Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the JPMorgan Healthcare Conference. My name is James [indiscernible], and I'm associate on the health care investment [indiscernible] here at JPM. We got Dr. Sutaria from Tenet [indiscernible] here to talk to you today [indiscernible] to share about the company's story. So I'll hand it over now.

Thank you, James. It's a pleasure to be here today. Before we get started, let me direct you to our cautionary language regarding forward-looking statements on Slide 2. Please take a moment to read this. Over the last 4 years, Tenet Healthcare has transformed into a different company in every aspect of our business. Today, I am pleased to review the remarkable results of the transformation that we began in early 2018, outline our next phase of growth and describe how we expect to fuel our ongoing success. In 2018, we established an ambitious transformation. And while it was not part of the original plan, we executed this transformation while navigating a global pandemic. Let's review what's been achieved on Slide 4. First, we have built a growth company, which is the foundation of the plant. We divested 5 hospital markets where Tenet was not the best natural owner. These transactions resulted in proceeds in excess of $1.7 billion, almost 17x the adjusted EBITDA. At the same time, we intentionally invested to become the uncontested leader in ambulatory surgery. Second, we restructured operations to be significantly more efficient and effective. Simply put, we aspire to be the most disciplined and analytically advanced operator in each of our business segments. Third, we have materially improved quality, safety and compliance, utilizing consistent, measurable outcomes. Finally, we are a resilient system of services. Our enterprise has generated consistent earnings, significantly increased free cash flow, lowered leverage, and those things have proven to be very reliable quarter after quarter, year after year. Underpinning this has been an overhaul in our governance and management talent with a team motivated to take Tenet to new levels. Our significantly improved performance since the fourth quarter of 2017 reflects the commitment of this team we've built. Compared to 2017, we anticipate our year-end 2021 results to show top line revenue growth despite us divesting $2.5 million in revenue, in addition to the headwinds created by COVID. We anticipate EBITDA growth of 35% and to improve our EBITDA margin by 400 basis points on a nearly $20 billion revenue platform. We also expect to show increased free cash flow of about [ 160% ] or $800 million. And additionally, as part of the -- at the end of the third quarter in '21, we had reduced our leverage by about 40% compared to year-end 2017. Tenet is today a fundamentally different and attractive investable company with, as I already mentioned, a clear objective to be the most disciplined and analytically advanced operator. As you can see on Slide 6, the shift in our strategic focus has been central to what we have achieved. Our Hospital portfolio is now more focused on higher acuity care and has a more disciplined level of efficiency. We aspire to be the best provider of emergent and elective high acuity services in our markets, with excellent doctors and cutting-edge clinical technology. The strength in our hospitals is reflected by over 25% EBITDA growth in same-hospital operations since 2017. And while USPI was a part of Tenet back in 2017, the commitment we drove as part of the transformation was to scale it, scale it into the undisputed leader in ambulatory surgery. This has been the centerpiece of our new strategy. At this conference in 2021, we outlined a bold goal to reach 50% of the company's EBITDA coming from USPI. We have made consistent progress in this regard, and importantly have done so while improving our Hospital and Conifer segments. We are also modernizing Conifer with new technology, an offshoring strategy and a focus on point solutions, which is taking hold in the market. The results so far is 1,000 basis point margin expansion, proving that Conifer is truly a productive asset of the company and far from the assets that some assume should be divested in a fire sale back in 2017. When you look at our map of care delivery locations, it reflects our strategy. We are focused on markets where we can provide a strong value to payers and consumers. We have positions in these markets in which we can compete effectively. We can provide consumers with an access to a continuous care between USPI and our hospitals or our health system partners. And while we remain open to opportunistic ideas on further portfolio change, we are competing effectively where we are today. The USPI platform is our gem for the future. The organization has scaled to a leading position in a market that is still fragmented with a lot of runway for growth. USPI's physician relationships, development strategy and operating platform are all top notch. In fact, the USPI story is nicely summarized by the 6 differentiators that you see on Slide 8. In addition, the ability of Tenet to deliver synergies makes USPI an outstanding growth assets with margin