Good morning. Welcome to Tenet Healthcare's Fourth Quarter 2022 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell you may begin.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's fourth quarter 2022 results, as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represents management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Saum.

Thank you Will, and good morning, everyone. To kick us off, I want to thank all of our physicians and caregivers for their commitment and attention to our patients' needs throughout 2022. Three years into the pandemic, I continue to be inspired by the people I meet who have chosen to forge ahead and find their calling in health care. Second, I want to take a moment to acknowledge three of our leaders who have announced their retirements this year. Roger Davis came to Conifer in 2020, planning to transition to become the CEO of a spun out independent company. Roger has been a selfless leader acting upon the opportunities to improve Conifer's technology, point solutions, AR operations and global footprint with Conifer remaining a part of Tenet rather than advancing his own personal goals. For that we will always remember his leadership as a role model in the company. Brett Brodnax has devoted over 20 years to building today's USPI. He is a pioneer in ambulatory surgery and a rock star in his field. The relationships he has cultivated with health system partners and doctors will remain a hallmark of USPI, because he has never treated them as his, but ingrained them into the fabric of USPI. He and I jointly selected Andy Johnston to return to the company after gaining additional operating experience outside of the organization and I could not be more pleased with the way the three of us will lead this transition over a full year. And generously Brett's desire for USPI's success is so strong that he has offered the option for additional time beyond 2023 with us. Dan Cancelmi is approaching 30 years with Tenet, starting as a CFO in a hospital and building his career succeeding in every role he took as…

Thanks, Saum. And good morning, everyone. We were very pleased with how we finished the year, with fourth quarter adjusted EBITDA excluding grand income, coming in at or above the midpoint of our guidance ranges, for all three of our businesses, driven by renewed same-store volume growth for USPI, strong same-store adjusted admissions growth in our hospital business, and lower levels of contract labor exiting the quarter, all of which gives us momentum as we begin 2023. In the quarter, we generated consolidated adjusted EBITDA of $897 million, which included $40 million of grant income. Our performance reflected strength in volumes and improved management of labor costs. Additionally, our results were supported by continued focus on high acuity service lines. Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which delivered strong operating results. USPI's fourth quarter adjusted EBITDA grew 18.7% compared to last year excluding grant income and its EBITDA margin continues to be very strong at 43.6%. Surgical case volumes were 101% of 2019 pre-pandemic levels. Also USPI delivered a solid 2.3% increase in revenue per case and surgical cases were 70 basis points higher than fourth quarter 2021 on a same-facility basis. For the full year, USPI produced case volume growth of 2% and net revenue per case growth of 2.5%. We continue to be pleased with the strong margins and cash flow generated by our ambulatory business. Turning to our acute care hospital business. Fourth quarter same-hospital adjusted admissions increased 2.9% over the fourth quarter of 2021 and total same-hospital inpatient admissions increased 50 basis points, while non-COVID inpatient admissions increased 4.3%. Our labor management continues to be very effective, despite the cost pressures, specialty temporary contract and our staffing costs. On a consolidated basis, we exited the…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America. Please proceed with your question.

Great. Thanks. I appreciate all the color on the USPI side of the equation and the expectations for improvement there. But I just would love a little bit more color on as you do the postmortem on what happened in 2022 and why you're a year behind on that first -- on the second part of the transaction, how much visibility do you have in that normalizing? What went wrong then? Why do you have visibility in improvement this year? And is there anything you're going to be doing differently around future deals or de novo developments? Thanks.

Hey, it’s Saum. Just real quickly on that. I think it goes -- this goes back to the commentary that I made about a wide range of the types of centers that we purchased, many of which were much, much in earlier stages of development ramp-up. And again, some of them were literally just breaking ground. And so when you couple that with the disruption from COVID to physician practices that would impact ramping centers, you look at some of the supply chain issues we faced in getting centers opened and running with the right equipment and infrastructure on time, the ramp-up of those centers being slowed slowing potential timing for buy-ups. I mean all those things kind of played into a bit of a perfect storm on a great set of assets as we noted they're the center level asset performance on the ones that were more mature, we're doing just fine. But just when you look at all of that put together, we had a set of assumptions that entered not expecting a lot of that disruption and it just didn't play out that way. And that's why I figured, it's just easier to just be clear. It's a year behind the expectations but we still feel great about the portfolio.

Our next question comes from Jamie Perse with Goldman Sachs. Please proceed with your question.

