Tenet Healthcare Corp (THC) 2002 Q4 法說會逐字稿

Good morning, everyone and welcome to the Tenet Healthcare Corporation fiscal year 2002 fourth quarter earnings conference call. Tenet is pleased that you've accepted their invitation to participate in this call. Please note that today's call is being recorded by Tenet and will be available for replay. The call is also available to all investors on the web, both live and archived. By participating in this call, listening to the replay or the web cast, you are acknowledging that the call and the web cast are the property of Tenet and that the call, the recording and the web cast may not be recorded in whole or in part or replayed or reproduced in any other form without Tenet's expressed permission. Tenet's management will be making some forward-looking statements on today's conference. Those forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission, including the company's annual report on Form 10K and its quarterly report on Form 10Q, to which you are referred. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Most of you have received our detailed quarterly financial and operating data. If you haven't, it is available on first call and the following web sites: tenethealth.com, businesswire.com and companyboardroom.com. Slides that support today's presentation are available on companyboardroom.com and now at this time I would like to turn the conference over to Mr. Jeffrey Barbakow, Chairman and Chief Effective Officer. Please go ahead, sir.

Thank you very much. Good morning. We're pleased to announce a truly outstanding quarter this morning, which is a fitting conclusion to a truly outstanding year. Without question, fiscal 2002 has been the best year in the company's history so far. As I look at both the quantitative and qualitative results for this past year, a couple of trends stand out. The first is the consistency we have demonstrated throughout the year. Each quarter had its high points, but all four quarters are remarkably similar in the magnitude and source of their improvements. Secondly, that improvement was really across the board, in virtually all areas of our operations and from the top to the bottom of the income statement, the balance sheet, and the cash flow statement. Let me give you just a few highlights. Net income from operations increased 43% in the quarter, 45% in the year. Earnings per share from operations rose 42% for both the quarter and the year. Same facility admissions rose 1.8% in the quarter and 2.4% for the year. Net operating revenues rose a robust 16.5% for the quarter and 15.4% for the year. Same facility patient revenues rose 13.9% for the quarter and 13.7% for the entire year. EBITDA rose by 26% in the quarter, 25% in the full year, while EBITDA margins reached 20.7% in the quarter versus 20.1% for the year, our highest level ever. Pre-tax margins from operations rose three full percentage points for both the quarter and the full year. Net cash from operations increased to more than 2.3 billion in 2002, up 500 million from a very strong 2001. Bottom line, we are earned 64 cents in diluted earnings per share from operations, up 42% from the year ago quarter. All brochure numbers have been adjusted for the recent three-for-two stock split. Excluding goodwill charges, net income operations was 68 cents per share, compared to 49 cents in the year ago quarter. This will be the tenth consecutive quarter where we've posted growth of 20% or better, the seventh in a row of 25% or better, and the fifth in a row of 30% or better. I am very pleased with this performance. I'm even more pleased with the improvements we are making in our business. We've talked before on these calls and in other presentations about our key initiatives. These include Target 100, which is designed to build a dynamic customer service culture in our hospitals. It's called Target 100 because our goal is 100% satisfaction among patients, physicians and employees. The Employer of Choice initiative is designed to help us recruit and retain a high-quality work force in a very competitive market for labor. Our goal is for Tenet hospitals to be the preferred places for nurses and other health care professionals to work. Our Partnership for Change initiative is a proprietary system Tenet has created to help us deliver consistent quality care and to improve patient outcomes. We believe these initiatives will help to further positively differentiate us among hospitals and hospital systems in ways that ultimately will contribute to better health care delivery and should lead to superior financial performance for years to come. One of the key contributors to our success has been our very strong cash flow. This has enabled us to do many things to strengthen and grow the company and to improve returns for our investors. We invested a record amount in our facilities last year, almost 900 million. We acquired five new hospitals in markets where we already operate. At the same time, we reduced debt by more than 200 million and we repurchased more than 18 million shares of our own stock. We are finding it to be a great time to have plenty of capital, excellent liquidity, and a conservatively structured balance sheet. A year ago, I said that the operational 1 improvements we have made internally and the initiatives we are pursuing together with improving the external environment had set the stage for an extended period of outstanding growth for Tenet. That is proving to be the case. Today, we reiterate our previous guidance for longer term earnings growth. Over the next several years, Tenet anticipates that diluted earnings per share from operations will grow at a rate in the mid to high teens each year, and potentially higher in some years, without any significant additional acquisitions or benefits from a change in accounting for goodwill amortization. Fiscal 2003 is likely to be another one of those years when earnings growth is above this range. Even after increasing fiscal 2002 earnings by 17 cents, as if the change in goodwill amortization had occurred in fiscal '02. This follows growth in earnings per share from operations of 42% in fiscal 2002 and 28% in fiscal 2003. As we conclude this most successful year, I want to thank our investors for your continuing support. We are pleased that you have been rewarded for it. I especially want to thank our more than 114,000 caregivers and employees, managers and executives for the truly outstanding job they have done this past year. Day in and day out, they provide compassionate, quality care to more than one million inpatients and 9 million outpatients over the course of a year. They are the people ultimately responsible for the success Tenet has achieved. Let me also add that with all the questions will corporate credibility these days, I take considerable comfort in the fact that we have emphasized high ethical standards at Tenet for many, many years. It is absolutely central to our culture, and we continually reinforce it in many ways, including annual ethics training for every Thank you, and at this time, let me turn it over to Thomas Mackey, our Chief Operating Officer. Tom?

