Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Thank you. Thanks, everyone, for joining us for our next presentation. With our next presentation, we have the team from Tenet Healthcare. Joining us from the team, starting at the top is Ronald Rittenmeyer, Executive Chairman and Chief Executive Officer; Tom Sutaria, President and Chief Operating Officer; Dan Cancelmi, Executive Vice President and Chief Financial Officer; I believe we have Owen Morris as well on the call, Corporate Treasurer and USPI Chief Financial Officer; and Regina Nethery, Vice President of Investor Relations. And I think first and foremost before I turn it over to Ron, I just want to thank the management team, in particular, I know you've been always very gracious with your time, meeting with investors, obviously, in Florida historically. But again, I always do want to thank you, and thank you all for taking the time. And thank you to investors for joining us for this presentation. So with that, I will go ahead and turn it over to you Ron for some opening comments, and then we'll jump right into the questions that I have and some that may get -- head into veracast here.

All right. Well, good morning. Thank you, Larry. It's always a pleasure to be at your conference. And I want to mention to everyone to please take a look at the cautionary statements that we have posted regarding today's presentation statement standard and format. But I would ask that you read that. I'm not going to take the time to read it to everybody. But if you would do that, I would appreciate it. And it's located on the second page by following our introductory page on the deck. So we posted a deck. I will highlight just a couple of things. And then I think the smartest thing for us to do to use time in these things is not spend a lot of time going through slides. They're pretty self explanatory. And we'd refer you to those to look, and I'm sure everybody's already [indiscernible] through them. So let me just give you a summary, and then we'll open it up for questions. And I think that's usually the most productive part of the meeting. Everybody has seen, I believe, probably our earnings release through the third quarter. I would say that this has been a very interesting year to say the least. We still see it as a tale of 2 cities in many ways. It started out, as you know, with a very complicated for everyone, not just us, but everybody, when the virus hit, we started fighting an unknown enemy, and we had our moments. But when I look at our performance overall on the continuum, I think what's important is we reacted very quickly. We shut down unnecessary things and yet, per the government orders, we remained open fully staffed and prepared to receive what at the time was expected to be a large surge. We did have obviously some surge points throughout the country, back in the March and April and May time frame, areas like Detroit, Miami, some in Phoenix, et cetera. We also had many areas that we had absolutely minimal activity, but we were still fully staffed and as you know, like the surgeries had been stopped, mostly ER visits had stopped because of the shutdowns short of anything that was very, very critical. And we furloughed a lot of people, and we shut down about 1/3 -- a little more than 1/3 of the USPI operations. We bounced back during the second quarter. And we came back in a very measured, methodical approach. We ramped up based on the volumes that we saw coming back as elective surgeries were allowed to start again. We are very careful from the standpoint of staff infection because we're pretty aware that if our staff gets infected, we won't have an operation to run. So safety first at the hospitals became a banner that we focused on significantly. Early on, we had pre-bought a lot of PPE because we really didn't know, and we realized that there was no shelf life in the near term that would be of a concern. So we started out in a pretty good place. We obviously felt the same pressure as everybody else as time we're on. We put some reuse equipment in place, especially for N95 mask, and we sourced a lot of things at a much higher price, including staff as well as PPE. But in the end, it all washed out. Government intervention was very helpful. The CARES Act was very helpful to us. We have a high percentage of Medicare patients throughout our system in Medicaid as well as a reasonable percentage of charity cases. As you know, we turned nobody away. We operated as efficiently as we could. We even designated certain hospitals in certain multi-markets where we have more than one facility as our COVID hospital, so we could focus on care in a very, very efficient manner, worked very well for us. At the same time, we ramped up our operations over in Manila. Manila went to a complete shutdown, work at home. We had about 500 to 600 associates at the time that started, I guess, in late -- mid-April. We currently have about 1,500 associates on staff in Manila. So even during the pandemic, we were able to continue to move operations as plans, specifically back office things, like payroll and other areas and especially some Conifer operations to our Manila operation, and I'm happy to say they did a great job and continue to perform very, very well. We reopened our headquarters, reopened our satellite