Tenet Healthcare Corp (THC) 2003 Q1 法說會逐字稿

Good morning everyone and welcome to the Tenet Healthcare fiscal year 2003 first quarter earnings conference call. Tenet is pleased you accepted their invitation to participate in this call. Please note that this 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 webcast, you are acknowledging that the call and webcast are the property of Tenet and the call, the recording and webcast may not be recorded in whole or part or replayed or reproduced in this other form out expressed permission. Tenet's management will make forward-looking statements on this call today.

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 differ materially. Certain of those risks and uncertainties are discussed in the 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 this, no promises to update any of the forward-looking statements. Most of you have received our financial and operating data. If you haven't, it is available on First Call and the following websites: Tenet health.com. Businesswire.com. And Companyboardroom.com.

Slides that support today's presentation are available on companyboardroom.com. At this time, I'd like to turn the calling over to Mr. Barbakow, Chairman and Chief Executive Officer. Please go ahead.

Thank you and good morning. We are very pleased to announce another outstanding quarter this morning. And a strong start to what we believe will be another very, very good year for Tenet.

This quarter was similar to every quarter last year in the magnitude of the growth we have accomplished. And just as with the past many quarters, the 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. This kind of consistency we hope is becoming a trademark for Tenet.

We are proud of our consistent performance and we know our shareholders value consistency in this uncertain economy and unpredictable markets. Let me give you some highlights and as we discuss comparisons with the prior year, wherever appropriate we are comparing with prior year numbers adjusted to reflect the adoption of SFAS 142 as if it were in effect in the prior year.

Net income from operations increased 39% in the quarter. Earnings per share from operations rose 39%. And, in fact, if we add goodwill amortization back in both years, EPS from operations would have been up 42%, exactly even with full-year growth last year.

Same facility admissions rose 1.8%. Total facility admissions rose 4.1%. Net operating revenues rose -- increased 12.3% for the quarter. Same-facility patient revenues were up 11.2%.

EBITDA rose by 21% in the quarter while EBITDA margins increased from 19% to 20.4%. Pre-tax margins from operations improved by 2.7 percentage points. Net cash from operations exceeded $2.5 billion for the past 12 months. Another new high for us. Free cash flow also set another new high for the past 12 months.

Bottom line, we earned 68 cents in diluted earnings per share from operations, up 39% from the year-ago quarter as adjusted to exclude goodwill amortization. All per share numbers are adjusted for the recent 3-for-2 stock split.

This is the 11th consecutive quarter where we've posted growth of 20% or better. The eighth in a row of 25% or better. And the sixth in a row of 30% or better. I am very pleased with this performance. I -- I'm even more pleased with the improvements we are making in how we manage our business.

We have talked before on these calls and other presentations about our key initiatives. These include, Target 100, which is designed to build a dynamic customer service culture in our hospitals. It is called Target 100 because our goal is 100% satisfaction among our patients, physicians and our employees.

The employer of choice initiative is designed to help us recruit and retain a high-quality workforce in a very competitive market for labor. Our goal is for Tenet hospitals to be the preferred places for nurses and other healthcare 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 healthcare delivery and should lead to superior financial performance, excuse me, 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 to our investors. We invested a record amount in our facilities last year, almost $900 million.

This year we expect to spend $1 billion for improvements and expansions to our current system. These expenditures are bringing needed services to the communities we serve and creating growth for Tenet and its shareholders. At the same time, we continue to reduce debt by more than $400 million this quarter and repurchase our own stock.

We are finding it a great time to have strong cash flow, excellent liquidity and a conservatively structured balance sheet. There are many, many opportunities for profitable investment and growth.

For more than a year, we have been saying that the success of our strategies, together with an improving external environment, have set the stage for an extended period of outstanding growth for Tenet. Last quarter, we told you that fiscal 2003 was likely to be another one of those years when growth and earnings per share from operations will be above our long-term guidance of mid-to high teens growth each year. Based on our strong 1st Quarter performance and the continuing strength we see in our operations, we are raising our fiscal 2003 guidance at this time.

We now expect that earnings per share from operations will increase by at least 25% this year, even after adjusting fiscal 2002 earnings upwards by 17 cents as if the change in accounting for goodwill amortization had occurred in fiscal '02. This follows growth and earnings per share from operations of 42% in fiscal 2002 and 28% in fiscal 2001. 2003 should be another very good year. Thanks, and at this time, I turn it over to Thomas Mackey, our Chief Operating Officer.

Thank you, Jeff and good morning, everyone. From an operational standpoint, we had another excellent quarter; excellence is a word that describes all of our recent quarters. Same-facility admissions increased 1.8% against a strong prior year comparison when they increased 3.5%.

We are averaging same facility admission growth of approximately 3% for the last nine quarters, which is up significantly from approximately the 2% average for the previous three years. With acquisitions and one new facility included, total facility admissions grew 4.1% in the quarter. Once again, baby boomers led all other age groups in admissions growth.

Same-facility admissions in the 41 to 50 age group rose 7.7% in the quarter while the 51 to 60-year-old age group rose 5.3%. We've been closely tracking this statistic for nine quarters now and the baby boomers have been the fastest-growing age group for every one of those quarters. We've noted some skepticism among a few of you regarding the importance of baby boomers to current and future industry trends.