Thanks, Jeff and good morning, everyone. From an operational standpoint, we had another excellent quarter, but then excellence is a word that describes all of our quarters this year. Same facility admissions increased 1.8% against a very strong prior year comparison when they increased by 5.5%. We are averaging same facility admission growth of 3.1% for the last eight quarters, which is up significantly from the 1.9% average in the prior three years. With acquisitions now contributing as well, total facility admissions growth was quite strong, up 6.8% in the quarter. Baby boomers once again continue to lead other age groups in admission growth. Admission in the 41 to 50 age group grows 6.8% in the quarter, while those in the 51 to 60 age group rose 4.2%. These groups have consistently led our admissions growth in every single quarter over the two years that we've been closely tracking this statistic. We continue to generate double digit growth in unit revenues. Same facility revenue emission increased 12.7% over the prior year quarter. This is an uptake from the third quarter level and right in line with the 12.9% average for the full year. As in previous quarters, higher acute is important to continue this trend. Same store patient base increased by 3.4% in the quarter, but in looking at the components subacute days, those with the lowest revenues, declined 2.5%, over overall acute base increased by 5.7% while intensive acute days, those with the highest revenues increased by a full 7%; in other words, our high revenue per day services are growing the fastest, while the low revenue per day services are actually declining. Clearly, this is no accident but a deliberate part of our strategy. Data for the full fiscal year shows the same relative trends as in the quarter. The combination of volume growth, improved unit revenues and stronger growth in outpatient revenues resulted in same facility net patient revenues growing 13.9% in the quarter and 13.7% for the year. With the addition of acquisitions partially offset by continuing reductions in other revenues, total revenues grew by 16.5% in the quarter, 15.4% for the year. We are quite pleased with the performance of our recent acquisitions. Over roughly the past year, we've acquired six facilities. As a group, they contributed about 167 million in net revenue in the quarter. More importantly, the EBITDA margin of this group of facilities reached 12% in the quarter, which is pretty amazing, when you consider how recently we acquired them, and that all of them were losing money prior to our taking ownership. We've clearly become very good at turning around troubled hospitals. As we've reported on previous calls, we are increasing our capital spending to meet growing demand in our markets. Capital spending in '02 was 889 million, up nearly 50% from the 601 million last year. In fiscal '03, we expect capital spending will increase again to approximately the $1 billion level. While it's always difficult to slice and dice this number precisely by typist spending, several trends are evident. A greater percentage of our growing capital budget is being devoted to true capacity expansion, as we experience or can readily project capacity strength constraints at more of our hospitals. We're also funding more large projects, such as the major new expansion bed tower at USC University Hospital, an entirely new hospital in suburban Memphis. I'd like to take a few moments to address our key initiatives, beginning with Target 100. In fact, our company-wide patient satisfaction is already very high, with 94% of our patients reporting they're satisfied or very satisfied. We've decided to raise the bar. We don't want just satisfied patients. We want very satisfied patients. As we know a satisfied patient may return to our hospital, but a very satisfied patient will probably tell others will what a great experience they had. So we're changing the scale we use to survey patients in order to better differentiate between satisfied and very satisfied. Today, we're using a ten-point scale and our goal is for patients to rank us a 9 or a 10. Already, 83% of our patients give us those exemplary ratings. Both Target 100 and Employer Choice Initiatives contribute to employee satisfaction. Employee satisfaction is up. Nurse turnover is down. Interestingly, the best performance is in our star hospitals, where more than 85% of the patients rate the hospital nine or ten. These hospitals have even higher employee satisfaction and lower nurse turnover, and we know what our hospitals need to do to achieve this star status. We've developed a very extensive effort to double our number of star hospitals over the next year, and we've factored it into our CEO incentive comp. plan. The third initiative I'm really excited about is our partnership for change initiative, designed to improve clinical quality and patient outcomes this. Is a system that Tenet has developed to implement more effective ways to measure quality care and by using quality measurements, to better manage hospital processes. We began with a single market, expanded then to 38 hospitals, and we now have enough data to know that by using this system, we can save lives, reduce complications, reduce costs, and make our hospitals and our physicians even more competitive. We have a very aggressive plan to expand the partnership for change. First, we're expanding the DRGs covered by the system to include all surgical procedures. We've recently added modules on adverse drug reactions and hospital-acquired infections and in the coming months we're going to expand a little out of this program beyond the current 38 hospitals to include all Tenet 2 hospitals. This program is unique to Tenet. It will help us ensure that our hospitals provide quality care to our patients and help us provide our physicians with data they can use to improve their clinical outcome. It moves us toward a future where we can provide demonstrable proof of quality and cost of efficiency to payers and to patients. It's my opinion this will give Tenet a powerful competitive advantage in our marketplace and strengthen our position as acquirer of choice. At this time, let me turn it over to David Dennis, chief corporate officer and Chief Financial Officer. David?