performance and the ability to deliver returns to joint venture partners that significantly outperform available industry costs. In short, the combination of Tenet and USPI is a significant driver of value. While the very successful initial SCD deal has been well covered before, let me dive deeper into the recent transaction. We folded essentially the remainder of SCD into USPI and established a creative development partnership for the future. The recent transaction included 86 muscular [indiscernible] centers that will deliver very strong financials. We expect approximately $675 million in net revenue and approximately and affirming $275 million in EBITDA once the centers are all fully ramped. Based on experience from the initial transaction, we expect to deliver $45 million in fully ramped synergies, which is around 16% of EBITDA. This will allow us to dramatically reduce the effective acquisition multiple over time. This transaction also included a unique exclusive development partnership for 5 years with a minimum target of 50 centers with SCD's principles. This complements USPI's highly successful development team to expand our reach and ability to grow inorganically. We anticipate that the portfolio of 135 tenders from the 2 SCD transactions completed, will have approximately $540 million in EBITDA and $360 million in EBITDA minus NCI at run rate. This reflects an attractive EBITDA margin of over 40% in a portfolio that we acquired -- that came essentially debt-free at the center level. The SCD deal alone with only $2.5 billion approximately of capital invested is expected to deliver more earnings and a much stronger EBITDA margin as just a small portion of USPI than other publicly traded ambulatory surgery comps. It is clear by any measure that the current market value of the stronger and more diversified Tenet remains significantly below its potential on a sum of the parts basis. We are focused on execution to deliver this added value to our shareholders. This is centered around 4 principles, which are highlighted for you on Slide 10. Tenet will stand for high-quality specialty care in the community. We will continually enhance our services to meet the needs of our communities. This also includes enhancing Conifer services for its health care clients. Tenet will build upon the distinctive ambulatory surgery platform that is USPI. We will utilize USPI's unique capabilities to set the bar for providing excellent high-touch service in ambulatory care settings. And we will execute the plan to grow and capture earnings from our recent transactions. Tenet will be a leader in developing new services in lower-cost settings. We are already a leader in value-based care with our ambulatory platform with the value delivered to private and government payers. We will continue to introduce high acuity services into the most clinically appropriate lower-cost settings, whether that be our acute care hospitals, ASCs or physician practices. And finally, Tenet will foster an ecosystem for leading physicians. We will continue to attract and retain locally, regionally and nationally recognized physician with a shared commitment to excellence in compliance, quality, safety and patient experience. Over the next few slides, let me bring this to life with some real-life examples and how we'll translate these 4 principles into actions. In El Paso, we have [ raised ] significant investment to expand capacity at The Hospitals of Providence East Campus to service the growing demand for stroke, women's health, surgical services and trauma services. In Palm Beach, as part of a multimillion dollar investment in Specialty Care, Delray Medical Center's Comprehensive Neurosciences Center became the first in the region to offer magnetic resonance-guided focused ultrasound therapy to treat essential tremors. The Children's Hospital of Michigan recently opened a fetal care center to increase access for prenatal diagnosis of congenital anomalies for families across the Midwest. We will continue to make significant investments across our hospital portfolio to offer more convenient access to high-quality, high acuity services in the community. We're also making a number of larger investments in high-growth attractive markets to service the health care demand. In South Carolina, we are building a 100-bed hospital in Fort Mill, which we expect to open in August of this year. The campus will also include a medical office building with physicians and diagnostics. In San Antonio, we will break ground this year on a new health care campus in Westover Hills, inclusive of a hospital, ambulatory surgery center and medical office space. In Phoenix, we will break ground this year on a new health care campus in Buckeye, starting with the medical office building and an ASC with a hospital to follow shortly thereafter. These developments will be focused on high acuity specialties tailored to service each community's unique needs and designed with environmental sustainability in mind. We will be focused on making more strategic investments coordinating between our hospital systems and USPI to expand the service areas that we care for. We will continue to build upon USPI's