We know that they're important to us, we're seeing particularly strong growth in baby boomer volumes and we're seeing strong growth in the services they need. Things like cardiology, orthopedics and neurology. We can debate which came first, the chicken or the egg, but it doesn't really matter.

What matters is that the baby boomers are here and that they're driving growth and our strategies to serve them are proving successful. We continue to generate strong growth in unit revenues, same-facility revenue per admission increased by 9.9% over the prior year quarter.

We are not expecting a repeat of the nearly 13% growth in this statistic that we achieved last year and I know none of you are expecting that, either. But we believe that a combination of continuing strong increases in acuity, coupled with good gains in commercial pricing and modest increases in government program reimbursement, will enable us to report good gains in this indicator for many quarters to come. We believe our ability to lead the industry in revenue per admission growth is based on our strategies to lead the industry in intensity and acuity.

Why? Because sub-acute services generate the lowest revenue and intensive care services generate the highest revenue and we're seeing the highest rates of growth in the highest acuity services. This has been a consistent contributor to our performance for many quarters now and we believe it will continue.

It certainly was in effect during the 1st Quarter. Same-facility patient days with sub-acute services declined 4.2%. At the other end of the acuity spectrum, definitive observation unit days and intensive care days rose 9.4% and 6.6% respectively. Triple and double the 3% growth for overall same-facility patient days.

This played very significant shift in our business mix and it's driven by our strategies to grow higher acuity services. Our service mix analysis confirms these trends with same-facility cardiology admissions up by 5%. And to answer another question we've occasionally received, we didn't see a post 9/11 baby boom in our markets.

Deliveries in the quarter increased only 6/10 of a percent. The combination of volume growth and improved unit revenues resulted in same-facility net patient revenues growing 11.2% in the quarter with the addition of acquisitions, partially offset by continuing reductions in other revenue, total revenues grew by 12.3%.

During the quarter, we reported on the highlights of our capital spending program for the year. Totaling $1 billion, it includes the construction of one new hospital, major capacity additions and a number of others. And expansions of emergency departments, operating rooms, cardiology, orthapedics and oncology programs across the system.

Some of you have written in recent months about the tightening supply/demand situation for hospital capacity. We agree with you. It won't affect all markets equally or at the same time, but it is coming. Most, if not all of the investor-owned companies, are increasing their capital spending probably because all of them see the same things we're seeing. Many opportunities for excellent returns on capital investment.

However, 85% of the industry is still not-for-profit or government-owned and with so many not-for-profit hospitals still constrained by low profitability, inadequate access to capital, the efforts of the investor-owned segment of the industry are not likely to be enough to change the impending capacity shortage.

This combination, the tightening supply/demand balance and our ability to fund expansion, bodes well for future growth in market share and growth on an absolute basis in an environment of good pricing. So, at this time, I will turn it over to David Dennis, Chief Corporate Officer and Chief Financial Officer.

Thanks, Tom and good morning, everyone. Let's start out with costs and margins. The salaries, wages and benefits came in at 38.4% of net operating revenues, down slightly from the 38.5% in the year-ago quarter.

The pressures on the labor cost are still there, but I believe we're doing an excellent job of retaining the talented employees that we have in this tight healthcare labor market.

Supply expense at 14.3% of net revenues was up slightly from last year's 14.1%. The category showing the largest increases are consistent with the higher acuity we're experiencing, particularly in cardiology and orthopedics. Bad debt expense was 7.5% of revenues, exactly even with last year.

Receivable days were 61.6 days at the end of the quarter, that's down 4 days from the prior year. Other operating expense declined again this quarter by 150 basis points to 19.4% of revenues. This expense line continues to be the most important contributor to our margin improvement. With the exception of insurance expense, principally for malpractice, we've seen very stable trends in most components of this cost line.

The combination of strong revenue growth and good cost control on these fixed and semi- fixed costs is an important contributor to our positive operating leverage. Putting all this together, EBITDA margins increased by 1.4 percentage points from 19 to 20.4%.

Typically our first quarter is usually our lowest-margin quarter of the year. Interest expense declined by 34% from the prior year quarter or $33 million. Reflecting the benefits of debt reduction and lower interest rates on our borrowers. Pre-tax margins from operations surged again from 12.4% in the prior year quarter to 15.1% this year.

Our cash flow performance continues to be outstanding, net cash provided from operating activities for the last 12 months exceeded $2.5 billion, the highest 12-month level that we've achieved yet. Free cash flow, which we define as net cash provided by operations less capital expenditures hit $1.65 billion for the last 12 months. And one of the uses of free cash flow during the quarter was a further reduction in debt, which declined by $423 million to $3.6 billion.

This brings the decline over the last three years to a nice, round $3 billion. This has been good for our bond holders and good for our stockholders. It also puts us in a position to very easily finance even the largest of potential acquisitions without any strain on our balance sheet or our credit ratios.

Over the past year, we've refinanced essentially all of our publicly-traded debt. The call of the 6 percentage exchangeable notes in the past quarter complete the process. With this accomplished, we've now eliminated all the restrictive covenance associated with debt that was issued long ago when we were high yield issuer.

We have more than doubled our average maturity in the process from about five years to more than 10 years with no significant current maturities until fiscal year '06. And, of course, we've significantly reduced our interest costs, taking advantage of both our upgrade to investment grade statement as well as a historically low interest rate environment.