operations. And have been back, I'd say, in what we consider to be pretty much fully operational for the last couple of months. Performance through the third quarter was very good. Our recovery has been very positive. USPI has very -- had demonstrated very good performance year-over-year, and we have put a lot of focus in surgeons, specialty groups, on our strategic high acuity service lines. So much of what we're seeing is the benefit of the work we did in the last couple of years. And then Conifer continued to do an outstanding job, and we continue to have very, very great progress in terms of client cash, so -- and client cash operation, not only for us but for everyone else. One of the most important things is throughout the pandemic our staff infection rate actually was below 4%. And I think the national average is about 13.5%. So those types of things have helped us dramatically in running a very, very tight ship. From a capital standpoint, I think you know we issued some new stuff because we were not aware -- I'm not unaware, but I'm sure would be a better word of what the cash situation would be going forward when this first hit. So we took advantage of some markets. We equally, as time went on, decided to move forward on restructuring our $2.5 billion of our 2022 maturities, and we were successful in doing that at a decent interest rate at 6.125% and it helped us by reducing our interest expense as well as in improving our future cash flows. I already mentioned the CARES Act. Dan can talk about that in some detail, if you have questions about that. We are not anticipating paying it back early or returning it. So I'll get that question off the answer ahead of time. We are not the same as HCA from a profile standpoint, hospital profile, profitability, et cetera. I mean we're happy that they were able to do that. But from our standpoint, we think it's prudent for our stockholders and all of our stakeholders that we manage this appropriately. So that will continue. Overall, I think we've had a really good year, given the situation. We have been ahead of consensus, which is a consistent story. We have -- our data-driven analytics that we installed really informed us in terms of our ability to make the right decision and continue to do so. We tightened up capital dramatically. We've released some of that because now we're -- we can see potentially the light at the end of the tunnel. We're very aware of the status on the vaccines. We have people that obviously stay very close to that. We probably can't add a lot more color to that today other than we have a very active group of our infectious control people, et cetera, engaged with the government, dealing with how we will administer that depending on how it actually gets rolled out. So we're up to speed on all of that. Across all 3 businesses, we're very pleased with performance. The current spike in COVID cases, I'm sure there are a lot of questions, so I'll wait for those. Other than El Paso, which felt the greatest surge in the last couple of weeks, I would say that, sure, we have seen some increases, but they're all very manageable, and we're under control. It's a different profile than what we saw early on. It's a younger profile. It's a profile that can be sheltered at home in many cases and it's a profile that we now -- realistically we've learned a lot, and there are therapies and other things. We started this thing in the early days, we were kind of working through this with everybody else and dealing with rumors and opinions much more than we are today. Today, we're dealing with much more fact-based approach and a much more data-driven and results-oriented answer. I think Page 6 of the slide talked about some volumes through October. We're not prepared to really discuss November. I think we'll be okay in November, but we don't have all our data in. As you can imagine, it's only just closed yesterday. So we're not quite that good. You'll notice we released our third quarter earnings earlier than normal, that will be a standard going through. As you can imagine, Dan is very excited with me, very happy that we've decided to do that. But we do think it's the right thing to do. And I think we're much better shaped than we used to, be much better prepared, et cetera. We also provided some data on -- and disclosures on a monthly basis. That will end at some point because that's really not the right way to do it. In lieu of having guidance, we felt that -- since guidance is so hard to anticipate at this point, we thought it was better to try to be as transparent as possible and provide data on a monthly basis so people can at least get a sense directionally of what we're thinking and saying that we are grounded in fact and et cetera. But until this virus gets a reasonable amount of vaccines in place and inoculations done, it's very hard for us to understand where the spike may happen next. Because it's random, and we're prepared, but it still is a random draw. Liquidity is very good. We're in very good shape liquidity. Dan can answer those questions. But I think we covered all that in the quarterly announcement as well. So with that, I will stop and turn it back to you, Larry, and we'll just open it up for questions. I think that would be the simplest and the most effective use of everyone's time.

