Tenet’s Q4 2006 Earnings Call Prepared Remarks
February 27, 2007
Trevor Fetter, President and Chief Executive Officer
Thank you, Operator, and good morning.
I want to begin by offering my thoughts on the accomplishments of 2006, our performance in the
fourth quarter, and an assessment of where we are in our turnaround.
Perspective on the past year
It’s amazing to look back to what we covered in last year’s fourth quarter call to realize how
much we’ve accomplished in the last 12 months.
A year ago, we still faced a number of daunting challenges, for example:
• The second Alvarado jury was entering its fourth month of deliberations, and it would be
another two months before this second jury was declared deadlocked; and
• The Medicare outlier and physician arrangements investigations were entering their
fourth year, and physicians were voicing their concerns that the ultimate settlement might
leave the company financially incapable of investing in our hospitals; and
• The IRS was examining Tenet for a significant tax exposure dating back to 1993 through
These matters threatened the continued existence of the company. And, in 2006, we resolved
As a result, Tenet enters 2007 in the strongest position it has enjoyed in years. I believe our
position allows us to move forward with a sense of growing strength, and we are building the
momentum we need to generate competitive financial returns for our shareholders.
It’s hard to believe that at the time of this call last year we were also still reeling from the effects
of Hurricane Katrina. The hurricane had wiped out six of our hospitals and had eliminated the
jobs of more than 4,000 of our people. Twelve months ago, we were still putting together our
insurance claim and trying to determine the futures of these hospitals and the communities they
served. Katrina was devastating to the company, but in 2006 we essentially resolved the
aftereffect. We settled the insurance claim and found an excellent buyer for the hospitals that
were in a condition to continue operating.
2006 – Full year performance
Our financial results for 2006 present a mixed picture. We had a number of charges for
settlements of investigations and litigation, as well as charges for impairments of assets whose
value had eroded since Tenet acquired them.
Adjusted EBITDA was $153 million for the fourth quarter of 2006. This translates to a margin
of 7 percent and growth of 24 percent over adjusted EBITDA for Q4 2005. The adjustments are
detailed in the press release that we issued this morning.
At mid-year, with the announcement of our major settlement with the Department of Justice, we
provided investors with a 2006 outlook for EBITDA in the range of $675 million to $775
million. So, for the full year 2006, we were in the range, but at the low end.
Of course, it’s important to place the full year results in context. Compared to $572 million in
adjusted EBITDA for 2005, this represents an increase of over 20 percent year over year, which I
think is evidence that we’re making solid progress in rebuilding the company.
None of you will be surprised to hear that the items hurting our performance in the second half of
2006 were slow patient volumes and high bad debt expense. Both volume and bad debt were
particularly weak in the third quarter. But, in the fourth quarter, we were able to improve both of
these performance measures relative to recent trends.
I’m not ready to declare that we’ve reached an inflection point on either volumes or bad debt
expense, but I was encouraged by the trend toward the end of the year, and we’re working hard
on our innovative strategies to address these critical variables.
Our 2007 outlook for the 55 hospitals that we expect to have at year-end includes an EBITDA
range of $700 million to $800 million, the midpoint of which represents EBITDA growth of
approximately 7 percent, and a margin of approximately 8.3 percent. This represents our very
best thinking on the 2007 outlook, and Biggs Porter will provide you with a more detailed review
of the underlying line items which drive it.
Ordinarily, I prefer to limit an earnings outlook to just the current year. But, at this point in
Tenet’s turnaround, I believe it is helpful to share with you management’s assessment of the
earnings power of the company – both in the year ahead, and looking out toward 2009.
We are stopping at 2009, not because it is likely to represent the end-point of our turnaround, but
because the uncertainties are far too great to make meaningful statements beyond that point. For
example, within three years Tenet, and the entire industry, could well be in a completely
different environment for the financing of government health care programs and care for the
One of the great things about the hospital business is that there is no end of opportunities for
improvement, so I’m confident that we will continue to identify fresh initiatives to address the
challenges and opportunities that present themselves over that time frame and beyond.
Recent Government Proposals on Universal Health Care
Regarding the future of health care finance, as you know, proposals on covering the uninsured
are being put forth virtually every week. President Bush, a number of governors, senators,
industry trade groups, labor unions, and presidential hopefuls have all put forth different plans.
