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

Q4 2018 Tenet Healthcare Corp Earnings Call

DALLAS Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Tenet Healthcare Corp earnings conference call or presentation Tuesday, February 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Strong

Tenet Healthcare Corporation - VP of IR

* Brett P. Brodnax

United Surgical Partners International Inc. - President & CEO

* Daniel J. Cancelmi

Tenet Healthcare Corporation - CFO

* Jason B. Cagle

United Surgical Partners International Inc. - CFO & Senior VP

* Ronald A. Rittenmeyer

Tenet Healthcare Corporation - Executive Chairman & CEO

* Saumya Sutaria

Tenet Healthcare Corporation - COO

* Stephen M. Mooney

Tenet Healthcare Corporation - CEO & President of Conifer Health Solutions

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Anagha A. Gupte

SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Brian Gil Tanquilut

Jefferies LLC, Research Division - Equity Analyst

* John Wilson Ransom

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Mei Shang

Nephron Research LLC - Research Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Tenet Healthcare 4Q '18 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Brendan Strong, Vice President of Investor Relations. Please go ahead.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [2]

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Good morning. Thanks, Amanda. The slides referred to on today's call are posted on the company's website. Please note the cautionary statement on forward-looking information included in the slides. In addition, please note that certain statements made during our discussion today constitute forward-looking statements. These statements relate to future events, including, but not limited to, statements with respect to our business outlook and forecasts, our future earnings and financial position. These forward-looking statements represent management's current expectations based on currently available information as to the outcome and timing of future events, but by their nature, address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward-looking statement. For more information, please refer to the risk factors discussed in Tenet's most recent Form 10-K and subsequent SEC filings. Tenet assumes no obligation to update any forward-looking statements or other information that speak as of their respective dates, and you are cautioned not to put undue reliance on these forward-looking statements.

I'll now turn the call over to Ron Rittenmeyer, Tenet's Executive Chairman and Chief Executive Officer. Ron?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [3]

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Thanks, Brendan, and good morning. As we posted last evening in our release, Tenet delivered strong financial performance in 2018. Revenue, EBITDA and EPS were all above consensus. EBITDA was in the upper half of our outlook range, up 4.7% and up 9% on a normalized basis. We also more than doubled EPS in 2018 to $1.86, which was above the high end of our outlook range. Each of our businesses rounded out 2018 with solid results. USPI delivered adjusted EBITDA less facility-level NCI growth of nearly 13%, after normalizing for the divestiture of Aspen. USPI's case growth was 3.4%, including strong performance in both our surgical and nonsurgical businesses. Conifer had a great year, with adjusted EBITDA up nearly 35% on a normalized basis. They also improved margins by 330 basis points in the fourth quarter alone. Their performance throughout the year was a result of diligence and execution and a more pointed approach to cost management. Our hospitals delivered normalized EBITDA growth of 2%. Volume performance was below our expectations, but we do expect improvements throughout 2019 with our new leadership and new focus.

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. I would say, I would agree you, the $150 million to $175 million that is our starting point. We spent -- invested a little more than that in 2018, based on the attractive opportunities that were there and pipeline is very robust. So I'll turn over to Brett to...

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [6]

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A. J., it's Brett Brodnax. First of all, yes, we were very pleased with 2018 results from a development perspective. As Ron mentioned, we invested $240 million for the year. We added 7 new health system partners and we added 27 new facilities for the year. So it is one of the better years that we've had as a company from a development perspective. As we look at 2019, as Dan mentioned, our pipeline continues to be robust. We have guided $150 million to $175 million, but look if we continue to find high quality acquisitions, it could be a little bit higher than that. And then on the hospital front, our health system pipeline continues to be very robust. We'll add as many health system partners in 2018 as we did -- I'm sorry in 2019 as we did in 2018, which will bode well for our future growth from both M&A and...

