Tenet Healthcare Q3 2010 Earnings Call Transcript

Tenet Healthcare (THC)

Q3 2010 Earnings Call

November 02, 2010 10:00 am ET

Executives

Thomas Rice - Senior Vice President of Investor Relations

Stephen Newman - Chief Operating Officer

Trevor Fetter - Chief Executive Officer, President, Director and Member of Executive Committee

Biggs Porter - Chief Financial Officer

Analysts

Ralph Giacobbe - Crédit Suisse AG

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

Frank Morgan - RBC Capital Markets Corporation

Justin Lake - UBS Investment Bank

Gary Lieberman - Wells Fargo Securities, LLC

Albert Rice - Susquehanna Financial Group, LLLP

Whit Mayo - Robert W. Baird & Co. Incorporated

Thomas Gallucci - Lazard Capital Markets LLC

Darren Lehrich - Deutsche Bank AG

Adam Feinstein - Barclays Capital

Sheryl Skolnick - CRT Capital Group LLC

John Rex - JP Morgan Chase & Co

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Tenet Healthcare Earnings Conference Call. My name is Jeff, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed, Mr. Rice.

Thomas Rice

Thank you, operator, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations and are subject to risk and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Trevor Fetter

Thank you, Tom, and good morning, everyone. Well, I will blame you if you write report saying that this is a noisy quarter. In summary, our earnings number was huge and we're raising the bottom end of our 2010 outlook. The volumes were soft, and the EBITDA is flat to 2009, if you make appropriate adjustments.

We generated over $900 million in net income due to the accounting recognition of the value of our tax loss carryforward. Biggs will explain this further, but the key point is that while existence of the NOL has been well known it should be more tangible to investors now that it's on the books.

Looking beyond net income, we were challenged by soft volumes in the quarter. We reacted to a particularly weak July by implementing a reduction in force in August. The impact of these actions to reduce costs along with improved volume trends after July led to a positive earnings trend in the quarter, in which EBITDA grew steadily from July to August to September.

It's worth noting that we face the very tough comparison this year as adjusted EBITDA was up 50% in the third quarter last year. Once you allow for year-over-year variability, our longer-term EBITDA trend remains strong. You can see the variability and the clear long-term trend demonstrated on Slide 4.

Clearly, our growth has been very strong but not a steady as I'd like. When you make your assessment of our growth in EBITDA in the quarter, please consider the items on Slide 5. The third quarter of 2009 included three favorable items contributing a total of $20 million. We called out these items in last year's third quarter call, and nearly all of you noted them when assessing our performance.

In contrast, this year's third quarter includes items with a net unfavorable impact of $16 million. In total, these items created a $36 million unfavorable swing from the third quarter of 2009 to this year's quarter. Net of these items, this quarter was essentially unchanged.

As I mentioned earlier, we're raising the bottom end of our outlook for 2010 EBITDA to a new range of $1,050,000,000 to $1.1 billion. This is the second time this year we've increased one or both ends of the range. Volumes were certainly weaker than we originally anticipated, but this has been offset by stronger pricing, enhanced acuity and excellent cost control. We're also benefiting from the California provider fee being larger than we forecast and health IT spending being less than we anticipated.

Soft volumes were a dominant theme across the industry last quarter, so I'd like to give you some color on our experience. The overall takeaways that the volume declines were contained to a small number of hospitals, and once again a single service line. OB accounted for a full third of our volume loss.

Total admissions declined 3.5%, and commercial admissions declined 8.6% in the quarter. July was by far our weakest month for patient volumes. The trend was more encouraging in August and through mid-September. Through the first 28 days of October, commercial admissions trended slightly better than in Q3 but total admissions were slightly weaker.

As you can see on Slide 7, outpatient visits were down 2% in the third quarter. Emergency department outpatient visits were down 1.7% in the quarter, but just over 70% of that decline is due to a reduction in flu, so non-flu ED visits are basically flat year-over-year. Outpatient surgeries were up modestly, increasing by 0.1% and adjusted admissions were down only 1.8%.

The volume losses this quarter and this year have been confined to a small number of hospitals. In fact, just seven hospitals comprise more than 70% of our total admissions declines in the third quarter. But while these seven hospitals cost the majority of our volume losses, the other 42 hospitals in the aggregate are performing better than the industry average.

The seven hospitals are widely dispersed. There are two in Texas, but they're not in the same market. The other five are each in different states. Interestingly, although California is challenged by extremely high unemployment in some of our markets, none of our California hospitals are among the seven.

There is no single theme for the volume losses at these seven hospitals. One of the hospitals are having a solid and growing year but facing extremely tough comparison on volumes in Q3. Another one lost the unprofitable volume. Those two, plus three others, grew EBITDA significantly despite their volume losses.

The two others saw challenges with their physician channels. These are instances where physicians have gone into direct competition with the hospitals, where we're competing hospitals have engaged in very aggressive and sudden physician employment strategies. No matter the reason for the volume declines, we're responding appropriately, and we believe that we're already turning the losses around. In October, in these seven hospitals, while still down, the volumes were down by a lower percentage than in the third quarter.

Turning to service lines. I already mentioned that the third of the total volume decline was in OB. Looking beyond OB, there's some elective service lines, I'd like to share some interesting insights with you. As we're deep into the recession, it's very clear that patients who have a significant personal financial responsibility are behaving very differently than patients who don't. We've known all along that this was driving reductions in our commercial elective surgical volumes. But let me give you some facts that our other orthopedic surgery as an example.

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