national platform and exceptional reputation as shown on Slide 13. Ambulatory acquisitions continue to offer attractive returns, and we plan to deploy at least $200 million in capital in 2022. Our track record demonstrates that we are the partner of choice for independent physicians looking to unlock future growth in their centers. We have a robust and growing pipeline. We also plan to syndicate 15 to 20 new de novo developments in 2022. As we've discussed, the SCD partnership provides a leading pipeline in musculoskeletal de novos, which complements USPI's distinctive experience in multi-specialty, 2-way and 3-way de novos with over 50 health system partners. In addition, attracting high-quality physicians to deliver organic growth continues to be a differentiated management capability at USPI. In 2021, we added over 3,400 physicians and started over 80 higher acuity service lines, including total joints and robotics in our centers. We will build upon that in 2022. We believe USPI's portfolio can reach 575 to 600 surgical facilities by the end of 2025. We have reinvested in our development capabilities to achieve this goal. Additionally, we have a thoughtful strategy that balances acquisitions and de novo developments, and we have proven this works. Turning our attention to Conifer on Slide 15. Our new leadership team has revamped commercialization efforts and recruited high-performing sales talent to complement stronger service offerings. This has resulted in new hospital revenue cycle management clients, including Providence for mid-cycle services and Steward in end-to-end services. We have maintained a high renewal rate for hospital and physician revenue cycle services driven by our high client satisfaction. Additionally, Conifer's value-based care business continues to sign up new clients for their population health and financial risk management services. In 2022, we have a growing pipeline of new client opportunities as well as expansion opportunities with existing clients. We have established and set clear expectations for a high-performance culture at Tenet. We believe in decision-making and actions guided by information and insights. This empowers our people regardless of their role or tenure to engage in improving our operations with measurable impact. Our commitment to diversity is an active part of how we do business. We believe that our workforce must represent the community it serves, and we actively support that goal in every aspect of our human resources plan. We have embraced automation and globalization. This includes leveraging artificial intelligence in Conifer Solutions, delivering automated real-time dashboards to our operators and continuing to scale our global business center in the Philippines, which now has about 2,100 employees, providing 24/7 support to all of our business segments and some of our clients. Lastly, our corporate governance remains strong. We believe that sound corporate governance promotes sustainable, transparent and reliable processes that helped us achieve overall business effectives for the Tenet enterprise. We do not expect any disruption or change in this approach going forward. This operating model and the continued improvement in talent remains fundamental to delivering future results. Today's presentation reinforces our new strategic focus from early 2018. We remain committed to evolving our portfolio EBITDA mix as shown on Slide 17. At the end of 2023, we expect USPI to deliver -- to achieve and deliver approximately 50% of the mix, hospitals to be approximately 39% and Conifer to be approximately 11% on a pro forma basis. This furthers the question, which some analysts have raised, why does the multiple not reflect the mix? Stepping back and considering the external environment, it is important to note that all of our outstanding long-term debt has a fixed rate of interest and the maturity dates of our notes are staggered from 2023 through 2031. We believe that our current capital structure minimizes the near-term impact of potentially higher interest rates, and the staggered maturities of our debt allow us to refinance or retire our debt over time. Additionally, our USPI Ambulatory business and Conifer Revenue Cycle businesses, which have grown substantially since 2017, are less susceptible to material impact from a rising interest rate environment due to their payer or patient mix, strong cash flows, including light CapEx requirements. These businesses are also less susceptible to the inflationary pressures impacting labor, external spend and capital. In this environment, we believe the diversification of our business protects and will build significant value for Tenet shareholders. Tenet is an attractive and investable growth company. We are more capital efficient, we produce greater free cash flow, we are committed to debt reduction and our business is aligned with the highest growth areas of the future. We are energized by the opportunities ahead, and I am confident in our ability to continue our positive trajectory. Thank you all for joining us today. I welcome our Executive Chairman, Ron Rittenmeyer; and our Chief Financial Officer, Dan Cancelmi, as we turn to Q&A.

