Good day, and welcome to the Tennant Healthcare Call to discuss the company's intention to spin off Conifer. Today's conference is being recorded. At this time, I would like to turn the conference over to Brendan Strong, Vice President of Investor Relations. Please go ahead, sir.
Good morning. The slides referred to in today's call are posted on the company's website. Please note the cautionary statement on forward looking information included in the slides. In addition, please note that certain statements made during our discussion today constitute forward looking statements. These statements relate to future events, including, but not limited to, statements with respect to our business outlook and forecasts, our future earnings and financial position and future corporate actions.
These forward looking statements represent management's current expectations based on currently available information as to the outcome and timing of future events, but by their nature, address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward looking statement. For more information, please refer to the risk factors discussed in Tennant's most recent Form 10 ks and subsequent SEC filings. Tennant assumes no obligation to update any forward looking statements or other information that speak as of their respective dates, and you're cautioned not to put undue reliance on these forward looking statements. Now turn the call over to Ron Rittenmeyer, Tennant's Executive Chairman and Chief Executive Officer.
Thanks, Brendan, and good morning. I appreciate everybody joining us today on such short notice. As you saw in the press release that we issued this morning, we have completed our strategic review of Conifer. And following a thoughtful and detailed process, the Board and I have decided that the best path forward for Conifer is to execute a tax free spin off to the shareholders of Conifer by the end of the Q2 of 2021. During this call, I will discuss the breadth and depth of the strategic alternatives that we explored as well as outline the key next steps that we're taking to prepare Conifer to be an independent publicly traded company.
But before discussing the Conifer spin off in more detail, I want to take a moment to provide a brief overview of our results for the quarter. We expect adjusted EBITDA will be comfortably within our outlook range for the quarter and consistent with consensus estimates. Volume growth strengthened in our hospital business with admissions and adjusted admissions both up for the quarter. USPI continues to deliver favorable volume growth and Conifer delivered another strong quarter. We will have greater detail available in our upcoming earnings call on August 6, and I wanted to reaffirm our adjusted EBITDA outlook for both Q2 and the full year before I moved into the Conifer discussion.
Our call today is really about Conifer. So I'm not going to answer any other specific questions on Q2 until our call on August 6. So moving forward on Slide 2, we've listed at a high level the process starting with our announcement in December 2017, a few months after I was named CEO of the strategic review for Conifer. You should recall at that time and throughout this process, I was clear that we would sell the business if we received a valid all cash offer that represented a fair value for the businesses, including improvements made during the process and a contract that clearly supported the main mission of collecting all of Tenet's cash as well as provisions that were commercially acceptable. So for context, at that point, there was clearly some uncertainty in general regarding Tennant.
We were making several significant leadership changes. We had announced but not yet completed a $1,000,000,000 divestiture program and there were questions how we were going to fund the continued buy up of USPI. Fast forwarding to today, we are very much in a different position as a company. The leadership changes across the entire enterprise have created a new and invigorated sense of urgency and accountability. This includes changes at the Board level with 6 of our 11 directors having joined since October 2017, changes in senior management team, including our new COO and numerous changes throughout our corporate ranks and hospital leadership teams.
We have completed our divestiture program, executed and completed our buy up of USPI, focused on top line growth and continued to grow same facility revenue in both our hospital and ambulatory businesses. And we further expanded USPI through additional acquisitions. We are more than halfway through an aggressive cost reduction initiative that remains on track to remove about 450,000,000 dollars of annual run rate expenses from our cost structure by the end of the year. And regardless of the distraction of this strategic review process and the uncertainty that it created relative to the team and in general the company, Conifer has produced financial results, which are dramatically improved over prior years, and we believe Conifer will continue to make forward strides that will be impactful and sustainable. As a company, we're on a path for adjusted EPS in 2019 to be roughly triple that what we reported in 2017.
We continue to make progress towards lowering our ratio of debt to adjusted EBITDA, primarily through EBITDA growth with a 4.7% EBITDA growth in 2018 and another 4% to 7% growth contemplated in our outlook for 2019. And we remain focused on margin expansion with roughly 200 basis points of margin expansion from 2017 to 2019. While we are far from declaring victory, it is clear that the company has reset and is in a much stronger financial position than it was just a few years ago. So moving to the Conifer decision and referring to Slide 3, we want to take a moment to place the Conifer effort for the last 18 months into context. We kicked off and undertook an exhaustive review of different options, all with the goal of delivering value for our shareholders.
As part of the process, we evaluated many different alternatives and we primarily focused on 2 structures. An all cash sale of Conifer, which was the number one focus when we started and merging Conifer with another company and then spinning out the combined company via a tax free spin to tenant shareholders. That was the transactional structure we deeply explored during the exclusive negotiations that we announced in February. Slide 4 provides a pictorial outline of the initial sales process that we have conducted. One of the driving reasons we started the strategic review was because shareholders approached us and said, we believe there could be some buyers for Conifer that would be willing to pay a high multiple for the business, possibly in the mid to high teens.
