Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Thanks everyone for joining us today. It's my pleasure to be introducing Tenet Healthcare. Tenet is one of the largest providers of hospital services as well as ambulatory surgical centers. Presenting today, we have Saum Sutaria, Chairman and CEO as well as Sun Park, who's the CFO; and Will McDowell from IR. And I think Will is going to make a couple of comments first.

Sure. Thanks, Kevin. Good morning, everyone. In the course of our conversation today, we may make some forward-looking statements. In the context of those statements, I would suggest you refer back to our cautionary statement in our most recent earnings release and SEC filings. And with that, I'll turn it over to Saum for some opening comments.

Thank you, Will. Thanks, Kevin, for welcoming us. Good morning, and I appreciate your interest. Last few months, we've spent a lot of time talking about some of the things we've done in the marketplace with the portfolio, et cetera. So rather than rehash that, and we may touch on that in Q&A. Let me just make a few comments about how I see the future. First of all, we've deleveraged the company materially. We like where our leverage is right now in the next comments about how we see a leverage ratio target for the future in order to create some clarity for investors and others who have interest, and that's very much top of mind. The second thing is we see a tremendous opportunity with our ambulatory platform. We're in this unique space of innovation and ambulatory care growth, which creates a significant amount of value and savings for the system, but it's also unique in the sense that it's value-based care that actually creates value for shareholders, which we don't see as much of today. The site-based savings is critical in our environment of generating more efficient and a sense of satisfaction, surgical services for the future. And we like the fact that we have the leadership position in that marketplace. Our acute care hospital portfolio has been paired and is more focused. We like where the portfolio is. And as we look forward, we plan on testing additional investments in that segment to accelerate growth. Our physician platform is growing and building. We think we've built something that attracts high-quality productive entrepreneurial doctors, and we plan on growing that environment in the future. And finally, Conifer. Conifer has been an incredibly valuable asset. And in an environment where complexity has plagued revenue cycle companies, we've stayed focused on the basics, collecting cash across the board at a very, very high rate. And we are now returning the organization to top line growth coming out of the pandemic. So we're very excited about what Conifer will contribute to the company over the next few years. There are a few things that really won't change as we look forward. Those are our commitment to being a meritocracy for Tenet, a data-driven organization that is very focused on return on capital, return on invested capital and a clear partnership with our physicians in order to deliver better value for our patients. Those foundations and the discipline we've established will not change in this coming environment as we've demonstrated we're very committed to that.

All right. Great. I guess, I think one of the things that everyone is still trying to get a handle on right now is the general backdrop for utilization. How would you guys describe a -- do you believe that utilization has kind of normalized? Are we still kind of below the long-term trend line if we ever try to go back to 2019 and trend forward and kind of -- or are we kind of back to normal growth expectations?

Yes, Kevin, let's break it down between the 2 segments. The ambulatory surgery segment, obviously, last year had far above our annual guidance. And we really think that the recovery or the deferred care that was probably out there is done. We're returning to a more normal growth algorithm at USPI. And as we've indicated, we see growth building through the year, given the very difficult comps from prior year. The most important thing from a growth standpoint in the ambulatory business, from my point of view, is not numbers, it's acuity. It's acuity in net revenue per care -- acuity business because that's where the value is created for the system. And all of our investments are very much dedicated especially on an organic basis into building those programs in our centers. I think the acute care side has more recovery to go. I anticipate that this year and even part of next year -- recovery in the acute care segment. Probably over time, a heavier mix of government, especially Medicare, returning into the environment more fully. And also, you're still feeling that unfortunate demand hole that was left from all of the premature mortality that occurred due to COVID upfront rather than over a longer period of time. So as more people age in to that higher utilization or the last 5 years of life, we'll see that recovery that would continue somewhat 5 years after 2021 into the 2025-ish timeframe.

And so I guess for the last few quarters, you guys have been talking about labor cost being high, probably temp labor costs being high, and then it's come down, and you say, well, now it's come down to a point where potentially it makes sense to kind of reinvest in labor to try and grow volumes again. I mean how much of where volumes are today as a function of you had in business lines versus economically it didn't make sense, but it's starting to make sense and we can maybe now start to see some of that recapture?

Yes, Kevin, I mean, you have to put this in the long-term context of what we've been trying to do with the company. The acute care portfolio, not just the portfolio, but the operations, if you go back 5, 6 years, needed a significant amount of restructuring, right? It wasn't just whether we kept or disposed of assets. It was also the service metrics that we were deploying in each of our assets. The pandemic allowed us to accelerate that transition, right? And so we've been very clear. We're not chasing 2019. What we're chasing same as in the ASC business, in the acute care business, is a high acuity, emergent and elective platform built around specialists that drive profitability. If you look at the outperformance of our hospitals relative to our expectations, we're absolutely convinced that strategy works. I think for us, as the portfolio has, I mean, has become more even across the country for us, we now have a bunch of investable -- more investable markets, including those that were slower to recover from COVID, where we can begin to add capacity back. We'll do it thoughtfully. We'll do it diligently. It's not going to be a massive opening that occurs with a bunch of costs that's allocated to it without an obvious source of demand. But we do see that as a potential accelerant over time. In the first -- and change percent, that's pretty significant again, above what our guidance was. So we do see those opportunities to add capacity back.