Hey. Good morning, guys. I was wondering if you could just spend a minute on what's in guidance for reimbursement, particularly on the commercial side. What kind of success are you getting in renegotiating contracts? And what visibility does that give you in terms of the rate update you'll see over the next two to three years, the contract duration?

Hey Jamie, it's a Saum. Good morning. We believe we're in a very good position from a health plan contracting perspective, where is essentially fully contracted this year about 95% and in terms of the negotiated terms and provisions we negotiate contracts for all of our facilities hospitals, USPI facilities, our physicians on the national basis with the national plans and on a statewide basis for the Blues. So we feel very good where we're at. We get asked a lot about in terms of percentage increases. And are we having conversations about given the inflationary environment, we absolutely are. We talk about rate increases typically in the 3% to 5% range, and some more recent negotiations. We've, obviously, been discussing the inflationary aspects and I think we've been making progress on that too. So we feel really good where we're at from a contracting perspective.

Our next question comes from Justin Lake with Wolfe Research. Please proceed with your question.

Thanks. Good morning. I wanted to ask another question on USPI. I appreciate all the detail. Dan said, I think 22% of EBITDA for the year in the first quarter that looks like it's up about 6% year-over-year, if I'm measuring that correctly versus 11% for the year. So what's driving that? What do you think is going to drive the significant ramp through the year to get to 11%? And then just quickly on NCI it looks like it's up a lot year-over-year materially faster than growing faster than EBITDA. Can you walk through the driver of that? I assume, it's at least partially due to the buy-ups. Thanks.

Hi, Justin, it's Dan. Let me address – let me hit the second one, the point about the NCI. Our NCI expense assumption for the year, when you look at it on a – we refer to it as sort of like a flow-through basis EBITDA minus NCI. It's roughly 64% anticipated for this year, which is consistent with prior years. 2022 is roughly 65%. So the flow-through is really consistent between the year. You're right. There is – obviously, as some buy-ups are completed that can have an impact too. But the flow-through in aggregate is very consistent from year-to-year. In terms of the first quarter, we obviously laid out our first quarter assumptions on a consolidated basis $775 million at the midpoint and your point about USPI being 22%. Keep in mind, as USPI moves through the year fourth quarter is typically seasonally the strongest quarter for USPI, so we feel comfortable with where we've set our guidance at this point.

Okay. But the seasonality wouldn't be impacted on a year-over-year basis then I would just say my right that it's up 6% in the first quarter, but 11% for the year. And if so what drives the ramp through the year to get to the 11%? Thanks.

Yeah. Again, we feel comfortable with the growth. Obviously, the percentage can move around a bit depending on various factors. But we – again, we feel good with where we set guidance for the first quarter as well as full year.

Thanks.

Our next question is from Ann Hynes with Mizuho. Please proceed with your question.

Hi. Good morning. Thank you. I just want to focus on surgery center organic revenue growth of 3%. You did give some detail on the call backing into it, it would be 4.3% and 1% being the reduction of lower acuity services. Can you tell me what inning you are in that process? How much of a headwind to growth? Is that – will that be next year? And also is there anything else that you think is currently impacting the company's ability to get back to that mid-single-digit growth target and maybe other things you're doing to achieve that in 2023? Thanks.

Hi, it's Saum. First of all, just so that we characterize it the right way. I don't consider it a headwind to growth in the sense that what we're really trying to do is enhance acuity and focus on not only net revenue growth, but over time profitability from those higher-end services. I mean, the case counts it's a headwind to case counts in some respects more than it is what we're trying to do and build and grow. And really, we're talking about the lower end of really the lower end of services that you find in the ASC setting, which you're going to migrate over some time anyway. So we actually -- I mean, I'd reiterate we're going to continue to look for those opportunities. Now I think your question of what inning are they in particular for USPI is a good one. And the -- one of the reasons that we feel comfortable with this year's guidance is that the impact of the strategic and other initiatives as well as some of the reductions from those type of migrations that we saw in 2022, we expect to slow in 2023. That's not to say that sometime in the year or in the future, we won't look at other opportunities for transitions, but we expect them to slow, which is why I called that out as a bridging item into the 2023 guidance

Our next question comes from A.J. Rice with Credit Suisse. Please proceed with your question.