Our Board and I were very willing to listen to these ideas and thought it was worth exploring. We undertook the process with a clear intent and we continue to state that in our communications to pursue a sale if we were able to negotiate an appropriate price for Conifer. In many discussions with our shareholders and other stakeholders, it was openly shared by this constituency that this was the right framework for a decision. As you can see, this was by any measure an extensive process. We engaged Goldman Sachs to run the process and we spoke with a total of 74 potential buyers, including 16 strategic buyers and 58 financial buyers.
Out of the group, 9 submitted preliminary non binding bids for Conifer and 3 of these initial bids were high enough for us to continue moving through the process. A point that is critically important is that the preliminary bids were based on a business plan that we have provided to the buyers that projected Conifer would deliver $308,000,000 of EBITDA in 2018. As I'm sure you'll recall, when we first announced our intention to pursue a sale of Conifer in 2017, we said that we expect Conifer would deliver $270,000,000 to $280,000,000 of EBITDA in 2018. Month by month, we continue to identify and properly execute opportunities to improve Conifer's cost and service structure, and we reflected this through our bankers to the bidders as we recognize changes, including details on how it was achieved as well as in the increased EBITDA outlook for Conifer that we provided in conjunction with our Q4, Q1 and Q2 earnings releases last year. Ultimately, we ended up delivering $357,000,000 of EBITDA at Conifer in 2018, an increase of $82,000,000 from what we projected at the start of
the year.
Conifer delivered nearly as much EBITDA growth in 2018 in absolute dollars as they did in the prior 3 years combined. These were exceptional and most importantly sustainable results. Conifer will continue to grow in 2019 and this was achieved despite the natural uncertainty of a strategic process coupled with a potential negative impact of hospital divestitures. So looking at Slide 5, our expectation was the bids needed to recognize sustainable improvements, which were easily verified in due diligence. It was clear that Conifer was making great progress in enhancing its performance.
It was also clear that this was something that bidders did not want to pay for since they had viewed Conifer's enhanced performance as synergies that they would achieve after an acquisition. Our job is to maximize value for our shareholders, not the shareholders of the bidders. So we rightfully required that we'd be paying for the performance improvements. However, the bids simply did not reflect those changes. Our perspective was and we openly stated and discussed it with potential bidders that we had identified the savings, we were achieving the results as our performance showed and felt it was appropriate to be paid for that performance.
We also had identified a clear path to offshoring, but offshoring was not included by the bidders in determining the values. Additionally, the terms that the buyers proposed for a long term contract between Tennant and Conifer were, in our view, unrealistic. In general, some, if not most, of the potential bidders expected a 10 year contract or longer, which frankly, we had no issue with. However, they also wanted above rate market escalators. The buyers did want to be held accountable for collecting 100% of our cash, which is critically important to us and something that I discussed numerously.
There were several different iterations, but none assured that we would have a proper and effective recourse if cash collections fell short. Additionally, many expected unrealistic guarantees. For example, we did not sell a hospital if we did sell a hospital, they expected us to guarantee the buyer would use Coniferm or if not, we would continue to pay the buyer for that sold assets RCM as if we still owned it for the duration of the contract. That's not how outsourcing works. It is the outsourcers responsibility and in turn their risk to sell their service to the new buyer or to find new business to replace what could be lost.
Finally, some of the bids provided an equity component versus an all cash sale. We did not want to accept the transfer of the risk in this type of transaction nor the potential lack of liquidity of someone else's equity. In the end, the parties conducted very degrees of due diligence on Conifer and submitted their offers. We felt these offers were not adequate, especially considering the improved financial performance at Conifer. And as I said on several occasions, I strongly believe there was a view among some and maybe all of the buyers that we had to sell Conifer, that we were a forced seller, that we had to sell Conifer to delever the company.
And as I've said throughout the process, Conifer is not a strategic part of Tennant, but is a very valuable asset and our shareholders deserve the right price for it if we sold it. And we continue to believe Conifer is a very valuable asset, and we also continue to believe there is room to further improve it going forward. On Slide 6, while the outright sale of Conifer at the right price was our first choice, we decided it was also appropriate to invest the time and effort to ensure we had explored all alternatives to value creation. We determined there may well be another alternative worth exploring that might yield an acceptable value. This included the idea of combining Conifer with a 3rd party and then spending this 2 entity in a tax free spin to our shareholders.
There were several potential benefits from a transaction like this that we have outlined. We believe the merger spin transaction could have been structured in a way that would have been tax free to both shareholders and tenant, just like a straight spin of Conifer is expected to be tax free to both shareholders and tenant. The tax implications of a sale versus a spin were critically important part of the decision process. So it's worth taking a second to discuss this. As you know, we have a federal net operating loss carry forward.
The size of the NOL is approximately $1,000,000,000 dollars as of December 31, 2018, meaning that we could offset $1,000,000,000 of taxable income for federal tax income purposes. If we were to sell Conifer, this would trigger a taxable gain. And even in a low valuation, combined with our very low tax base at Conifer, would have used up most or all of the NOL. Tennant is at the point where we are generating taxable income and we expect to use the NOL over the next few years without a sale of Conifer. Using the NOL to offset a portion of the taxable gain on Conifer sale is not free.
