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CEOCFO CEOCFO Monthly Analyst |
"To print this page go to file and left click on print" Feeling BULLISH!
Healthcare Triad Hospitals, Inc. Burke W. Whitman Interview conducted by: CEOCFOinterviews.com Biography of Burke W. Whitman is the Chief Financial
Officer of Triad Hospitals, Inc., responsible for developing and implementing the
company’s corporate financial strategy. Mr.
Whitman joined Triad in February 1999 with a background in health care, finance and
development, and he led the company’s spin-off as a separate publicly-held company
that year. He was previously President and
CFO of Deerfield Healthcare Corporation; Vice President – Finance and Development of
Almost Family, Inc.; and an Investment Banker with Morgan Stanley. He has served on active duty and in the reserves
as an Officer in the U.S. Marine Corps and serves on the Board of Marine Corps University. Mr. Whitman holds a BA degree from Dartmouth
College and an MBA from Harvard University. Triad Hospitals, Inc., through its
affiliates, owns and manages hospitals and ambulatory surgery centers in small cities and
selected high-growth urban markets. The
Company has 48 hospitals (including
one new hospital under construction) and 14
ambulatory surgery centers in 16 states with approximately 8,800
licensed beds. In addition, through its QHR subsidiary, the Company provides hospital
management, consulting and advisory services to more than 200 independent community
hospitals and health systems in 43 states. CEOCFOinterviews
– There have been a lot of changes in your company. Can you tell us about those changes? Mr. Whitman
– We continue to be very much on track with our integration of the
former Quorum Health Group, Inc., facilities into Triad.
We closed on the acquisition of Quorum on April 27, 2001, and laid out a
comprehensive plan for ourselves to integrate the two companies – to combine the
cultures, the policies, procedures, the infrastructures and the strategic planning. The integration is going very well, and we are
right on track with that plan. More recently, on September 14, we
issued a press release in which we announced that we have signed a tentative agreement to
sell our Paradise Valley Hospital in Phoenix, Arizona, to Vanguard Health Systems out of
Nashville. We decided to sell this hospital
because we are committed to having a very strong market position in every market that we
serve, either in our own right or by partnering with someone who has a very strong
presence in that market – Phoenix was our last remaining exception to that rule. It’s a big urban market, with lots of strong
players, and we had only one hospital there, with no partner. We didn’t have the same strategic position
there that we would most always like to have. It
is an outstanding hospital; it has won awards, even in this past year; it’s going to
do well and I think Vanguard is going to be happy that they have it. Vanguard is committed to building a network of
hospitals in that Phoenix market; they have several already, and this will add another to
their network. I expect it will work very
well for them. Although we are selling
Paradise Valley, we remain absolutely strongly committed to Arizona as a state and to the
Phoenix market in particular. We still have a
joint venture, of which we own 51% and Banner Health Systems owns 49%, that owns and
operates ambulatory surgical centers (ASCs), and we remain totally committed to those. They perform well, and we enjoy our close working
relationship with Banner. Unlike Triad,
Banner does have a major hospital presence in Phoenix that reinforces the market strength
of our ASCs. Banner was created a couple of
years ago through a merger of the former Good Samaritan system and the Lutheran system. We also have a very strong market share ourselves
now in Tucson, Arizona, with two full service acute care hospitals and a third facility we
are beginning to grow in the northern part of the metropolitan area. In fact, we expect our Tucson presence to grow
more rapidly than the rest of the company. The second thing we recently
announced is that we have confirmed and received approval from our board of directors to
proceed with a significant new hospital in Bentonville, Arkansas, that will replace and
enhance an existing hospital there. When we
bought Quorum, one of the markets that we acquired was the Bentonville market, with two
hospitals in northwest Arkansas – Bates Medical Center and Northwest Medical Center. We inherited an obligation to actually build a new
replacement facility for Bates and we are carrying that out. However, we decided to accelerate the project, and
we are also going to make a significantly greater investment in the project, with a larger
facility than was originally planned. We are
very excited about the northwest Arkansas market and this project. It is a rapidly growing market –
population growth is outstripping all of the infrastructure – so this hospital
replacement is actually being designed to expand later from 85 beds to 128 private beds
and to add a second bed tower as the demand requires.
We’re actually building the initial facility with the structural
capability and the space on the ground to make it even bigger as the population continues
to grow. The third thing we recently announced
is that we will continue to own and operate Quorum Health Resources (QHR), the hospital
management subsidiary that we acquired through our purchase of Quorum. We had been evaluating whether to sell or keep
QHR, and we determined that it is more valuable to us than to potential buyers. CEOCFOinterviews - When do you feel that the integration
will be completed and the two companies will operate as one? Mr. Whitman
– This year we will stabilize the operations of the two companies, and
we’ll have the essential pieces in place by the end of this year. All of our policies will have been implemented
throughout the former Quorum facilities. We
will also have transitioned all of the financial systems.