Hi, everybody. Thanks for all the detail on USPI. I might pivot over to labor. If you're saying in December contract label was about 6% of total SWB. Is that a good run rate that you're taking into 2023 with guidance on where you think that would be? And then I know your experience with contract labor throughout 2022 was a little different in pattern than some of the other public peers. How much of a tailwind gross basis would that represent if you're 6% or whatever the number you're thinking it will be for 2023 versus what you spent on contract labor in 2022? And then finally have you incorporated any of that into your outlook, or are you sort of holding that out in case you need it for the permanent labor?

Hi, A.J. It's Dan. Good morning. In terms of contract labor - contract labor peaked as a percent of SWB in September. And as we move through the quarter it declined sequentially each month. And we exited with December at 6.4%. As we move into this year, we have assumed some further moderation this year in our contract labor spend, obviously, net of full-time employment costs because I mean what we're really focused on is replacing contract labor to the greatest extent possible with employed colleagues. And so we – obviously, we've been focused on now. We're going to continue to do that as we move through this year. And so, yes, we have built some moderation in aggregate contract labor into our guidance this year.

So net-net what you're doing on the permanent side it is -- you have some in there?

Yes. We've obviously taken into consideration the incremental investment with our employees when we think about the reduction in contract labor it obviously will be replaced by some form of employed costs, right?

Okay. All right. Thanks a lot.

Our next question is from John Ransom with Raymond James. Please proceed with your question.

Hi. Just a little confused about the cyber issue. How do we think about that last year versus this year in terms of a good guide to organic growth?

Hey John, it's Dan. So, obviously, in terms of the EBITDA, we've sized that approximately $100 million and we did receive insurance proceeds in January of $10 million and that is reflected in our guidance this year. But we have not reflected any additional insurance proceeds in our guidance this year. Obviously, we're working that with the insurance carriers, but we have not assumed any additional proceeds. Obviously, in terms of the impact on volume, it did have an impact on volume. And we obviously took that into consideration when we built our volume assumptions for this year.

Just remind me what was the total that you collected last year from insurance?

Total was about $10 million in terms of the net impact on the P&L. But that offset -- that's part -- we rolled that into that net $100 million number.

I see. So, in other words just to be clear it's about a $90 million good guide if we think about the organic growth help this year.

Well, no, we view it as $100 million. That's what we put on the slide. Again the cyber estimate that was an estimate and it took into consideration some of the insurance proceeds that we received.

Okay. I got you. That's what I was confused. All right. Thanks so much.

Our next question is from Josh Raskin with Nephron Research. Please proceed with your question.

Hi, thanks. Just first a clarification. I think the baseline that you guys were talking about last quarter was about $3.15 billion in EBITDA for 2022. And now it's $3.03 billion. So, I'm just curious what changed in the baseline assumption? And then my real question I was interested in the comment that Saum made around value-based care and USPI I'd be curious if the build-out of your ASC portfolio in the past couple of years has changed anything with respect to those contracts on a national or state level with the Blues with the big payers. And specifically are they looking at ways to move more volumes to ASCs? And how is that sort of impacting your negotiations?

Hey Josh it's Dan. Let me address in terms of some of the funding reductions compared to what we talked about on the call in October a couple of things. One, there is -- we did recognize $40 million of additional grant income in the quarter that number through the end of the third quarter was roughly $154 million. We ended the year with $194 million. But also at that time we didn't have visibility -- clear visibility in terms of when some of the pandemic supplemental funding for the Medicare 20% add-on the FMAP the Medicaid, additional FMAP funding so when -- obviously, we know now when the public health emergency is anticipated to expire. And we have visibility into how the FMAP will be phased down during the year. Those are the primary differences.

Yes, hey it's Saum. On the second part of your question, this is another reason why the continued push into what I described strategically around higher acuity services in the ambulatory surgery setting is important because on a differentiated basis relative to the cost in a hospital that continues to be a very attractive site of care value-based care initiative, I don't -- I can't think of other than the ASC setting a stronger site of care efficiency in the system that would exist relative to the alternative cost structure. And so yeah, we do see that as not only attractive to commercial payers, but also to government payers from the standpoint of the work that we do there and also the ability to do it with high patient satisfaction and safety levels. So I think over time as we continue down this path of innovating in higher and higher acuity things than our ASCs. I think the ASC business in USPI in particular will be viewed as a real value-based care enterprise.

Our next question comes from Steven Valiquette with Barclays. Please proceed with your question.