In addition, we remain open to making additional changes in our hospital portfolio, which also could result in taxable gains. We concluded that it's much better to explore options for Conifer that would be tax free to shareholders, including a merger spin or straight spin that would preserve our NOL for other purposes, including enhancing our cash flow over the next few years as we continue to work to improve performance. Looking at Slide 6, we stated the most significant potential benefits of our merger spin. There was a way to structure that transaction so that shareholders would benefit from owning a separate company focused on revenue cycle management and other business process outsourcing services, while providing an appropriate amount of leverage on the new Conifer by using a debt for debt exchange at the time of the spin, which we expected to be tax free to tenant, thus reducing the debt level at RemainCo. We were mindful of how our merger spin would impact both the leverage profile for RemainCo and SpinCo and have been thoughtful of this in order to provide a balance.
Finally, our expectation was there would be both revenue and cost synergies and possibly some management synergies by combining Conifer with another company. A merger spin would allow Tenet shareholders to participate in this upside if they chose to retain their ownership interest in the new Conifer post spin. Clearly, these were some great reasons to be excited about the prospect of a merger spin, which is why we spent several months in exclusive negotiations and due diligence. As we proceeded with our diligence on the merger partner and further evaluated these opportunities and negotiated the relative valuation between Conifer and the partner that we were looking at, we did ultimately conclude that this just simply was not the right transaction. So at that point, we concluded that to unlock the value created by Conifer, the most effective action was a tax free spin to the Conifer shareholders.
It was the most logical and effective step forward. Slide 7 outlines our view of the strategic rationale for the tax free spin to shareholders. As I mentioned, we started the process, Conifer was a valuable business with strong margins and great free cash flow. The service that Conifer provides is incredibly important Tenet and its customers. However, unlike USPI, we don't believe Conifer is a strategic part of our healthcare delivery platform or frankly any hospital system.
The revenue cycle management and value based care services that Conifer provides can easily be done on an outsourced basis. Therefore, separating Conifer from Tennant allows us to retain the great services that Conifer provides to all of our hospitals, while recognizing the different financial profile, capital needs and growth trajectory for Conifer. Having separate management teams and a Board entirely focused on Conifer's service offerings should help the company further improve execution and accountability. Each company will be able to independently pursue what is best for its growth, its customers, its employees and ultimately its shareholders. Over the long run, our view is that Sempra Econifer should translate into proved shareholder value as a result of the benefits of the separation that I've just outlined, combined with giving the markets an opportunity to value these distinct businesses separately.
There is still a lot of work that we need to do for Conifer to be fully prepared for an independent company status, which we outlined on Slide 8. We believe this work will take up to 2 years. So we're targeting a spin off by the end of the Q2 of 2021. We know as many of you do, there is a long list of material things that have to get done to set up the mechanics and regulatory aspects of this spin. We need to recruit a new independent board with skills and perspectives to help shape Conifer's future growth and strategy.
We will need an IRS ruling or legal opinion that it will be a tax free transaction for U. S. Federal income tax purposes for our shareholders and tenant. And as with any spin, the SEC will need to declare the Form 10 effective. We will need new independent auditors and a variety of separation points regarding policies, etcetera.
We have a new and exciting partner with Dignity with the Dignity CHI merger that we need to ensure is included in these discussions. And while all these take time, there are also several important business milestones that we need to achieve before Conifer is ready to be a standalone company. Start with, we want to position Conifer as a growing company, which is adding new customers and delivering profitable and positive revenue growth coupled with a robust sales pipeline. Following today's announcement, Conifer will have an opportunity to develop and execute on a new sales and marketing plan, highlighting the benefits of its future independence and improved competitive position. Simultaneously, we are restructuring the commercial part of the business and rebuilding the sales team at Conifer, and we are in the midst of an active effort to recruit the new commercial sales officer.
All of these actions should translate into stronger revenue growth. The second set of significant action is the management team that will carry Conifer forward. As we announced this morning, Steve Mooney, Conifer's CEO has stepped down and we've named Conifer's COO, Kyle Burnett as the interim CEO effective today. The company and myself want to thank Steve for his years of commitment and oversight to create a valuable and viable company in Conifer, and we view him as an alumnus of Tennant. Kyle has delivered a consistent and exceptional set of performance metrics since being placed in that role in 2017.
He has a long and distinguished career at Tenet, USPI and now Conifer. While we're very pleased with his performance, we're also launching a national search for a permanent CEO. Kyle understands and agrees he'll be one of the candidates that we consider as we look at the right person to lead Conifer as an independent publicly traded company, and we will assure this is done objectively and with the appropriate emphasis on a long term quality candidate. Likewise, we need to give Conifer's future CEO sufficient time with the business and potentially making additional changes to position the company for future success. We also believe it will be helpful to materially complete our offshoring efforts so that the market could really understand the go forward financial profile for Conifer.
While this may be an ongoing project, we do see the next 18 months as a critical transition period. Our intense focus on improving Conifer's financial performance while maintaining or enhancing operating performance for customers, including Tennant, will position Conifer well for its future success. And this work will take us a bit of time. As I've discussed on several occasions, we also need to finalize the contract between our hospitals and Conifer on terms that make sense for both sides on a go forward basis with appropriate incentives and penalties. It's critically important that Conifer continue to do a great job collecting our cash and the part the only part to protect tenant is that the right contractual terms in place.