The board authorized an additional 20 million share repurchase during this quarter, bringing the total authorization up to 50 million shares. In addition to offsetting the diluted effect of stock options, we will also begin to take advantage of market opportunities.

Through the end of August, we had purchased 20,972,250 shares of our stock at an average price of $39.52. Including an additional 2,791,500 shares in the 1st Quarter. We currently have forward purchase contracts in place for an additional 4,575,000 shares for a future settlement at a price of $42.64 a share.

We began our share repurchase program in the 1st Quarter a year ago and are now beginning to see absolute declines in the diluted share count. Diluted weighted average shares outstanding declined in the quarter by just over 3 million shares.

The level of our repurchase activity over the balance of the year will continue to be influenced by a number of factors, including market conditions and, importantly, the level of our acquisition activity. Al the measures of leverage and interest coverage shows an improvement in the quarter. The coverage ratio or EBITDA to net interest expense improved again significantly, rising to approximately 10 times in the quarter, up from 5.5 times only a year ago.

And our debt to EBITDA declined to 1.23 times, down from 1.87 a year ago and well below our long-term target of two times. Our outstanding financial performance in the past several years is reflected in the significant increases in our other return measures.

The return on assets jumped to 9.3%, up from only 6.9% a year ago and more than doubling over the past three years. Return on equity climbed to 23%, up from 18.5% a year ago and 15.2% three years ago. This strong performance is in spite of the fact of the significant de-leveraging that I just talked about.

Fiscal '02 was a great year for the company and we're off to a strong start in fiscal '03. From every perspective, we couldn't be more pleased with our operations. Revenues are growing at a robust rate.

We've achieved across-the-board improvement in all measures of profitability and returns and we continue to expect further improvement. Our financial condition just gets better and better each quarter. We see continuing evidence of the benefits from our major initiatives, in patient satisfaction, employee satisfaction, quality and outcomes and, of course, cash flow that helps us all pay for it.

Quite simply, we continue to experience the strongest fundamentals and the prospect -- the best prospects we've ever had. At this point, let me turn it over to Paul Russell, our Senior Vice President of Investor Relations for some final comments.

Thank you, David and good morning to everyone. I want to expand on the earnings guidance Jeff gave you earlier in the call for fiscal 2003. Had we adopted SFAS 142 in fiscal '02, earnings per share from operations would be 17 cents higher than the $2.17 originally reported. Giving a base for comparison of $2.34.

To reiterate, management anticipates that diluted earnings per share from operations are likely to grow from that level at a rate of at least 25%. We're basing this guidance on a number of assumptions. And our guidance does not include the impact of any additional acquisitions.

First 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 perhaps not quite of the magnitude we achieved in fiscal '01 and '02. Interest expense should decline significantly from fiscal '02 and on a quarterly basis should show a continuing modest sequential decline from 1st Quarter levels.

The effective tax rate for the year should be approximately 39% and essentially all of the decline is due to the elimination of goodwill amortization through the adoption of SFAS 142. Diluted shares outstanding should remain flat or more likely decrease slightly depending on the level of share repurchases.

Now, last quarter we said that the actual magnitude of earnings growth for the year would be most sensitive to the strength of overall revenue growth and the improvement in EBITDA margins. The increase in guidance today is, to some extent, reflects continuing strong revenue growth and lower interest costs and to a larger extent, it reflects very good margin improvement. That -- 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 November. From then until our next earnings report, expect it to be about January 7th, 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 Diana Takvam.

Last quarter, we talked about some metrics we, and you, can use to gauge the quality of our earnings. I want to update the numbers for the latest quarter. Over the past four quarters, we earned $2.53 per share from operations. Our cash flow from operations was 5.03 per share, just about twice the earnings. And our free cash flow from operations after a significant increase in capital spending was $3.29 per share, just like last quarter, that's free cash flow of 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. What Tenet offers to investors is really very simple. Exceptional consistency, remarkable growth, very high quality. All that and we believe a modest valuation, as well.

We do have a number of investor presentations scheduled for this quarter. We will be speaking at the Solomon Smith Barney healthcare conference in New York on October 29th. On October 30th, we will be hosting a lunch for cellside analysts, also in New York. On October 31st, we will host a luncheon for institutional investors and analysts in Boston. We will be appearing at the CIBC healthcare conference November 5th in New York. The CSFB healthcare conference November 13th in Phoenix. And the Merrill Lynch healthcare conference December 3rd in New York.

So, we hope to see many of you at one or more of those meetings. There's lots of opportunities. At this time, we will open it -- open the call up for questions. And operator, would you please give the instructions?

Thank you, ladies and gentlemen, today's question and answer session will be conducted electronically. If you would like to pose a question at this time, you may do so by pressing the star key followed by the digit 1. Because of time limitations, Tenet has not been able to answer all questions on recent conference calls. Therefore, we would ask that as courtesy to the many other listeners who do have questions that, you limit yourself to one question, only. After your question has been answered, you may re-enter the queue with another question, which Tenet will address with time-permitting. Once again, ladies and gentlemen that, was star 1. We will take your first question from John Hindelong with Credit Suisse First Boston.