Great. Thank. Good morning, everyone. I mean the details on slide 10 for the adjustment [indiscernible] EBITDA for 2022. And I guess from that it seem like EBITDA margin for the total company [indiscernible] is right around 15%, if we're doing the math roughly, and then 2023 [indiscernible]. So just want to confirm that we are thinking about that right that are at least gradually determine the level of EBITDA margin expansion in 2023 versus 2022 [indiscernible] basis? And then [indiscernible] is there anything else where we're calling out if your point of view [indiscernible] that could drive some margin expansion at least on gross basis for 2023? Thanks.

Hey, Steve, we were having a hard time hearing you and you were cutting out. I think you were asking about the margins on a normalized basis. When we look at the margins in 2022 versus 2023 projections on a normalized basis in 2022 15.9% call it 16%. And for 2023, it would be roughly 16.3% on a consolidated basis, after you normalize for those various items. So there is some margin expansion and that's obviously will continue to be a focus of ours to continue to expand our margins as we move through the year and into 2024 and beyond. I'm not sure I heard exactly on contract labor. But as I mentioned, we exited the year at 6.4% saw nice improvement. The operators did a really good job managing those costs down and we have assumed some moderation as we move through this year in contract labor that has been reflected in our guidance. So hopefully, that addressed your questions that we were having a hard time hearing you.

Yeah, better now. But that was really just [Technical Difficulty]

Steve, you're breaking up entirely for us probably better to follow-up with Will off-line. We really can't hear you. We're kind of catching every other word.

Our next question is from Whit Mayo with SVB Securities. Please proceed with your question.

Hey, thanks. Maybe to ask one more on USPI sorry about this. But what actually did SCD contribute in 2022? That might be helpful. And what do you have in your plan for this year? Do you think you get back to that $140 million target, the $175 million? And then maybe just a quick follow-up. Looking at the bridge, it does strike me as odd that you expect USPI to generate the lowest organic growth of all the segments this year. And the prepared comments sound a lot more bullish and encouraging than maybe the percent that you're guiding to. So maybe just to challenge you a little bit on the 5% number like why that is the right number?

Hey, Whit, it's Dan. In terms of SCD, as Saum mentioned in his prepared remarks, we're basically a year behind. And what we said for 2022 for SCD was we would anticipate generating approximately $140 million of EBITDA in 2022. So you should think of it as that in terms of -- for 2023. We're essentially a year behind in terms of that. In terms of the organic growth, USPI's organic growth we're projecting that to be 5% on a normalized basis. And the hospital growth is -- there's -- as Saum again mentioned in his script that growth is a little bit higher than what we historically project for the hospitals. But it's also being supported by further improvement in our Massachusetts Hospital, as well as our new facility outside of Charlotte.

Okay. Thank you guys.

Our next question is from Andrew Mok with UBS. Please proceed with your question.

Hi, good morning. Hoping you could provide an update on the buy up activity in the second SCD transaction? How many SCD II buy-ups did you complete in 2022 versus your expectation I think of 30 plus to start the year? And what are you assuming in your guide for 2023? Thanks.

Hey, Andrew, it's Dan. In terms of -- we have assumed some buy-ups in 2023. I would say we have very good visibility into them and we feel very comfortable with the assumptions that we have built into our guidance for this year for those anticipated buy-ups.

And do you have the number that you did in 2022?

The entire -- 35 -- roughly 35.

Okay, great. Thanks.

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Hey guys. Thanks for taking the questions. A couple of questions on the hospital side just for -- just some number of questions. Can you quantify the nurse-to-patient ratio you guys had in back office 2022? And how do you think about that for 2023. On the same topic, can you quantify the turnover you saw in the back half of 2022? And any details around nurse recruiting and how it's tracking versus your expectations?

Hey, Pito it's Saum. We don't report our nurse-to-patient ratio. They're different state-to-state and some states have regulations and others don't. And it really depends heavily on the acuity. I'm not even sure how in an aggregated way one could describe a nurse-to-patient ratio given the differences in ICU, MedSurg, Forest [ph], Telly, et cetera and we don't plan on reporting on that. The second part of your question, it's important obviously I took the time to mention it and I appreciate you're highlighting it. We're very focused on our nurse, but also tech and other important clinical role recruiting and that's been going very well. As I've indicated, our hiring was up on employed staff in 2022 over 2021 and that's accelerating. But at the same time, importantly, because of the investments we've made in the workforce, our turnover rates have come down, which is important from a retention perspective. And I think, you could legitimately attribute those reductions to the investments we've made stabilization of the operating environment, coming out of the pandemic surges, the recurrent surges and also probably a somewhat less desire for nurses to continue on the pace at which many of them are choosing to travel for other assignments. And I think as all of those things help to stabilize the workforce environment in 2023. As Dan noted, we hope to make further reductions in our reliance on contract labor and expect that to moderate through the year. So, it is a very important agenda item as we look forward. I would tell you, one last piece of color on this that, over the past couple of years, I had mentioned a few times, that we have built a lot of relationships at the ground level with nursing schools. And our ability right now to bring on new graduates into our environment, it's better than I've seen in a long time and that's helping. Those investments in relationships that we made over that time, I think will serve us well in 2023.