As part of the new agreement, we expect to adjust both the scope of services that Conifer provides to our hospitals and the rate that hospitals pay to Conifer for this service, and we're finalizing those details. We're also still working through additional cost reduction opportunities. I do believe Conifer continues to have meaningful opportunities to further improve its cost structure. Much of this should be in place by 2020, we should be able to better articulate the impact and explain the benefit from offshoring in further detail on our Q4 earnings call in the coming February. And then finally, we do intend to spin off Conifer with an appropriate capital structure, which we expect to include the same debt for debt exchange we talked about in the merger spend.
This is an exciting day for us and it is a very big day for Conifer. When we spin off Conifer, we believe this investment in time and change will ensure it is well positioned for success as an independent company. And we believe our healthcare delivery platform will also be positioned for growth and further success. So with those prepared comments, operator, we're now prepared for
questions. Thank We'll take our first question from Ralph Giacobbe with Citi.
Thanks. Good morning. I guess one just hoping you could flush out a little more thoughts on the I know ranges around how much debt will shift to Conifer and capital structure of tenant sort of post the spin. Just want
to clarify the comments of sort of
the debt for debt exchange.
Well, there's not much I mean, Ralph, I appreciate the question. And I understand why you're asking it, but remember, we have 2 years. At the same time, we've got to realize that we are clearly, as you've seen, the trajectory of Tenet Hospitals and that part of the business USPI, I think is very positive. If you look back in the last 7 quarters, we've hit our EBITDA, we've either hit consensus or beat consensus 6 out of 7, the one we missed was due to settling malpractice in the value based contract issue in California. So when I look at just performance, I'd say we hit 7 out of 7 comfortably.
EPS says hit all 7. So from a performance standpoint, we are clearly focused on debt at Tennant, first on performance, which I've always said. Asset sales, we haven't talked much about that because I do not want to publicly start talking about what assets we may or may not dispose of, but clearly it's a very clear topic. We are actively involved in looking at those things. There are still areas that we think we would be better if we trimmed off certain pieces.
So we're going to continue to be aggressive about that. So then once that's done, that will all have an impact on debt, obviously, in the profile of tenant. And then you kind of slip forward to 2 years from now when we spin it out. I think that decision and the debt to debt exchange will be made as we get closer to that because we'll have a clearer view and a clearer field. But there's no way I'm going to we plan to load up Conifer and cause that to have a capital structure problem on the way out.
We want it to be successful. So it's a balancing act and it's kind of hard to see here theoretically with all these actions in place. All I can do is tell you that based on our trajectory, I believe that we will do the things we've said. And then secondly, based on the debt to debt exchange, we will do an appropriate capital structure. So I know that's not the exact numbers you want me to fill out, but that's the best way I can do when I look forward without it being more than theoretical.
Dan, do you have any follow-up to that?
Good morning, Ralph. Listen, we've talked about we're very focused on reducing our leverage, which is primarily through earnings growth. But as Ron mentioned, when we get to the point of the spin off, we'll look at what makes sense from a capital structure perspective in terms of the amount of debt on the Conifer organization. And then essentially what would happen at that point would be there would be a reduction in debt on the tenant side.
Being tender for tender, I think. Correct.
Okay. And then I
hope that's helpful.
Yes, no, that's fine. I understand some level of wait and see. But just want to be clear, I guess, on my follow-up on the Conifer EBITDA. So your guidance, the midpoint for the share, I think, is around $375,000,000 Would that amount simply come out of the total tenant EBITDA base? Or are there other considerations, overhead, stranded cost, where we need to make sort of other considerations as opposed to sort of that simple math when the time comes?
Rob, it's Dan. You're right. The midpoint is $375,000,000 for this year. Certainly, as we move forward, we expect Conifer's earnings to grow. In terms of at the time of the spin off, obviously, depending on the Conifer's earnings level at that point as well as we did want to point out that we will be looking at entering into a new contract with Conifer.
And so depending on the ultimate pricing on that particular contract. But I think directionally you should be thinking of it like that. Whatever the Conifer's EBITDA that's what
I'm not concerned about the Conifer contract issue being a big issue because it will be fairly consistent. There'll be obviously, we said we're going to relook at some of the scope things, but let's assume that just moves past and comes through and won't affect the number in the end result. To your question about cost, yes, there will be cost that will come out of Tennant. I mean, there are things that as an enterprise you do, some of that will go over to Conifer. But my impression or my expectation, I'm really not impression my expectation, is that over the next period of time, Conifer will step over all that.
I don't see us moving large cost blocks over to Conifer, because Conifer will have to do some things for a public company structure, but I expect them to be able to step over that with other improvements. Equally, I expect Tenet to reduce its cost and continue to reduce its cost and whatever cost the Tenet eliminates should not be a one for one change for Conifer. I mean, simplistically, you could say that would happen, but I do not that will happen. We've already started to look at that. And so Tenet will get some, I think it's a little early to be specific about that.
But rest assured that we do not plan to see large cost shifts back and forth.
Okay. All right. Thank you.
We'll take our next question from Tito Chichiring with Deutsche Bank.
