Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Hi. Good morning, and welcome back to day 2 of the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'll be hosting today's session. Thanks to the Tenet Healthcare team for joining us this morning. It's my pleasure to welcome CFO, Dan Cancelmi; COO, Saum Sutaria; and Vice President of Investor Relations, Regina Nethery. Saum has some opening remarks. So Saum, why don't I open the floor to you.

Andrew, thank you, and thanks for welcoming us. On behalf of the 2 of us and Ron Rittenmeyer, our Executive Chairman and CEO, who will be joining us for investor sessions later today. Let me just make a few brief comments as we introduce the session. Look, I think for the community that knows us pretty well, I just would remind us that today, Tenet is a company with 65 acute care hospitals that has really moved into #1 or #2 positions in the majority of markets. We have the leading ambulatory elective surgical platform with over 300 sites at USPI, and the leading revenue cycle outsourced services business in Conifer. In addition, we've got about 1,800 colleagues in our fully functional captive in Manila. As you know, we've been in the midst of a 3-year turnaround that has included improving our earnings performance, free cash flow generation. And importantly, strategically, really repositioning our Hospital business for success, while at the same time, expanding and growing the USPI platform and improving Conifer's performance with almost 1,000 -- over 1,000 basis points of margin improvement over that period of time. A year ago, we were in a position, right before the pandemic hit, with a tremendous amount of momentum. We've been pretty transparent through the pandemic, so you're aware of where that stood. And obviously, the pandemic forced us into a different agenda, which at this point, we are now looking forward from coming into 2021. We thought we delivered an outstanding fourth quarter with $832 million of EBITDA without CARES Act money that significantly exceeded consensus. All 3 of the business segments performed well, which is very important. And volumes held up very nicely through the end of the fourth quarter and coming into this year, which we'll talk about a little bit further. Importantly, as you know, we completed, in December, a transformative acquisition, expanding our portfolio in USPI with the SCD assets and further cemented our position as not only a leader in the space, but making a significant commitment to being the leader in orthopedic bone and joint care in the ambulatory setting, a tremendous growth opportunity that we see there for the future. We're committed and have been committed to improving free cash flow in 2020, excluding the advances from Medicare and the payroll tax deferrals generated about $1.2 billion in free cash flow. And the balance sheet is strong, stronger than it's been with over $2.9 billion of secured debt capacity. And obviously, in a very positive way, seeing a leverage ratio that dipped below 5% to 4.7% at the end of the year. As a result, obviously, we've announced that we would retire $478 million in 2025 notes, saving us $33 million a year in interest expense. But COVID has ramped down very nicely, but it's not over. We still have over 850 patients in our hospitals from a peak that exceeded over 3,000, but the agenda is also shifted to include vaccination. We've vaccinated over 219,000 doses that have been administered by our hospital. And we continue to spend and invest money in PPE and other things to deal with the variants that have now emerged in the U.S. from COVID standpoint. Our guidance for 2021 is strong with $3 billion of EBITDA at the midpoint, an increase of 33% from 2020 with our peers acuities and obviously, USPI is significantly leading the way with a 56% increase, which we obviously, the full year benefit of the SCD acquisition in addition to organic growth and other inorganic activity that we plan at USPI. We estimate $1.325 billion in adjusted free cash flow. Before we repay $700 million in total of Medicare advances, that's an estimate and the deferred payroll taxes. Obviously, this is a continuation of our commitment to strengthen our business and utilize the platform we've built to continue to improve performance of our shareholders. So with that, just in closing, I want to reiterate that our outlook is bullish, given the multiyear transformation of Tenet. We've come out of the pandemic and coming out of the pandemic, feeling good about where we're headed and the opportunities in front of us. Our commitments to improving performance in the Hospital segment, scaling the USPI platform and working with our new management team at Conifer to reintroduce Conifer into the commercial market and beginning to make progress on the top line is unwavering, and we look forward to discuss the questions you have.

Great. Thanks for that introduction. So to start, can you give us an update on the latest volume trends, including the impact from the February weather disruption in Texas?

