Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Well, thank you, everyone. Thank you for joining us at our Leveraged Finance Conference -- 2021 Leveraged Finance Conference. With our next presentation, I'm happy to host the management team from Tenet Healthcare Corporation. I think we all have known for many years. As a kick out from the team, we have Ron Rittenmeyer, Executive Chairman; Saum Sutaria, Chief Executive Officer, congratulations on the new role, Saum; Dan Cancelmi, Executive Vice President and Chief Financial Officer; Owen Morris, Treasurer; and Regina Nethery, from Investor Relations. I'm going to kick it back to the team. Dan's going to give us some quick upfront remarks, and then Ron's going to kind of run us through -- give us some recent review of the operations, third quarter and so on and so forth, and then we'll turn it over to Q&A. So go ahead, Dan, I'll turn it over to you.

Great. Thank you, Larry, and good morning, everyone. Before we begin, I want to remind listeners that we'll be making some forward-looking statements as part of today's presentation. Investors should take note of the cautionary statement slide included in our most recent earnings release presentation that was dated on October 20, and that is available on the Investor Relations page of our website. We also suggest listeners review the risk factors discussed in our most recent Form 10-K and other filings with the SEC. With that, I'll turn it over to Ron.

Thanks, Dan. Good morning. We appreciate everybody joining us this morning. I was saying to Dan earlier that it feels funny, Larry, without being in a room with an enormously long table and a lot of kitchen noise and people busting through the doors trying to have a conversation. It's almost too quiet. I thought we should bring some people in just to make noise outside. So there we felt more at home as these conferences have always gone but always were a lot of fun and enjoyable. But we appreciate everybody joining virtually. I would just make a few brief comments. Consistent with what I believe is a strategy we started 4 years ago, the company continues down the path very much aligned with the strategy of continuing to sharpen our hospital portfolio. And as you can see by just the performance within the Hospital segment, we've really now honed in on, for the most part, those markets where we really have a strong position and a lot of opportunity for growth and continued opportunity to really outperform. So that part of the strategy has worked very, very well. And most recently, we disposed of those 5 units in Miami, but we kept Palm Beach, of course, in our very strong operation in the middle of Florida. We also said that the second part of the leg of the strategy was to expand as rapidly as possible on the Ambulatory segment. As you can see in this last year, roughly as we come up on December, we have done some extraordinary deals relative to our Ambulatory segment. In addition to the SCD portfolios, which we have really I think, done a great job with at a very good multiple. We've also just added other units. So now we are really poised to expand in the markets that we've already been in and enter new markets as well as just overall built of scale. And we see this over the next couple of years as a major part of the growth story, and obviously, the earnings story, which really puts the Ambulatory segment in a much stronger position from an earnings standpoint. So both our Hospital segment and our Ambulatory segment have really changed their profile in terms of their earning contribution. And then let's not forget Conifer. I know that we -- Conifer -- in some respects, people think that we could have moved faster, done other things. But when we started out, we were in a much different place when you think back to that JPMorgan presentation in December -- I mean, in January of 2018, when we first mentioned that we were thinking of doing something with Conifer in reaction to the investors who all felt that we should monetize it. And we went out and looked at all that and clearly determined that the monetization that many people thought we would get was not realistic because people didn't want to pay that level. And we took the position that we were going to continue to look for opportunities, but we didn't treat it like a dead asset waiting for sale. And when you look at the margin improvement and the cash improvement and the overall stability of Conifer, it has really been significant. So we're very proud of that asset. And we're still on track. I mean don't misread this. We're still on track to look at spinning it out. But as you know, I mean, we're going to base that on the market and what's going on in the market and as well as what's going on in the business and any other things that may come up. Because we're more in the position now where we can make these decisions in a more conscious manner versus having to make them because of some pressure either from an equity or debt standpoint. Clearly, our equity has done very, very well. And when you look at our leverage, we have dropped down significantly. I mean, when you think back to that first conference when we were talking 6.5 roughly -- 6.4x, we're in a totally different place. And I remember there were many people doubting that. And I got to tell you, I was worried a bit myself, but being new at it. But realistically, we've delivered against the targets that we've set. So I feel that we've really moved very strongly against the methodologies we set, and we're going to continue down that path. There are no great strategic changes overall to what we're doing. And we've built a much stronger team, a much stronger leadership throughout the organization. We've changed out a lot of people. And the addition of Saum as CEO, which we just did in September, I think, is another signal to the stability of the company, is having a couple of years to transition this in a way that continues to build on the partnership he and I built. And with Dan and the team, I think, also gets underneath the fact that there's no sudden moves in the marketplace that should shake the foundation of the company. We're still going to go after the same things we've gone in. So with that, everybody that saw our third quarter earnings, there's not much more to add to that. And I mean, it was a great quarter, and we're going to continue down the path. But I have nothing, I think, further to add at this point. I'll hand it off to Saum to see if he has any brief comments.

