COVID today that you think we'll be seeing for a while going forward or any changes in consumer behavior and how they access the health care system that you expect to be longer lasting?

Sure. I mean COVID has been certainly a bit of a wake-up call in terms of the pace and scale, at least in this country at which this type of pandemic type of infectious disease can spread. The hospitals are used to taking care of infectious disease patients. You often have patients requiring very similar protocols to COVID if you have active tuberculosis or some such thing, but not at this scale, right? So we've started the process of actually what were our lessons learned during this first phase of COVID and how would we respond if there was a second spike. Ron described some of that in terms of our multi-hospital markets, in terms of cohorting, in terms of safety protocols, in terms of having adequacy of the supply chain for various things. Not just PPE but all of the things in the supply chain that are required to keep the rest of the hospital going because as we pointed out, we've had to keep all the hospitals fully open for the services that are required even if the volume wasn't there. So that type of learning is available to all of us right now. And the preparations at Tenet for that are underway if we have a second spike. Longer term, I would only make a couple of comments. Again, I think it's really hard to predict. I think we're optimistic about the ambulatory environment. We believe that this may have been a little bit of a breakthrough moment for certain telemedicine type of activities. And the third thing is, I would say, in the opposite direction. I think the trepidation about going to hospitals will be hopefully short-lived. We continue to get stories about people dying at home or having very complicated conditions that are untreated at home from not visiting the emergency department. And I think over time, that will correct itself. It just remains to be seen how long that will take.

All right. Great. Well, thank you, guys. It seems like we're out of time, but I appreciate the conversation. Thank you.

All right. Thank you, Kevin. I appreciate it.

Thanks, Kevin.