So far, every proposal leaves some details to be worked out. But they tend to fall into three
categories. One is a tax code change to provide incentives for people to buy insurance under the
current system. Another approach is to provide direct subsidies to people to purchase insurance
in the private market. The third approach is to have a universal coverage through a single-payer
system. There are pros and cons to each approach.
But what I find most encouraging is that expanding health coverage to all Americans has become
the most important domestic policy issue. Every presidential candidate will have to take a
position on it. I’m also encouraged because virtually every serious proposal has two elements in
common. These elements are a requirement that every American has insurance, and that those
who can’t afford the insurance receive assistance to make it more affordable. Beyond that, there
are wide differences. But the main objective of hospitals is to receive some form of payment
from those patients who currently do not pay us. Virtually every serious plan addresses that
Last week, our industry group, the Federation of American Hospitals, unveiled the most
comprehensive and well thought-out plan to date. I encourage you to go to the Federation’s
website and take a look at the plan. It’s sensible and it’s actionable.
It may still be until 2009 before we see real relief for the uninsured problem on the legislative
front, but when you look back just a year, very few policymakers were even talking about how to
address the problem.
In the meantime, at Tenet, we’re not waiting for a legislative solution. In previous calls, and at
our investor day, we previewed the strategies we’re using to improve collections and act more
like a retail business in financial interactions with our customers. No matter what the national
solution for the uninsured is, our early actions in this area will position us well.
Before introducing the other members of our management team here this morning, let me repeat
that as we enter 2007, we do so on a stronger footing than at any time in the recent past.
As 2006 unfolded, we reaped some early benefits from our Commitment to Quality program,
winning Center of Excellence designations at five times the rate of the industry average. And,
we saw the preliminary, but potentially powerful, impact these designations could have on
Finally, we added some new, energetic members to our senior management team in 2006,
• Cathy Fraser, our new Senior VP of Human Resources, who joined us from McKinsey &
• Biggs Porter, our new CFO, who joined us mid-year from Raytheon, and who has already
had a significant impact on our operations; and
• Dr. Steve Newman, who stepped into Reynold Jennings’ shoes January 1 as our new
Chief Operating Officer. As most of you know, Dr. Newman has already built an
outstanding track record at Tenet for engineering what appears to be a highly successful
turnaround of California.
It is my pleasure to introduce him to you now. Steve, the floor is yours.
Stephen Newman, Chief Operating Officer
Thank you Trevor and good morning everyone.
Let me first say that I am honored to succeed Reynold Jennings as Tenet’s chief operating
Reynold did a lot of heavy lifting over the last three years and built a solid foundation for future
growth at Tenet. He would be the first to tell you that I inherited a work in progress. However,
it is now my job to make sure we continue to make sufficient progress while dealing with market
forces that are anything but static. I am confident that the sum of my training and experiences,
along with an excellent management team at Tenet, provides me with a solid chance of success.
Because I’m a physician by training, I like to diagnose things. And my diagnosis is that we
simply must continue to improve our ability to execute consistently on all the growth strategies
we’ve put in place over the past three years. If we do, our prognosis is good and we’ll be on a
path to sustained improvement in our financial performance.
There are no short cuts to achieving the success this management team envisions for our
company. I intend to contribute all of my energy to the path we have chosen and in which I
believe strongly - creating a health care company that differentiates itself from our competitors
by the excellence of its clinical quality and data-enriched decision making.
Changing outdated physician perceptions of Tenet’s hospitals will take more time than originally
anticipated, but we are pursuing this goal with a real sense of purpose and urgency.
The targeted work we’ve already done to build volumes is central to that effort, and I want to
spend a few minutes this morning talking about our success to date and what we have learned so
far. I really believe the early results demonstrate that we are on the right track.
We are attacking the volume and profitability challenge in three, interrelated ways:
• First, through our Targeted Growth Initiative, or TGI, which consists of a deep analytical
assessment of each hospital’s strategic position to identify opportunities for growth and
business lines that should be de-emphasized or eliminated.
• Second, we are deploying financial muscle behind these findings with the significant,
$150 million increase in our aggregate capital expenditures we announced last June; and
• Third, we are effectively marketing our newly strengthened capabilities to our physician
base through our Physician Sales and Service Program, or PSSP.