Okay. Thank you, Ron. Thanks for the thanks for the introduction and so forth. Just a couple to follow-on maybe your initial comments. One, are you seeing -- in terms of the kind of resurgence here without getting into specific like in November or otherwise. Can you just talk to -- are you -- have there been any movement towards having to close facilities or any -- anything of that nature based on from any individual states? And/or are you -- have you seen any hot spots that you had to kind of address independently of kind of your broader model?

Okay. I'm going to turn that over to Saum. Let him answer that question.

Larry, to your first question, we've not had to shut down any facilities entirely. Look, we, like everybody else, we've learned to manage separation of COVID and non-COVID patients much more effectively. We've also learned to address their needs earlier in their course of illness, which has made a big difference, I think, in the morbidity and mortality that you see from COVID today relative to what we were seeing in the early days, as Ron described when we were fighting kind of an unknown enemy with an unknown disease profile. So things like length of stay have begun to improve within the COVID care environment, both in the floors and the ICU, that improves throughput, it preserves capacity. And at the same time, the medical needs of everybody else in the community have built up enough where we've put a priority in premium on continuing to service them because we've had the right safety protocols in place to protect our staff. We're very proud of the fact that the infection rate in our staff has been significantly lower than what we've seen elsewhere. It's allowed us to have the confidence to manage both COVID and non-COVID patients at the same time. The increases that we're seeing today all over the country from a COVID standpoint, to your second question, are obviously creating concerns in communities and among state and local governments about the increase -- in the rate of increase, and of course, there are a myriad of models out there, mostly academic predicting ICU capacity will be filled up again. And I'm not sure exactly how to read those. I mean, there have been lots of predictions about many cities getting overwhelmed in the same way New York City did in the early days of COVID. And we really haven't seen that. I think health systems largely have come together in local communities and coordinated their capacity pretty effectively including across multiple cities as needed to accommodate these surges. And I think the best thing we can do is avoid large-scale state-based or regional shutdowns of all economic activity and focus our attention more on just getting people to do the basics around distancing, masking, avoiding large gatherings, the basic things that will slow down the spread over the next few months. So we don't -- we are concerned about the amount of discussion out there, about large-scale state or otherwise kind of shutdowns. There's no talk of elective surgery shutdowns or anything like that yet, largely because I think the health care systems have demonstrated that they can manage this effectively. But we think the best thing to do would be to do the simpler things that would lower the rate of transmission.

Okay. So just a follow-up to that. Do you see any challenges absent I don't say absent but when we get beyond the pandemic, do you see any challenges in terms of returning in-patient volumes back to kind of 100% of their pre-pandemic levels or does the kind of the outpatient surgical model kind of gain traction longer-term in this environment? Obviously, USPI performing extremely well. Trying to get a sense of that balance longer term in your mind?

Yes, absolutely. Look, I mean, first of all, let me start with the second part of your statement. USPI in the ambulatory surgery business and surgical hospital business is performing incredibly well. It's a testament to the strength of the portfolio, the partnerships with other health systems and really the physician community that participates at USPI for which patients seek care actively. So I think you're right about that. It is an environment today where the ambulatory surgery setting in particular is one that is not only growing and what it can do capably. I mean, just look at what's happening in orthopedics, for example. But it's also one that's viewed as a bit safer than an acute care hospital, at least with the pandemic ongoing if you're going in for an elective procedure. And so there's both patient and physician demand. I think we've noted in the past that we've added almost 1,100 physicians who've tried a USPI center for the first time during the pandemic, who may not have practiced in such a setting before. And I think we'll continue to see that demand increasing. On the acute care side, look, I think I would make 2 comments, the first is it is unlikely that demand should be measured is going 100% back to exactly what it was pre pandemic from a mix standpoint. I don't see any reason with the ongoing aging of the population and other things that the demand for services at acute care hospitals in aggregate will reach 100% of where it was and continue to grow from there when the pandemic subsides, but the mix may be slightly different. And the mix change will cause health systems to have to understand where that demand is going to be and how best to invest to service that demand. And so there may be share shifts that occur in markets depending on what people choose to do. We think there will be a premium on outstanding intensive care, outstanding cardiovascular care, outstanding surgical care, really high throughput and effective emergency department care. And the foundation that we've been laying for the last couple of years strategically in those areas we think will serve us well in the acute care market. And finally, this has also been a time where we have continued to invest in building new specialty programs within our hospitals. Obviously, a little bit more selectively but there are areas, for example, robotics and other things that are growing quickly in the acute care environment in terms of their application that could be nice replacements for some of the work that will move into the ambulatory surgery setting, for example, in our USPI business. So again, to summarize, this is not going to be a case of trying to replicate or create a replica of what 2019 was, it's going to be a case of really looking forward and thinking about what demand will be out there and how to succeed in servicing that demand in 2021.

