Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Good morning. Welcome to Tenet Healthcare's Operational Update Conference Call. [Operator Instructions] I will now turn the call over to your host, Mr. Dan Cancelmi, Executive Vice President and Chief Financial Officer for Tenet. Mr. Cancelmi, you may begin.

Thank you, operator. We're pleased to have everyone join us on short notice to discuss the press release we issued this morning related to Conifer. Tenet's senior management joining me today include Ron Rittenmeyer, our Executive Chairman; and Dr. Saum Sutaria, our Chief Executive Officer. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent Tenet management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement in today's press release as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Ron.

Thank you, Dan, and good morning. We are pleased to host this opportunity to describe a bit more fully how we arrived at the decision in our views moving forward regarding Conifer. I'm joined by our CEO, Saum Sutaria, and our Executive VP and CFO, Dan Cancelmi, for a Q&A after a few remarks just for context purposes. So let me start. As those of you who were present at the JPM Conference in January 2018, will recall, the tone we set was to step back and view with both a critical eye and a more transparent approach, Tenet's decision to improve quality, address clear gaps in performance and take actions directly to enhance shareholder value across 3 key units of our enterprise. For Conifer, this meant improving client performance and capturing margin expansion opportunities while producing an intellectually honest assessment of its market value and fit within the Tenet enterprise. Unfortunately, after many months and meetings with interested party, was clear their interest was really focused in a fire sale purchase, offering targets related to Tenet's cash collection expectations that were simply not acceptable and ignoring what we determined to be realistically -- realistic upside. Clearly, the perception of value that had been commented on was not realistic nor was there a full understanding of the tax implications related to net proceeds as a deleveraging event in a sale. Realizing that sale path was a nonstarter, we then refocused on potential JVs, possible mergers and other thoughts. None of these proved out to be the best avenue to achieve value nor significant as a deleverage event for Tenet. The most promising view was potentially executing a tax-free spin, which we announced as our go-forward decision. We spent considerable time and effort establishing the trajectory, including following the appropriate regulatory requirements. Additionally, we made numerous changes to the leadership as we frame the company to move in this direction. Importantly, we continue to state, while we were on the path to spin, we also were on a path to maximize Conifer's performance, which was happening real time as we drove deeply into the operational and overhead areas. There is no question, COVID slowed down many of these pathways. Realizing this, we pushed out the execution by a year, but factually, the environment driven by COVID was not cooperative. Conifer's ability to grow in the marketplace was hindered by COVID. And frankly, the market appeared to be less engaged in recognizing value driven by revenue cycle businesses. As this progressed, we spent significant time evaluating current performance, adding additional opportunities to expand and reset the overall basis of expectations for the future. During COVID, we launched our global business center in Manila, which has now grown to about 2,200 associates despite the COVID quarantines. This was a defining move for Tenet and Conifer allowing us to have an effective 24/7 environment with a highly educated and committed team, while also gaining a more effective economic base point for this type of work. And it substantiated our ability to drive material change despite other significant distractions. Throughout the process, we remain steadfast in our view that if the spin was the best path, we would execute. We're also very clear that the decision points, including the determination of Conifer's value to the larger enterprise and the best interest of our shareholders, whether markets would be engaged at a level to propel Conifer forward as a stand-alone enterprise, whether the deleveraging event would be material and impactful and importantly, with Tenet and other Conifer clients have a better platform than what we have been able to achieve currently and especially during the last 4 years, and all of that would add up to be very important in the final decision. Over the last few months, included in our recent board meeting, management, our advisers in the Board reviewed the current state as well as what we foresee as next steps. After a very long and detailed review and discussion, we made the determination that the spin of Conifer was really not in the best interest at this point of our shareholders or the overall enterprise. And as stated in the release, our conclusions were driven by the current performance of the Tenet Enterprise and Conifer's role in that performance currently and into the future. Our view is significantly improved financial profiles of Tenet and Conifer, including adjusted EBITDA margin improvements of more than 1,000 basis points at Conifer since 2017 supports the value we can drive by keeping the part of the Tenet Enterprise. Expectation is that Conifer will deliver full year 2022 revenue growth in the mid- to high single digits with a strong margin and cash flow profile consistent with past years and ongoing benefits anticipated for revamping commercialization efforts, new sales talents and technology and a focus on point solutions, all of which have started and have a very reasonable runway going forward. While this has been a long process, it has not been time wasted. It allowed us to understand, evaluate and take action that improved performance rather than just hold an asset without achieving upsides. We provided the opportunity for a deep and thoughtful database devaluation resulting in significant performance and right decisions going forward. As Saum stated, this is a compelling business with more opportunities that we are positioned to achieve. So with that context, why don't I just open it now for questions, you've got Dan and Saum and myself on the phone. So operator, we're ready to start.