Let me begin with our Targeted Growth Initiative. As most of you know, Tenet’s
implementation of TGI began in California, where I was the regional senior manager for the last
four years. We selected California in late 2004 as the launch site for TGI because of the new
management structure and the recently completed strategic divestitures. The re-engineering of
our business profile in California is now essentially complete. We do not expect to experience
anything approaching the volume contraction we saw in California as we implement TGI in our
other markets. Also, I am pleased to tell you that in the last six weeks of 2006 and continuing
into 2007, our California hospitals in the aggregate have shown volume increases over the prior
year. That’s a particularly gratifying achievement for me and our California management teams.
Of course, our challenges cannot be overcome with TGI alone. There has to be a quality product
to sell and a reality that makes our value proposition tangible. To deliver the highest quality
care, our physicians and nurses need and deserve the best equipment available.
To that end, we have significantly increased our capital expenditures, targeting projects which
will most immediately impact our existing physician relationships. We invested $133 million in
Q3 and an additional $297 million in the fourth quarter.
These capital allocation decisions, along with those in the future, must be based upon sound
business decisions with acceptable returns on investment. Let me share with you one of the
many examples of both clinical and business applications of our recent incremental capital
West Boca Medical Center acquired a DaVinci Surgical robotics system at a cost of $1.7 million
through our recent capital infusion. During the first month the program was operational, seven
robotic cases were performed with additional cases scheduled. Once all available physicians are
fully trained and credentialed and the marketing campaign is underway, we anticipate using the
robotics system on approximately 20 cases per month, potentially resulting in incremental
EBITDA of approximately $840,000 annually. Interestingly enough, the three physicians
currently performing robotic surgery at West Boca have increased their year-over-year
admissions by nine. That incremental volume is expected to continue.
Because these initiatives are so interrelated, it’s impossible to say for sure how specific increases
in volumes link to a specific strategy. But since I know this audience has been very interested in
tracking our progress on PSSP, let me share one prominent statistic with you that illustrates the
success of this effort. The approximately 4,900 physicians we targeted in our Physician Sales
and Service Program increased their admissions by 3.7 percent in the fourth quarter of 2006
compared to their same admissions in the fourth quarter of 2005. That’s a strong number and,
although it’s premature to claim that we have cracked the code on volume growth, we are very
proud of this performance.
Without question, we have a lot more work to do. The biggest opportunity is with the remaining
one-half of our physician base, or roughly 5,500 physicians. This group represents about half of
the physicians we have referred to as splitter physicians, and whose continuing erosion of patient
volumes is offsetting the growth we are seeing in the remainder of our business.
Let me spend just a moment to take a deeper look at some of that volume erosion. There are a
number of reasons why a particular hospital might struggle with volume growth. I mentioned
that Florida, as a region, is lagging in volume growth. Heavy spending by our competitors,
erosion of certificate of need protections we formerly enjoyed, and two years in a row of severe
hurricanes have eroded our inpatient and outpatient business. We are expanding the
implementation of recommendations from our TGI initiative, reinvesting capital to raise the
technology level of our hospitals and beginning to expand our physician alignment strategies in
joint ventures as mechanisms to reignite growth in this market. We believe these tactics will
reverse the drop in business over the intermediate time frame.
We are applying lessons learned from our physician interactions in other ways too. We are
expanding our physician alignment strategies to include selective employment of physicians in
markets where we need to secure our primary care base. Having developed measurement
systems to assess our clinical quality and tailoring our service offerings through TGI, we are now
able to deliver services that have real value to our customers.
Just as we did in managed care, centralized patient financial services, quality improvement and
cost management, we are now designing an integrated, coordinated business development and
marketing function to galvanize all of our strategies with one goal in mind: to grow our business
in a targeted and selective fashion. This will help further position our hospitals as entities
offering top quality, customer-focused services at a competitive price.
Before I turn the microphone over to Biggs Porter for his financial review, I want to devote just a
few minutes to bring you up-to-date on our strategy to accelerate the growth of our outpatient
As most of you know, in the spring of ’06 we formed a dedicated group under the leadership of
Steve Corbeil to bring a targeted focus and additional resources to our very important outpatient
business. A third of Tenet’s revenues already come from outpatient services and we believe we
are well positioned for future growth.