Okay. Great. And a little bit of extension of that. On the ED volumes, I think you highlighted in your slides, you say continue to remain challenging through October. Can you speak to kind of -- we've -- I've heard obviously losing lower acuity volume, but can you speak to where it stands, kind of your -- what you're seeing today? And do you expect that those volumes will recover in the ED?

Yes. Emergency Department volumes are certainly lower than they were last year. I think there are a few things driving that. The first, of course, is, as I described, there is a set of services where the demand simply has decreased. So the easiest example that I like to use is that when schools are closed and athletics are not as prevalent as they used to be, you simply see less fractures. And that demand is down. And when schools open up and athletics come back and all that stuff, the fractures and things like that will come back, sprains, fractures, whatever the case may be, will come back. And that's lower demand because of underlying conditions that are decreased. This is not a case of -- it's not like the fractures are happening and they're being treated by telemedicine. That's not what's happening. The second reason for this is just simply the broad-based patient comfort in coming into the emergency department for things that they used to. There's a fear factor out there, largely, in our view, created by what everybody saw on the news in April and May, when the view of the acute care hospital was what was going on in New York City, which, again, was very different than what was going on in most communities in the U.S. The fact is that most hospitals have figured out how to manage COVID patients and non-COVID patients in the emergency department setting safely. We've certainly done so, and it's going to take time for consumers to get comfortable with that again, but we expect that they will get comfortable with that again over time. And then the last factor, which is kind of the unknown, is, is there some component of low acuity emergency department care that is being taken care of in some other setting or by some other means? It's really too early to judge that in terms of what the long-term impact will be. So we haven't really put a lot of effort into that. I will tell you that we do spend a lot of our time following and tracking high acuity ER visits to our hospitals and ensuring that we are providing the right set of services to stay competitive in that environment, and we have stayed very competitive in that environment.

Okay. You do track. Does -- just as a little bit of a follow-on. Does -- your outsourcing partners in the ED, does it -- is it -- do you rethink your approach in terms of working with your partners in that ED setting?

Well, our outsourcing partners in the emergency departments, first of all, have been absolutely critical partners during this pandemic. If it weren't for the quality of the physician staff that they put into place and deploy alongside our hospital-based staff or even our own hospital-based emergency physicians where we have them in-house, the pandemic management in that setting would not have been as effective as it is in the tenant hospitals. So we -- first of all, would thank them for all the effort they've put into being good partners with us in that regard. I would say that of course, we rethink it. I mean, we've had to do training, we've had to provide different protocols and pathways, care pathways that we've worked on together in that environment. And obviously, with demand changing, we've had to change the staffing levels. Just like in our hospitals, it hasn't been easy for us flexing down to demand. I'm sure they've seen similar kind of challenges in the flexing they've had to do, but we've sort of managed through that. The most important thing I would say is at this point, it would be helpful if the broader industry would support emergency department physicians looking forward because the call on their needs has not stopped.

Right. Okay. Yes, certainly a fair point. We run low on time. I've got a couple of -- 3 questions coming in here. One, just the government stimulus, do you expect incremental stimulus support going forward, either from dollars available from existing or remaining balances in the stimulus funding or incremental funding going forward?