Let's jump into Q&A. I think that we'll probably get to the more specifics at that point in.

Okay. Okay, Larry, ball's in your court.

Thanks, Ron and Dan, for the introductory comments. Ron, it really gets to -- my first question really gets to kind of following on your commentary. You had a very strong third quarter rate guidance in an environment where you saw yet another COVID peak, if you will. Can you just discuss how your model today as -- especially as it as it relates to COVID, we're concerned about potentially the next, I'll call it, wave here. I mean you've proved that you can perform through. I mean, what have you learned kind of over the last 18 months about how you address this pandemic and be successful in an environment relative to where we were, call it, 4 or 5 quarters ago.

Right. That's a great question, one of the benefits of this job is the Executive Chairman is I don't have to do as much work. So I hand that question off to Saum and Dan to answer. I kind of look at the bigger picture now, and curiously, Saum, do you want to take that?

Yes. No, Larry. I mean, look, first of all, I would say that with every successive COVID surge, we learned more about how to take care of the patients who have COVID, managed them effectively to better and better outcomes but also maintain access for the rest of the community for all the services that we provide. We've been fortunate in the sense that the way we have chosen to manage our operations and staffing during COVID surges have allowed us to keep our facilities, by and large, completely open for elective and other procedures unless there was a regulatory mandate not to do so. And there have been multiple pillars to that. The foundational question that you're asking, though, at this point in our operation is grounded, whether it's USPI or the Hospitals or physician business in an analytical framework that we use to deliver more real-time insights to our operators to make better decisions. I mean our philosophy was that many industries have moved in this direction. We began a process in 2018 upon Ron's arrival of putting that foundation in. There was an investment to do so. The pandemic forced an acceleration of that, in particular with respect to the way in which we manage our labor, our length of stay, our dedication of resources, our availability of PPE. And that acceleration has frankly helped us coming out of the pandemic surges to manage our operations better. Look, I would tell you, we're not satisfied with the level of contract labor that we're using. We've just found ways to mitigate it. We're not satisfied with where we see our recovery in terms of volumes. But by keeping capacity open, we've reached levels comparable to 2019 or in the 90s-plus in terms of 2019 and above that, above 2019 at USPI. Again, just on the basis of real-time allocation and reallocation of resources. Fundamentally, it's working. The company as an operating company and making sure that we have the ability to share the insights as well as the resources across the broader network.

Okay. Great. Along those lines as it relates to the Hospital segment. That's where you had a couple of transactions embedded in there, but nonetheless, your margin performance has been tremendous year-over-year sequentially. Your thoughts on the sustainability of the margin profile, particularly in the Hospital assets, the Hospital division?