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Operator [7]

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We will take our next question from Ralph Giacobbe from Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [8]

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Certainly understand the sensitivity, but just wanted to be clear on Conifer. On the exclusivity with the partner, is that just a straight up sale or some sort of JV or other alternative? As I know you had mentioned other potential alternatives in the past, just wanted to be clear on that?

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Operator [9]

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Please stand by. Brendan, are you there?

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [10]

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We are here. Is something happened? Line dropped?

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Operator [11]

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Yes. We can hear you now.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [12]

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Okay. All right. So please go ahead with the next question, Amanda.

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Operator [13]

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I believe, Ralph was still asking his question. Are you still there, Ralph?

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [14]

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Yes, I am here thanks. I do not know if you caught my question or not?

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [15]

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Yes, we did not hear it at all, sorry.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [16]

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So it was basically certainly I understand kind of the sensitivity, but I just wanted to be clear on Conifer. The exclusivity that you mentioned with a partner. Is that a straight-up sale or is it some sort of JV or other alternative? I know you mentioned in the past potential alternatives, so just want to be clear on that.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [17]

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Well, unfortunately, I can't answer that question. As I said to you, I'm really bound by a very tight confidentiality agreement that we signed. That's why I tried to put that in my text. I appreciate your question and I understand why you want to know but this won't be that long of a process and I am sure we will be able to answer that down the road. But right now, I'm really bound by this and all I can say is, it's one of the partners we've been speaking to and I can't get any -- that we have been looking out and I can't go any further than that what I said in the statement, I'm sorry. By the way, it is good news, so for the record.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [18]

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Fair enough. I will wait for that. So you had previously targeted 3% to 5% EBITDA growth for 2019. Maybe just help us on the drivers of what changed to give you confidence to kind of raise it to that 4% to 7% range, maybe above and beyond kind of the incremental cost saves that you saw?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [19]

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Good morning, Ralph, this is Dan. Certainly, as we finetuned our outlook and modeling for this year, certainly one of the key factors was the cost efficiencies that we're going to execute on the new $200 million cost reduction initiative. So that's part of it. Certainly, as we examined each market, with Saum coming on board, in his role, and diving deeper into each market, looking at the opportunities there, and the trends we saw in the fourth quarter as well played a part in that as well. So we increased it a little bit. It was nice to see the hospitals perform better than we expected in the fourth quarter and looking forward to continuing to deliver those types of results on the hospital side.

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Operator [20]

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Our next question will come from Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [21]

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On USPI business, it seems your revenues grew about 5% in 2018, your margin improved about 120 basis points. Is that the right ratio going forward in terms of same-store revenue versus margin improvement? Or are we at a level where margin improvement become challenging? That's because if we look at your same-store guidance for the ASC is about 4% to 6% and back out $10 million to $15 million of incremental EBITDA from acquisitions, I don't see a big margin improvement in your 10% to 12% guidance.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [22]

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Well, absolutely, as we continue to grow the margin improvement is more of a challenge on the bigger base. We do have some facility-level margin improvement built into our guidance for next year. And I would say, we -- at a facility-level, focusing on reported margins, we're still at 30% facility-level margins and we try to improve that a little bit each year.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [23]

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This is Dan. Just the other thing I want to point out, the USPI has been performing incredibly well. We are very optimistic that, that's going to continue organically. Just to remind you, we look at it as 2% to 3% case growth going forward as well as 2% to 3% pricing growth, and EBITDA growth -- EBITDA less NCI growth 8% to 10% on a long-term basis. We're going to do a little bit better than that this year, but -- and then when you think about the pipeline, we feel obviously, really good about the business.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [24]

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I mean, it's been performing outstanding. I guess, on that same topic, minority interest expense is starting to grow, I think, double the rate of ASC EBITDA guidance? Does that mean that some of the growth is coming from selling more shares to doctors or is something else incurring in the minority interest line?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [25]

