Tenet Healthcare Corporation

Welcome to Tenant Healthcare Corporation's fourth quarter 2020 earnings conference call. I will now turn the call over to Regina Nethery, Vice President of Investor Relations for Tenant.

Thank you. We're pleased to have you join us for a discussion of Tenant's fourth quarter 2020 results, as well as a discussion of our financial outlook for 2021. Tenant Senior Management participating in today's call will be Ron Rittenmeyer, Executive Chairman and Chief Executive Officer, Saumya Sutaria, President and Chief Operating Officer, and Dan Kinselemi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes an accompanying slide presentation, which has been posted to the Investor Relations section of our website, tenanthealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent tenant management's expectations based on currently available information. Actual results and plans could differ materially. Tenant is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation, as well as the risk factors discussed in our most recent Form 10-K, subsequent Form 10-Q filings, and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Ron.

Thank you, Regina, and thank you all for joining us this morning. I did want to highlight a few points worth mentioning as outlined on slide three. All overall results for the fourth quarter adjusted EBITDA of $832 million, which excludes grant income and has a $19 million gain from a sale leaseback of a medical office building, was notable, better than forecast. This performance was achieved while we remained under a COVID surge that started around Thanksgiving and remains, although trending down, with us today. We closed the year with approximately 2,700 cases that are active inpatient, and today we're at approximately 1,900 active inpatient cases across our system, having peaked in January at about 3,000 cases, which was actually greater than our July surge. The hospital segment achieved its budget in the fourth quarter, excluding grant income. The grant income we received covered losses throughout the pandemic, not just the fourth quarter. And we remain with an overall loss of hospital revenue of approximately $500 million, which is not covered and which to date we have absorbed. We are very appreciative of the grants, which have helped mitigate the losses to our system due to COVID, allowing us to remain stable and focused on patient needs. While admissions remain below 2019, driven in large part by the COVID spike continuing, and the reluctance of patients to seek care by delaying it or simply ignoring it, acuity remains very strong. We also benefited from the improvements we've made in managing the segment, utilizing database predictive analytics, the addition of new service offerings, ongoing strong cost controls, and the additional specialists we've added throughout our hospital system. Ambulatory equally had a very strong quarter. Although cases were down due to the pandemic by 5.5%, our revenue per case improved by 5%, driven by improved acuity. USPI business performance has recovered in earnings and is pressing beyond the 2019 levels. And as lower acuity cases return, should grow earnings even further. The cost controls, as well as the revenue per case improvements, more than offset the case loss. And we expect the transition to lower acuity cases to follow the pattern set by the vaccine distributions. We do expect the current activity remain high than in the past. Overall, the combination of solid continued performance with the core of USPI and the addition of the SCD facilities, which have performed very well, have continued to make the inventory segment a very strong performer. Conifer also had another excellent quarter with increased revenues by 33.6%. Additionally, revenue from third-party clients increased 5.2% from the fourth quarter of 2019. The year-to-date revenues remain slightly below 2019 due to divestitures of hospitals by tenant and other clients and the pandemic impact across all clients. Conifer's EBITDA performance for 2020 was very strong. And while down 4.9% or approximately $19 million, their margin in 2020 was 28.1%, which is the same as 2019. The cash collection process, very well executed, as were the services provided to all clients. The amount of disruption from the pandemic and the management changes made this a difficult year for managing Conifer. But we are very pleased with their resiliency, and their commitment to the entire client base. Altogether, as you can see on slide four, we delivered $399 million in net income in 2020 and 3.1 billion in consolidated adjusted EBITDA. And what's impressive is the steady improvements we've been making over time and how this has translated to our continued growth, particularly as it relates to EBITDA. Taking a look at some of the key elements of our balance sheet as outlined on slide five, we've made significant improvements. Today, we have approximately 2.9 billion of secured capacity, which is a significant improvement from the last few years. We ensured our liquidity was solid during the pandemic, and we issued some additional notes, as well as expanded our revolver. We actively reduced our capital budget across the entire system, and we benefited from the