Thanks Tom, and good morning, everyone. I'm going to start my discussion of the quarter with expense ratios and margins. Salaries, wages and benefits came in at 38.1% of net operating revenues, that's down from 38.9% in the year ago quarter. The pressures on labor costs are still there but I believe we're doing an excellent job of managing this in a tight labor environment. Our supply expense at 14% of net revenues was exactly even with last year, and it's consistent with the range we've seen for many quarters. We've been working to improve or capital productivity in all aspects of our business, with a notable success in receivables which I'm going to talk a little bit more about in a minute. We don't talk about inventories much, but we have had considerable success in this regard as well. Inventory days declined again this year to 42 days, down from 48 days a year ago and from the high 50s a few years before that. A bad debt expense dropped to 6.6% of revenues in of a mixed shift to managed care. I'm very pleased and proud of our team that accomplished this feat. Other operating expense declined again this quarter by 90 basis points to 20.6% of revenue. This expense line continues to be the most important contributor to our margin improvement. Many of the cost items in this line are relatively fixed in nature, so our strong revenue growth helps to reduce them in percentage terms. We saw utility expense decline again in year from the prior year; however, given the upward trends we've seen in malpractice expense, we added significantly to our malpractice reserves in the quarter. Putting all of this together, EBITDA margins increased by 1.6 percentage points from 19.1% to 20.7%, and as we predicted last quarter, EBITDA margins exceeded 20% for the full year, coming in at 20.1%. Interest expense declined by 32% from the prior year quarter or $33 million. Reflecting the benefits of debt reduction and lower interest rates on our borrowings. Pre-tax margins from operations surged again from 11.7% in the prior year quarter to 14.7% this year. And this is yet another new record for us. This was truly an outstanding year for cash flow. Net cash provided from operating activities for the last twelve months increased to 2.3 billion dollars. That's an increase of 500 million from our excellent performance in 2001. Free cash flow, which as you all know, we define as net cash provided by operations less our capital spending hit 1.43 billion for the last twelve months. That's up 200 million from last year, in spite of the $300 million increase in our capital spending. All of our measures of leverage and interest coverage showed improvement in the quarter. The coverage ratio or debt to net interest expense improved significantly, rising to 8.55 times in the quarter, up from 4.9 three times only a year ago. Debt to EBITDA end of the year at 1.44 times, down from 1.88 a year ago, and well below our long-term target of two times. Over the past nine months, we have refinanced essentially all of our publicly-traded debt. The recent call of the 6% exchangeable notes will substantially complete the process. With this accomplished, we've now eliminated all of the restrictive covenants associated with the debt issued when we were a high yield issue. We have more than doubled our average maturity in the process from about five years to more than ten years with no significant current maturities until fiscal '06, and of course, we've significantly reduced our interest costs, taken advantage of both our upgrade to investment grade status, as well as historically, as an historically low interest rate environment. Going forward we'll have much greater flexibility in manage, our balance sheet, particularly with regard to stock repurchases. Thus far, we've embarked on a modest share repurchase probram designed to offset the diluted affect of options exercises. The board has authorized repurchase of 30 million shares. Through the end of May, we have purchased 18.2 million shares approximately of stock at an average price of $39.35 a share on a post blitz basis. That represents an additional 5.6 million shares in the fourth quarter. This slightly more than offset the approximately 17.8 million shares of option exercises during the year. In addition, we have forward purchased contracts in place for an additional 4.46 million shares that we'll settle in the near future. Our outstanding financial performance over the past several years is reflected in significant increases in our return measurement. Return on assets jumped to 8.1%, up from 5.7% a year ago and more than doubling over three years. The return on equity topped 20%, up from 16.2 a year ago and 13.5% three years ago. This strong performance is in spite of significant deleverage ago of our balance sheet over this period. As Jeff said at the beginning of the call, fiscal '02 has been the best year in the histoy of the company so far. From every perspective, we couldn't be more pleased with the results. Volumes of revenues are growing at robust rates. We have achieved across the board improvement in all measures of profitability and returns and expect further improvement. Our financial condition just gets better and better. We see continuing evidence of the benefits from our measuring initiatives, inpatient satisfaction and employee satisfaction in quality and outcomes and of course in cash flow. Quite simply, we continue to experience the strongest fundamentals and prospects that we have will had. I'd like to now turn this call over to Paul Russell, our, Senior Vice President of Investor Relations with some final comments. Paul?

Thanks, David, and good morning, everyone. I want to expand on the earnings guidance Jeff gave you earlier in the call with respect to fiscal '03. You should all be aware that we will adopt SFAS 142 for the 2003 fiscal year. Now, had we adopted this in fiscal '03, earnings per share would be 17 cents higher, giving a base for comparison of 234. To reiterate, management anticipates that diluted earnings per share from operations are likely to grow from that level, 234, at more than a high teens rate. We're basing that guidance on the following principal assumptions. We expect revenue growth of at least 10%, coming from a combination of higher volumes, improved unit revenues, and to a small extent the incremental full-year impact of acquisitions made during fiscal '02. We expect further improvement in EBITDA margins, although not of the magnitude we achieved in fiscal '01 and fiscal '02. Interest expense should decline significantly from fiscal '02 and on a quarterly basis should show a continuing modest sequential decline from fourth 3 quarter '02 levels. The effective tax rate should decline just slightly over 39%, essentially all due to the imlimitation of good will amortization through the adoption of SFAS 142. Diluted shares outstanding should remain flat or decline slightly, depending on the level of share repurchases. Now, the actual magnitude of EARNINGS growth for the year will be most sensitive to the strength of overall revenue growth and the improvement in EBITDA margins, and as we get further into the year, we expect to update our guidance and further refine our assumptions. Let me remind you, again, of our policies regarding earnings guidance under regulation FD. We will review earnings models for consistency with guidance and reported results between now and the end of August. From then until our next earnings report, expect it to be about October 2nd, we will not review or comment on earnings models or earnings guidance, except by means of a press release, if warranted. You should send any models either to me or to Dianna Tackbaum. In today's environment, when investors are rightly questioning many things that they previously took for granted, I think that it's important to close with a few comments regarding the quality of Tenet's earnings. First, we invite you to delve into our accounting policies and assumptions. Like many companies, we will be providing additional details this year in our annual report, but don't stop there. Call us if you have further questions or need additional explanation. We talk a lot about EBITDA in these calls, because most of you seem to want to look at that measure, but we've deluded ourselves into thinking that EBITDA was either earnings or cash flow. There's been enough written about the inherent weaknesses and inconsistencies of EBITDA that I don't have to repeat any of it here, but those of you using flow, 1.3 times our earnings per share. Now, that, we think, should be a pretty good indicator of the very high quality of our earnings. We enencourage you to compare this ratio with other companies, take it a step further, find a way to factor it into your approach to valuation. Now, let's open it up for questions. Operator, could you please give the instructions.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, please press star one on your telephone. Again, that is star one. If you do have a question today, because of time limitations, Tenet has not been able to all questions in recent conference calls, therefore, we would ask as a courtesy to many listeners if you do have questions that you please limit yourself to one question only. After your question has been answered, you may re-enter the queue with another question by Tenet will address time permitting, and we'll go first to John Tinderling at CS First Boston.