Great. Thanks so much, Dr. Sutaria. As a reminder for everyone tuning in, I want to call your attention to the blue button on your screen. That's where you'll submit any questions that you may have. We have 1 question already submitted. "what actions does the company considering to unlock shareholder value?"

Did you hear that? Go ahead.

Yes, what actions are...

We couldn't hear you.

Shareholder value.

Well, I think, I mean, we've already done it.

Yes. I mean, a number of things. I'll start off on this. Clearly, we've been focused on improving the operational performance of the company and driving improved earnings across all of our business segments. It has resulted in more consistent operating results from quarter-to-quarter. It has resulted in a significant increase in free cash flow generation. It has resulted in a significant reduction in leverage. We've continued to expand and grow a very strong Ambulatory segment, and we will continue to do that. But our 2 most recent transactions, very large transactions, as Saum pointed out in his remarks demonstrate that. Those 2 transactions -- the size of those transactions alone is very significant. In terms of other steps that have taken in terms of governance, as Saum addressed the governance actions that have been taken. In many respects, since Ron came on board as CEO at the end of 2017. So we think we've taken a number of steps to improve value for shareholders. We're going to continue to do that. And not even mention some of the various operational improvement initiatives we embarked on over the past 4 years, including a $450 million plus cost efficiency program that we executed.

I mean, the only thing I would add to that is that if you think about the opportunities that exist from the deals that we completed and the continued expansion of the USPI platform, and you've got to understand how intertwined it is with Tenet in the ability to bring synergies. Together, that makes an incredibly unique platform in a very fragmented market for shareholder value creation. And our ability to deliver on that and execute on what we've already done ought to create tremendous value. The reality is, of course, we're looking and stepping back and saying, in addition to everything we've done to build up that inorganic pipeline on our own, the partnership now with SCD, what are the other things that we can do to continue to grow and develop in that segment? I was very clear about the use of the words in terms of our belief and our leadership position there. We intend to extend that, right? I mean that is our fundamental priority in what we do. We're just uniquely positioned to do it because of the way Tenet and USPI are, in many ways, intertwined.

Thanks so much, Dr. Sutaria, for their response. We've gotten a few questions that have come through about Omicron, the latest on the labor situation and the impact on the business, both from the perspective of higher costs and labor availability.

And so Omicron is certainly keeping us and everybody busy right now. I mean, the case volumes are increasing. Dan will talk about some specifics in just a second. But let me just try to diffuse a bit of story. Obviously, we reaffirm guidance for the year today. We have been clear all along through the last 7 quarters essentially that we've been dealing with COVID in one way or another that we're very aware and cognizant of the pressures that COVID creates. Its capacity, its supply cost, and now, of course, dominating seen for the last 12 months or so has been labor costs. We have managed through that every quarter. We have adjusted our capacity, our staffing, our productivity, our length of stay. We've had analytics that have underpinned that, that help our hospitals manage on a daily basis. And we will manage through this as well and are managing through it at the same time. And so I appreciate the fact that it's a challenging environment. And more than anything, we're grateful to our clinical and hospital staff, nurses and all other clinical staff for the work that they're doing. But we will continue to manage through this until this labor market normalizes.

Yes. I mean, that's right, Saum. First of all, our caregivers have has been phenomenal through this entire process. And listen, we've had a lot of conversations about this. We've managed through these surges before. Not surprisingly, our current COVID cases levels are higher than when we would have last discussed that, latter part of November. I would tell you just some facts here to point out. In terms of our COVID admissions, as a percentage of our total admissions in the fourth quarter, they were roughly 7% of our total admissions in the quarter, lower than what they were in the third quarter when they were about 10%. We currently have about 2,000 inpatient COVID cases across the system, higher. But listen, we're managing through it. I think the fact that our announcement this morning that we will meet or exceed consensus, which is $300 million, a little over, I think, demonstrates that we can manage through these challenges.