At this moment, the outpatient group is actively focusing on two separate aspects of our
outpatient business. The first is existing hospital-based or campus-based outpatient departments,
mainly diagnostic imaging and ambulatory surgery. We have already identified a number of
operational and customer service issues which can be enhanced by the direct intervention of this
highly specialized team. This should lead to short-term volume growth, subsequent
improvements in efficiency of operations and, ultimately, to earnings growth.
We see signs that our physicians have been energized by these improvements. Let me give you
just a couple of examples. At Lake Pointe Medical Center in Rowlett, Texas, we made
significant investments in new equipment, as well as marketing and scheduling improvements,
for the digital imaging center. In the last several months, the average number of patients seen
per day at Lake Pointe’s digital imaging center has risen to 45 from 38 – an increase of more
than 18 percent. At Saint Francis Hospital in Memphis, operational and scheduling
improvements since September have increased the number of MRIs done from 14 to 19 per day.
This volume increase on MRIs alone should equate to an incremental $234,000 of EBITDA
annually for this one facility.
We are beginning to see examples such as these throughout our system, and I am optimistic that
over time our volumes and subsequent profitability will show real improvement.
Second, the outpatient group is also bringing its expertise to bear on the development of a
number of new outpatient centers. Many of these will be joint-ventured with physicians as we
expand our physician alignment programs.
So, as you can hear, there is a lot going on and very much to do. After two months on the job, I
am more excited than ever about our prospects and I eagerly await the positive results of all we
With that, I’ll turn it over to Tenet’s chief financial officer, Biggs Porter.
Biggs Porter, Chief Financial Officer
Thank you, Steve, and good morning everyone.
I’ll start by providing some additional color on our results for the fourth quarter, and then review
the 2007 outlook and intermediate term assessment of our earnings potential, as outlined in this
morning’s press release.
First, with respect to volumes
Admissions declined by 0.9 percent in the fourth quarter. Although a decline, this was none-the-
less the best performance the company has achieved since the first quarter of 2004.
It is important to note that the aggregate growth number obscures the fact that we had
improvement in many markets. In fact, except for the admission losses in four of our Florida
hospitals, Tenet would have achieved positive admission growth in the quarter.
Although there were improvements in several markets, including California as Steve discussed,
there is no escaping the fact that volume losses had a serious effect on our financial performance
in 2006, and this included the fourth quarter. A reversal of this pattern and a return to more
normal volume gains will help us to capture the favorable operating leverage available in our
With respect to cost
As you may recall, we implemented our salary and wage increases on October 1. Accordingly,
the annual increases were fully in place for the entire fourth quarter and unlike earlier quarters,
the 2.9 percent increase in salaries, wages and benefits is therefore a meaningful, apples-to-
apples comparison for the quarter. Comparing this 2.9 percent growth to the 0.9 percent decline
in admissions demonstrates the negative effects of operating leverage when volumes decline.
Our expectation of improved volumes in the fourth quarter and first quarter of 2007 restrained us
from taking more aggressive actions to reduce costs by contracting our infrastructure. This,
unfortunately, was a theme throughout 2006, and we are going to monitor 2007 closely in this
On the positive side, you’ll note that supplies expense barely budged at all, rising by just 0.5
percent. This stability demonstrates the superb job accomplished by our supply chain team,
making aggressive use of bulk buys, and working cooperatively with our key suppliers to
identify opportunities to create additional savings.
Other operating expense grew by $20 million, or 4 percent. Although there are a lot of moving
parts, the biggest drivers of this increase are:
• A steady increase in medical fees over the last year, primarily related to on call physician
• A steady reduction in the costs charged to discontinued operations, which are credited to
the other operating expense line on the income statement.
In the aggregate, our controllable operating expense rose by just 2.7 percent, but on a per
equivalent patient day basis, grew by a less impressive 5.9 percent. This metric illustrates once
again the negative operating leverage impacting our business when we experience volume
declines. It is precisely this sort of leverage which we expect will have a positive impact as
volumes start to grow. Equally importantly, there are a number of areas we have identified as
areas of cost and risk reduction, which we will be pursuing in 2007 and beyond.
Let me now turn to the topic of bad debt. In distinct contrast to many in the industry, Tenet
reported a decline in our bad debt ratio in the fourth quarter, to 5.7 percent compared to 7 percent
While this represents a positive development, there were a couple of items favorably impacting
the ratio and contributing about two-thirds of the 130 basis point decline.