Sure. I can start and then -- volumes are probably a little bit behind where we were at the end of the fourth quarter coming into February. The COVID surge lasted through most of January post the holidays. But we're on the path to recovery from that. The weather had a really 2-week effect in not just Texas but all of our southern states and a number of our USPI centers, both in terms of the freeze, but also some of the issues with electricity and water and other things. We don't believe at this point that there's any need to adjust our Q1 both earnings guidance and performance guidance beyond that based upon what we see today.

Yes. I think we've demonstrated, we've done a pretty good job managing in our cost as volumes vary, whether it's due to the COVID surges or now, in this case, storms from several weeks ago. So we feel absolutely comfortable still with our guidance for the first quarter and the full year.

Do you think that the weather disruption was contained in February? Or are you still experiencing some lingering effects into March?

Well, in terms of what we're doing is doing actually a pretty good job rescheduling the cases that did have to be deferred. We'll have those cases rescheduled, by and large, by the end of the quarter. Some of the cases will be obviously performed into the second quarter. But again, based on what we've seen so far, there's no need to update our guidance at all.

Got it. That's helpful. And then there's an ongoing debate in the marketplace about how quickly utilization could rebound as COVID cases decline. Is there anything you would note during the current drop in cases that would suggest a different or accelerated pattern for non-COVID utilization?

Well, I'm not sure I want to enter the debate if there's an ongoing debate. But I would say that -- look, we're very focused on executing our recovery playbook. We've been through 3 surges, each one successively higher in number from a COVID standpoint in terms of the capacity challenge it presented. And each time we have improved and executed the same recovery playbook. Get the new cases scheduled, allow visitors into the hospital safely to create an environment people want to go into, get the ER marketing moving so that people know they have a safe point of access, work with the physician community to provide easy access for direct admissions and things that they may need for their patients that have deferred their care. So we're kind of running that operational playbook and expect that we will see a recovery. This was a larger surge, so it may take a little bit longer. The only dynamic that I would note is there is a lot of what I would describe as chatter more than a fact-based about patients wanting to wait until I'm vaccinated to do my elective procedure, this and that, whatever the case may be, unless it's emergent or necessary. And so we'll see, we'll see what effect that has. As Dan pointed out, we've got the capacity to take on the cases if they come in. We also have the ability to flex our costs effectively if the volume takes a little bit longer to reemerge.

Okay. That's helpful. And then even though cases are declining, new variants are now reported to make up a greater portion of those cases. From your seat, has anything changed in the way your clinicians are treating patients with new variants that would suggest a higher acuity or a longer length of stay?

Yes. So when somebody comes in with symptoms of COVID and then even is confirmed to have COVID. I mean it's not like we're sequencing the genome to understand whether this is a COVID variant or a prior generation, if you will, with COVID virus. I mean, we take care of the patient as if they have COVID. So we don't know oftentimes whether this is a variant or a non variant. So I would answer your question maybe slightly differently. One of the things with each successive wave is that we've learned how to care for these patients better, right? We've learned better protocols in the ICU, better ways to oxygenate without having to put people on ventilators. Better ways to manage the length of stay, that, in particular, with this third wave, we put a lot of attention to in order to reduce our need for excess staffing for the patients by getting them to a lower level of care safely earlier by understanding the disease better. So we're just working on making sure that we're better and better and taking care of COVID, variants or not.

Got it. That's helpful. On the vaccine front, close to 20% of the general population has received at least 1 dose. I think you mentioned 219,000 doses administered in your prepared remarks. Where does the vaccination rates stand among your clinicians? And what impact does that have on the staff quarantine rate?

Well, a couple -- I mean the vaccination rate among our staff is very high. I mean, the majority, in some cases, the vast, vast majority have chosen to take the vaccine. And most of them have completed 2 doses. I mean from a staff standpoint, we're virtually -- with the first wave, we're virtually complete, from that standpoint. So now there's obviously some people that wanted to delay to see how it went, and they're in their cycle now. And we're doing a lot of patient population type of vaccination today, much more than staff. Staff quarantines are not a problem right now. From the beginning, we've been reporting we put so much effort into protecting our staff that our staff infection rates nationally have been materially lower than what's been reported publicly by the CDC and other experts. So we feel good about that in 2020, and I think the vaccine only helps that.