Excellent answer. That's very helpful color. Another question, a couple of questions we've gotten that touching on the outpatient ASC market. Are you seeing any increased competition from peers for assets impacting multiples? And does this change your strategy in terms of geographies you are focusing on for balancing tuck-in versus platform acquisitions?

Yes. Let me make a couple of comments there. I mean, first of all, one of the benefits of the transactions that we've engaged in with SCD is it's expanded. In fact, the number of markets in which USPI exist. USPI was pretty broad-based around the country, but it's allowed us to expand into other markets where USPI wasn't present before. Maryland is a good example based upon USPI going from 0 into -- well into the double digits now in that market. So look, we see opportunity and partially, again, with the ability of Tenet to work with USPI and the health system partners that we have to operate virtually anywhere that we want to in the U.S. from the USPI standpoint. We don't find individual markets are limiting. It's more related to the business opportunities that we find and/or the physicians that we work with to look at syndicating and standing up de novos from that standpoint. The other thing you have to think about from an expansion standpoint is that, remember, we're -- we may be the largest ASC company. We're by far the largest in the bone and joint orthopedic space at this point, right? There are more physicians in that space partnered with USPI at this point than many other entities combined. And there's a reason for that because of the ability to, in a focused way, take the most rapidly growing part of the segment and build that. And similarly, we have development initiatives for what might become the next generation of areas that grow and develop an ambulatory surgery over the next decade, spine, cardiovascular, et cetera. So the geographic expansion is one approach, obviously, to think about. But the diversification of services into the ambulatory setting is another way to grow. And in many of the USPI centers, we can do that in existing centers without necessarily deploying a lot of capital. And at the same time, we have the ability to build new centers with these diversified services to grow the asset base. So when you look at it from that standpoint, we don't worry as much specifically about competition. We worry more about the breadth and depth of our relationships in the markets we're in, but also with the specialties we want to partner with. And that's really our main competition internally, how are we doing in terms of building the breadth and depth of those relationships.

The only other thing I'd add to that in terms of an impact on pricing or multiples, yes, I think it's pretty clear the last 2 SCD transactions, as we've disclosed when we announced those transactions, the EBITDA minus NCI multiple on a fully ramped basis is very, very attractive. It's in the 7 so we're very pleased with the economics associated with those 2 particular transactions.

And we are playing long ball, right? I mean that's part of the game.

Great. Another question regarding how you think about government regulations, regarding [indiscernible], hospital and groups, any kind of along those lines?

Well, I mean, first of all, government regulation in this area exists for all segments of our business. Obviously, government regulation is higher and necessarily so in the hospital segment than, say, for example, the Conifer business, which is a B2B outsourcing business. But even there, privacy laws and other things are very important. And the ability to safeguard patients and client data is absolutely critical to what we do. So government regulation, from our standpoint, the more important thing is that it's predictable and rational and we adapt our business processes around that. In the ASC business, one thing I would tell you that it plays incredibly well with physicians is that when you have an environment that protects those centers from a compliance standpoint, they figure out pretty quickly. It's protecting their financial investment in those centers, and they care a lot about that. And having the expertise to do that in a way that's incredibly clean, especially as the ASC segment begins to get more attention from regulators and being in a leading position from that perspective is something we think is actually a very important value driver into the marketplace. So again, government regulation is all over the place, much of it necessarily so, but part of this becomes value creation from safeguarding.

And dealing with it directly, without -- I mean, we don't see it as a burden as much as we see it as. It is what it is, so let's do it the best we can.