It'd be -- I don't have a crystal ball on this by any means. But we had heard originally that during the lame duck session, there would be some activity, but I haven't seen it. So I have no idea what's going to happen. I personally don't think -- there will be a lot of activity until after the new administration's brought into office, and then we'll see what that looks like. It may or may not be -- we don't know. I don't know how to know because it depends on who you speak to. But at this stage, they still haven't used up all the CARE dollars. So there's dollars available in the original CARE Act. We've certainly gone in through various channels and made a request that they release those funds. But to date, nothing has happened, and we'll just have to wait and see. I don't have a better comment about that.

Okay. That's fair. Maybe it's for Ron as well. Can -- an update -- this question coming in. An update on the timing on the Conifer spin and how you view leverage at the RemainCo at this point in time?

Well, I'll answer the first part, and I'll bounce it to Dan on the leverage question. But the -- look, the Conifer spin, nothing's changed. I mean, obviously, the pandemic's changed everything, but we filed already for the IRS ruling. So we'll see where that goes. We announced today a new CEO, so that's done. And we have work yet to do, obviously, to determine. But the only update I would give you is we're going to have to watch what the markets do. We're not going to do the spin. If I -- first of all, we've always said we don't have to do this. So we're not going to do it if it doesn't make sense. But the reality is that the area I'm most concerned about is what the market will look like at that point. I mean, we got a new administration starting in a little over 1.5 months. Their fiscal policies and monetary policies will probably have some impact. We're going to have to understand what that looks like, taxation as well, depending on whether they take the whole senate or not. So I mean to sit here and come up with a complete story based on fact I don't have because there are some really big unknowns, but my concept is that we're still moving along, we filed the right paperwork. So we have our own schedule that we're operating on the assumption that sometime between the second and third quarter, life will allow us to take the steps we said we would do. As to the leverage, we're not going to discuss that yet because there are other factors in play that will help us make that decision. And beyond that, I really don't have much more to update. We've updated it every single quarter. There's not -- I mean, there's not much more to add to this story. The 2 long poles in the tent have always been the IRS ruling and the -- what the markets and the markets are an unknown, especially now. So that's my point. Dan, do you want to talk about the leverage question?

Yes, Larry, let me just assure everyone that we're incredibly focused on improving cash flow generation. We're reducing leverage as well as reducing the total amount of debt. As far as how that interplays with the Conifer spend at the time of the spin, the appropriate amount of leverage will be put on Conifer. It's a great cash flow generating business, so they'll be able to support an appropriate amount. And we will use the proceeds from that to reduce debt on the tenant side, the RemainCo in a tax-free manner. Nothing's changed on that front. We have various tranches that are callable at this point, and we'll become callable as well as we still have the 2023s out there, but we have options other than the 2023s, and we'll look at the entire capital structure and do what makes the most sense.

Dan, that applies, obviously. You have a significant -- question coming in here, significant cash balances today. Question being how do you think about those capital allocation priorities you've kind of touched on? And what do you think is the best way of driving equity value?

So in terms of the -- our current liquidity, obviously, we took many actions to enhance it over the past 8, 9 months. We're obviously very satisfied to be able to access the capital markets, and we appreciate all the investor support on that, which is very important. We've been very clear as to our capital allocation priorities, including continuing to grow our ambulatory business, investing capital there as well as investing capital to grow our hospital, higher acuity service lines, you're going to see more and more of that. Listen, some of the cash balance that we have right now, obviously, we will have to repay with Medicare advances that we received, which were very helpful, do have to be repaid, but the repayment time line was extended and it does not begin now until April of next year, and we have until September of 2022 to pay it. So we were pleased that the terms were extended. It was very helpful.

Okay. Great. Thank you for that, Dan. I think we got to go ahead and wrap it up, we're about 4, 5 minutes over. I just want to thank Ron and team for taking the time both today and for joining us at our conferences over the years, truly appreciate that. And thank you, everyone, for joining us this morning. And everyone, have a great day, and we'll speak with you Sam. Bye-bye.

Thank you.

Thank you.

Thanks.

Thanks, everyone.