Thanks, and good morning. Some of us have noticed that corporate governances in the news these days, so I'm wondering, Jeff, if maybe you could comment on the make-up of your board. I think you're only insider. The size of the board, might there be changes? Could you have more insiders on the board? Could you explain the size of the board, and could you also discuss executive compensation?

Sure. Let me first start with the board itself. You raise a great point. Just to take a moment going back to the predecessor, one of the predecessor companies that formed Tenet when I joined, had 19 board members, if I'm correct, many of which were insiders. One of the first things that we did in starting to expand that company was to change the make-up of the board. Today, we have a very strong and extremely independent board. All of you can look to the financial information and see those individuals, but we've continued to strengthen that over the last few years. We will further strengthen our board, our annual meeting in October with yet another very, very strong, very independent individual that will be announced after our nominating committee meets in a week and-a-half. This is a very experienced individual, a very active director, active, active businessperson, and will help us tremendously. We believe today in terms of size of the board, as you said, I am the only insider on the board as of this point. We believe we have a completely independent board, and it works very well. Size has ranged over the last couple years of a 10 to 11 neighborhood, and it works very well for a company of our size. We have a hard working board. They're all involved in several committees, and it's worked well for us, so we feel very comfortable. As to your executive compensation, we basically set targets at the beginning of the year based on performance, and everything flows from that. We have, over the years, as Tom said earlier on some of the areas, whether it be Target 100, Employer of Choice or any areas that we particularly focus on. In David's case, I think over the last couple of years in AR days, we've set extra hurdles for performance in these areas and from the compensation point of view. We have two outside consultants that help us on this to make sure that we service the 75% area in terms of our peers, and this plan has worked very very well. A lot of it at the senior level relates to stock, both purchases on our behalf and options, and since I have been here over the last nine years, I think we've lost one individual over that period that we wanted to keep. So the plan did work very well for us and obviously it's working very well we think at least for performance.

Thank you.

We'll go next to Sheryl Sculnik with from Global Partners.

Good morning and very nice job. Congratulations of all of the hard work, especially on the cash flows and the DSOs. In this market, it seems like people are looking for reasons not to invest, to forgive me if I talk about something that maybe is a negative here, but I'd like to hear your thoughts about this. One of the concerns out there about the hospital industry in general, and especially when we hear you're planning to increase your capital expenditure budget by a very significant amount is a concern that are we building too many beds, and that's beginning to creep up. If you could give me a sense of what's happening competitively in your markets, whether or not you do see any rationality in the building or if at this point in time you're the only one in some of your markets who's building beds at this kind of a rate, and whether or not there's anything really to be concerned about here.

Sheryl, this is Tom. I think each of our markets is somewhat different. Clearly in California, the financial state of many of our competitors here has not enabled them to keep up with the increases in demand, the increases in population that we see in California. So we feel we're very well-positioned. The same is largely true in Florida for us, and in many of our own markets. We have a few markets where there's been, you know, a degree of irrationality in expansion, and we look at that very carefully. I think the thing that investors should look at is the returns we've been getting on our capital spending over the last few years, and both David and I and Jeff and the board take a very hard look at all of these capital projects. We expect large returns, and as you know, it's generally the safest risk, lowest risk investment that we can make, because we understand the markets. We understand the demand equation. So we believe that our capital plan for next year of roughly $1 billion will continue to produce the 4 same kind of great returns for us over the next three or four years that you've seen in the last couple. So I don't think it's a big concern.

Okay, that's great, and thanks to Paul for doing the multiplication for us. It seems like it helped the stock.

We'll take credit.

Charles half at bank one invest ors.

Hi. Good job in the quarter. Thank you for taking my call. I have a the question regarding labor. I think David mentioned that there were still some pressures still there. I wondered if maybe David or Tom could maybe kind of slice that up a little bit, either regionally or by nurse specialty and then also talk about your registry utilization over the past couple of quarters.

I'll let Tom take that.

Looking at the contract labor numbers -

I know what those numbers are but the question is I think does it differ by type of employees that we meet.