Good morning, guys. Thanks for taking the questions. As we think about the spin off, you mentioned some pushbacks for potential buyers, including contract length and cash collection provisions. Can you tell us how long the contracts will be on the Conifer with the spin out? I believe you have escalators in place on those contracts.
Now cash collection provisions terms be different from other rep segmentation companies in the market?
Well, it's a good question. I would just say that I can't totally answer that. Look, the contract for Conifer and Tenet, it's already structured out, I think, 99%. All that it's not a lot different than what we're doing today. The goal is 100% cash collection.
If you don't collect 100% cash, then you have a potential penalty. If you collect over 100%, meaning that you've been more aggressive, you've found other opportunities, you should get rewarded for that. It's pretty much how we manage the company today. And so fundamentally, it's not a big change. Length of time, look, 10 years is fine.
I think it could be longer, but typical these typical outsourcing contracts to me, 10 years is a reasonable time. Escalators are important, but at the same time, companies need to outsourcing companies need to not have built in price increases. They have to provide services that make you want to give them a price increase or provide you new services. The real issue for outsourcing is to have some type of incentive to improve. And when you have that incentive, you get your pricing increase based on efficiency.
Not a lot different than what we get from managed care in many respects. There has to be efficiencies built into the system. They have to look for cost improvements on an ongoing basis. That's where they should benefit. They have to look for new technology to automate and figure out ways to cut out steps in the process.
I believe that building in standard escalators at times is not necessarily the most positive way to incentivize someone to perform. So this will not be a contract that will be out of, I think, out of market. If anything, I think it will be very much market. And but I can't compare it to everybody else's contract because those kind of terms are not necessarily publicly available. But it will not be a contract that's unreasonable or out of commercial standard.
Tito, was there anything else? It sounds like maybe we're moving on, Shelby?
Yes, sir. We'll take our next question from A. J. Rice with Credit Suisse.
J. Rice:]
Hi, everybody. First of all, just want to explore a little bit more. Obviously, you've got a partner in Conifer and Dignity. They own about 24% of it, I believe, still. Can you just tell us how involved they have been in this decision making process?
Or do you now go to them and present this to them? And within the terms of their relationship with Conifer, do they have the ability now? Is there a change of control that allows them either to put the equity to you or to Conifer? Or is there any provision for them to restructure their contract as a result of a change of control type of provision?
So let me answer this a couple of ways. One is there are no provisions for them to do any of that. So the contract is the contract. But they've been involved. Saum is sitting here with me.
He's just recently spoken with them, correct? I mean, they're totally up to date. The new common spirit, which is obviously the combination at senior level, we've met with directly and they're very comfortable with where we are. Saum, do you have any other comments?
I think
the management team at common spirit is very supportive of this.
So I see no change in any
We don't think of that.
Would the intention be then for them to just retain the 24%, so you'd spend yours out to your shareholders and they would retain their stake or what would happen to their stake?
Hey, Jay, it's Dan. Well, ultimately, we can't predict how they'll ultimately view their investment on a long term basis. But the plan is that at the time of spend, they would get the appropriate interest in the new organization.
Same as any shareholder. And whether or not they keep that stake or sell it, I mean, we have no control over that. They'll still be contractually engaged with Conifer as a customer.
Okay. And then my other question was related to, so you're going to go out and bring in do a national search for a new CEO of Conifer. Just things like negotiating the contract with you all and other sort of strategic decisions? Can they move forward before you get a new CEO? Or are you sort of bringing the new CEO and then you finalize those types of things?
We're running the business. We're going to move forward. I mean, we've got 2 years. We're going to have we're going to move forward on all those things. As we hire a CEO, they will certainly engage with us on all of that.
But for now, for the next few years, we still own and operate it. So the majority of it along with common spirit. So from my perspective, we're not going to stop doing what we're doing. And but the new CEO obviously will join the company with full awareness of where we are, what we're doing, and we'll look for their insight as well. But conceptually, I don't see it changing the pace or anything we're doing.
Okay. All right. Thanks a lot.
We'll take our next question from John Ransom with Raymond James.
Hey, good morning. Just curious on kind of for the cost cuts, what should we think about in 2020 as sort of a starting out point when you fully load the cost cuts that you is there some additional wraparound cost cuts that will go into EBITDA as we think about modeling next year?
John, it's Dan. Good morning. Absolutely. I mean, there will be incremental cost efficiencies realized next year and then we think beyond in terms of cost actions that we have already targeted and begun to execute on.
I'm sorry. I meant the $80,000,000 Is that fully realized this year? Is there a piece that will go into next year? I didn't ask the question right there. Sorry.
Yes. John, yes, there will be a piece realized into next year. Yes. So if you recall, the $250,000,000 cost reduction initiatives of ours, we fully realized that by the end of this year. And then the incremental $200,000,000 taking us up to $450,000,000 We realized about $50,000,000 this year and then the remaining $150,000,000 we capture next year and Conifer is
part of that. Conifer is part of
that. Part of that.
Yes. Approximately how much of that is Conifer?
We haven't specifically said the exact dollar amount, but it's a fair amount of that money.
I just put fair in cell C3 and it didn't give me a number, but thank you.
Here's how you think about it, Sean. If you look yes, I know. If you look at our breakdown of our savings that we have on our walk forward in the slides, I'd use about the same proportion.