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No, I've got to say, I think that -- this is Brett -- I think that's primarily driven by the fact that we did a couple of large acquisitions in 2018 that we acquired a minority position. And it was a result of the health system partnership deal in one of our key markets around the country. So that's a large part of what's driving the higher equity and earnings.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [26]

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Okay. And is there a possibility for buying back some of that MI in the next year or 2?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [27]

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We always continue to look for opportunities to buy ownership in the existing facilities that we know well. Obviously, we don't have the due diligence risk related to buying ownership in facilities that we already own and operate. So we continue to look for opportunities within the portfolio to do that.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [28]

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And Pito, just to remind you during '18, we increased our ownership interest in USPI from 80% to 95% where we reacquired or purchased the remaining Welsh Carson interest.

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Operator [29]

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We'll take our next question from Anagha Gupte with SVB Leerink.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [30]

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The question firstly was on the pricing growth where you saw at least in the fourth quarter 5-plus percent ex the California provider fee. You successfully renegotiated contracts with Anthem, Cigna, perhaps Humana. Can you talk about the sustainability of this? You're baking 2.5% to 3.5%, I think, into revenue per admission for '19? And how that plays out?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [31]

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I understand, certainly, we were poised to see the revenue yield in the fourth quarter a little over of 5%. For the full year, it was 3.6%. So again that -- it is being driven by our focus and allocation of capital to the higher acuity service lines and certainly our commercial book of business as well. So when we think about this year, obviously, we see the guidance that we're assuming, that it's going to be 2.5% to 3.5%, but we feel good about where we are at. From a contracting perspective, we're about 90% contracted for this year and little less than half for 2020. So good visibility into pricing on the commercial side. And we know where Medicare is going to be. Medicare, about 2% growth year-over-year. So we feel good about pricing. And then cost management, obviously, we feel really strong about that in terms of what we already executed on and what we think we can continue to execute on, and capture additional cost efficiencies.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [32]

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Okay, thanks for that. And then on the USPI. Just to follow up on the M&A landscape and the competitive dynamics there in terms of the availability of assets, surgeons, the multiples and what types of players are looking to buy here?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [33]

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Yes, Ana, this is, Brett Brodnax again. So in terms of competition, the primary competition that we continue to see is related to other surgery center companies that are playing in the space. We're also seeing a little bit of a resurgence of competition from health systems around the country who are trying to figure out how they accelerate their ambulatory growth. Now many of those health systems are looking to organizations like us to partner with to help them to do so. But there are health systems around the country who are deciding to go it alone and we view those, as obviously, competitors. And I guess, the third dynamic that we were seeing a little bit of at this point is large physician groups, who are seeking private equity partners to consider a rollup strategy. Now some people would view that as competition. Quite honestly we see that as an opportunity as we can work with some of these A/E firms to help leverage our infrastructure as opposed to them having to replicate their infrastructure. And we think there is opportunity to function with these A/E firms to help them grow their footprint and scale up their business at a much more expeditious pace. In terms of the multiple -- I'm sorry, go ahead. In terms of the multiple, sorry, go ahead.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [34]

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Yes, please go ahead. Sorry, no, no, I'm sorry, about that. Go ahead.

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [35]

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Okay, in terms of the multiples, I would say that they are pretty -- they have been pretty consistent over the last year and 1.5 years. We're seeing multiples anywhere from 7 to 8x, which has been pretty consistent with what we've seen in the recent past. We don't see that changing anytime soon, and we think the market pretty well stabilized from a multiple perspective. I will say that the market is doing a better job in terms of discounting and the risk associated with some of the assets around the country. But at the same time, are paying the premiums for the high quality assets, but overall the averages are pretty consistent.

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Operator [36]

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We will take our next question from Kevin Fischbeck with Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [37]

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Just wanted to go back to the volume commentary. Obviously, I appreciate all the things you're doing, operationally you are trying to improve things. But just wanted to understand, the economy is doing pretty well. Is there anything though that's sort of counteract to 2019 why you're not going to see better volume growth this year? You mentioned of course EBITDA drag, but is Detroit still a drag, or is there some other issue that's kind of holding you back this year that makes it easier for us to have visibility into the improvement in 2020 and beyond?