[Operator Instructions] Our first question today is from A.J. Rice of Credit Suisse.

Just maybe ask, are there any things that Conifer was not doing because it was heading for the spin or was doing, I guess, I should say as well, that now with the decision made definitively to keep it in-house? Is that a strategy in any way direction or even the spending levels in any way?

Saum?

A.J., listen, I think one thing that's important is that our Conifer team never lost focus on their primary objective, which is better client service, innovating inside of Conifer driving better results. And we really did not distract at all the operating team. We do see a lot of opportunities both on the top line and also things that we're trying to do to improve efficiency and effectiveness looking forward. That agenda was always there, and it doesn't stop now. Obviously, there are some things that were going on in terms of preparing the organization, various filings and other things that now stop, right? But I really want to emphasize that our operating team has remained focused on what Conifer should be doing, which is serving its clients. Dan, I don't know if you want to add to that?

No, that's exactly right. I totally agree with that. And A.J., we're full speed ahead. We've been full speed ahead as Ron mentioned, a significant margin improvement during this entire process at Conifer. So -- and now we're back to revenue growth expectations and -- so again, we feel very comfortable where we're at. And in fact, we just want to point out that we reconfirmed our guidance for 2022 in our press release this morning as well.

Sure. And just to clarify, on the costs associated with preparing for a spin-off and anything you're doing just added up as a separate company. In the grand scheme of things, the fact that you did reaffirm your guidance suggests that it wasn't material to the overall Tenet entity that any expense that goes away? Is that the right way to think about it?

That's correct, A.J. Absolutely.

The next question is from Jamie Perse of Goldman Sachs.

I just want to get to the mid- to high single digit revenue growth. Curious how you get there between Tenet and external clients. And just whether that's new contracts you've signed in the last few months or quarters and if 2022 is the level of growth you're guiding to this year is sustainable going forward?

So it's a mix of both. But really, our focus is external to Tenet from a growth standpoint, and it's really focused on deploying our point solution portfolio more actively in the market, as the COVID surges begin to wane. And our sales teams that we've built up are able to get out into the marketplace and have additional conversations. We also have clients -- existing clients that are acquisitive and growing and developing themselves. They've performed well through the pandemic and are in positions of strength to grow and develop and we're at their side from that perspective. We're not giving guidance beyond this year, but it's obviously our intention to continue our growth trajectory at Conifer over a longer period of time.

Okay. And the press release talked about new sales talent in technology. I'm curious if you've added any new capabilities to Conifer over the last few years or if we should be expecting any more that help you on that point of solution focus.

Well, we're continually adding capabilities. I mean, beyond the offshore capability, there's a number of things that we've done to automate. Some of the work we're doing, their predictive analytics that we talk about as part of the overall Tenet Enterprise. That's always in our minds, included Conifer and the work we're doing there to -- in particular, in this environment, really be ahead of and on top of understanding the requirements from both our commercial and government payers is an important addition. And then there's a variety of things on the front end of the revenue cycle that we have been building into point solutions that are important. So all of those are highly relevant.

[Operator Instructions] Our next question is from Jason Cassorla of Citi.

I want to follow up a little bit on A.J.'s question here. I just want to understand now that you're keeping Conifer. Do you expect any potential pickup in demand from external clients that perhaps may have decided to defer contracting just during the process. I just see if there's any kind of bullish there that could help added revenue over time.

Saum?