Thanks and good morning. And, Jeff, question for you, it's pretty obvious that the fundamentals are in great shape now. I'm wondering from a big picture point of view, from a global point of view, what are the issues that you concern yourself with that might disrupt the growth, we read in the paper this morning that the number of uninsured is growing. Might that translate into higher bad debts? Or we read about more co-payments and the slowdown in admissions. Which do you think are the most significant and what steps might you be taking now to preempt them from disrupting your growth?

I think what we worry about the most in terms of our organization at this point is labor and capacity, in terms of interrupting our growth. I think some of the external issues that you've mentioned and there are many more after that, certainly we -- we lose some sleep. They are major issues, we do all we can, whether it is in Washington or state by state, to try to address those issues. But we're one organization, we have, you know, a couple percent of the total health care market share and I -- I don't think we'll be able to tackle some of those issues unless we get more support, whether it is in Washington or on the state level. So, we stick to the things we can control and I think on the top of that list, certainly; labor. And that's -- that's one of the reasons or the very reason that we focus intently on that, whether it is Target 100, employer of choice or all the other actions we're taking as an organization to make sure that we have the staff to handle our customers as they come through.

Thank you.

We'll ge next to Charles Lynch with CIBC World Markets.

Thanks, I wanted to drill down more on the company level. In your discussion of same-store results, you gave fairly clear details about the relative movement in our patient mix.

I'm just curious in terms of your outlook over the next couple of years, it appears to me there could be some declining contribution from this great revenue for admission trend, as you change that mix, at the same time there, could be an increase in contribution at the volume side as your higher acutely services continue to grow in volume and you see less of a falloff in lower acutely services.

Can you give color on how you're thinking about in the next two or three years, how it might trend out and when quarter expectation is in the orders of magnitude in there?

Well, Charlie, we've seen for the last six or seven quarters a -- a fairly stable pattern. -- of increased P&R, older populations, the 40 to 60-year-old age group.

The services that those people are using are the very services that we've been focusing our capital investment, physician recruitment on for a long time now, cardiology, orthopedics, neurology, neuro surgery. And what I would expect over the foreseeable future is an acceleration in those trends to higher and higher levels of acuity. And frankly, we expect for the balance of this year, higher levels of same-store admission growth.

So, I think that, you know, what you've seen is just a foretaste of what you will see going forward and I think we also, because of the capacity constraints, continue to shut down the lower acutely and sub-acute services across the system. In fact, if you were to look at the acute admissions in our acute hospitals, they're actually up over 2.2% because we had a decline as we did with our patient days in the sub-acute admissions. The only thing I disagree with, Tom, as you said, our older patients, 40 and over! [ Laughter ]

Me, too!

I'm not going to touch that! Thank you very much.

We'll go next to A.J. Rice with Merrill Lynch.

Hello, everybody. Just maybe following up the last question, obviously Tom and the entire group, you're painting a picture where admissions growth and volume trends generally continue to improve for the foreseeable future and continue to remain robust by historical standards.

I guess I would throw out to you, with your historical experience in the industry, what -- in terms of managed care utilization, review or other payer review or technological changes, to what extent, you know, do those sort of impact that utilization pattern -- or that volume pattern that we're looking at and maybe comment on whether that is -- we should be concerned on that front from your perspective and also maybe contrast the impact that it tends to have on admissions trends versus maybe length of stay or other categories, give us some perspective on that, if you would?

A nice easy one!

I'm trying -- you have a lot of questions embedded in there, A.J. We have tried to assess the impact of changes in managed care utilization policy and quite frankly, you know, when you look at the system as a whole, we -- we haven't been able to determine whether it's had an impact on either admission trends or length of stay. I think it is intuitively obvious that it must have had some impact. Where that goes in the future, I mean, certainly there was an enormous backlash by the patients or enrollees in managed care about the utilization policies that, you know, we saw in the mid to late '90s and talking to those people, I certainly don't see a return to that kind of -- of very tight and oftentimes irrational utilization management that we saw in that period. Technology is a hard one to assess. I mean we have not seen any transforming technology in the hospital side of this business, actually for quite some time, since the advent of laproscopic procedures and the movement of surgery from inpatient to outpatient. It continues, I mean our outpatient surgery growth continues to outpace our inpatient growth. Actually, our outpatient surgery was up 4.3% in the quarter. But it doesn't seem to be having a -- it's not sort of at the expense of impatient the way it was seven or eight years ago. So, I mean your crystal ball is probably as good as mine with what's in the pipeline, but we don't see anything.

A.J., this is David, I take that -- the softball part of that question that you asked and it really just reinforces, like Tom said, you know, we see -- through their actions, not by any sort of stated positions, or anything like that, but the actions that we see in the work that the managed care companies are doing, that mirrors our own, to try to enhance our technology and make sure that our interfaces with them continue to drive down both our internal costs and our ability to collect, but they're getting the mirror image in trying to save money that way.

But I think that if you ask your colleagues who cover the managed care payers, a lot of this price increases that you're seeing in premium, let's face it, people are getting price increases across-the-board because so many more are using higher acuity services and these guys know they're going to have to continue to pay for it.

Uh-huh.

A.J., let me add, too, this is an unusual time in our industry. Certainly it is an industry that has historically been very cyclical and we've been going through several years here of pretty interesting times.