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Saumya Sutaria, Tenet Healthcare Corporation - COO [38]

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Kevin, this is Saum. Thanks for the question. I am pleased with the underlying foundation that we have in all of the remaining markets. And we have opportunity across the markets in our ability to improve patient access, scheduling some of the things that Ron described in the beginning that are just operationally going to allow us to serve those communities better. And then, obviously, we are focused on -- but it takes time accelerating the pace at which we add high-quality caregivers to our network. And then finally, if you think about the discussion that we've been having around the strengths of the USPI platform across the country, that applies very much to the markets in which Tenet has hospitals. And so the integration with the ambulatory platform across the different vehicles, ambulatory surgery, urgent care, imaging, all those remain growth opportunities for us in the Tenet hospital market, which we will pursue over the coming year.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [39]

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Okay. And then just a question on the cost saves. Can you break out how much is coming from Conifer, so just -- so that we know that if you end up do -- divesting Conifer, how much of that cost base we should be thinking about as -- that we should [attribute] to the ongoing business versus the divested business?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [40]

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Kevin, it's Dan. So on the bridge, you can see the -- from when you were walking from 2018 to 2019, we broke that down between the 3 business units that will realize this year the full $200 million. We will provide more visibility in terms of the specific dollar amounts by business unit a little bit down the road. But in terms of, I would tell you that there are additional cost efficiencies, opportunities at Conifer as well as all -- the other 2 business units, and that's where we're going to be executing on. But at least for now, refer to Slide 16, that at least gives you the pieces for 2019.

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Operator [41]

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We will take our next question from Josh Raskin with Nephron Research.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [42]

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Actually, it is Whit. Are you on the line?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [43]

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We can't hear anything.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [44]

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Yes, I am here.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [45]

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Go ahead, Whit.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [46]

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Maybe just first on Conifer. I'm trying to reconcile 2 things that I presume are interrelated. First, the implied decline in the non-Tenet revenue seems a little steep this year. And I'm just wondering of the hospital divestitures, how many terminated the contracts with Conifer? And then second, looking at the $40 million headwind from the divestitures in the bridge, it seems to suggest maybe $160 million of lost Conifer revenue, if we assume maybe a 25% margin or maybe $4.5 billion of managed revenues. So I'm just trying to reconcile this, it just seems to imply a larger number than I would have expected.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [47]

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Whit, it's Dan. The $40 million -- or the $30 million number that you've seen on Slide 16, I think that's what you're referring to. Yes, there's obviously a few pieces in there. I was wanting to try to hit a few of them, and then I'll turn it over to Steve in terms of a broader overview. But that -- the $30 million of growth, some of that is attributable to contracts we have with customers, where we have price escalators in there or rate escalators, that will, certainly we anticipate drop straight to the bottom line. So certain contracts we have could be -- the escalators could be based on CPI or another metric. So that's a fair sized amount in that line. Certainly, as Tenet grows its business, there is additional revenue that Conifer realizes. And we don't believe we would need to add any additional resources either. So there's a little bit of that in there. And then the mix of business. It's important, as we think about the types of services we're providing to all customers, certain point solutions depending on the mix of those point solutions, the margins can be much more attractive. We've also, in certain cases, decided to exit some business that wasn't necessarily the most attractive, and may have had either smaller margins or maybe actually slightly dilutive margins. So whole list of items that go into that in terms of what drives that $30 million. Steve, do you want to address the broader...