Great. Let's talk about your marketing campaign for a minute. Throughout 2020, you ran a thorough marketing campaign to increase awareness that your hospitals and emergency rooms are safe. How has that program evolved? And what might you do differently in 2021 to convince the lower acuity cases to reenter the emergency room?

Yes. The marketing program is very much decentralized to what each individual market is experiencing, right? So we kind of think about it as a life cycle when COVID is surging, what do we need to be talking about in order to help people make sure that they continue to feel like the hospital stay for non-COVID care. Obviously, when there's a COVID peak and ICU capacity is short, we've been thoughtful about what we're going to defer and communicating about that. And then as COVID has come down, we have focused our energies more on the -- bringing the business back in terms of our marketing campaign. I would say the biggest difference today between the initial stages of what we were doing in marketing is the physician community is, frankly, active front and center in our marketing campaigns now, right? So we've done a lot of work in the community on safety and other things. But we're using a lot of direct physician videos about different specialties, symptoms of disease that people shouldn't miss. They should get things checked out. Here are the different places they have to go get things checked out if they need it. Here's how to think about an emergency. We've got tele ER capacity now at many of our ERs so that people can get a quick read, if you will, of whether I need to come in and feel comfortable and safe with the ER before they come in. So we've tried to evolve the marketing campaign and in particular, involve our physicians more in it.

How should we think about the earnings impact from the loss of lower acuity ER volumes? It doesn't seem like that buoyed created much of an earnings headwind in 2020?

Yes. I think it's fair, Andrew. Some of the lower acuity cases, the margin profile is obviously different and smaller and quite frank than other more complex cases. But listen, that business, we're obviously optimistic that, that business will come back, and we won't be pursuing it because we do -- I mean, there is a margin on that business. And in terms of -- we continue to feel very comfortable in terms of how we will manage our cost back up as that business comes back on. So that we're looking forward to that volume rebounding stronger as we move through this year, particularly when we get to the second half of the year, and it'll add incremental earnings to the platform going forward.

Okay. Great. Let's move on to a normal course of operations. When we look at Tenet's business today versus 3 years ago, it's a very different looking enterprise. You're now on track to deliver $700 million of normalized free cash flow this year. And given all the investments into the ambulatory segment and continued commitment to spin Conifer in 2022, how different could this enterprise look over the next 3 years when considering both business mix and capital structure?

I'll start on the cash flow aspect and then turn it to Saum. In terms of free cash flow generation, as Saum pointed out, generated about $1.2 billion of free cash flow in 2020. Looking to this year before the repayment of the Medicare advances in the payroll tax deferral, we'll have roughly $1.3 billion. We will make distributions to our minority shareholders, particularly in our ambulatory business or they refer to as cash NCI distributions of around $470 million. So after those distributions, we'll have over $700 million of free cash flow. How will that be is? Well, obviously, we're focused on reducing debt. We're focused on allocating capital to our Ambulatory business. As a baseline, we've talked about this quite a bit over the past several years, we look to invest $150 million to $200 million into the Ambulatory business, either for de novo projects or for acquisitions of centers. Some years, it's going to be more. Last year was a perfect example. The SCD transaction, we're very pleased to complete that in December. We'll also continue to invest capital into our Hospital portfolio in terms of growing our higher acuity service lines, where we continue to see opportunities there. So we feel optimistic, we'll continue to grow our free cash flow as we move forward over the next several years. And 2022, we'll also have to pay back the remaining amount of the Medicare advances and the other half of the payroll tax deferral. But that cash, we already have that reserved for, it's already on the balance sheet. And so we feel optimistic about our ability to continue to improve free cash flow. Conifer was a big part of that story in 2020, and it continue to be pleased with our revenue cycle and cash collection performance for us. New management team in place in the back half of last year and doing a really good job, and they were a big contributor to our cash flow generation last year.