You know, the first question was what are the regional trends, and you know, this is an issue that seems to transcend any one region. There is a nursing shortage, a pharmacy shortage, a radiation, radiology tech shortage, a lab tech shortage in almost every market in which we operate. We have been focused on this for the last two years in trying to make our hospitals better environments for people to work in, and we have seen progress on our turnover, not just of our ends, which is the most critical area because of the number of them who work in our hospitals, but in all employee categories as a result of these

And your use of registry over the past couple of quarters?

We had a downtech in the second quarter on a sequential basis. It was up in the third quarter, up again in the fourth quarter, so we, you know, right now, we certainly do not see that abating. It's about 6% of SW and B, certainly more than we would like, but that's the environment that we're in today.

Great, thank you.

We'll go next to Andrea Beattie at Salomon Smith Barney.

Good morning, congratulations. Just doing some quick arithemetic here, it would appear that your same hospital EBITDA margins were around 40 basis points higher, you know, taking your 167 million of applied revenue with 12% average margins. Could you actually touch on what you perceive to be the low hanging fruit for further margin expansion of your acquired facilities?

Andrea, actually our same hospital EBITDA margins were up a good deal more than that. I'm just looking for the particular number here. They were up more than the overall margins, and I can, after the call I would be happy to help you through the math on that.

On the low hanging fruit, we have obviously picked a lot of the low hanging fruit already to get these margins from negative to 12%. Basically, what that entails is right sizing the facility from a labor and management standpoint, putting in our systems and policies and procedures, doing a better job collecting cash and driving down the bad debts in those facilities, and we are quite pleased with what we've accomplished. The next big phase for these hospitals to get them to the average company margin really involves service development and business development service expansion in them. For example, we're putting in a new emergency room at our South Fulton Hospital. We're about to reopen a women's program at Good Samaritan in south Florida and each much these facilities has a business development plan. Some of these things will take place in the next year. Some of the things that we have in mind will take two to three years to accomplish, but it's really business development going forward.

Do those acquisitions have a high proportion of maybe subacute services that you'll be sort of seeing the higher conversion to acute care services?

A few of them do, actually, and we're in the process of rationalizing some of that, where we have duplicate subacute services, the Danielle Freeman campus, for example, but on the whole, they are not much different than the average Tenet Hospital 234 in terms of mix of business.

Right, thanks very much.

We'll go do you to Darren Leibowitz at Suntrust Robertson Humphrey.

Good morning, everyone. Can you comment a little bit more on the malpractice environment, just give us an idea of the rate of change in your malpractice costs? I guess David, you indicated that a big part of the jump sequentially in the other op.ex. line was related to malpractice accrual. Could you put a little more meat around that? I think the sequential jump was $90 million.

Sure, the total, the actual jump in, it was about 90. 60 of that is addition to reserves. The other is actual insurance cost increases, and so for the year, our total malpractice expense was about $210 million. That's up from about a little over 150 last year, so it's gone from about 1.2, 1.25% of revenue to about 1.5% of revenue.

Okay, and what are your actuaries called for in '03 will be?

We actually think that we won't have the, you know, the significant additions to reserves, so we think that, in '03 that's probably somewhere in that same range of a couple hundred million bucks.

Okay, and Tom if I could just follow up on the malpractice issue on an operating, on the operating side, in states where the malpractice environment, I guess, is most severe, you're in a couple of those, have you seen any impact to your volumes and have you seen any, you know, physicians drop out of your hospitals?

Yeah, the fact is we have. It's been particularly acute in Philadelphia. We've seen some lost in volume as a result of the physicians just saying we can't practice in this environment any more. The same is true to a smaller extent in Florida and New Orleans. I mean, it hasn't become what I would describe as a material problem in the company, but it's something we're looking at in terms of steps that we could take, primarily from a political standpoint in trying to get tort reform enacted in these various states working with the US Chamber of Commerce. This is a major issue, not just for hospital companies, but for employers across the country who pay the premiums at the end of the day. We don't feel it's a productive use of health care dollars, frankly, and you know, we thank God that so many of our hospitals are in California, where this problem has been dealt with effectively. We're also looking at some other programs to work with our physicians, where there are no alternatives to acquiring malpractice.

Thanks very much.

Operator?

Our next question comes from Gary Taylor, Banc of America Securities.

Good morning. Two quick questions. The first was, do you have a total same store revenue growth number? I've kind of estimated and I'm tiptoeing around it but I wanted to see if you 5 had an exact number.

You got it there?

We had given same store patient revenues in our prepared remarks, which is probably the more relevant number, but including everything such as the other revenues for fiscal year would be 11.7. For the calendar year or for the quarter, I'm sorry, 11.5. As you no doubt know, the other revenue components are declining. That's particularly physician practices, which we've by and large completely divested now. We've closed down our HMO operations, sold some of the remaining SNIP facilities and other operations.

Right, I might have missed. I think in the release I saw 12.7 same store per inpatient admission. Was there a different number for total patient revenue?

That's revenue per admission, the 12.7, and we'll give you that number -

We'll get to the second question and get you the other one while you're asking.

The other question is, could you talk a little bit about commercial contract renewals to the effect of January, '03 renewals, how many of those are being negotiated, have been negotiated and what sort of rates we're seeing?

Gary, I think as we've said in prior calls, we have over 7,000 contracts. We don't necessarily operate on a calendar year basis in terms of those contracts. They are pretty much spread out across the year. In terms of rate increases, the the environment really hasn't changed very much. We're seeing 5, 6% rate increases and in some cases, substantially higher than that in our negotiations with the how our same store hospital revenues are performing, because it separates out some of these other business activities.