We're trying to set ourselves apart from our competitors as Tom had mentioned earlier, while 85% of the industry is still not-for-profit, that -- that portion is not doing as well, we'll say, in terms of some of the financial measurements. We've got a bunch of new consumers coming through, you know, we've talked about the baby boomers over and over again. The 83 million people. It is a lot of customers, they're smarter, they're more demanding, they're adjusted to service, that's where Target 100 comes in.

We're spending tons of capital and it's really -- it's really pinpointed, whether it is heart, neurology, orthopedics, you know, cancer, we're trying to set up the centers of excellence and be known in our community for the place to go. We measure the results very carefully, whether that's partnership for change, whether that's outside parties that measure our service, we were delighted in terms of our four and five-star hospitals this last quarter, I can't remember the exact numbers for you -- 49 hospitals out of 114 have reached the status, which is a very big deal for us. We really didn't talk about it this morning.

And -- and when markets do change, whether it is a pricing change or some kind of volume change, which we really don't see for quite a while. But when they do change, we will be a different company. We've got a very strong balance sheet.

We're equipped to do anything we need to do to really set ourselves apart and maybe change the way health care is delivered in this country. So, you asked a really wide question and I'm giving you a wide answer, but that's really what it's all about at Tenet.

Right. That's great. Thanks alot,

We'll take our next question from Gary Taylor at Banc of America.

Good morning. Two questions. One, wondered if we could just delve into a little more on the outpatient side? You continue to see relatively slow growth in number of visits, yet the outpatient surgeries were up substantially, and I know before we've looked at kind of exiting the home health and that's been a factor bringing the visits down.

I wondered if the move away from sub-acute was also causing, you know, therapy visits to be down or what else could be kind of bringing those numbers down?

Gary, this is Tom. That's a good question. We actually had a decrease in our reported outpatients for the quarter and as we delved into that, we took a look at some of the detail behind that. It's not easy to do. We have literally thousands of outpatient sites; some hospital based, some non-hospital based. But if you look at some of the big drivers for us with our profitability, our ER business, which represent more than 30% of that outpatient volume that we report, are up 2.6%. Our outpatient surgery was up 4.3%. Our outpatient CT Scans were up about 3%.

That combined volume represents well over 40% of the statistic you're looking at. The balance of that is a really catch-all. There is diagnostic radiology, there is clinical lab visits, to the extent we still have some physicians, it represents physician office advises, outpatient PT and occupational therapy.

It looks like that catch-all and we can't get a detailed breakdown of that. It is down a little more than 3%, but our outpatient net revenues were actually up about 9%. So, we think the higher acuity, higher margin types of businesses are -- are pretty well maintaining and -- and maintaining the growth rate that we've seen over the last several quarters.

Great. And then just one more quick question, on the acquisition side, you know, I guess it's -- it's obvious that you have some potential interest in the system in Kansas City, but outside of that situation, could you maybe comment on what the rest of your pipeline looks like in terms of other opportunities?

Looks pretty good. We'll have some other things that we will talk about as we go forward.

Okay. We'll wait for that. Thank you. [ Laughter ]

We'll take your next question from Cheryl Skolnick at Fulcrum Global Partners.

Good morning and thank you, Jeff, for the "40 to 50" comment not being quite so old. [ Laughter ]

You're welcome!

All right, don't worry. Got to get used to it. All right, if we could get into a little bit more of the detail in the quarter for a second, please? With respect to the bad debt, now, I'm sitting here and looking at cash flow from operations, up very significantly in the quarter, up 43%, which clearly was better than EBITDA, and I'm looking at day sales outstanding down both year-over-year and sequentially, I guess it was down a couple of days sequentially. And I'm looking at bad debt as a percentage of revenue being flat. Why am I confused?

I'm confused because it would seem to me that your collections are better, your cash flows are stronger so your bad debt might tick down. Why didn't it?

Cheryl, it is David. Very perceptive question. Only, I correct the -- actually sequentially AR days ticked up almost two days from the May quarter.

Okay, I didn't -- We were 59 and now we're 61. Okay.

But, you're right, it is down four days year-over-year,. Where the -- the cash flow is purely a function of some late government payments. The difference is -- is mostly in government payments that the state, Medicaid principally, delayed and did not pay in May and paid them in June.

So -- but we had -- we performed a service, recorded the revenue when they sent us the letter telling us how much they were going to pay us, then, at the the last minute, they delayed the cash payment a month.

Right, which is why we look at 12-month trailing cash flows and it is still at record levels, so, no one should get nervous about that.

That's why we're more interested in that statistic rather than month-to-month or quarter-to-quarter.

Okay, but -- because the day sales outstanding ticked up sequentially but was still down, walk me through that, down year-over-year yet you had a flat percentage, right? Day sales outstanding are down year-over-year?

Yes, they're down to almost four days.

Right. But you still have a flat percentage of provision. Is there anything you're seeing in your revenue mix that makes you want to be you know, that conservative? Or is it not conservative?

You know, bad debt, unfortunately, I mean we have the mix of patients, instead of mix of services, I mean it really -- it depends upon when you deliver the service how many self-paid patients wound up not paying? We can't control how many self-paid; the variability between the number of self-paid patients, which is where most of the bad debt is quarter-to-quarter. And, you know, we take care of everyone who comes to our facilities.