About 37 basis points, or $8 million, of the decline resulted from an 18 month look-back at our
collection experience, which improved slightly during 2006 as a percentage of revenue. As a
result of this collection history, we reduced our reserves for uninsured accounts receivable from
92 percent to 88 percent.
The biggest single driver here is the effect of our compact on revenues and, therefore, collection
percentages. While it is impossible to measure all the effects on human behavior of lower bills,
as we have reduced the value of revenue billed under our compact, we have seen collections as a
percentage of that revenue go up. This is mostly just the effect of a smaller denominator and
does not mean that we are collecting more cash from the uninsured, just an improved percentage
As you may recall, we have said that we reserve for bad debt at the point of discharge based on
historical collection rates. By adjusting that rate to our post-compact experience and applying
the new adjusted rate to our outstanding receivables, we see the improvement in bad debt
expense we had in the quarter. We would expect these collection rates to be sustained, if not
improve going forward. But there are certainly still risks associated with the growth in uninsured
Bad debt expense was also reduced by approximately $10 million, or 46 basis points, due to the
settlement of several contracts. There was an offsetting effect of $3 million on contractual
adjustments to revenue, resulting in a net income benefit of $7 million.
There was a 50 basis point increase in the uninsured percentage of our total admissions relative
to last year’s fourth quarter. However, on a more positive note, it remained stable at 4.4 percent
relative to our third quarter.
Turning to pricing, we achieved an 8.6 percent increase in inpatient base rates in our commercial
managed care portfolio. This increase was in line with our budgeted number and demonstrates
that our favorable trend in pricing momentum remains intact.
Some of the other pricing metrics we provide were less robust in the quarter and demonstrate the
multiple factors impacting our business.
The increase in net inpatient revenue per admission, a key measure in our managed care portfolio
yield, came in at 0.2 percent, or basically flat.
Two factors had a significant impact on this result:
1) The main factor is that the mix shift in our managed care portfolio continues to evolve
towards additional managed Medicare and managed Medicaid. This results not only from
the declines in commercial managed care volumes, but also the absolute growth in
managed government programs – much of which is migration from traditional Medicare
2) The growth in this pricing metric was also adversely affected by the decline in average
length of stay in the commercial segment of our business from 4.1 to 4.0 days over the
same time period. The decline in average length of stay was impacted by the case mix
index for managed commercial, which declined by 1.6 percent. Declines in cardiology
volumes in Florida and volume declines at certain of Tenet’s academic medical centers
contributed to this reduction in acuity and, in a related manner, also adversely affected
pricing metrics in the fourth quarter.
In touching on the topic of the declining length of stay let me offer the view that we do not see
this as a serious concern with respect to our future financial performance. Clearly, managed care
payors with per diem contracts have a clear interest in reducing length of stay. However, the
average length of stay for commercial patients at Tenet hospitals is within the target range of the
medical management programs of our major commercial payors, and so we don’t expect it to be
driven significantly lower due to immediate payor focus.
The contribution to our pricing from stop loss payments declined to $77 million in the quarter
from $94 million last year. This reduction is consistent with our strategy of moving towards a
stable pricing structure, which is more dependent on base rates.
Before I leave the subject of pricing, I should note that we have had only very minor increases in
our gross charges over the last several years. We anticipate making modest adjustments to these
in 2007, but the effect of this is limited because there is only limited pass through under our
managed care and government program billings, and through our compact with the uninsured.
Adjusted EBITDA came in at $153 million for a margin of 7 percent. Although within the range
of outlook we had provided for the quarter, it was below our own expectation as driven by the
lower than expected volumes. There were a number of items affecting adjusted EBITDA. I
should note, however, that in addition to the larger items noted in the release, there were several
smaller charges in the quarter aggregating about $18 million related to vesting of benefits, risk
pool adjustments in New Orleans for out of network utilization related to Katrina, severance and
Turning to our cash position, we ended the year with $784 million in cash. This obviously is
below the estimate we last shared with you in our third quarter conference call, which we had
said was approximately $1 billion. I’ll take just a minute to give you the drivers of this variance.