Yes. We've -- Larry, so one thing we've addressed before is that one of the things we did at the beginning of the pandemic in addition to putting in place a track of experts in the company to manage COVID was we realized at the time, and if you think back to March of 2020, we had no idea -- the world had no idea what was going to happen vis-a-vis COVID. We took the perspective that both from the standpoint of planning for volume recovery and mitigating expense inflation that we would need to put capabilities in place very early on because at some point, COVID would either disappear or be reduced to the point where it wasn't clear all of the demand would come back in a short period of time. And therefore, expense management and inflation management was very important. So in that regards, there have been a number of things that we had kicked off at that point, including I've already described kind of our enhanced analytical approach to managing our labor, our length of stay. We undertook a process of comprehensively examining all of our purchase services contracts in the company, both at the corporate office and the field, we conducted and executed on an IT cost savings initiative to streamline our operating environment. And obviously, we've discussed that we stood up during the pandemic and have successfully transitioned a number of functions, in particular, in Dan's area into our global business center in Manila, which is actually working extraordinarily well for us. So look, our view is that it is critical to the future of the Hospital segment to continue to be cost competitive in order to appropriately manage our margins going forward. Many of the cost improvements that we've taken and continue to take will be permanent, and we continue to look for new opportunities. So I feel very good about the fact that the foundation, again, in the expense management area, which helps with the margin performance is not a transitory effect of COVID.

Okay. So you're saying some of those rationalization costs at that point in time getting into that 1Q -- 2Q of '20 are actually sustainable longer term, some of the things you learned coming out of that.

That's right.

One thing I'd add to that is in addition to all the various actions taken from a cost management perspective, the focus of Ron and Saum and the team on driving growth in the higher acuity, more complex cases, coupled with our contracting position from a payer perspective has also been a key driver. Our revenue yield has been a key driver of margin improvement as well.

Okay. I mean, is it fair to -- I'm sure it's a question you're getting quite frequently now. Just to follow up on that, your thoughts on you've been able to seemly kind of pull the line on and do a good job of managing contract labor. Can you just speak to labor costs generally both organically and on the contract side? And maybe it's a touch on supply chain as well in terms of presenting any incremental challenges as we get into this kind of potentially another wave of the pandemic?

Yes, sure. I mean, a couple of things. First of all, the labor shortages in the market that have occurred in particular, in the Nursing segment have largely been driven initially by COVID spikes that created demand in particular geographies that outstrip the supply. That resulted in what has become now a more institutionalized travel nursing industry contract labor, as you call it, than we've seen in the past. And it's going to take some stabilization of that local demand outstripping supply for the market to normalize. We're seeing that a little bit right now, but it's not ideal by any stretch of the imagination. So the concept that one is going to solve their workforce challenges purely through utilizing contract labor is probably a failing strategy. I mean we're working extensively on local recruitment, retention, in particular, diversification of the sources of nurses. We have our own -- we happen to have and now have bolstered our own Tenet Resource Agency. It existed prepandemic that rather than 4-week assignments in the traditional contract labor sense. So we're working on all of those things. The inflation pressure is real on a net basis. Again, part of managing the inflation is also managing the demand, which is why I keep reiterating our work in length of stay management because appropriate patient length of stay is good for their quality and safety, but it's also a reduction in the demand for labor. The USPI environment has more contract labor than we would like as well, but it's -- in the scheme of things relative to the Hospital segments, miniscule frankly. And it's a very different work environment. The work environment makes it more amenable to retain the nurses that are there. So we haven't seen a tremendous amount of disruption in that environment.

Right, from a labor perspective. Okay. But do you feel you can -- I mean contract labor, is that environment becoming even more and more challenging in terms of retaining staff?

Well, again, I would say that if anything, right now, we see the contract labor rates mitigating a bit from their peaks, if you look at the late summer to where we are now. And look, I have no idea how to forecast whether or not this new COVID variant is going to have an impact or not. But what I would say is that at least our experience right now is that the contract labor environment is loosening up a little bit. The only difference, and I've pointed this out before is that in prior COVID spikes, if you go back into 2020, the contract labor environment would normalize or mostly normalize when the COVID spike went away. Right now, the COVID spike that we're experiencing, we're probably running 1/3 of our peak in the summer in terms of COVID cases, but the contract labor environment has not normalized. That's a different phenomenon, right? Obviously, we're hopeful that a number of nurses who've exited the workplace have done so temporarily. And we're engaged in a whole bunch of outreach mechanisms to look at opportunities to bring them back into the workplace. Many of them are essentially saying, we're not coming back until the new year given our earnings this year through contract travel engagements, and that's fine. We just want to be in a position to engage them early and give them options when they look for work in the new year.

