Community Health Systems, Inc. (NYSE:CYH) Q1 2024 Earnings Call Transcript

Community Health Systems, Inc. (NYSE:CYH) Q1 2024 Earnings Call Transcript April 25, 2024

Community Health Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Community Health Systems First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Anton Hie, Vice President of Investor Relations. Please go ahead, sir.

Anton Hie: Thank you, Chuck. Good morning, everyone and welcome to Community Health Systems’ first quarter 2024 conference call. Joining me on today’s call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Lynn Simon, President, Healthcare Innovation and Chief Medical Officer. Before we begin, I must remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC.

Actual results may differ significantly from those expressed in any forward-looking statements in today’s discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We’ve also posted a supplemental slide presentation on our website. All calculations we will discuss exclude impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs and expenses related to employee termination benefits and other restructuring charges. With that said, I’ll turn the call over to Tim Hingtgen, Chief Executive Officer.

Tim Hingtgen: Thanks, Anton. Good morning and thank you for joining our first quarter conference call. At CHS, 2024 is off to a good start with the solid operating and financial results achieved in the first quarter. Same-store net revenue increased 5.7% compared to the first quarter of 2023. Same-store admissions increased 3.8% and adjusted admissions were up 1.9%. The prior year comp was our most challenging of the year with strong same-store admissions growth of 4.8% and adjusted admissions of 9.4%. So we were very pleased to see continued strong demand. Same-store ED visits increased 3.4% in the quarter, and surgery slightly increased – in the first quarters of both 2023 and 2024, surgical volume was well above the first quarter of 2019, beating our pre-COVID baseline by approximately 10%.

Growth, coupled with strong expense management, led to 120 basis points of margin expansion year-over-year. Adjusted EBITDA came in at $378 million, up 12.8% from the prior period on a consolidated basis, with growth in our core portfolio outpacing the impact of prior period divestitures. This first quarter performance puts us very much in line with the guidance provided in February, but our work is not yet done, and our leaders remain focused on the opportunities ahead of us. We continue to make steady progress in each of our near-term priorities, and we are especially pleased with investments that are accelerating growth. We opened our new tower in Knoxville, Tennessee, a few weeks ago, and our Baldwin County, Alabama campus expansion remains on schedule to open by the end of the year to address the strong demand for health care services in that fast-growing market.

Investments continue into incremental access points to expand outpatient capacity in multiple markets, which included the opening of 2 new ASCs during the quarter in our Tucson, Arizona, and Cedar Park, Texas markets. Another high-impact initiative that we’ve been updating you on is our work to in-source the management of certain hospital-based medical specialties. In a minute, Kevin will share details about how the financial impact from this initiative is tracking to our expectations, but I want to address the clinical and operational improvements we are seeing. We now manage 29 ED and hospitalist programs and across the board, we are realizing better quality metrics, improved throughput, lower premium pay utilization and greater patient satisfaction.

These improvements are consistent with our enterprise goals, and it is gratifying to see so much progress, especially when you consider that we have been self-operating these programs for less than a year. We’ve expanded our efforts to in-source select anesthesia programs with two sites already in place and additional opportunities expected to come online in the months ahead. We don’t often take the opportunity to share our internal programs that are driving alignment across the organization, but today, I want to mention that we recently hosted our 2024 Health System CEO and medical staff leadership conferences. We spent time reviewing our goals and the initiatives that will drive results over the next few years. It was energizing to see so much commitment from our local health system leaders who are absolutely focused on executing our strategies and leveraging the resources and support available across the CHS organization.

I remain excited about the opportunities ahead this year and into the future. During the conferences, we also discussed our enthusiasm to be on the leading edge of innovation, leveraging our size and scale to discover new opportunities and to improve care design, delivery and outcomes, utilizing technology and joint venture partners that are focused on moving health care forward. Last quarter, Dr. Miguel Benet talked about our partnership with Google Cloud and worked to unify our data into a single platform that can enable the future use of AI in health care setting. This quarter, I’ve asked Dr. Lynn Simon, President of Healthcare Innovation and our CMO, to share more about innovation across CHS and in particular, our new partnership with Mark Cuban Cost Plus Drug Company.

Lynn?

Lynn Simon: Thanks, Tim. Over the past several quarters, we have implemented a number of innovative programs at CHS, including remote monitoring for people with chronic conditions, virtual support for people living with depression and anxiety and other behavioral health issues, an AI-informed early warning system that alerts caregivers to potentially concerning trends during childbirth and a virtual tech-enabled telesiting initiative that is improving safety for hospitalized patients at high risk for falls. As we consider our approach to innovation, we also recognize there are opportunities to rethink and even disrupt the way we purchase products and services. As an example, our relationship with Mark Cuban Cost Plus Drug Company has the potential to generate significant advantages for our affiliated hospitals by addressing rising drug cost and drug shortages.