Great, and if I could just have 30 more seconds, I think David had alluded to share repurchase a little bit, and just wanted to clarify what he had said, and I guess what the thinking is with respect to the amount of free cash flow you're generating and where you're at in terms of your leverage ratios as to share repurchase or authorizations potentially increasing in the future and how you view that as a use of funds.

We will approach an authorization as we run out of capacity on the current authorization from the board. Obviously, when you add up the numbers between cash flow, capital expenditures and interest expense, there's some money left, and that number is getting bigger and bigger.

There's not a lot of debt to do anything with.

But obviously, we prefer to spend it on capital expenditures, and that, as everyone knows, that process is, I guess, best described as lumpy. It never happens in a straight line or a straight timeline. So it will - we have to make decision what we see quarter to quarter, what we see on the horizon, what we should do with the cash in terms of acquiring additional shares, but obviously our capacity for that activity has greatly increased especially with the elimination of all the old covenants, and as you can see, significant cash flow on a quarterly basis, plus obviously some limited bank lines. So the odds are that there will be more rather than less of it but we haven't made a decision.

We'll move next to Andrew Bach at Goldman Sachs.

Good morning, congratulations. The performance on the company seems at least to us to be due to in a small measure what you might call methodical culling of the portfolio to its current form and resulting in sort of the local market strength. I'm wondering if you could somehow quantify the range of operational opportunities and somehow give us some sense of the strength that it affords you relative to either competitors in the market and in particular, payers, and I ask this because as we've seen the sort of stock move down with the overall market and seen the PE contraction, I'm very interested in thinking about this in terms of the valuation, pretty much comparing the portfolio and its strength three years ago and more focusing on the risk side of the risk term equation and how that would calibrate.

Tom's going to answer this but let me just say a couple of things quickly. We got into a business several years that was much wider than what we are today. We have exited over the past six or seven years, so I'd say five or six different businesses that range from rehab to site to international to dialysis to, I mean, go down the list and look at the history. What we've tried to do, and you raise a good point in terms of culling of the portfolio, but we also culled our business. We tried to become the best operator of large health care providers, hospitals in the country. We have used, again, you said a strategy of sticking to where we knew, and you've seen over a period of time that we very seldom go into new markets. We continue to expand in the markets that we presently serve. When Tom was asked a question before about the five or six acquisitions we've done in the last year, it's pretty easy for us. It can be pretty messy like many of these were, and we can give them our contract. We can give them our buying. We can do all the things Tom said and pretty quickly, we can turn it around and then focus on what really is important to the community. We drive these decisions really by trying to measure outcomes and trying to measure what is going to work for that particular community, because we found that cash flow flows from that. We're doing the right things, it really does work for us, and we've evolved over the period of, you know, five or six or seven years into a company that's very focused. Again, we believe we're doing things that no one else is even thinking about doing and wait until you see some of the things we're going to be doing in the next couple of years that some of these programs allow us to have information in order ta make the right kind of decisions. Given all of that, when I started with this company nine years ago, 85% of the business was not-for-profit and 15% was for-profit and today it's still 85% and 15, which allows us tremendous growth in the business we serve. You take a state like California, that doesn't have a lot of large competitors, got some real issues, you know, whether you worry about earthquakes, whether you worry about nursing, a lot of these hospitals are going to be gone and the capacity constraints are even going to be greater, so for us, it is terrific in just about each of the markets we serve. So that's sort of a background of why we feel very, very comfortable about where we can take this company over the next few years and how it allows us to say something like we'll be past the high end of the range or however we put that this morning, but you know, at least telling you that again, next year, and we think for several years it looks pretty good for us. Now, with all of that, Tom can really answer it specifically if we need to as to the real question.

You know, the only thing I would add, Andrew, to what Jeff said is, if you look at our portfolio today, 2/3 of our hospitals provided number one or number two in their marketplace in terms of market share. How much leverage does that give you in the marketplace? I think we've discovered that it gives you quite a bit. In many, many of our markets, we are providers that the payers need to have in the delivery system. You know, we certainly don't have 6 unilateral leverage or infinite amount of leverage but there's much more of a balance today, and I think that's what's driven or rate increases from the managed care companies up at a rate much more proportionate to their premium increases than what we saw historically, and we expect that to continue, and we're going to continue to strengthen ourselves in those markets with additional acquisitions.

Okay, great, thanks very much.

Thank you.

We'll move next to Gary Lieberman at Morgan Stanley.

Good morning. Two questions on unit revenue growth. First, can you quantify in the quarter how much of your unit revenue growth came from the acuity shift versus how much came from pure pricing?

In the quarter, no. I mean, we did this I think in the second quarter we did a very detailed analysis, and believe me, there's a lot of detail that you have to look at to figure out what the impact is across 114 hospitals. What we determined, and I would guess that the statistics would hold for the full fiscal year, is that more than 40% of our increase in net revenue per admission was the result of changes in the mix of our business from subacute or less acute to more acute business and I think that has held and will probably continue to hold going forward.