focus on free cash flow, delivering excellent results. Conifer's focus on cash collections was a significant driver of our free cash flow. This clearly tied to our decision on the cash acquisition of the 45 ambulatory centers from SCD in December. It has also strengthened our financial profile, and we have announced the retirement of approximately $478 million in debt. It's important to realize we're very engaged in determining our debt strategy. It's relationship to our acquisition and divestiture strategy and deciding what actions are best for our shareholders and for the long-term stability of the company. Today, our leverage ratio for the quarter is 4.7 times and we expect to finish 2021 below five times despite paying back a large portion of the Medicare advance funds. These are important milestones in our transformation. This does not imply that we are satisfied as we will continue to actively evaluate every mechanism possible to improve these measures. It does mean we are in a different place than we were at the end of 2017 and our decisions are based on the best possible set of actions driven by data and a deeper understanding that we believe with our board provides the best outcome long term for our investors, suppliers, employees, communities we serve and most of all, our patients. Our debt trading levels remain very strong and speak to the financial strength that the debt markets have on our business. As I mentioned recently at the JPMorgan Conference and as you can see on slide six, over the next three years, we expect the portfolio mix of our hospital segment to move from 53% of the portfolio mix of EBITDA to 35%. We also expect the segment to continue to provide higher quality of earnings from the higher acuity cases we expect based on our expansion of specific specialty service lines and our focus on the chronically ill patient. We are continuing our strategy of trimming the hospital portfolio of assets that we believe do not fit our strategy. Memphis, as an example, was an opportunity and we decided not to press back on the FTC's decision. Given the potential benefits, we're equally pleased to have it in our portfolio. There are others, however, that we should consider and will continue to act accordingly. When we make these decisions, we do so thoughtfully and within the transformational envelope we have created. It's a very active part of our strategic platform and process. Again, so we're clear, we're not on a selling campaign. but we remain active in selection and decision based on several attributes tied to alignment of our markets to our overall goals. We also expect USPI to continue to expand its footprint. We plan to continue with de novo placements, tuck in acquisitions, as well as considering large actions that are available and justified. We have successfully completed the recent SCD buy and to date, remain extremely pleased with performance and the opportunities these units have added to our portfolio. We also added over 3,500 new physicians on staff across USPI and included 73 new service line starts in 2020. We expect the portfolio epitomics of this segment to increase from 33% to 50% or greater going forward. These are the stats and the progression of a business we are investing in. and plan to continue to ensure it remains a leader in its category. Our presence in the Global Business Center has also proven to be very successful. We developed this additional business unit during the pandemic and staff trained and deployed most of the associates during the lockdown in the Philippines. The design remains to provide 24-7 support to the entire organization. and we have been successfully growing and operating it since February 2020. The sport has proven invaluable across our system as we can process and react in shorter timeframes with quicker response, providing our field teams with efficient and effective information that ensures they can execute their roles successfully. The JPMorgan presentation, we noted the plan to double the number of associates by 3,000 and others in the coming months and we see a path to potentially provide these services to other clients since we've proven they are effective and the value of a 24-hour operation in providing support is truly significant. So before I hand this over to Dan to focus on the corridor guidance and other important areas I'd like to discuss conifer, move to slide seven. The decision on the future of conifer was a debate long before I took over as chairman and CEO. When I first spoke at J.P. Morgan in January 2018, I clearly stated we're going to initiate a process to determine the viability of cell conifer. We spent the greater part of a year engaged with potential buyers whose offers were at the low end of our expectations and, frankly, were not a reasonable return for our shareholders. Throughout 2018, we remained true to our commitment and spent significant time focused on the best pathway. At the same time, realizing the value contained in Conifer had not yet been realized, we made significant improvements, not distracted by a potential sale or another alternative. We ran Conifer to succeed and not to be taken by another party at a loss to tenant and thus to our shareholders. The results were a $74 million