First, almost half of the variance is attributed to an incremental tax payment of $80 million,
resulting from the settlement of some disputed issues with the IRS for fiscal years 1995-97. This
settlement, which was announced in late November of last year, was in addition to the $110
million tax payment we made in the fourth quarter to settle the undisputed portion of the revenue
agent’s report for the years 1998 to 2002. You may recall that the revenue agent’s report and the
expected payment for it were discussed on our last earnings call in early November. These
settlements substantially close out the audit issues related to the years 1997 and prior, and
significantly reduce the contingencies related to later years.
Secondly, capital spending for continuing operations came in at $297 million in the fourth
quarter, at the very high-end of our November expectations of $250 to $300 million.
And finally, earnings came lower than we expected, and working capital variances and rounding
contributing the remainder.
As a result, we had a net cash use of $21 million in operating activities in the quarter, where we
had expected operations to be a net cash provider as we would normally see in the fourth quarter.
Before I leave cash, I will note that we did have a sale in the quarter of very old fully reserved
accounts receivable related to discontinued hospitals. These are receivables which have already
gone through all of our internal and external collection efforts. We received approximately $15
million in proceeds from the sale, which have been accounted for as deferred revenue under the
accounting rules because we retained some upside if the purchaser ultimately collects above a
certain amount. You will see more details in our 10-K, if you are interested.
I will now take a moment to discuss our fourth quarter impairments. Under generally accepted
accounting principles, we evaluate, every quarter, if an event has occurred which would require
testing for impairment. Sometimes these are bright line events, but more often than not it is a
judgmental assessment of trends and future expectations. Irrespective of this, we always test at
the end of the year. Like most companies, this enables us to use our updated long range planning
in the analysis.
In this case, we had three hospitals and one region which did not perform to expectation in the
second half of the year and for which we believe their recovery will either be delayed or less
robust. We also have some medical office buildings we are selling and some reductions in the
fair values of assets which have previously been impaired. In terms of new hospital
impairments, there was only one of significance, which was over half of the 164 million in long
lived asset impairments we recorded.
Unfortunately, even a very marginal change in future estimates of performance can affect
impairment if the facility or region has been on the border previously. This becomes exacerbated
by the fact that, in the case of a hospital, once impairment is triggered there is a cliff effect under
the standards which takes it all the way from book value down to fair value. This means that you
can have a gradual decline in value without any accounting recognition, but then a substantial
charge once impairment is required.
In the case of the Central Northeast Region, it has a limited number of relatively large hospitals
operating in only three markets and, therefore, was logically at greater risk of impairment
because a shift in the expected performance of just one or two hospitals or markets could drive
the performance of the region. Said another way, there are fewer moving parts to offset each
other as hospitals go through their cycles.
Please remember that this doesn’t necessarily mean that the assets in question aren’t contributing
to the company’s performance, just that the future expectation doesn’t line up with their carrying
value. Also, most of our hospitals have recoverable or fair value well in excess of their carrying
cost. Unfortunately, we can’t adjust those upwards or, for that matter, even reverse prior write
downs in instances where there is subsequent improvement.
It should be apparent to everyone that we have not performed in the aggregate up to the
expectations we had going into last year. Likewise, certain facilities have struggled more than
others and changed our view of the pace of their recovery, just as we have changed our view of
the pace of the company’s recovery in the aggregate. If our facilities perform to our expectations
from this point, then we would not expect further impairment resulting from operating
Let me now turn to our outlook for 2007 and offer some general comments regarding our
assessment of Tenet’s earning potential out through 2009.
We have framed our discussion of 2007 in terms of the 55 hospitals we expect to have at year-
end as it is a cleaner presentation and more representative of the company’s on-going earning
power. As a preface to my later comments on volumes, I will note that the two hospitals being
excluded from the same hospital numbers, Trinity and RHD in Dallas, had negative admission
growth last year of 12.1 percent and outpatient declines of 11.7 percent. The effect on our
consolidated admissions was 30 basis points and on outpatient visits 20 basis points. As we have
discussed previously, these hospitals are under leases which expire in August of this year.
As we have stated on numerous occasions, the key variable in the outlook is volume growth.
Along with bad debt, volume growth is also the most difficult metric to project.