Okay. See, I knew I'd get an answer out of you, Dan. I'd just said to keep pestering you. The other question I had, a more broad strategic question. If you look at the competitive landscape and revenue cycle, some of your competitors have layered in, I would say, incremental capabilities beyond just kind of a revenue outsource.
Conifer hasn't grown a lot. And you guys have said, well, when you got an asset held for sale, it's hard to grow it. But I'm just kind of interested longer term, what strategic capabilities do you think Conifer needs to compete and win and grow versus what it has today?
Yes, this is Tom. So it's a good question. And I think one of the important things that we would reiterate, it is very hard to grow when there's uncertainty about the future of Conifer, both from an ownership and structure standpoint. We think this clarity will help. Look, the second thing is Conifer has been an evolving business over the last few years in terms of its capabilities across the revenue cycle, including greater automation, standardization of workflow and also dealing with the complexities in today's environment from a payer reimbursement and payer dispute denials environment over that period of time.
So there are a number of incremental technologies that have been built into Conifer's platform that make it today a very different performance entity as reflected in the results of our customers, including Tenet, than what it was even a few years ago. So as we have talked about the cost savings and the EBITDA improvement that Conifer has achieved through efficiencies as a strong part of the narrative, we've spent less time talking about all the advancements we've made in the actual business and capabilities that Conifer can deliver to its customers. With this announcement, we will be much more focused on that go to market story being at the forefront of what we discussed and let the results speak for themselves. Look, the second thing I
would say is that
the marketplace for revenue cycle outsourcing and including value based payment changes that create additional opportunity in the revenue cycle, we believe is still a strong and growing market. The addition of other services, IT services and other things that you're seeing in the market may actually add too much complexity in a single outsourcing relationship versus the discipline and focus of excellent revenue management and value based care payment management, which we believe we can offer. So I don't think it's clear that the market has declared that broad based back office capability outsourcing in a single entity is necessarily better than a focused technology and automated revenue cycle and value based care business, which really is important to collecting as Ron continues to repeat 100% of our and our customers and future customers cash. So I don't have a prediction about how that's going to go, but I will tell you that we believe there's a lot of runway in the marketplace to continue to improve and expand our offering in the revenue cycle.
And I would just add to that if you think broader, the spin out provides an opportunity for the platform to be expanded separately. When it's no longer part of Tenet, it can be viewed differently. And I think our marketing engine here, at least at Conifer, has never really ignited and gone after what the platform can provide and the strategic stuff it can provide. Even beyond that, but it needs to provide it as a separate offering, not necessarily to Saum's point over complicating the revenue cycle piece.
And just thank you. The last follow-up me kind of going back to the capital structure is, you guys are just all in on fixed rate debt. And I know it's great that you don't have covenants and that sort of thing. But as you think about your capital structure, why in the world would you at least take, say, a turn of EBITDA and put it into a floating rate bank line and just have more flexibility as you sell assets and deleverage, have more flexibility to just pay down debt at par versus having to wait until a bond matures or whatnot? It just seems like you're all this focus on cost cuts.
The obvious one to me is your capital structure, which largely remains of any company I cover the most fixed rate bond centric capital structure I've ever seen.
We don't disagree with that statement, Dan.
Yes, John. Certainly, we will be looking at that as we move forward and make sure it makes whatever ultimate capital structure we put in place that it makes sense given the interest rate environment.
And also Tenet as well as Confer.
We'll take our next question.
We agree. Go ahead. Thank you, operator.
We'll take our next question from Justin Lake with Wolfe Research.
Thanks. Good morning. Just a bunch of follow ups to some that's already been asked. First on CHI, can you remind us what the remaining term of that contract is and when does it end? 2,032, Justin, it's Dan.
Okay. So effectively, don't expect them to have to sign some kind of further contract extension here?
Yes. This has no impact whatsoever on their contract with Conifer.
Okay. And in terms of CHI EBITDA, should just think about that as being in the ballpark of the 24% ownership that they have? Is it about a quarter of EBITDA contribution to the company?
We don't break that out. I don't No. You mean
in terms of the CHI share
of the drugs Conifer's EBITDA or their EBITDA? Yes. You're talking about the impact
on that.
Yes. What we've talked about publicly, Justin, is between Tenet and CHI, it represents roughly 75% of revenue. And in terms of the R and D that would be directionally in the ballpark as well. But again, there's no change whatsoever in the contract as a result of the plan to spin Conifer.
Got it. And then just in terms of the question that was asked before by Ralph on leverage. I mean, I totally understand you guys are thinking this through, But let's just say you get to the 5 times, I think you're kind of targeting, should we think about this entity having similar leverage when it spins out to the overall company? Or should we expect it to have anything meaningfully below or above?
I'm going to pump that because again based on what I said earlier, we're going to look at all that and provide a range, but I'm not going to I mean, we are not going to over leverage the spin. That would not be in the best interest of Tenet or any of the shareholders. And that's about as far as I really want to go with that description for now.
Okay. Totally understand. Just to what point do you think you'll be able to communicate that along this process? When do you think you'll be sharing that with shareholders?