improvement in EBITDA in 2018 and a margin that went from 17.7% to 23.3%. In every case, not a single party was interested in paying for the improvements or even acknowledging they were sustainable. We then researched potential merger candidates, which proved not effective, and determined the best potential course of action was a tax-free spin. We announced a tax-free spin in July 2019 and set a timetable of late second quarter 2021. Our plan was to use the time to address what we believe were gaps necessary to close before a spin would be successful. It included new leadership, assessment of the tenant contract that needed to be renewed, Determination of how we could reignite the growth trajectory that had really been stagnant for a couple of years and a clearer assessment of the overall technology including the current use of outsourcing. Conifer ended 2019 with an improved EBITDA of approximately $386 million and a 28.1% margin which substantiated our improvements were sustainable and our decision was correct not to accept that buyers would not include these improvements to be valued in a potential sale. We entered 2020 with a strong start in Conifer, and we believed it was a clear path forward. We also initiated startup of the Global Business Center, began to place approximately 600 new associates in the center, which covered Conifer and tenant activities that we began to relocate. By late February, we entered the pandemic. Conifer was forced to trim its teams and began to move call center personnel to home where possible. Our entire focus turned to cash collection and maintaining the various administrative services they provided to ensure hospitals continued to function properly. The Philippines also went into a lockdown, but we were able to hire, train, and initiate work with 1,000 new associates in and around Manila. They were up to speed quickly and provided much needed support during these very hectic days. We are proud of how quickly and effectively the whole Conifer team reacted to support our hospitals and other clients and ensure our patients received the attention they needed. We also hired a new CEO for Conifer in December 2020 and we're fortunate to find someone who had a solid background, a clear vision on growth and performance. He understands the business and is engaging in developing the pathway for growth and service to our clients. From summer of 2020, we also added a new COO and the COO of Client Services. Both individuals bring experience in their respective areas and are going to be additive to our new CEO. Muscle building the leadership during COVID was difficult, but our results have been excellent and we're really excited about these additions. We are aligning our priorities to develop credible point solutions that are ready to take to market. We realize the development of the GBC also offers the opportunity to potentially create another offering for Conifer that could be taken to selected clients focused on their administrative areas that are fully functional in the GDC, supporting tenants' field operations and expanding as a live case study. These new offerings will be a strong addition over time to Conifer's portfolio as we develop and implement them using the tenant experience as a roadmap. And as we return attention to the expired tenant contract, we've also determined there were opportunities to potentially move Tenet's mid-cycle business support to Conifer during 2021. The Tenet contract is close to being finalized. It's an arm's length and fully negotiated commercial agreement designed to be between two fully independent companies. Previously, I stated we remain on track for the spin in late Q2, early Q3. And while we continue to make solid progress on this front, the reality is Thank you very much. and cement existing opportunities with common spirit, scaling up the GBC, which is a critical linchpin, and settling the new management into a cadence that would allow us to make this move seamlessly. We know there are opportunities in new third-party contracts and growth, new lines of business and financial outsourcing, and the GBC expansion. We also know the areas we are not fully closed due to the distraction and delays of COVID. As such, We believe it is prudent to take an additional 12 months from Q2 2021 to prepare Conifer for a highly successful and sustainable spin. We have proven for the last three years that Conifer is a very valuable asset and is adding value to our shareholders every day. We believe the decision is in the company and shareholders best interest to successfully spin Conifer maximizing the value of the importance of this business unit. We expect 2021 will be a solid year for Conifer, and we expect the changes we outlined to improve the stability and scope of the business are truly value enhancing and necessary. Remember, Conifer is a 28% margin business, which has demonstrated sustainable performance. Conifer is still positioned for a strong apples-to-apples EBITDA growth of 9%, excluding the projected $35 million recontracting with Tenant and the $9 million AR recovery in 2020. So with that, let me turn this over to Dan, who can discuss more details in a quarter and our guidance, and then I'll have a few closing comments. Dan?