Okay. Great. Maybe flipping over to USPI. Thank you for that commentary, Saum. You're quick obviously 2 transactions, 2 most recent transactions. You're kind of moving your -- aggressively towards your 50-50 goal by the end of '23. Can you talk to -- I guess I'm asking the question, can you talk to the integration of the 2 most recent transactions and some of the opportunities that it will present longer term? And I guess the question kind of resides for me is if you -- if I were to ask beyond 2023, does that percentage in theory continue to grow? Is the basic strategy that you've deployed today just continued to expand from there if I were to look beyond 2023?

Yes. So let me make a couple of comments about that. And then I'm going to spend a moment just kind of outlining the very -- just the basic high-level terms and benefits of the transactions that we've undertaken. First of all, the strategy doesn't change. We're not prepared to talk about a mix beyond 50-50 at this point. But let me reiterate that the strategy won't change. The Ambulatory Surgery segment in this country is still extraordinarily fragmented. And even after completion of these transactions, we and other organized companies will remain a small minority of the overall and total market. There's plenty of runway for this strategy. What's great about that is that given that USPI is demonstrably -- that not only the best acquirer and integrator but also delivers the most synergies. We tend to be the physicians partner of choice in these joint venture assets. The reason I don't want to comment beyond the 50-50 is, remember, we're also making investments in the Hospital segment. We're building a hospital in South Carolina, where we've announced plans in San Antonio, and we have other plans that we're looking at selectively where there are extensions of our strongest markets. And so we're just not prepared to look beyond 50-50 at this point. And the 2 businesses are reasonably intertwined. The transaction of -- between Tenet, USPI and SCD, when you look at it in totality, brought together the 2 most attractive and certainly the highest-margin portfolios in the ASC industry. It also positioned us to take USPI, which was the leader in orthopedics in bone and joint care and really solidify that. I mean that is the next 5 to 7 years of growth in this industry and we've solidified that position. It's not just SCD, but also the Compass transaction was primarily a musculoskeletal based transaction. So as you point out, in December of 2020, we -- in January of 2021, we acquired 49 centers originally. And based upon the fact that they were successfully integrating and the physicians were reporting a high degree of satisfaction with USPI. We worked on this next transaction, which brought 92 more centers into the fold. 65, which you can think of as mature like centers, like the 49 centers and 27, which are just ramping up or will ramp up at that point. So you're talking about a portfolio that approaches almost -- it's a little bit over 140 centers, assuming that we actually close fully the transaction here with SCD. It also took SCD as a development engine, which was terrific off the market and aligned it with USPI in a 5-year exclusive agreement. So if you think about it this way, USPI typically, in a given year, will bring on 15 to 20 centers through its own development team. You add about 10 a year through the SCD process, which tends to be different. We don't tend to overlap and compete. We don't anticipate cannibalization. We'll have a nice engine for growth going forward over the next 5 years. Ultimately, the transactions ought to result in 7.5x or less effective multiple on EBITDA minus NCI. And if you just think about this aggregate number, this portfolio is going to deliver greater than $350 million in EBITDA minus NCI when ramped up in total. I mean that is a stunning number in comparison to any comparable out there, and that's just the SCD transaction itself, let alone USPI, which is a much bigger entity. So again, we're very excited about the future prospects for this leading portfolio regardless of the work we do to continue to improve and invest in our Hospital segment.

It's important to also note the Hospital segment will continue to improve given what we've already done with it and how we've modified interim and gotten much more focus with it.

And to that extent, does -- you're saying fully ramped through $100-plus million EBITDA. Thoughts on kind of when timing -- what is, by definition, fully ramped? Is there kind of -- is it a 12 months? 3 years? I mean, is there realistically timing to think about around that?

Larry, it would be about 3 -- roughly 3 years or so.

From the numbers in the presentation, getting that $300 million, you're talking about a 3-year time frame, okay.

Doesn't mean we won't push it for sooner, but I think comfortably, we're comfortable with 3 years.

Okay. I have 2 questions coming in. I know we've only have a couple more minutes here. Two questions coming in. Dan, I think this one is to you. We touched on the beginning when Ron had joined the profiles of north of 6. Today, obviously vastly improved. Your thoughts on kind of the rating agencies and it seems like I said, your numbers and your leverage profile seems to be obviously does not reflective of a CCC unsecured rating.