Our 2007 outlook assumes we will achieve same hospital admission growth of approximately 0.5
to 1.5 percent and growth in same hospital outpatient visits of approximately 2 to 3 percent. The
mix between government and commercial payors is assumed to be unchanged.
We believe these volume increases are achievable, and will be heavily influenced by the macro
environment as well as the success of our own initiatives, including capital investments,
Targeted Growth and PSSP. Although Tenet remained behind industry growth rates in the fourth
quarter, we are encouraged by a narrowing rate of admissions decline. In future quarters, we
may well look back at this as a true inflection point. First quarter volume results to date are
mixed and don’t give us a strong indicator, so it is too early to tell.
Under the assumption that we achieve this volume growth, we would then expect same hospital
net operating revenues to grow by 4 ½ to 5 ½ percent.
In terms of pricing, we expect a continuation of existing trends which, with the expected mix of
government and commercial payers, should remain in the mid-single digits.
Controllable operating expense per equivalent patient day is assumed to grow by 4 ½ to 5 ½
percent, which presumes we continue to have good cost control and slight reduction in average
length of stay.
In terms of bad debt expense, we are assuming a level of 6 to 6.7 percent for 2007.
Under these assumptions, we would expect EBITDA to fall in the range of $700 to $800 million,
and produce a margin in the range of 7.8 to 8.9 percent. Excluding restructuring, impairments
and litigation, this would produce a pre-tax loss of $100 million to breakeven and earnings per
share of a negative of 13 cents to breakeven. We have left the range fairly broad due to risks
associated with the macro environment, most specifically volumes and bad debts. I will
emphasize that this is caution, not expectation, because we do expect our initiatives to provide
significant offset to this risk if it becomes reality or to give us lift in the event the trends
You can find more detail in our press release, which includes estimates for depreciation and
interest expense, as well as a reconciliation to the GAAP definition of net income.
Net cash flows from operating activities are expected to be in the range of $300 to $400 million.
After capital expenditures of approximately $750 to $800 million, free cash flow would be in the
range of a negative $350 to $500 million. This excludes approximately $200 million of net cash
expected to be generated from announced asset sales, net tax refunds and other activities such as
litigation and discontinued operations. After factoring these in, our net cash usage would likely
be in the range of $150 to $300 million in 2007. This means our cash at year-end 2007 would be
in the range of $475 to $625 million.
It is important to understand that the $750 to $800 million expectation for capital expenditures in
2007 includes about $150 million carried over from the 2006 commitment of $800 million.
With that discussion of 2007 as a base, let me offer some thoughts on Tenet’s earning power out
We are discussing these numbers out to a three-year time frame, that is to say 2007 thru 2009 –
significantly farther than most of our peers – not because we believe we have a more accurate
crystal ball than others, but because we recognize that in a turnaround situation, investors have
an unusually difficult task in trying to assess the longer-term earning power of the company.
Over time, I would expect that we will stop going this far out in our comments.
Last June, we shared a view with you that our two to three-year outlook for our earnings
potential was for an EBITDA margin of 11 to 13 percent. We now believe that in the
intermediate term it is more likely that we will achieve results in the mid to lower end of that
range. We also believe that we are more likely to achieve that level of financial performance in
2009 rather than in 2008. The upper end of the range is not likely due to the fact that our volume
assumptions are more modest, including the effects of a lower starting point coming out of 2006.
We have also taken some additional caution on the bad debt front. While we expect to make
continuing progress from our own initiatives in mitigating bad debt, we are concerned that
further deterioration in the macro environment could offset much of this progress.
The net effect of these revised assumptions is that our recovery has likely moved about one year
from what we previously expected.
I talked about inflection points earlier. If you look at this from a macro level, we are expecting a
further shift in volume trends to occur during 2007, with steady improvement in volumes
thereafter. The rate of increase in our income will be more than linear with increasing volume as
we benefit from the greater absorption of our fixed cost base, and as we continue to improve
efficiency over the course of our turnaround.
Let me close with one last summary thought. There is, of course, risk both upwards and
downwards in the estimates for both 2007 and the intermediate term. However, we believe that
by aggressively pursuing cost and other initiatives, we see as much opportunity to improve these
results as we see in risks. To be prudent, however, we are going to stay balanced in our outlook.
I know my comments have been lengthy and I appreciate your patience. With that, I’d like to
have our operator assemble the queue for questions from our audience.