Certainly not before I'm into the 2nd year. I got to get through this. We had 2 years ago. This is not a conversation till sometime after the 1st year that we do this. And I'd say 6 months before we maybe get to the spin, if you're going to push me into dates, that'd be the earliest that we start, I think, publicly talking about it.
I mean, you just got to realize that you're asking me to commit to things over the next 2 years that at this stage, I think, we need time to look at our asset sales, the other stuff we talked about doing. And it's just inappropriate to sit here and theoretically come up with numbers, etcetera, that and scenarios that we're working on. So, I can't commit to that until I think later in the process.
We'll take our next question from Josh Raskin with Nephron Research.
Hi, thanks. Good morning. As you guys sort of thought about this process and I understand that a lot can change over a 24 month period, but as you evaluated some of the bids that you didn't think were particularly reasonable or reflective of the value and sort of juxtapose that with this tax free spin from a valuation perspective. I understand you mentioned kind of a mid to high teens multiples that had been put to you by stakeholders or shareholders, etcetera. Is that a base?
Is that where you were framing your reference in terms of where you think this will trade in the market? Or do you have different views than what was sort of put to you in terms of that idea?
Well, clearly, we'd like to certainly trade at upper teens, but I don't think I can answer that question at this point other than we certainly believe it will trade very, very well. We believe it will be a strong company in the market and we think it will have a good offering both in terms of its cost structure as well as what we believe we're doing for its growth structure. So without having specifics today, because I don't as we put this together, we obviously posted in our own process, looked at what we think is reasonable and together with Goldman and others did scenario planning around that. So we wouldn't be doing this if we did not believe this was not going to be a very successful move for our shareholders as well as for the company. So I can only tell you that you understood where we were headed.
The numbers that were I said earlier from our stakeholders were interesting numbers, but the reality is this will be a market decision. And I believe that this thing should provide a very, very strong exciting company when it spins out. And I think it will also be good for Tenet and overall shareholders. So I don't know how else to really answer that at this point because I can't quote a specific multiple. I did that one time in terms of what I thought and
it was
not a good idea.
Maybe I didn't ask the question well. So as you think about those bids that came in, I guess more specifically, were they in that range of valuations and the terms were just unreasonable and you thought, hey, we can spend this 2 years from now with more acceptable terms, better outcome Or were those bids just not reflective of that mid to high teens valuation that was coming out?
I would say it was all the above. I would say it's all the above. We were not the bids, as I said in my prepared remarks, did not reflect the improvements in Conifer. So if you look at the $86,000,000 did not reflect in our opinion substantially those improvements, did not reflect the future plans in offshoring. They just didn't.
And the reality is we saw them reflected more of the earlier numbers. So
they weren't at
the level we thought were appropriate. You got to understand the mix of equity versus cash. We didn't want equity, so we discounted that. So it's very hard to do an apples to apples comparison, other than to say that we made a decision today based on what we think is the best return for our shareholders and the best outcome for Conifer and Tennant and our minority investor in terms of common spirit. So we made a decision based on that.
That's the only way I can really answer that.
Okay. Thanks.
We'll take our next question from Kevin Fischbeck with Bank of America.
Great. Thanks. You mentioned that part of the, I guess, opportunity over the next 2 years as you bring us together as they somehow bring kind of this, I don't want to say new partner, but with Dignity and CHI coming together, you mentioned that there was some sort of opportunity in that combination that you thought would be more obvious, I guess, in 2 years. Can you explain a little bit more what you meant by that?
I don't really recall saying that I saw that as a I mean, there's always opportunities, but I don't see I don't believe we said anything exactly that way. I don't have any knowledge of what common spirits going to do from a contractual standpoint there. They obviously have an agreement with us till 2,032, and we expect to execute that flawlessly for them. But beyond that, I don't think that I can today identify any specific opportunities beyond that with them. Clearly, if there is one, we'll be standing in line and hopefully our performance will make us more attractive than anybody else.
But at this stage, I think that's a that would be a hope. And but I don't have specifics beyond that. Is that Dane, did I miss anything?
I think
I'm sorry.
Clearly, it's we would we
will look for opportunities to expand our relationship with CommonSpirit. But as we outlined the process to ultimately get the company to be public, it's not as if it's contingent on some specific incremental business with Con and Spirit.
Okay. And then I guess you mentioned also that being a separate publicly traded or separate company would potentially help in the sales process. Are you seeing actually that, that is a barrier now that being owned by Tenet has in fact been an explicit issue with some customers? I just want to understand kind of how much better that sales go to sales strategy might be as a standalone company? Thanks.
I don't think it's totally a barrier, but realistically as a company, Conifer is not a standalone business. It doesn't get 110 percent of our attention. It's a division. It is it can be very well be a standalone division, a standalone company. I think as such, it will have more freedom and more ability to move on its own and to build the team and resources accordingly.
So I always believe when you have divisions, you really always need to evaluate whether it will be a stronger standalone company or stronger as part of your company. I think it was nurtured and brought through the process very effectively by Tenet, but there is a point where it's got to go and do its own thing. And I think this is the right thing to do or we wouldn't be doing it. Otherwise, we would have just kept it. But I think realistically, it is the right decision from a value standpoint.