We agree.

Yes, we agree with that.

We don't disagree at all.

Yes, thoughts on agency discussions?

Yes. We've been having conversations quite extensively with the rating agencies. Obviously, our leverage has improved dramatically. If you go back to third quarter of 2017, we were above 6x, most recent quarter, we're in 3.5x. And the amount of debt that we've retired just this year alone, we've retired $1.6 billion of debt this year. So it's going to save us over $80 million of interest.

In addition to everything else we've done.

That's right. And listen, it's getting the attention of the agencies. And we keep in contact with them routinely going through the math, going through the strategies. And so we're optimistic that as long as we continue to drive performance and continue to demonstrate improved free cash flow generation, the rating changes will come. I think people underappreciate, this year, we're projecting about $1.3 billion of free cash flow before we pay back some of the Medicare advances and the payroll taxes that were deferred. That's about $700 million. That cash is already set aside, it's on the balance sheet. So a substantial improvement in free cash flow generation, continued overall performance improvement. We think the rating changes will be there.

Okay, great.

Similar to the multiple issue, Larry. From an equity standpoint, I mean, we're still get multiples of a hospital company, when in reality, we're turning very quickly into a different model that maybe the market is not ready for and -- or doesn't understand. But we -- we're not just a hospital company. So when you see some of our -- when you look at our multiple, we're frustrated because no one wants to break through the fact that the Ambulatory segment now is so strong and even Conifer. I mean no matter how you measure it, Conifer is a hell of a contributor. And so those balances, it's hard to get rid of history and opinions that are based on, well, 5 years ago, we still have people say that to me. Well, I remember before you came, this was blah, blah, blah, I get that, but it's kind of hard to live back in 5 years. So anyway.

I think the other thing, Larry, is -- I think the agencies could be somewhat cautious in terms of -- given the hospital environment, because of the pandemic, and not knowing exactly how it's going to unfold over the next several quarters. So we'll see. Obviously, we just got to keep doing what we're doing.

When you think about a number of times now we've gone through the pandemic rerun. You would think by now, we've built a little credibility in terms of we never say it's going to be easy, but we're generally ready for it so.

Yes. Ron, just one last question. This is more of my own question here, which I think you raised a great point. What do you think is -- if I was to ask you what is the one key hurdle to getting the market to move you away from that hospital multiple into that, call it, surgery center, outpatient multiple that you see from some of the...

I guess if I really knew that answer, I'd be probably resting right now on the beach front. But the reality is, I think it's just the awareness and it's kind of shaking off 4 or 5 years ago. You're going to get current with where we are. I mean I think we've proven that everything we've said we've delivered. We've been very transparent about everything. I'm fine arguing the finer points of whatever. But at the end of the day, you got to kind of go with what is our performance dictated. And what do our trends dictate. And even when debt was -- even go back 2.5 years, people were jacked up about whether that's still too high. Worried about what that was trading at. I mean I'm not sure who was worried because certainly, our trading levels on the debt side have been very strong. And the -- you just got to realize we're not your father's Oldsmobile, right? I mean we've changed. And there's -- we've got an entire new management team, an entire new structure in terms of how we approach stuff. We've really eliminated a lot of the past. And it doesn't mean there still isn't hangovers. There still isn't issues but it's kind of an awareness and a realization. And then don't get me wrong, there aren't some people who get that. But I think that the industry tends to lag kind of far behind a bit. So I don't mean that negatively. I mean it's just kind of a fact so.

Yes. Okay. Well, thank you.

I hope that helps.

Yes, it does. It's very helpful. But thank you for the presentation as a whole is very helpful. Dan, Ron and Saum. And when I think you're there. I can't quite see you. And Regina, thanks for joining us always at the conference. And a year from now, we'll be having back to our normal structure. I would just say that.

Hopefully, I look forward to the noise and you buying dinner. Thank you.

Thanks, everyone. Thanks a lot. Appreciate it.

Thank you, everybody. Thank you. Bye-bye.