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Stephen M. Mooney, Tenet Healthcare Corporation - CEO & President of Conifer Health Solutions [48]

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Yes, Dan, I think overall, I think with the comment you made [on Slide 16.] I think it's on Slide 15, you mentioned $150 million revenue decline. As we move it from, say, it was a Tenet hospital, when it gets divested, it then moves into commercial. I mean, when that happens, we typically have a 2-year transition service agreement as a result of that. And so those counts now are starting to come off the portfolio. A lot of cases, as you know, they were required by some organizations that had internal operations. You know what is going to happen, obviously just last year and that's happening again in 2019. So that's kind of the part of the process as we continue to go. So -- and Dan mentioned that some of it is result of that and other parts it is a result of some contracts that we just do not feel we wanted to continue with as they are coming up for renewal, their profitability and other things like that. So it's kind of where's it at.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [49]

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Of the 4, just to be clear, the $40 million headwind. How much of that is coming exclusively from divestitures? How much is coming exclusively from maybe terminated contracts? Or how much is coming from business that you intentionally walked away from? I mean, presumably it wouldn't be much of an EBITDA tailwind if it was financially attractive.

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Stephen M. Mooney, Tenet Healthcare Corporation - CEO & President of Conifer Health Solutions [50]

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The vast majority of that number is coming from the divestitures.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [51]

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Okay, perfect. And one last one, since I heard Jason earlier. Looking at the $45 million of acquired EBITDA in the ambulatory division this year, can you break out how much of that is expected to flow through unconsolidated versus the consolidated? And I guess that the corollary there is that the equity earnings growth and implied margin improvement looks really high this year, so I'm just trying to flush out where all that growth is coming from?

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Jason B. Cagle, United Surgical Partners International Inc. - CFO & Senior VP [52]

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Whit, it's Jason. I can't tell you how much more unidentified M&A is going to be unconsolidated versus consolidated. We go after the deal as they present themselves and we've never been effectively able to guide to that. I will say, to your point on equity and earnings, the vast majority of that is what Brett mentioned earlier, that we had a couple of large acquisitions right at the end of the year that really don't impact '18, but are coming through the equity line in '19.

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Operator [53]

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We will take our next question from Josh Raskin with Nephron Research.

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Mei Shang, Nephron Research LLC - Research Analyst [54]

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It's Mary on for Josh. My question is around the ASC seasonality, which didn't seem as strong this year in the fourth quarter. Is there anything to call out on the volumes there?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [55]

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This is Brett Brodnax. First of all, I would say that, if you look at the full year, we're pretty pleased with overall volume growth, the 3.4%. And if you look at Q4 specifically, you have to take into consideration that the Q4 in 2017 was at 4.6%, so we had a pretty significant cost that we were dealing with. And that's really the primary driver of the results in Q4 of 2018.

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Mei Shang, Nephron Research LLC - Research Analyst [56]

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Okay, got it. That makes sense. And then just on inpatient surgeries this quarter were a little bit weaker than we were expecting. Is this primarily related to Detroit or the service line closures?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [57]

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This is Dan. Certainly, when we think about surgical volumes, we need to grow those. We're not necessarily pleased where our aggregate numbers are. But I would tell you that's obviously one of the areas when we think about allocation of capital and focusing on higher acuity service lines, the strategy is to grow incremental surgical volume, whether it's in the inpatient settings or outpatient setting.

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Operator [58]

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Our next question will come from John Ransom with Raymond James.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [59]

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Last year, you had some losses in the California capitation business that you called out in the third quarter. What's the comparisons in your '19 guide versus what you experienced in '18?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [60]

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John, it's Dan. 2019, the risk contracting business in Southern California, you should think about it in terms of, roughly $15 million for the full year, probably a little more weighted into the first half. We've changed that management. We're getting our arms around the business, and we'll get it solved and -- but it's going to take a little bit more time.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [61]

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Okay. And then secondly, just going back to the Conifer business, not Conifer itself, but what -- is this market for revenue cycle hospitals, is it still growing or have we hit a maturity point in your opinion?