So, from that, can I extrapolate that there is still work to be done on making sure you try to get as much as you can, you know, as much as you can out of your cash collection process early on in the admission?

We try -- I mean just as we do with the managed care patient, we try to see what those payments are, I mean, but our overall policy is to try to determine at the time of admission the ability of a patient to pay.

Okay. I guess what I'm getting at is there still more room to be improving the collections process?

There is -- there is room, always, for us to try to figure out if there's a better technology to tell us up front whether or not that patient is going to be able to pay. Right now, some of the systems available out there, the way you do a credit check or the willingness for the patient to tell you, you know, some patients don't want to come in and tell you they can't pay you. It is embarrassing to tell people you can't pay for service. And -- but we have, you know, we constantly try to improve it.

Our MET program, run by patient financial services, has taken thousands of patients who come in the door with no means and made them -- done the paperwork for them, helped them become eligible for other chair programs, whether it is Medicaid or otherwise.

Uh-huh.

And sure that, serves us because at that visit we are going to get paid more than if it was just a -- you know, 100% bad debt or a charity care. But for those patients, now any facility they go to, they wind up going in qualified for a program.

So, it's not totally self-serving, but, yes, you're right, we have to continue to work on it. There will be a percentage that just will never pay you and we will never eliminate it because we can never get perfect knowledge on the way in the door.

Right. I understand. But I appreciate the answer and it sounds like you still have more benefit in that line to be able to report. Which is good.

Thanks. Cheryl, this is Paul. You're quite correct that there is a relationship between days outstanding and bad debt expense. But it is not a perfect linear relationship and bad debt expense is also going to be sensitive to mix issues as well as aging and days outstanding aspects. Understood. Thank you.

We'll go next to Deborah Lawson at Salomon Smith Barney.

Good morning, it is Andrea Deecey for Deborah Lawson. Can you provide some color on how any changes in dish reimbursement or indirect medical education reimbursement, if in a worst case scenario, no Medicare Bill is passed, I think they're looking toward an effective date of January 1st, and how that would impact you?

I think, you know, we haven't run those numbers until -- I mean until everything gets settled, trying to make a determination on one proposal, until both sides decide what the final package is going to be on an overall basis. We just really don't spend the time to try to figure it out.

Okay, can you quantify how much in -- of your revenues are from dish and from IMA payments then?

We have never broken our revenues out by specific categories on reimbursements in that fashion; we certainly get IME payments, we get Medicare, Dish, as do most companies, but we've never engaged in getting into that level of minute detail line item by line item.

Well, if nothing gets passed, it is set to decrease, I think by 11%. So, have you factored any of that into your guidance?

We have factored all current law into our guidance.

Great.

And I would say, you know, that any -- any Medicare -- new Medicare legislation would be incremental to what we've talked about. We've certainly not factored it into our thinking or budgets or guidance at this time.

So, I should read that you factored in an 11% decline, you know, overall, which is what is current law, then.

You should assume that we have factored in the full picture of existing law as it effects reimbursement.

Okay, thanks.

Ladies and gentlemen, as a reminder, due to time constraints, please limit yourself to one question. We'll go next to Darrin Lerich at SunTrust.

Thanks, good morning, everyone. I want to go back to the labor discussion for a second and wonder if you could talk a little bit more about your use of temporary staffing, the absolute dollars associated with that in this quarter and the prior year.

You also provided turnover numbers this quarter, last year and then a broad commentary to the balance of the year with regard to labor costs. Should we essentially expect labor costs and the growth there to be -- to track with revenue growth in terms of the balance of the year? Thanks.

First on contract labor, we actually had a very small down tick sequentially on our contract labor cost. That's -- since the overall cost since the rates seemed to continue to go up. I'm going to guess that our actual hours -- usage improved a bit more than that. That's sequentially versus the 4th Quarter of last year.

Year-over-year it continues to be up significantly versus 1st Quarter last year as you would expect to see in a shortage situation. We are continuing, Darrin, to, you know, take every step that we can to reduce that contract labor. It's a very expensive, you know, human resource for us. We don't have -- I have not seen our final 1st Quarter turnover numbers. We were down in the 4th Quarter to roughly 19%. Again, that's our statistic, not everyone measures it in precisely the same way. We're continuing to try to get that down.

We're piloting a number of very innovative web-based scheduling systems that will give our nurses much greater control of their schedule and much greater flexibility. We are negotiating on a regional basis with the contract labor agencies since it is primarily a local issue, to get selected vendors to drive more volume to them at a reduced price.

We're also tightening up our controls, one of the things we've realized is the adjudication of how much you owe and what you ought to pay versus what you get billed is sometimes as complicated as the managed care billing process. We're tightening up that to be sure we're only paying for what we've contracted for. So, it is a big focus for us. But it is also a real problem.

And I guess just -- I realize you don't have the turnover numbers in the quarter, but your sense, Tom, just in terms of whether that is stable with the 4th Quarter, down --

I don't have one, Darrin, I mean until I get the numbers, I would just be guessing.

Thanks a lot.

We'll go next to Adam Feinstein with Lehman Brothers.

