Edited Transcript of THC earnings conference call or presentation 26-Feb-19 3:00pm GMT

And to that point, we are actually addressing gaps in performance with new leadership teams in specific hospitals and markets, and with increased oversight and thoughtful direction from Saum Sutaria, our new Chief Operating Officer. One of Saum's highest areas of focus in 2019 will be to lead the continued restructuring of our platform for organic growth in our hospitals.

With that overview, I'd now like to take a few minutes and speak to some of the specifics in 2018. Clearly, it was a year of significant change, change in the way we think, change in the way we operate, change in the way we lead and engage our teams, and change in the way we conduct outreach in our communities. We made measurable changes to our culture and will continue to make significant moves throughout 2019. We believe it is correct and fair to say, by any measure, we are a different company than we were in 2017. We are much healthier, more focused and more aligned across businesses. As you can see on Slide 3, we delivered on many of the plans we laid out at this time last year. Broadly speaking, these plans were centered on core areas: performance, which we just discussed; portfolio enhancements; efficiencies; and importantly, people. There is an inseparable link among all of these elements, because while individually important, they follow different paths. They also very -- they are very intertwined, creating a foundation for sustainable growth. I believe that we will be more successful with our teams energized around the common mission and a sustainable drive for consistency in execution our performance in quality, service and delivering the mission efficiently. This is something I and the teams have been working on since I arrived. Revisiting and restructuring core strategies, aligning operations around the problem, not the person, hiring the best talent possible, integrating functions, removing unnecessary processes and as a team, focusing on the core of what we do and how to do it better for the long-term growth in returns.

So let me provide a quick rundown of some of the key steps forward from last year that speak to those points. In addition delivering solid performance, we also divested noncore operations, including 17 hospitals and facilities in 2018, and another 3 hospitals just last month. These divestitures generated proceeds of over $1 billion, including cash and the elimination of capital lease debt. We did this while continuing to expand our Ambulatory portfolio and complete the buy-up of USPI. We invested $240 million in Ambulatory M&A, including adding 27 facilities and 7 new health system partners. This was a great year for acquisitions and de novos and we will continue to pursue these opportunities aggressively.

We exited 2018 with $250 million in run rate savings. And today, we are announcing a new $200 million initiative. We expect to be on the $200 million run rate as we exit 2019, bringing the total cost savings to $450 million in a little more than 2 years. I'm really proud of the progress the team has made here, and believe that our teams have adopted a mindset that we can always do things more efficiently and effectively without compromising the quality of our work and service to our patients. We reshaped leadership ranks across the organization, tapping the best talent internally and externally to help define the culture of accountability we need ingrained in our teams. In addition to these achievements, much of what we did last year was to identify areas that were lacking the appropriate level of attention and strategic direction, like marketing, position recruiting and scheduling, just to name a few examples. We identified these and other areas across the business and continue to make changes to put us on better footing for the future.

And much of the transformation taking place is happening because we have new or different leaders in place, some of whom have been in their positions for the better part of 2018, but many of whom were recently appointed or promoted, so they just have started scratching the surface. When I think about 2018 as a year of change, I think about 2019 as a building year. I'm pleased with what we've achieved in 2018, but we have a lot we need to improve upon going forward, including volume growth in our hospitals, a stronger sales pipeline for Conifer, patient satisfaction, position recruiting and better coordination of hospitals and Ambulatory platforms. At the highest levels, we remain largely focused on the same things, growth in operational excellence and everything that supports that through a stronger team of people and a more unified culture. Our priorities for 2019 are summarized on Slide 4. As it relates to growth, we are focused on earning patient loyalty. Growth in our hospitals and at USPI is dependent on building and sustaining greater loyalty from our patient. This is about how we handle arrival to departure and everything in between. What we do impacts new and returning patients and our objective is to be seen and known as the location desired for quality care. Driving further improvement in quality and service is core to these efforts and something Dr. Ernest Franklin, our new CMO, is working very closely on across the enterprise. Dr. Franklin joined us in January, and his proven track record in clinical leadership and his tenure as a physician and operational leader will be incredibly beneficial as we work to improve patient experience. We are also working to strengthen our network of physicians. We're focusing on earning more business from independent physicians and improving scheduling, providing the best place for quality care to be delivered. We've also restructured physician recruiting, focusing by service line on the groups that make a difference in meeting the needs of our communities and patients. We are focused on adding new physicians on an ongoing basis throughout 2019, bolstering our clinical skills and depth across our business units.

Another major part of our growth plan is the direct community focus marketing approach that we discussed previously. Integrating our marketing programs and communications teams, similar to what we're doing with other departments, we ensure we use the same umbrella campaign across the country and tailor it locally to the service lines that fit the needs of that specific community. We continue to brand local hospital systems, reflecting local heritage and name recognition that resonates within the community and engaging our teams locally to be the face and voice of that message. Our message is now built on the tagline of community built on care and every aspect of our multiple systems, hospitals, surgery centers in Tenet markets, urgent cares, freestanding EDs, all will carry this message with their local brand. Whether it's a DMC in Detroit, The Hospitals of Providence in El Paso, the Desert Care Network in California and so on, we will deliver the same unified message in print, radio, video and to community influencers. All of these messages are using our employees, doctors and staff, not actors and are produced internally. They serve as a linchpin to changing the culture, starting in the field and flowing back to headquarters, with the clarity of the message and purpose being stated by our employees, doctors and teams. We will continue to build on developing our brand image through 2019 and going forward.