Great. Thanks, so much.

Our next question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey good morning, guys. Dan thanks for the color on your capital deployment views. But maybe just thinking about the buyback announcement from last quarter and your views on debt pay down as well. Where do you think the right leverage ratio is, or have you set leverage targets? And maybe just to clarify, as we think about buybacks, curious as to your thought or philosophy on using debt at some point to buy back stock, or are we avoiding that altogether? Just want to clarify all these things. Thanks.

Yes. In terms of leverage, we've obviously made substantial progress over the past four or five years. If you go back to 2017, we were north of six times and we brought it down to approximately four times since then. Reducing leverage is obviously a very important focus of ours. As we make all capital decisions, we take into consideration, what's it going to mean to our margins, what's it going to mean to our free cash flow generation, what's ultimately going to mean to our leverage. So, it's top of mind always. And we'll continue to look for opportunities to reduce leverage in the future. In terms of the mix of debt retirement versus share repurchases, as I mentioned in my remarks, we have four key priorities. Debt retirement is one of them, as well as share repurchases. We look at -- obviously, we'll look at where market conditions are at and as well as various investment opportunities that we have and balance -- balance our capital allocation based on what we think will drive a best return for shareholders.

Thank you.

Our next question is from Stephen Baxter with Wells Fargo. Please proceed with your question.

On the volume outlook. So on the hospital side it looks like if you achieve the growth you're targeting. I think you'll be in the upper 80s range compared to the 2019 baseline. I guess how should we think about the volume that you haven't recovered? I guess how much of that do you view as a real opportunity, if labor pressure eases and how much do you think could be service lines that might not make sense for the company going forward? And then just on the USPI side, do you think the volume growth on USPI is going to be pretty consistent throughout the year, or do you think maybe that's going to be ramping a little bit throughout the year maybe as the environment continues to normalize? Thanks.

Yes. I'm happy to start, it's Saum. So on the hospital side from a volume perspective, I would say that it really – the year really depends on the assumptions that we've moved past significant disruption from COVID-related activity. Obviously, as the last three years have proven, that can be somewhat hard to forecast. But I think there's a lot of good reasons at this point to believe that that will in fact be the case this year. Even the acuity of the COVID that we're seeing and even during the winter the amount of COVID we saw has come down. It's been quicker to treat easy short stay in and out type of cases with much lower impact on acuity. And importantly for us, given our strategy, it had a lot less effect on disrupting surgical scheduling and other things in the acute care hospital environment. So anyway, that's just I think a good sign overall. Look, in terms of USPI, as I mentioned, we're bridging from an inconsistent quarter-to-quarter set of results in 2022 into 2023 with a very thoughtful, bottoms-up, comprehensive examination of our portfolio. It's – this is really important. We took the time to understand the physician additions, the initiatives, the service lines, et cetera before coming to our guidance and we expect to see more consistency through the year this year than we did in the prior year. And look, if there's a range on the guidance for a reason, if post-pandemic recovery is more attractive, the upper end of the guidance contemplates that. And obviously, we would love to deliver that. So that's what we're working towards.

Yes. And just to add on just in terms of from an earnings perspective is for USPI, as we move through the year, as I pointed out, roughly 22% of the EBITDA for the year will be generated in the first quarter, which is great when you look at the first quarter last year, it's growth of close to 13%, you take into consideration there is some headwinds in the first quarter this year compared to last year related to sequestration the 340B, but still even with some of that there's still nice growth year-over-year in the first quarter. And obviously, the fourth quarter is the strongest quarter for USPI.

We have reached the end of the questions at this time. This concludes today's teleconference. Tenet Investor Relations is available for follow-up questions. You may disconnect your lines at this time and we thank you for your participation.