Great, thank you. Thank you for taking the question. I need an update on medical malpractice insurance. Certainly, it's been a hot issue, but I guess it's been up in excess of 30% last year. I wanted your sense in terms of what kind of increase I may see this year. You seem to get a lot of leverage at the other operating expense line items. I wanted to get your sense in terms of the leverage there in spite of a big increase in medical malpractice insurance and then just any updates in claims experience as well. Thank you.

Last year's numbers were the result of taking a very sizeable charge in our 4th Quarter related to malpractice expense. Right now, what we've got budgeted, included in the forecast is that expense, that's relatively flat with respect to the amount --

Malpractice.

Yeah, what wha did I say? Still thinking about bad debt! Thank you. The malpractice expense is essentially flat.

A good portion of our malpractice insurance expense is not really insurance, it is self-insurance because we retain a significant amount of the liability ourselves rather than insurance it. We have seen some significant increases in the settlement value of cases that continues to occur and hopefully we'll be able -- that's something that's not totally controllable and hopefully our estimates of malpractice will remain constant with the forecast now, but it is a volatile area now.

The other concern is that the insurance market is extremely hard. The -- there are very few carriers out there willing to provide the coverage and if our experience continues to be adverse in regards to settlements, our insurance costs for the -- for what we don't retain will go up significantly, if we can even obtain the insurance coverage. So, it is a very volatile area.

Adam, number of cases, number of clients hasn't really been rising. It's been the -- really the cost of settlements. Within that total, other operating expense line item, though, malpractice is one of the largest items, certainly, but it is still one under 10% of other operating expense. And fortunately outside of insurance costs, principally malpractice, but, of course, other casualty liability insurance costs are going up, as well, but outside of those areas, we just haven't seen much in the way of increase or inflation and we've got it under very good control and that's helping our earnings.

Okay, thank you.

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

Thanks, you had me worried there for a minute I wasn't going get my question in. Tom, you discussed your expectation that unit revenue growth would moderate this year from close to 13% last year. Can you talk about what you think will cause that? The data I've seen is that commercial pricing may accelerate in 2003, so, are you not seeing that? Or do you think the acuity gains moderate somewhat next year? Thanks.

We think that last year was an extraordinary year, Gary. I've never seen the like of it with our revenue per admission gain. We never expected that to continue and I think the ten 9.9% we saw in the 1st Quarter is a much more realistic number. It may come in slightly higher or slightly lower, but I think that's a better number for modeling purposes and for guidance than sticking with last year's number.

Is that because you're being conservative or is there a change there?

I mean it is what it was. I mean, you know, that's -- you know, that's the number that we have for the 1st Quarter and I don't see any reason to believe that it's going to spike up materially, nor do I think there is any big risk that it's going to drop down. So, that's a number we're comfortable with for forecasting purposes.

Are there any data points you can give that are, you know, have caused it to moderate to the 9.9%?

You know, I can't. That number is the compilation of so many variables that I couldn't even begin to tell you what -- what -- what would make a percent difference in it.

Gary, certainly commercial premium increases are projected by many people to actually increase more in '03 than '02. That's -- that's the prices that the -- that the managed care payers are charging. Hospital rate increases to them seem to be pretty stable. We're not seeing acceleration from levels of a year ago, but we're not seeing deceleration, either and, you know, we're -- we're doing well with the kind of pricing that we're getting.

Great, thanks a lot.

Next we have a question from Kent Oliver at SG Cowen Securities.

Thanks and good morning. Quickly on the labor front, can you talk more about items such as underlying labor inflation, turnover, any areas you've made progress with regard to lowering vacancies, et cetera? Thank you.

Yes, Kent, this is Tom again. As I said earlier, we don't have 1st Quarter turnover numbers yet. It's a fairly complicated process to get that number. But we had seen sequential declines from about 23% a year ago down to 19% in the 4th Quarter. I have no reason to expect that that would change but don't really know at this point. What we're seeing is continued wage inflation.

I mean as we have to compete in the marketplace with other organizations, they're raising their rates for nurses, pharmacists, radiology, techs, it looks like, in total, our nursing salaries are up about 10% over a year ago. And that's pretty much what we're seeing in most of our markets. I don't see any reason to expect for the foreseeable future that that rate inflation is going to change very much.

I think in general, as John Hindelong asked a first question about some of the macro, the big issues, clearly this is the biggest for us. This is the one we spend the most time focused on and you will see that continue.

I think over time we will do extremely well over others, but there are huge shortages. It's interesting, some of the things that are now going on in Washington to help this along.

But, you know, this is something that I'm not sure is going to get much better for the industry in total as we move forward. So, we've got to position ourself to be the very best.

There are, however, some encouraging signs. And this is entirely anecdotal at this point, but we are, at least in many of our markets, beginning to see nursing enrollment in nursing schools go up for the first time in a very, very long time. And my projection, quite frankly; that as salaries get to the level they are, I mean at the 60, 70, 80 and in some markets over $100,000 for a full-time RN, the profession of nursing may become much more attractive than it has been. If we do continue to do the right things. I think that's the advantage that Tenet has.

Salaries going up and we're doing the right thing in regard to flexibility, control, better management, better tools and equipment to do the job and better technology.

Anything on productivity?

No, we've not seen any material change in it. It is very hard to again measure because a patient day this year is different than a patient day last year. But there's been no material change.