And how long does that take? Is that the situation of the beds are there such as about investing in nurses? Or does it mean recruiting doctors? Does it mean building out things and that is a multiyear dynamic?

Yes, it's a combination of staffing, the right physician capacity, the right technology for the service lines. Again, I think we plan on adding that capacity back what I would describe it rather than a quarter or 2.

And I guess when we think about just volume trends in general, there's been a lot of focus about how utilization started the year, ended the quarter, has gone into April, a lot of focus on the calendar and how things have gone in. So like how was April shaping up? Is it looking the way you would have thought of, of the March calendar impacts?

Yes, I mean I'm not going to comment on the second quarter. Look, what I would say is that Easter happens every year, okay? That doesn't mean that everybody plans for it perfectly in the way this happens. But let's not make Easter and the calendar an excuse for something that happens every year. We were really pleased with what we saw in the first quarter, and I'm pleased with the demand environment that we see today.

Okay. And then we've talked a bit about around the asset portfolio pruning that you've done on the hospital side. The commentary from here, it sounds like you -- are you done with it? Or is that not necessarily the takeaway from what you've been saying?

Yes. I mean we were happy with the portfolio before the asset transactions, right, because we believe we could invest and grow in those assets. But they did have the one -- there were 2 things that came together. One was strategically over a longer period of time, we didn't think that in our business model, the return on capital in those markets would be as good as in other places. And obviously, the second component of it is we had put a lot of work into improving them over the last 5 years. So we expected a premium price that would materially contribute to our deleveraging if we were going to be sellers. So if you think about our portfolio today, we're happy with our portfolio today. I think the marketplace understands the conditions for sale if there are additional assets that potentially could be sold.

And I guess, if you think about that pruning, I mean, to your point about the leverage today, I guess, like the leverage is 4.5, and you could get assets at 14x, 16x EBITDA, that's a great transaction. It's deleveraging. When your leverage is 3.5, does it make the same sense to sell, even if the multiple is good, if deleverage is not a priority? What do you do with that capital? Like...

Yes. I mean one of the really nice things about Tenet today is that we are a diversified company with other investment opportunities outside of the acute care market. So while we believe that allocating more capital, for example, on a per bed basis and other things into the acute care market gives us the opportunity to test more accelerated growth in the acute care market as we come out of the environment we've been in over the last 5 years, remember, we have to measure all of the investments we make against returns in the ASC business or the Conifer business. So we believe there's -- I mean, it's an incredibly fragmented market. We're a small portion of that market. We're on the right side of the value equation. We believe that capital can be allocated into that environment when opportunities arise. And if you look at what we did in the first quarter, we proved that, right? I mean we invested more than our entire annual allocation because we saw the right opportunity.

Yes. So maybe it makes sense to talk about the surgery centers, which are increasingly the growth story here. What was it about the first quarter? Was it just happenstance that all these deals came together? Was there -- is there something going on in the marketplace that -- or your deal sourcing that allowed that to happen? And how should we think about deals for the rest of the year?

Yes. We -- I mean, all these deals coming together in the first quarter was a bit of happenstance. I mean both the hospital transactions, the ASC acquisitions. Some of these had been in the works or negotiations or whatnot for 18 months. And they happen to come together, not to the happiness of many of the members of our team, given how much had to happen in the first quarter, as you can imagine. But we were pleased to get them done and get them done in the right way. I don't think -- obviously, it's not practical to have quarters where that many things transact at the same time. But from an ASC standpoint, what I would tell you is that we're really happy with the pipeline that we see looking forward still. There are significant numbers of opportunities, high-quality assets in orthopedics and other things. And remember, we have 30 de novos in the works and scaled and planning to open over the next couple of years that will add to our growth platform.

Yes. So on the -- we think about the surgery center growth, you mentioned that a lot of the growth is going to be driving high acuity services. I think that like the market always has a little bit easier time understanding volume growth and they do pricing growth because pricing growth sometimes has onetime things in it. And so when we think about like that just thinking about volume, how much you think about pricing, what you're thinking about the core pricing and then how do you think about acuity and shift driving it, like what's the way to think about that going forward?

Yes. I mean one thing I would say is that we have historically, as I said, been very data-driven about why we believe 4% to 6% on a basis plus M&A is viable for USPI because we see a 10-year track record, right, more than 10-year track record of that. The problem is it's lumpy, right? There are years that outperform, there are years that -- but if you look at it from a compounded annual growth standpoint, it's pretty consistently in that where it tends to be 2% to 3% volume, 2% to 3% net revenue per case, which is a combination of price and acuity. If you look at what we're doing with the business today, we're focused more on acuity and growing that acuity than we are with the case volume, right? Because I always give the example, as we move lower acuity stuff -- one hip or knee replacement at the same time you do 8 or 10 pain procedures. But we're going to make that trade every time that it makes sense to do so. And that's why you see in the first quarter, for example, we are basically flat from a volume perspective on a 9% quarter the prior year, but 6-and-change percent increase in our net revenue per case, which is more than double what we guided to. So I would say we're also still understanding how our portfolio at USPI is evolving, which will allow us to refine that guidance over time.

And I guess there's one thing about the no promise that the next 10 years will be the same. So like when you think about what is lining up and driving that high acuity shift over the next 10 years, like what are the things that we should be focusing on is kind of saying, okay, I can see visibility into that.