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Stephen M. Mooney, Tenet Healthcare Corporation - CEO & President of Conifer Health Solutions [62]

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Yes, I'll take that, this is Steve. No, I don't think we've hit a maturity point. I mean, I think we're looking over the years, we clearly had estimates on how we think the market is going to grow. I think, in some cases, it hasn't necessarily grown as fast as we thought early on. We were seeing a lot happening with all the EMRs going in the hospitals, lot of focus was on that for several years. They're kind of coming out of that now, whether it's the conversions to Epic or Cerner. They're now starting to focus on bottom line -- bottom line improvement, how are they reducing overall cost structure? Obviously, we're clearly one of those solutions across the portfolio. So lots of conversations happening in the market. I think we're seeing more, what we call performance solutions or point solutions at areas around personal health management, plus availability services, on to the areas around self-pay is, work around your coding, your clinical documentation work. We're seeing a lot more uptick in that area right now. And the full outsource, you know are very strategic moves. So there's been, I think, few of those in the market in general. I doubt if you're going to see still tons of those going forward. You're seeing a lot of -- a lot of mid point solution areas, a lot of these areas of specialty that everybody is moving towards outsourcing. A lot of outsourcing is done today but they're typically looking for a partner that can aggregate that across the portfolio, and that's we think Conifer differentiates ourselves in the marketplace by coming in with a compete suite of solutions for the market and obviously bringing in technology enhancements, whether it's areas around AI, RPA, touch process languaging. In these areas, what everybody's looking at currently today is these one-offs, we have to [bring] our entire suite [in] the market.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [63]

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And last one from me. Dan, if we just look at M&A contribution and adjust for timing, and let's assume you hit the midpoint of your guidance. What's the 2019 EBITDA look from M&A? And this would include stuff that you bought in '18, that you didn't own for the full year plus what you plan on buying in '19? Can you kind of size the total EBITDA lift year-over-year?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [64]

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Yes. I would, John, moving on to Slide 16, we called that out and it's $45 million. That's a combination of deals that were done in '18 as well as some deals that were done -- that we anticipate will be executed on in 2019. You may ask a question, what's the breakdown between prior year deals and what we anticipate related to investments we'll make this year? It's probably roughly 1/3 of that $45 million would relate to investments we make in 2019 and the remaining related to prior year deals.

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Operator [65]

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Our next question will come from Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [66]

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Ron, so you guys have done a really good job with the $250 million cost cut. So as we think about the next $200 million, do you mind just walking us through some specifics and where do you think you can squeeze more? And how much harder would the extra $200 million be to achieve?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [67]

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Well, I think the $200 million -- the problem with cost cuts is there are always hard to achieve. But the reality is that we -- I think we have a fairly good sense that there will be more as we do further integration. We're going to consolidate, for example, our office structures here in Dallas into one building. That made sound trite but it actually will force a lot more integration to occur and we do need to do that. In the field, Conifer is going to continue to look at locations and can do consolidations. In the hospitals, we're -- we're doing same type of thing. We're always going through jobs and premium labor and contracting labor, and why do we need that and should these be permanent jobs at a lower rate than you pay for premium contracted labor. So there's a lot of effort on a lot of fronts. There's no silver bullet to this. We talked about offshoring, which across the country, there will be some -- that activity will begin to take shape this year and move at a reasonable pace. So to me, there is a lot of this people stuff, there's process stuff. Paola Arbour, our IT person is sitting here. She is spending a lot of time looking at upgrading systems and investing by eliminating some inefficient stuff and some things that have aged out to doing some new things, which will be an investment that we can almost cover just by the fact that money will be saved by the changes we make. So all of those things add up to, I think, a reasonable line of sight to the $200 million. But I would be kidding if I said I have it totally defined down to the number because we're not that good. But throughout the year, like we said last year, as we kept increasing it, there are places that we know we haven't finished yet in every one of the divisions and in every part of the effort we make to integrate. So kind of a long way to say that it's a broad program, but within that program, it's very specific. So we are doing it and we're very active in it, and I would say it's -- engaged with my whole team. And I think last year was interesting year in the people had to think about doing it. It wasn't something that was kind of normal. I think this year, we're already in the game and we understand it. And I think the ability to address it is much more ingrained in the organization than it was a year ago. So we'll see where it goes, but that is my intent. I'm comfortable with the number. I'm probably the only guy in this room that is comfortable with the number. But I believe the number is realistic and we should be able to achieve it, so hope that helps.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [68]