Absolutely. I appreciate the comments there. We've gotten a couple of questions as well about comments made on the third quarter call and kind of the framework for preliminary 2022 EBITDA growth, and whether that's potentially impacted at all, given Omicron uncertainty. I think that covers it for the most part.

No, we're not backing off at all off of what we said on the third quarter call about our thoughts on 2022. Listen, when we started putting together some of our assumptions for this year now, we assumed that there was going to be some level of COVID cases. So we were very clear, and it's uncertain how it will evolve. It's obviously ramped up over the past several weeks. But we'll continue to manage through that. What we talked about for 2022 was we anticipated some moderate growth over and above 2021, knowing that there are some items that we need to address from a headwind perspective, as I say. We sold our Miami hospitals in August of last year. And they had about $75 million of earnings in 2021 before we sold them. So obviously, those earnings aren't going to repeat themselves. We've also pointed out that sequestration, Medicare sequestration, 2% revenue reduction. We assumed that, that would be reinstated in 2022. It will be. It's been delayed somewhat. But we project right now, if it goes into effect as it's currently scheduled that, that will be resulted in about a $50 million difference in revenues between '21 and this year. But we took that into consideration when we put that message out a few months ago, and we're not moving off of that right now.

And we also reaffirmed our guidance, as we already said, in '21. So '22, to Dan's point, we're pretty consistent with how we've looked at it, and we're going to stay that way. But COVID is always going to be somewhat of an unknown. The question is, are we prepared to deal with it? And I think we've proven we're very prepared to deal with it. It doesn't mean we won't have some stress on labor, it doesn't mean we want to stress on other things. But we're adequately covered, as Saum, I think, has already mentioned, in terms of PPE and ability to respond, and we're dealing with it. Length of stays are shorter, and we're moving people through the system. So I think that's really what it's about.

Obviously, we'll have more to say on 2022 guidance when we close our financial statements and report our earnings in the first half of February.

Great. And a couple of follow-up questions came in after the first question touching on the labor environment in the context of Omicron. I guess, without the labor environment more broadly, whether you see structural changes there or any adaptations that will need to be made to continue to position the company.

Yes. Well, I mean, certainly, there are structural changes that have happened to the labor market. I mean, I think that it's naive to say that nothing has changed that won't impact us going forward even if COVID -- Omicron were to disappear in February. It's not like the labor market will normalize instantaneously, right? So there are some structural changes that are there. Look, I kind of tend to put these things into a few different buckets. The first is what I think we've proven we have the ability to do and do well, which is managed through the current labor environment, okay, even as the issues spike or regress a bit in terms of day-to-day appropriateness of management of our workforce. And that is going to be something we do on an ongoing basis, again, informed by data and analytics on a real-time basis regularly. It's not going to change because December 31 became January 1, right? It's not a new year does not mean a new approach from that standpoint. The second category that we are spending a lot of time working on, of course, is appropriate strategies to retain our staff and look at extenders and other things in the nursing environment. And at the same time, hardwiring our approach to reducing length of stay appropriately. So we're not using or creating our own demand for labor that's unnecessary, okay? And then the third category, which is going to take longer for everybody to deal with is changes in our recruiting and training strategy, including initiatives that we're putting forth around the country with new graduates, with transition of early graduates into more specialty-oriented areas and broader recruiting strategies to bring clinical staff into our environment. And that's going to take longer to play out. But certainly, if we continue to work on each of these 3 areas, we think we can work to a point where this labor market also, from a cost standpoint, begins to normalize.

Thank you very much for the color. One -- I think we've got time maybe for 1 more. [Operator Instructions] I think that may be all we have for today. Really appreciate the time. I'll pass it back over to you all for closing remarks.

Thank you, James. We appreciate the time. And as I indicated, we're very excited about the future here at Tenet, and very committed to the strategy that we've outlined looking forward. So we -- again, we appreciate the time and the opportunity to join you at a virtual JPM conference this year.