I already spoke about our efforts to continue expanding our Ambulatory platform, which we made the top priority, given the strong growth fundamentals and solid returns generated by these opportunities over time.

We have a very healthy pipeline of acquisitions and de novos and prospective health system partners. This will remain a key to our future growth. Conifer has had an excellent year in executing their mission, increased efficiency, improved quality and overall top quartile results with a year-over-year improvement of $74 million in EBITDA. We delivered nearly as much EBITDA growth in Conifer 2018 in incremental dollars as Conifer delivered over the prior 3 years. Sales growth has lagged, and we are focused on reengineering the sales process and team. We expect to add a new Head of Commercial sales shortly and rebuild the sales team. We've identified targets and are continuing to be engaged in new potential business. Our results from last year will improve our competitiveness in the market, and we expect to see this develop over the year.

With respect to Conifer, we said on a number of occasions that a range of alternatives are being evaluated and that we would close out the process only when the right decision is reached for Conifer and for Tenet shareholders. We have recently entered into exclusivity with one of the parties that has been engaging with us. While there could be no assurance that this negotiations will result in a transaction, we are very pleased with this progress, and we will continue toward delivering the best transaction for Conifer and our shareholders. As you would expect, we have confidentiality terms in place as part of this exclusivity. And due to that, we'll not offer specifics or answer any other questions at this time, other than to say it is really, really good progress on what's been a very thorough and active process. And I will provide -- we will provide an update at the appropriate time.

That brings me to our remaining priorities of operational excellence and talent and culture. We need to continue to enhance our agility, continue developing a culture of consistency in execution and results, and build on our efforts to drive further cost containment. Operational excellence will also come from deeper integration, better coordination of our business platforms and further standardization of processes where we can leverage best practices in the right way. For talent and culture, we will develop the energy and attention required towards team development, focusing on the best and the brightest including coaching, challenging and further developing our people and adding new high-talented individuals. Having the right teams in place, we will create the right environment to build long-term sustainable growth for our business.

Before I turn it over to Dan, I want to briefly comment on our outlook for 2019. Our results in 2018 were strong across each of our businesses, and we anticipate further development and improvement in 2019, resulting in adjusted EBITDA growth of 4 to 7%. In our hospital business, we anticipate delivering EBITDA of roughly 3% in 2019. Rebuilding volume growth is one of our biggest areas of focus in 2019, and we expect it will take most of 2019 to put us back solidly on the path to deliver sustainable long-term volume growth in our hospitals. I am optimistic that volumes will respond to the changes and restructuring we are making across the country.

At USPI, we anticipate delivering another 10% to 12% growth in adjusted EBITDA, less-facility NCI. And for Conifer, we're targeting normalized EBITDA growth of roughly 25%, once you adjust for the impact on Conifer from our divestiture program as well as hospital divestitures that were completed by some of Conifer's other customers. Growth and new growth will remain a key focus for this team. So with that, Dan will now provide additional details on our results and the outlook for 2019. Dan?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [4]

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Thanks, Ron, and good morning, everyone. We generated $684 million of adjusted EBITDA in the quarter, above the midpoint of our outlook range, and up 7.4% year-over-year on a normalized basis. Adjusted EPS was $0.51, which was above the high end of our range for the quarter. Our Hospital segment generated $352 million of EBITDA, approximately $10 million ahead of our expectations for the quarter and up 0.3% after you normalize for the items listed on Slide 8. Ambulatory EBITDA was $245 million, which was 12.4% higher year-over-year and EBITDA less facility-level NCI was $151 million, up 7.1% after adjusting for Aspen, which we divested in August. Conifer's EBITDA rose 10.1% to $87 million, with margins up 330 basis points. And adjusted free cash flow was $600 million in 2018.

Turning to Hospital volumes, which are summarized on Slide 9. Adjusted admissions were flat, excluding Chicago and planned service line closures in certain hospitals, which lowered adjusted admissions 30 and 50 basis points, respectively. We divested our last 3 Chicago hospitals in January, so these will no longer impact our same hospital metrics starting in the first quarter.

Revenue per adjusted admission was very strong this quarter, up 5.4% after we adjust for California Provider Fee revenue, and expense management was favorable again this quarter with cost per adjusted admission up 3.5% with excellent results in SW&B, supplies and corporate overhead, which we reduced by 28% in 2018.

For the full year, our Hospital segment produced 2.4% EBITDA growth after we normalized for the items listed on Slide 8.

Moving to our Ambulatory business on Slides 10 and 11, USPI continues to perform well. For the full year, they produced case growth of 3.4%, EBITDA growth of 15% and EBITDA less facility-level NCI growth of 12.7%. This quarter, we broke out Aspen's results on Slide 11 in order to help you better understand USPI's results. Conifer had another strong quarter too, as shown on Slide 12. For the full year, Conifer's EBITDA increased 26.1% and its margins increased 560 basis points to 23.3%. Conifer's revenue was down this quarter, but that was primarily related to hospital divestitures.