We will have taken the former Quorum facilities through our annual strategic
business planning process and budgeting process for the first time by the end of the year. We should start to see some modest improvement to
performance from some of the expected synergies. We
have already begun to implement our Triad strategy throughout the former Quorum facilities
and markets. There are some unique aspects to
our strategy at Triad, and we think it is a very good fit with the former Quorum
facilities. In 2002 we really expect
to see that strategy begin to take hold. We
expect to see some quantifiable improvement to the operating performance. By 2003 things should really be coming together;
we should be well on our way to having the performance optimized and maximized. By 2004 we will be off and running again. We have already launched our
Physician Leadership Groups, our “PLGs,” in each of the former Quorum
facilities. The PLGs are the tangible medium
through which we largely drive the primary, number one aspect of our corporate strategy,
and that is to develop and sustain strong, robust physician relationships. Most of our physicians are independent
practitioners. What we have done through our
PLGs is to create a deliberate, methodical, organized approach, working together with the
physicians to optimize the relationship such that we are helping each other to the maximum
extent. Our approach has resulted in good
performance for us and for our physicians in the old Triad hospitals, and we expect the
same thing to begin happening in the new Triad hospitals that came from Quorum. The second most important part of our
strategy is community relations, and for that, one of the tangible actions that we have
taken in all the new hospitals is to create – or in some cases to reorganize –
the local board of trustees that serves each hospital.
As was the case with the old Triad and is now the case with the new Triad
facilities, we have changed those local boards of trustees such that they consist entirely
of local leadership. Typically, half are
physicians who are affiliated with the hospital and the other half are local community
leaders. We involve them meaningfully in all
our planning, and they have a very strong influence on our allocation of resources. CEOCFOinterviews
– There are a lot of people who aren’t entering the medical field
anymore. Are you seeing any medical shortages
or do you see that being a problem in the future? Mr. Whitman
– It is something that we are feeling right now. What we are feeling is the much-discussed nursing
shortage, and we are seeing that to varying degrees.
We are doing a number of things to combat that challenge. The most important thing is a Nursing Leadership
Initiative which we are developing that will be similar to our Physician Leadership Groups
– our nursing leaders are working together among themselves and with the rest of us
to optimize their role and the role of others in the hospital to bring an even higher
quality of service and more efficient and effective use of the human resources in the
facility. It has already helped. Even while we have seen nursing salaries and wages
increase fairly significantly, we have actually seen a smaller increase in our overall
salary and wage costs because we have been able to improve the productivity of our human
resource teams in the hospitals; again, this is going to continue to be very much led by
our nursing leadership over time. The other
big group that is getting some publicity now to which you are probably referring is the
physicians. Recent news suggested that
we have seen one of the smallest pools of applicants to medical schools in quite a while. We’ll have to watch that. It certainly doesn’t have any negative impact
on us at this time, nor next year nor the year after that.
I think all of us will have to watch that as a matter of public policy. In Texas this year, the legislature passed
significant funding for nursing and other clinical areas to encourage high school and
younger students to start thinking about the health careers as a profession. More states will probably start to take that
initiative. If we as a country were to begin
finding that we were losing the great level of interest from very bright, talented people
that we traditionally have had in the medical field, then I’m hopeful and confident
that we would make the policy changes and create the incentives we would need to turn that
back in the right direction. We do not have
any fundamental problems in getting good physicians on our teams at this time. CEOCFOinterviews
- Do you see additional acquisitions or do you feel you want to focus on the Quorum
merger before going further? Mr. Whitman
– I think over time it is certainly possible that we could execute
some additional and sizeable mergers. We
absolutely will not do that in the near term. Quorum
was a large acquisition for us and it is most important for us in these next several
months to complete a thorough and effective integration of the two companies. The only thing that we could conceivably do in
the next several months is potentially acquire an individual hospital or two. Typically, at any given time, we are looking at a
small handful of such opportunities. At the
moment, none of those has a greater than 50% probability of happening, but if something
looked like a particularly good fit for us, we could pursue that. You are going to see us being opportunistic in our
portfolio management over time. We have said
for a couple of years that we would probably expect to add 2-5 hospitals per year in a
typical year. We don’t have any
specific plans right now but that continues to be the case, and we think that we will have
opportunities through acquisitions, joint ventures or de novo development to add something
along those lines in each given year. At the
same time there is always the possibility that we could divest an asset. Again, we have no specific plans at this time to
do either of those two things beyond what we have announced. CEOCFOinterviews
– Would any of those hospitals be outside of the sixteen states that you are
in now? Mr. Whitman
– Yes. We could expand beyond the sixteen states. The kinds of markets that we look for are
typically small cities with populations large enough to support full service acute care
hospitals with secondary care. There are some
markets that would be attractive to us in states other than the sixteen that we are in. We have looked at some of those and I suspect we
will continue to do so. CEOCFOinterviews
– Have you begun the construction on the new hospital in Bentonville? Mr. Whitman
– We broke ground on October 9, 2001, for construction in Bentonville,
Arkansas. MountainView Regional Medical
Center in Las Cruces, New Mexico, will open the summer of 2002. That will be our newest hospital and that’s
an all-new hospital in a new market. That is
an example of the de novo development that I was describing. CEOCFOinterviews
- Is your company going to have the funds going forward with the merger, the
acquisition, and the market changing as it is? Mr. Whitman –
We are very comfortable with our capital structure and our capital expenditure
campaign. In addition to buying Quorum, we
expect to spend in the range of $300 million this year in capital expenditures for de novo
developments, expansions and equipment. Next
year we will probably spend a similar amount. Even
spending on that scale, we will not need to increase our debt or leverage beyond what it
is now. In fact, we will gradually be making
ourselves less and less leveraged. That is
our plan. The majority of the projects in
which we are investing capital are projects that we expect to generate an attractive
return that meets our investment criteria. We
are feeling very bullish about those. CEOCFOinterviews
– Hospitals are changing names a lot – it seems that there are a lot of
turnovers as far as owners. Why is that? Mr. Whitman
– That has been true with some selective hospitals, and we have a
couple in the Triad family that have had a series of different owners. However, we at Triad are in this business because
we love what we do. Starting with our CEO,
all of us intend to continue to build and run an organization that is committed to
physicians, the community, the employees – all the things that Triad is focused on. There is no reason to expect any change of
ownership in the majority of the hospitals that we now own.