Well, yes, so I mean I don't -- I'm not sure how to answer that question exactly. I mean, our focus on growth has always included a value proposition that was grounded in, obviously, the innovation that the Tenet petri dish, so to speak, provides Conifer as a way to trial solutions, build them, improve them and then take them to market. That doesn't change. We do think that there are many providers out there who value that greatly in terms of how they think about the solutions that Conifer can offer. I mean I think just, again, Ron was as straightforward as I can be about this. The focus on building these types of solutions 4 or 5 years ago was not there. Taking them to market, while it could have happened earlier, was blunted by COVID. And so we've spent a lot of time improving the performance, the results and the margins in anticipation of a more open environment to be able to bring these things to market. And that's really where we're headed. I don't know that there's a more complicated story behind it. We do believe that the connection to the provider system is helpful and by some clients is very valued.

Got it. Okay. I just have a quick follow-up here. You discussed your point solutions. So maybe can you just highlight Conifer's value-based care business, including the pipe of opportunities there, as you sign up entities for population health and risk management services. And maybe just how you see that business line contributing to revenue growth expectations for Conifer just moving forward?

Sure. The value-based care business is an important and profitable part of the business. We don't breakdown in detail the revenues and margins. It's not a huge part of Conifer today. There are 2 businesses really in there. One, as you point out, is financial risk management business that is very effective and has some very long-term clients, servicing IPAs that take risk, both government and commercial risk. And then the population health management business, which is of increasing importance over time to both employers and employer representatives of employer organizations and/or retirees, that many organizations may have that are looking for approaches to improve access to information and health care navigation for their members. And Medicare Advantage, in particular, is an area where that set of products is very helpful. So that's really what the 2 businesses are. Obviously, in today's environment, both have an attractive future.

The next question is from Justin Lake of Wolfe Research.

This is Austin on for Justin here. I appreciate all the color and kind of the update. I did have a quick kind of question, stepping back to the enterprise level. I recall you guys talking when the SCD transaction was announced, kind of the EBITDA mix coming from ambulatory and sort of how Conifer impacted that mix even just from a mathematical standpoint. Given the update here now, just kind of curious on the thinking of an EBITDA mix shift and how much will come from ambulatory, where might that settle out? And do you perhaps start to look at the acute portfolio for increased opportunities and kind of driving that ambulatory contribution?

Yes, this is Daniel. I'll start on that one. The -- when we've talked about having 50% of our EBITDA being derived from our USPI business, mathematically, we always put that together and disclose it, but that did include Conifer. In fact, if you go to our most recent slide presentation, you'll see Conifer's in that equation. So this really has -- this announcement really has no impact whatsoever on our goal of exiting 2023 with roughly 50% of EBITDA being generated by the USPI business. And listen, one of the things we've been talking about, the hospitals -- our hospitals have performed so well over the past year that it's -- and this is a good problem. It's making it harder for us to achieve 50% coming from the USPI business. But like we've said, well, that's a nice problem to have when our hospitals are outperforming.

The next question is from Whit Mayo of SVB Leerink.

As I reflect back on the history of Conifer a bit, I mean it was established as an entity with its own infrastructure to potentially be a separate entity at one point. Are there opportunities or a thought here that you can collapse this or portions of this back into Tenet in the context of either shared support services or anything? I'm just wondering if anything changes the plan as you think out over the next few years?

It's Saum. Let me make a couple of comments here. I'm going to just reiterate what's most important in the way we structure Conifer is that it's set up appropriately to deliver the best results to our clients, obviously, inclusive of Tenet. And there are some shared services already. I mean even our global business center in Manila has both our Tenet and Conifer colleagues co-located in the work that they do. So there are opportunities there that we'll naturally look at and have naturally been looking at. But what I would just say is what's most important to us is that we set up Conifer at this point going forward to most effectively service and grow the client base. And the decisions about how we handle many of those areas, whether they're support functions or direct operating functions will be grounded in that goal.

There are no additional questions at this time. I would like to turn the call back to management for closing remarks.

All right. This is Ron Rittenmeyer. Again, I appreciate everybody joining and taking the time. And I have nothing else to add. Dan or Saum, anything else to add?

No. Thank you, everyone.

Nothing. Thank you, everyone.

Thank you, everyone. Have a great day. Bye-bye.

That concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.