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I appreciate that. And then my follow-up for Dan. As we think about leverage. I mean, you talked about 5x. I know -- I think in the past, you've mentioned a target of getting to 5x leverage by end of '19. Is that still the goal? And then how do you bridge that given the guidance ranges that you provided for the year?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [69]

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This is Dan. certainly, we remain committed to getting to 5x or lower from a leverage perspective. Listen, you can do the math based on the guidance we have. We still have a little more work to do to get there, and that's where we're focused on. Every time we make an investment decision, we are always thinking about the implications on our leverage. So I can assure you of that. So all I'll say, we absolutely remain committed to getting to 5x or lower.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [70]

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This is Ron, and I'd totally underscore that from the enterprise standpoint. As we continue to look at assets and evaluate assets relative to their fit and where that's going, we're not going to talk about anything specific. As I said before, we'll never preannounce. But -- I mean, those things are ongoing and a very active part of our process. We're not married to anything. And so anyway...

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Operator [71]

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And we will take our last question from Sarah James with Piper Jaffray.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [72]

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There's been an influx of investment in urgent care from many sources. How do you think about the risk of market oversaturation and maintaining share during this influx?

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Saumya Sutaria, Tenet Healthcare Corporation - COO [73]

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Sarah, this is Saum, thanks for the question. I agree with you that there's been an influx in investment, broadly speaking, in the urgent care space, so models are often not the same in certain different populations in that market. Remember, in many markets, including some of ours, there's shortages in primary care as well that are fulfilled from a demand perspective by urgent care centers as they develop. And then, of course, you have the retail clinics within big box retail that serve perhaps a different purpose in different populations. I think one of the things that you're seeing is that urgent care centers are increasingly providing slightly higher acuity care as well and taking on patients that may have some more chronic illness as well. So when I add that up at this point, it's not surprising to me that we're seeing more investments come in. There are different models. They're not all the same. And it's not entirely obvious which models will sustain over the long term. But I don't see yet a major problem with oversaturation across the country.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [74]

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And to follow-up here, what you guys are doing on marketing and sales strategy is really innovative. And I'm wondering if you're seeing it move the needle yet on volume or if it's having any impact on your strategy of what specialties and what mix you want to have?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [75]

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I don't know if it's that finite. I would tell you that it's clearly moving the needle on energizing our people in the field and energizing our teams around the country. They walk in a hospital, they can see their picture on the advertisements in the lobby, and they see their stuff on bus wraps as they go by me. It's an energizing experience to feel that you're part of the community and you're making a difference. I believe -- and we believe from at least the initial reads that it's having a very positive impact. And I think this is -- marketing is an effort that takes time. And it's how you build the foundation in the community, and that's what we're doing. So we feel good about it. We think that the initial responses, at least the visual initial responses are supportive. The real question will be how the numbers tumble, and how the service lines fall out. But we're a little early for that, considering we just really kicked this off towards the end of last year.

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Operator [76]

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At this time, I'd like to turn our call back to our presenters for any additional or closing remarks.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [77]

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Thanks a lot, Amanda. We thank, everyone, for joining us today. Our next event will be the Barclays Global Healthcare Conference on March 12. We look forward to seeing you there. And if you have any additional follow-up questions, you can reach me at (469) 893-6992. Thanks.

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Operator [78]

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This concludes today's call. Thank you for your participation. You may now disconnect.