We may have an acquisition from time to time; we will probably in any given
year add a few hospitals. And we may from
time to time also divest one that seems to make more sense for somebody else; but I
wouldn’t expect to see a lot of that from us. By
the way, we do not brand name our hospitals; they go by local names, names that typically
have long been parts of their respective communities.
We very much prefer that and are committed to sticking to that. We may own the bricks and mortar, but our
hospitals really belong to their communities and the local community needs to feel
ownership in its hospital as well. We like
that and we reinforce that. CEOCFOinterviews
- You have 48 hospitals but only 14 ambulatory surgery centers. Do you see yourself adding on to that area? Mr. Whitman -
We will probably add ASCs on an opportunistic basis. What you won’t see us do typically is lead
into a new market with an ASC. We will always
want to have our ASCs tied into a strong hospital network, and all of ours are. Even in Phoenix, where we are selling our one
hospital, we are very closely tied in with our 49% partner, Banner, who has a major full
service hospital presence there. I would
expect us to add additional ASCs in years to come. We
don’t have anything new to announce right now but I suspect we will in each year. CEOCFOinterviews
– Has the WTC incident affected your company? Mr. Whitman –
It would be impossible for anyone to say that we had anything other than a
terrible tragedy on a national scale and on a personal scale. However, I don’t really see any reason for
the tragedy to affect our company in any direct and significant way. We are not like the airline industry that is being
dramatically affected. We are not even like
the retail industry which some economists are concerned about. We are acute care hospitals, and if you are sick
or need medical care, the economic conditions and even the terrible tragedy of last week
are not really going to change that. Most of
what we do is not elective, so we really don’t see any reason for it to have much of
an impact on us operationally. Trying to
predict what the stock market’s reaction is going to be is obviously difficult for
anyone, but I will tell you that most of the observers of the market would say that the
healthcare sector, and in particular the hospital sector of the stock market, tends to be
defensive. That is to say that if
participants in the investment community are beginning to be concerned, then our sector
tends to be viewed as a safe haven. We’ll
have to see what happens to the market as a whole. Traditionally,
in most tragedies and crises in this century in this country in which the market has
reacted negatively the first day of trading following the tragedy, on average the market
has actually made up the difference and moved higher within the first week and month after
that tragedy. Maybe we will be fortunate
enough as a country to see that happen again.
CEOCFOinterviews
- Looking at your company for the first time, what would you say to a potential
investor? Mr. Whitman - We have a combination of attributes that make us, in my view, attractive on a long-term basis for an equity investor. First of all, we have fundamentally strong assets, good physical plants that are generally well positioned in the marketplace. Secondly, we have what I believe to be an exceptionally strong management team in depth and breadth. They have demonstrated that depth and breadth in talent in previous lives and even in our short history of Triad. With respect to financial performance and patient, employee and physician satisfaction, we have made huge progress and have actually achieved and even exceeded our plan across the board during the first two and a half years. It’s a proven management team. Thirdly, there continues to be significant upside potential in our performance and we would hope that it would translate to upside in our financial results. We started out with very low revenue growth and operating margins as a company, but we improved those methodically, deliberately and steadily since we started just as we said we would do. We expect to continue to grow those operating margins in a way that is not disruptive and in a way that is done in conjunction with our physicians and in a way that improves our financial health and performance of the hospitals and makes us even more capable of investing in a facility and making it a place that is even more attractive to physicians. Fourthly, at least in the near term, by most comparative measures – for example, EBITDA multiples – we are undervalued as an enterprise in the stock market relative to the other hospital companies. We expected that following the Quorum acquisition because a major acquisition like this does have some inherent risk and some inherent challenges in integrating the two. Most mergers end up not adding value for shareholders. The outside market wants to see a few quarters to see that we can once again do what we said we were going to do. But I feel very good about our ability to do just that. As long as we continue to be on track, it would certainly be reasonable to hope that those valuation multiples would improve. That, combined with the first three factors, could make Triad a favorable investment experience.disclaimers |