And then to follow up, the revenue growth guidance for '03 is 10% which is a slow down from this year, especially considering how strong the unit revenue growth was, so can you talk about where you see the unit revenue growth slowing down from, is that that you've gained a lot of the acute increases that you expect or is it the pricing is going to slow down? Can you talk about that? revenues last year. At this point in time, we don't see any immediate things that are going to pressure unit revenue growth, but we rek that, you know, roughly 12%, which was our growth for the year is a level that people have a hard time getting their hands around, and in our long-term guidance, we certainly don't need anything like that rate of growth to make these long-term assumptions that we've given you. So you know, we're giving some guidance here without being absolutely specific as to how much volume, how much unit revenue we can conjure up all kinds of combinations of those and we're still quite comfortable with the way the company is headed.

Our next call comes from AJ Rice at 00:59:49 Merrill Lynch. 00:59:50 >>ANALYST: Thanks, hi everyone. Just a couple 00:59:52 things real quick. I've heard a lot of talk that 00:59:56 increase on the 12.7% of the increased revenues for admission. One thing that hasn't been touched on though, I think this in this quarter, your anniversary, some of the BIP related give backs. Can you comment on the Medicare side, did that moderate the increase onever what is might have otherwise have been, and my bigger picture question was maybe to have you guys comment a little bit on the acquisition front. I know you've been out looking at deals. Can you just comment on what you're seeing in the urban market in terms of competitiveness as well as availability of properties and what the prospects are for doing some transactions over the next twelve months. What do you think

I don't know what wants to take what part of it. I think on the Medicare, AJ, we did not specifically go back through and try to factor in or look at the effect of any sort of an anniversary or exploration of any of those givebacks. On balance, Medicare revenues were up slightly. Everybody knew we were still going to get a little increase. As to the acquisition front, I mean, we continue to evaluate a number of ideas that it put forward that we developed, but we turned down significantly more than we even go to the next step and explore. We think that, and just based on conversation, we continue to believe that a lot of the not-for-profit hospitals continue to take a more rational look at what their alternatives are, and that we've had as much, if not more success than anyone in dealing with any not-for-profit, whether it's faith-based or just community-based, and we have done good things for them, their communities, their foundations. So we still are, we think, in the markets we serve certainly first on the list when people want to have a discussion, and so we're confident that we're going to be able to continue to make some acquisitions, but as you know, I mean, that's, gosh, I mean that's the most difficult thing to try to forecast at what sort of rate it would come in, and so our budgets, our forecasts internally, we do not factor in or make as a component part of that acquisitions of any kind.

I would say, add that all of the going forward statements that we are making are without acquisitions, but David's right, it's tough to predict. We turned down he said more than we wind up doing. We're in conversations right now with a number of them, very exciting possibilities. We'll see what happens, but in the meantime, we can reinvest in our own system and build acquisitions like the doubling of a hospital any time we want and it seems to be working well for us, so we're in an enviable position I think today.

Okay, thanks a lot.

We'll go next to Wayne Cooperman at Cobalt Capital.

Thanks, guys. Actually, all of my questions were answered, so thank you.

If your question has been answered at this time, you may re move yourself from the queue by pressing the pound sign on your telephone. We'll go now to Charles Lynch at Cyberworld Markets.

I didn't think I was going to get in there. Thanks a lot for taking my question. Just one last thing I wanted to touch on. As I look at your revenue results, one thing that strikes me a little bit that there's a lot of discussion about the improvement in your inpatient volume and business, but what I see here in this fourth quarter is also an accelerating growth in both outpatient visits and outpatient revenue. Is that any kind of regional phenomenon? Can you just kind of comment on that generally?

It's not a regional phenomenon. I think it's pretty much across the country. We've focused a lot more on our outpatient services. You know, as many of you know, followed this industry, outpatient was basically just a spinoff of the inpatient business, and we never paid a great deal of attention to it. All of our business plans now from our hospitals include both inpatient and outpatient development strategies. In some cases that's just going after the business that we ought to be getting from our medical office buildings. In some cases it means upgrading the quality of our equipment and services. In many cases, it involves, although it's not reflected in the numbers yet, but will be in the years to come are Tenet care strategy of developing kind of a model consumer-oriented outpatient delivery system in our markets, and we're very excited about the potential, but we have focused on that in a much more effective way, I think, over the last year than we ever have before.

Just as a quick follow-up to that. As I look at your revenue generation and the relative growth between inpatient and outpatient revenues, is that suggestive that you might have generally par amount of revenue growth from both of those areas going forward or will inpatient continue to exceed outpatient growth? 7

As I understand your question, certainly in the last few years, inpatient revenue growth has been faster than outpatient. Will those continue or will jut patient catch up again?

I don't know. For a number of years we saw outpatient grow substantially faster than inpatient. A good part of what we've teen over the last several years has been our exit in large measure from the home health business and some other unprofitable outpatient business lines, outpatient rehabs historically, for example. So I would not be surprised that, you know, those numbers would come more into balance going forward.

Okay, great. Thanks a lot.

Thank you.

We'll hear next from Kim Delliver at ST Keller and Securities. Mr. Delliver.

Dropped out.

Ken Weekly at UBS Warburg.

Thanks, good morning, everyone. All of my questions have been asked. Just one accounting one. If you look at your depreciation expense as a percentage of PP and E, it's about 7% versus your closest competitor, which is about 11% and I think the reason bind that, you classify about 60% of your PP and E in buildings versus again, your closest competitor which is about 40%. I'm wondering, I don't know if it's discretion, what goes into the classification of assets and how will that change over time as your capital spending goes up?

Ray?