It is obviously something we're focused on, particularly in the area of technology is can we find ways to put more of the nurses hours at the bedside with the patient than in filling out forms? And communicating with other departments. But that's a longer-term, not something you're going to see this quarter or next quarter.

Thanks.

We'll take our next question come Tom Marsisco from Marsisco Capital.

My question has been answered at this time. Thank you.

Thank you, Tom.

Next we go to Ellen Wilson at Sanford Bernstein.

Yes, hi, I will be quick. I wanted to follow up on the acquisition question from earlier in the call. I was wondering if first you can remind me what your acquisition criteria is? And second, if you could tell me at what point or under what circumstances if you would at all be willing to do deals to the point of being diluted?

It is David. The -- generally the criteria -- things that we look at, it is really not criteria per se because each and every market, each and every opportunity is different. We look, first and foremost, to enhance our position in the markets that we serve.

Second priority would be -- or that's really the second priority. First is our internal Cap Ex, but on the acquisition front, that's the first priority. We only look at going outside of our markets if we see an opportunity where through entering that market and we can develop a plan so that over time we can achieve a number one or a number two market share position.

And from that, then it really is looking at each opportunity but we -- we don't spend money easily and we like returns over 20%. So...that is something that, as I said, we then look at potentially what we can do or believe we can do in a given opportunity. But no set absolute criteria. As to dilution, we don't do diluted deals.

Let me just add to that, a good example is the six deals we did last year, they were all in market, the were all accretive they were all additive to what we did.. I think the average margin on those six transactions was negative. The last we looked, which was last quarter on those six double-digit in terms of margins, every one of those, not only worked financially, but built the strength of our system in the markets we served and we'll continue to do the same thing going forward.

Okay, thank you.

We'll take your next question from Frank Morgan at Jeffries and Company.

Good morning. On the subject of nursing, could you comment, I guess the final regulations are getting ready to come out from the governor's office out in California on the staffing ratios and set to take effect next year. Anything that's changed there? Or any additional flavor you could add on that situation in terms of how you might have to make adjustments? And would that, in any way, really affect your productivity?

And secondly, could you talk about what have outpatient pricing trends been like? You talked about volume, but what about outpatient pricing trends? And finally, overall volume trends by the months of the quarter? Thanks.

Frank, this is -- this is Tom. The governor issued his -- issued the new regulations yesterday or the day before. They are pretty much the same as the draft regulations that we saw some months ago.

There is a comment period in which I suspect the industry is going to try to negotiate with the governor's office to change some aspects of that, particularly as it relates to night shift staffing, that made essentially no differential between day, evening and night. So, you know you don't need the same level of activity and nursing support from patients asleep. So, we will be very active in those discussions.

As we said before, we don't anticipate that the regulations as currently drafted will have a material effect on our staffing in California. Certainly material effect on -- on the company as a whole. And they're not scheduled to go into effect until January of 2004, if then.

As outpatient pricing, I think it is running roughly parallel to inpatient, as we said, we were up about 9.9%, 9% on the outpatient net revenues, so, maybe actually slightly stronger, but there is also mixed issues involved there, as well. We don't -- we do not provide commentary on a month-to-month basis. Quarters are enough on volumes!

Operator, we've been at this now for well over an hour. We will take two more questions.

Next we go to Robert Main at Advest.

Yes, just a quick one left. You know, in the popular press, we talked about the current economic conditions. There is a lot of talk about how this recession or slowdown is different than others and that the middle class is being affected a lot more.

Are you seeing any kind of increase on uninsured or under insured among the -- the population that normally was insured? Or is that something you didn't really track?

I don't know how we could track that. I mean we see is somebody's status when they come to the hospital, but we don't know what it might have been six months earlier.

Right.

There is -- you know, again, I wouldn't challenge what Paul just said, what we do know is that the number of employed without insurance actually increased in the most recent year. And, you know, quite frankly our view is that it is the result of a lot of the mandates that the states have placed on -- on HMOs, in terms of coverage for this, that and the other thing, instead of a more basic package.

And we're clearly working at trying to find solutions that keep affordable health insurance available to employers or employees that may be at the lower end of the wage scale.

But nothing that's material --

Nothing material.

Okay, thank you.

We will take your final question from Joel Ray at Wachovia Securities.

Wow! Okay. Simple question, do we have statistics on what the case mix index was this quarter versus prior period?

Joel, you're probably referring to the Medicare case index. That's actually not a measure we use on a regular basis to track our acuity. We've seen certainly in some other situations in the past that undo attention to that statistic tended to get people in trouble.

You know, as we've looked at it from time to time, we've seen modest increases, but, of course , our biggest volume growth is in the 40 to 60-year-olds who are not in Medicare anyhow and we suspect that is where we're seeing some of the stronger acuity increases. So it wouldn't be picked up by Medicare case index in any event.

I was just trying to focus on the whole concept of higher acuity.

Of course, the case mix index is calculated for Medicare patients only. That's one of the things you're just not going to pick up all aspects of it.

Thanks very much and congratulations on a good quarter.

Thank you.

Thank you very much. We thank all of you for joining us today. I know we haven't gotten to necessarily all the questions, but both I and Diana will be in our offices today and invite you to call up with anything else you've got. Thank you.

Once again, ladies and gentlemen, that does conclude today's conference call, thank you for your participation. You may now disconnect at this time.