Now let's look at our 2019 outlook on Slide 13. Overall, we are targeting EBITDA growth of 4% to 7% this year. In our Hospital business, we anticipate EBITDA growth of 1% to 6%. If you normalize for divestitures and other items on Slide 8, hospital EBITDA will be essentially flat.

Turning to USPI, we anticipate generating 10% to 12% EBITDA less facility-level NCI growth. For Conifer, we are targeting growth of 4% to 6%. Normalizing for divestitures, however, Conifer's EBITDA growth will be closer to 25%.

Slide 14 contains additional details on our outlook. As Ron mentioned, we are working on a new $200 million cost reduction initiative. We anticipate realizing $50 million in 2019 and achieving $200 million of annualized run rate savings as we exit the year. This will increase the total annualized savings from our cost reduction initiatives to $450 million in a little over 2 years.

Slide 14 also points out that our outlook assumes approximately $260 million of revenue from the California Provider Fee program, similar to the amount we recognized in 2018. As you may recall, the current program is scheduled to expire on June 30, 2019, so we will be recognizing $130 million of revenue in the first half of this year under the current program. We fully expect a new program beginning on July 1 will be approved, but this will take some time. As a result, we do not anticipate recognizing any revenue under the new program in this year's third quarter. In the fourth quarter, there are 2 potential outcomes. If the state and CMS approve the new program before the end of 2019, then we will recognize the revenue associated with the second half of this year in the fourth quarter. We expect this will be around $130 million of revenue. If the approval does slip into next year, then we would record $130 million next year plus a full year revenue from this program in 2020.

Slides 14 and 15 contain additional details on our outlook, and Slide 16 contains some of the larger moving parts to work our EBITDA from 2018 to 2019.

Before I conclude, I would like to spend a few minutes on cash flows and leverage. Starting with leverage. We repaid $150 million of debt in 2018 through open-market repurchases and lowered our ratio of net debt-to-EBITDA to 5.6x at the end of 2018. We expect to make additional progress in 2019, and we remain committed to reducing leverage and moving it below 5x, primarily through EBITDA growth. Finally, in January, we announced a refinancing of $1.5 billion of our debt, which lowered our interest expense and extended maturities. We will continue to work for these kinds of opportunities.

In summary, we delivered solid results in the fourth quarter and calendar year 2018. We improved margin to 120 basis points in 2018, and we expect our margins to grow another 80 basis points this year, a 200 basis point improvement in 2 years. We expect to continue to strengthen our financial results this year, with EBITDA growth of 4% to 7%, including the benefit of continued excellence and cost management. And we have and we'll continue to make progress on reducing our leverage ratio. Let me now turn the call back to Ron.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [5]

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Thanks, Dan. I just want to close by saying, we will enter 2019 with a renewed sense of urgency and volume growth, more effective execution and investing in our teams while continuing to add external talent to our mix. We'll meet the headwinds and challenges openly, and with a mindset geared to addressing each quickly and effectively. So with that, Brendan, I think, we're ready to turn it over for questions.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [6]

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Great. Amanda, can you please start the queue?

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Questions and Answers

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Operator [1]

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(Operator Instructions) At this time, I would like to take our first question from A.J. Rice with Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [2]

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First, maybe just I quickly ask about the hospital portfolio. You saw some improvement particularly on pricing, obviously, in the quarter. When you break down, I know you've got a lot of different markets performing in different ways. Would you highlight any markets that did particularly well, any that are particularly challenging? I know, last time you talked about Detroit a little bit. Can you just give us a flavor for what's happening underneath the aggregate numbers in the hospital portfolio?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [3]

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A. J., it's Dan. Let me give you a brief overview. Certainly, we were pleased with the hospital results in the fourth quarter, as we mentioned in our prepared remarks. We came in about $10 million above where our expectations were at the outset of the quarter. So as you mentioned, very strong revenue yield from acuity. We continued to focus on more complex service lines, allocating capital to these type of service lines as well as our negotiated contract grades. So certainly, pricing was solid. Cost continued to be well managed across -- pretty much across the board. We certainly, from a volume perspective, we're not where we want to be at this point. That's a key area of focus of ours. We did call out couple of things in my script regarding Chicago, which -- we sold those hospitals, so that should be out of the numbers going forward. We did have some service line closures as well. We didn't call out Detroit this time, A. J., Detroit has not been an EBITDA problem. And so we like our portfolio of hospital facilities and really looking forward to growing those markets and driving additional growth as we look into this year and beyond.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And then just maybe my other question would be around just flushing out one aspect of the guidance in USPI and your Ambulatory business. This year -- past year you had about -- I think, in the prepared remarks you mentioned $240 million de novos and acquisitions. Looks like in the guidance, you got a little more moderation, $150 million to $175 million. Is that just sort of your typical starting point? And you may do better? Or is there some reason to think it won't be as robust as it was last year? What's the pipeline look like? Maybe some comments about that?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [5]

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Pipeline looks really good.