Oh, I don't think - there to that. Both the amounts on the books, the depreciation taken and so forth can be very sensitive to whether acquisitions were done as poolings or purchases.

Okay.

And I think you're referring to a competitor who principally did poolings, some of our most significant acquisitions had been purchases, the AMI one was, and you, you know, you, if you're doing purchases, you change, you up date values, you start over again, things like that. You got to be real careful of jumping to conclusions from those numbers.

Oh no, I know. That's why I asked.

The only way to get it would be to go back to the orgins of each company and layer on each individual acquisition on some equivalent basis, otherwise, you'll never get a comp. number.

If you look across the industry, depreciation as a percentage of PP and E, it's about 10%, which is a little higher, but again, you have been the least inquisitive on the pooling side, so that probably does account for it. Okay.

Next question, operator.

We'll go next to Ellen Wilson at Sanford Bernstein.

Thanks for picking me up. I had one question. I was wondering if you could provide some more color on the managed care overall contracting environment. You've obviously touched on the unit pricing so far, but the other side of the house, I hear from the HMOs things are getting more aggressive in terms of obviously the talk of tiered pricing, debating over stopped loss provisions, carveouts, et cetera. How would you characterize that environment and specifically, are you participating in any tiered networks today?

Yes, we - but I can't actually tell you what that means.

Okay.

And neither have my people been able to explain it to me. There's clearly been a lot of talk about it. I think it started out here in California, and I think a number of large organizations like Calpers have declined to participate in those products because largely, the tiering was based upon price.

Right.

And there are a tremendous number of issues that I think need to be worked out before that strategy will come into play, but again, I think at the end of the day, the importance of what we've developed in our strength in our marketplaces will enable us to compete at the highest tier with all of our payers out here.

The second part of being the other things, at least out in the market that I'm hearing, things are getting aggressive in terms of debating over stop loss provisions, set carveouts. Are you seeing managed care plans getting more aggressive?

I never saw them get less aggressive. This is a negotiation, and we both approached this from a very aggressive position. I think that, you know as I said to one of the callers earlier, I think the environment is more bald now. We need them; they need us. We both understand the pressures that each other face, and over the last couple of years, you know, we have been able to get reasonable increases from them that, you know, reflect their increases in premiums and we know what's happening to premiums next year in 2003, and we feel pretty comfortable that we're going to see a continuation of our net revenue increases so there's a lot of back and forth but not much has changed.

It really is. I mean, we're partners, business partners negotiating a contract and basically how we're going to get paid, and but also remember, we're one of the largest employers in this country, so not only do we read the premiere of the surveys out there from HR consultants about what these folks are charging, but they come in and try to raise our premiums the same way, and as you can imagine, it's an interesting conversation on both sides when they ask to increase our premiums by 15 or 20%, and we say okay, just give us that in reimbursement increases on the provider side, and then it becomes a different conversation. So it is, we're in the market buying these benefits for our employees all the time and we're also in the market negotiating reimbursement for our services, and as Tom said, they don't leave one item in the mix untouched, and neither do we, but the cost of care is going up.

Okay, thanks.

Operator, we'll take two more questions.

We'll go first to Adam Feinstein at Lehman Brothers.

This is Chris calling from Lehman. I was just wondering if you could comment a little bit on the acquisition you were going after down in San Antonio, the Baptist system and I believe vanguard ended up with that property. I was wondering if could comment on that and in general, if you're still seeing the private upstart hospital companies that have been capitalized recently in the market for acquisitions on a more recent basis.

We have seen some of these startup companies in many of the markets in which we have competed. We did bid on the Baptist system, and we were disappointed that the Baptist system didn't select Tenet and our partners, Christos and San Antonio. I believe we submitted a very competitive offer and the commitment we made to the Baptist board on capital investment and consolidation of the Baptist and Chrisos assets at market aere unique and really very well-addressed the needs of that community. I don't know why the board did not select Tenet and I don't think it would be productive for us to 8 speculate about it here, but as noted publicly by the representatives of Baptist, there are a number of steps necessary to secure approval and close that deal and it's not clear to us that the final chapter has been written, and we remain hopeful that our offer may be reconsidered there are other opportunities. As Jeff said, we're talking to a number of organizations out there. We're very excited about the potential of some of those, but as David said, they're a little bit difficult to predict in terms of timing and how much money we'll spend by the end of the year. If you look at the acquisitions we did last year, none of us would have projected those specifically at the beginning of last year. So we remain optimistic that there are opportunities out there for us.

Okay, thank you.

Our last question today from will be Robert Meades at Advest.

Good morning. A question for Paul's with regard to rent expense and also just building on the managed care question, are you saying sort of given the presence that you've guided in your markets, it's not so much an issue of how dominant a single payer is that's determining your rates, ie, the rate increases you're getting facial comparable market to market regardless of whether you've got very competitive market like you do in California versus some of the other markets?

I don't think any of our markets are uncompetitive. And you know, every negotiation is different. I mean, every payer is different. Every market is different, but on the whole, and I think all of our increases tend to center on that, you know, five or so percent that I talked about earlier, we don't have a lot of markets I can think of where we're seeing 1% and we've only got a few markets I can think of where we're seeing 20%, so they tend to center on that range pretty closely.

And Rob, rent expense for the quarter $62 million and for the year $241 million. With that, we thank you all for joining us today, and look forward to talking with you and seeing you all in the weeks and months ahead.

And that does conclude today's conference call. Thank you all for joining us.