Yes, Andrew, I would say, the thing that really guides us in terms of where we've been heading and it's taken a lot of work to get there and are heading is we believe that we can build the best emergent and elective, specialty-based high acuity platform in the country. And that is -- if you think about what we're doing across the different asset classes, that's what we're focused on. We want to ensure that we run outstanding hospitals, especially emergency departments, operating rooms, procedure rooms, ICU care and really do that in an efficient way such that we're not high cost. The USPI platform is -- you think about all the great things about it, but it is a remarkable value-based platform that we're committed to. We've embraced outpatient. Many of the types of cases that are performed there are done and 1/3 of the cost of what they would be in a hospital. And we look at that as a major avenue of delivering value and savings to the commercial and government payer community by having a lower cost platform that we're scaling to do things in a way that are more efficient. And that's an incredibly critical part of what we're building. Now the nice thing is we can build that in many, many markets, not just partnered with Tenet hospitals. Obviously, the majority of partnerships are non-Tenet from that standpoint. And then even from a Conifer standpoint, we're very much building the capabilities inside of that to evolve the revenue cycle yield capability to really deal with what hospitals are going to be in the future, which are much higher acuity sites of care. I don't know whether all the low acuity work will come back or not. But you do have to evolve the revenue cycle capability to be especially focused on ensuring that you do a really good job for the type of business that hospitals are likely to see. And obviously, physicians along with that. And that's what we're focused, it's kind of what guides us strategically. And so if you look at what we put out there for 2 or 3 years from now, what we think our mix of business will be, that's reflected in what we're seeing for where we want to be in the future. And we think we create more value for the shareholders of this company.

Great. Let's continue on the M&A topic. M&A has been a regular part of the ambulatory growth story, but the acquisition of SCD was much larger than usual. I guess, what's your appetite to do additional deals this size? And can you give us a sense for what the ambulatory pipeline looks like for assets with this type of scale?

Well, our appetite to do very good deals with high-quality assets and high-quality operators that are looking to place their assets and partner physicians in the capable hands is very big. I mean the platform at SCD, for example, in the way that the folks in SCD developed that platform and prime it for the next-generation of growth in terms of a more mature and full operating platform, like we have at USPI is a very nice way to transition and kind of take the initial success and create a next-generation of success from that. And remember, these are very high-performing centers, just like USPI has very high-performing centers. I always remind people, we're talking about businesses that run in the 30-plus percent margin range, which is very different than some of the comparables that you see out there. And so we're looking for high-quality assets. We're also building high-quality assets. So our de novo pipeline hasn't been stronger. And in addition, we see a lot of opportunities for tuck-ins to continue in the markets that are our priorities. So that development pipeline looks good. So we're very optimistic about 2021 from that standpoint. But of course, we're selectively spending time making sure we understand the larger platforms out there, if, in fact, any of them: a, provide a good value; and b, are comparable and the kind of quality that USPI has accumulated in its asset base.

Great. When you look at your ambulatory offering today, are there specialties that you would like to add to the portfolio or further penetrate? And how do you plan on executing that?

Yes. One of the nice things about USPI is that it's already a very strong multi-specialty platform. So the foundation of USPI tends to be larger ambulatory surgery centers, 4 to 6 operating rooms, sometimes, of course, bigger. But the foundation is multi-specialty. So we're very comfortable in a multi-specialty environment. Now obviously, SCD adds a lot more to our sort of 1 to 2 specialty mix from that standpoint. In both asset classes, the ability to grow bone, joint, spine, sort of that range of procedures that's moving into outpatient is a very large growth opportunity. We're obviously already the largest in that segment but we see even more opportunity from that standpoint. We see more opportunity to expand in areas that are still coming, cardiovascular, for example, specialty vascular and the foundation of GI, ENT, pain management and a lot of those other areas continue to have expansion opportunities, especially as the population ages. So we kind of focus our time across some of those specialties, ones that we're very familiar with and growing in a multi-specialty environment. And then, in particular, the bone and joint and spine area that we're very focused on maintaining a leadership position in.

All right. With that, we're out of time. So let's end it there. Thanks again to everyone for joining, and please enjoy the rest of the conference.

Thank you very much.

Thank you.

Thank you.