And Kevin, the other thing I think is that now that there's a clear visibility as to the future of Conifer that will resolve maybe uncertainty in potential customers' minds.
Yes. And we'll certainly sell it that way. Saum, do you have any other?
I think it will always remain the case that Conifer's ability to operate in the diversity of markets it does across Tenet and all of the other customers that it serves will probably and with the performance expectations those clients have will always remain a differentiating capability versus the rest of the revenue cycle outsourcing industry because we serve the broadest range of markets with the most diverse array of health system payers in this space and across multiple clients. So the capability is incredibly portable across the country for any client that chooses to use Conifer with the expectations that Tenet and others would have around performance. So it's a unique feature whether or not it's owned by Tenet or not.
Thanks.
We'll take our next question from Gary Taylor with JPMorgan.
Hi, good morning. Just two questions. One just sort of going back a little bit to I think what Josh was asking. When we look at the publicly traded comps, I think one trades around 6 and one trades 7.6 times 2020 EBITDA and it's sort of in the middle of that. It's not obvious from the publicly traded comps that there is immediate value creation from a spin.
So what gives you confidence that this would trade in a way superior to way consolidated tenant is trading?
Terry, it's Dan. Good morning. We look at the business, we are optimistic that when the company spins up that it will trade at a value accretive nature to the tenant's overall trading multiple. That's our belief. And as we continue to improve and grow the business, we believe that we'll be able to convince investors that it should trade Conifer as a standalone company, should trade at a higher multiple.
And Conifer this is Ron. Conifer, we have really established, I think, a superior cost basis in Conifer. And we will do more of that as we complete the offshoring steps and some other things. So the companies, the business that we now bring on as well as the existing business such as Tennant, will therefore be more efficiently brought on, more efficiently operated than in the past. We will continue to over the next few years tighten the overhead component of independent conifer or conifer as we have the whole company.
You saw our remarks about the Q2. We are continuing to run this company, I think, overall with a much stronger effort to reduce the things that do not generate a return and tighten up spending in areas that do not add value. So when this spins out, I think it will be spinning out as a relatively well built, very tightly operated company, which in many cases when divisions are spun out do not have that. It will have the processes pretty well buttoned up and we'll hit the street with an expectation to continue to grow and be able to be competitive in the marketplace because it will be able to price competitively given its overall cost structure will be incredibly tighter, I think, than most. That has the same process that when we talk about tenants improvement that we're doing on that side.
It's one thing to increase volumes, which we are doing through just operating better and providing the type of things that the communities need in terms of the hospital business. And we're doing that in a much more thoughtful way, a much better way, a much more efficient way. And that allows us to operate better and actually provide more. So from the standpoint of the company, I'm comfortable that we should be able to operate at a level can have a multiple that reflects that. Obviously, that will be determined by the market.
So you ask what's the confidence, the confidence is in the belief that we will have that type of setup. So that's the best I can give it.
Yes. I mean, I think you guys
have a very high margin business, strong cash flow generating business and a business that has its CapEx needs on an annual basis are relatively light. So we think that all will contribute to a valuation that will be strong.
And we'll continue to improve the technology basis and centers of excellence within it. So thank you.
My one follow-up, I know you've talked about this, you've talked about this before, but just an updated thought. I mean, given consolidated tenants leverage profile, I mean, what do you say to shareholders and credit holders who say moving $250,000,000 ish of free cash flow or spinning that out materially harms legacy Tenet financial profile?
Gary, it's Dan. We don't believe it's going to materially harm Tenet. We're obviously very, very focused on delevering and improving free cash flow generation and we will demonstrate that over the next several years. And so we wouldn't be doing this if we thought it was going to materially harm tenants.
And we have spent a lot of time on this. And again, I go back to the trajectory of the company is very positive. And I think the performance has been positive. So we would not do this if we thought it would materially harm the company. The Board wouldn't do it.
I wouldn't do it. The management wouldn't do it. So one more question.
We'll now take our last question from Matthew Gillmor with Baird.
Hey, thanks. I just had one follow-up and is on Conifer's cost structure. Conifer's margins are higher than the targets of the closest public comp and it sounds like that's not driven by pricing or terms with Tenet in that contract. So can you give us some sense to why Conifer has a better cost structure and just sort of help us understand the sustainability and then the upside to that cost structure?
Well, the upside, I think, continues to be how you restructure it and what type of overhead you put against it. I don't want to sound glib, but I mean, I think it's because we are really trying to run it the most efficiently way possible. We remove things that are not additive. So I don't know, Dan, do you have
a Yes.
I mean, I think, yes,
when we listen, we've been very focused on improving the operating cost structure over the past year and a half. Kyle came on board and approved an already efficient cost structure, but realized a lot of efficiencies very quickly, quicker than we had originally anticipated. So certainly that obviously helps from a margin perspective. And listen Conifer has been doing a very good job for not only Tenet, but CommonStairs and others. And again, leveraging its platform, which drives margin enhancement.
Got it. Thank you.
All right. Thanks a lot everybody for joining us today. We look forward to speaking with you again on August 6 when we put out our Q2 earnings results. Thank you.
That operator, I guess we'll end the conference. Correct, Brennan? Correct.
This concludes today's call. Thank you for your participation. You may now disconnect.