We recently became the first healthcare system to purchase injectable drugs produced in the new cost-plus drugs manufacturing plant in Dallas. Specifically, we purchased Epinephrine, a life-saving drug on the FDA’s list of current drug shortages and Norepinephrine for our hospitals in Texas and Pennsylvania. Through this strategic partnership, CHS will be advising and collaborating with Mark Cuban Cost Plus Drugs about additional ways we can address pharmaceutical cost, avoid drug shortages, reduced waste and improved medication administration safety and patient care. We expect this work to benefit not only CHS, but also other forward-looking health care organizations. Tim?

Tim Hingtgen: Thanks, Lynn. Before I turn the call over to Kevin, I’d like to recognize CHS hospitals and providers for a product accomplishment. A recent report from the company reputation a global online reputation management firm that specializes in industries such as healthcare, financial services, hospitality and property management recognized CHS as #1 among the 50 largest healthcare systems for online reputation. And this is the third year in a row we’ve ranked #1. In 2023, our hospitals earned a cumulative average 4.5-star rating on review sites such as Google, and our providers earned 4.8 stars. This speaks to our commitment to safety, quality and patient experience. We appreciate the confidence of our patients and thank our local health systems for all they do to make healthcare accessible, compassionate and worthy of this very positive feedback. Now I’ll turn the call over to Kevin to review financial results. Kevin?

Kevin Hammons: Thank you, Tim, and good morning, everyone. As Tim indicated, we were pleased with financial results delivered in the first quarter, which put us on track to achieve the guidance for 2024 that we provided in February. We are also pleased to see the momentum in volume growth that began last year continued into the first quarter of 2024 with 3.8% growth in admissions, 1.9% growth in adjusted admissions and 0.4% growth in surgeries, stepping over a particularly difficult comp from prior year. Net operating revenues for the quarter were $3.14 billion, representing consolidated year-over-year growth of 1%. On a same-store basis, net revenues were up 5.7%, driven by 1.9% growth in adjusted admissions and a 3.7% increase in net revenue per adjusted admission, which was positively impacted by improved rates, incremental state Medicaid reimbursement and strong inpatient growth.

Although volume improvements continue to be led by increases in Medicare Advantage business, we did see a slightly more balanced growth profile in the first quarter of 2024 with improvements in commercial business as well. Adjusted EBITDA for the first quarter was $378 million compared with $335 million in the prior year period and $386 million in the fourth quarter of 2023. Considering the sequential effect from the Bravera divestiture that closed late last year and lower recognition of Mississippi Medicaid expanded funding in the first quarter compared to the fourth quarter. We view our production with nearly flat sequential EBITDA as a sign of progress. Margin for the quarter was 12%, a modest decline sequentially despite the typical seasonal headwinds that affect first quarter performance, such as higher unemployment taxes and annual resets of copays deductibles in our commercial book.

On a year-over-year basis, margin improved 120 basis points. We believe this is a strong start relative to our guidance for mid-12% adjusted EBITDA margin for 2024. And we expect further margin expansion through strong cost controls, continued volume growth and top line leverage. We were again pleased with our performance on labor costs in the quarter. The average hourly wage rate increased approximately 3% year-over-year. Recall, we are anticipating an approximate 4% average hourly inflation rate for the full year 2024. Our progress in contract labor continued in the first quarter with contract labor spend of approximately $48 million compared to $52 million in the fourth quarter and approximately $85 million in the first quarter of 2023. This performance was consistent with expectations and primarily reflects reduced utilization of contract nursing as a result of our retention and recruitment efforts as well as a lower hourly contract labor rate.

We were also pleased to see continued progress from our in-sourcing and other initiatives to address medical specialist fees that have surged over the past 2 years. Medical specialist fees were flat compared to the first quarter of 2023 and slightly down from the fourth quarter. As Tim noted, we have seen strong operational improvements in the 29 ED and hospitals programs that we have brought in-house since last fall and 2 anesthesia programs brought in-house thus far. We believe we can continue to scale up these in-sourcing efforts and are well positioned to keep further increases under control despite ongoing pressure, including those in anesthesia. Cash flows from operations were $96 million for the first quarter of 2024 compared with $5 million in the year ago period.

This improvement was primarily the result of improved earnings as well as the timing of collections from the buildup of certain accounts receivables at year-end, which resulted in the overall net decrease in accounts receivable of approximately $39 million from December 31, 2023. Capital expenditures for the quarter were $93 million, on track for our 2024 guidance range of $350 million to $400 million provided in February. As announced last week, we signed an agreement to divest Tennova, Cleveland located in Cleveland, Tennessee for approximately $160 million plus the potential for an additional contingent consideration payment. And we continue to evaluate opportunities for further divestitures across a handful of markets that could total more than $1 billion in total proceeds.

The divestiture of Tennova Cleveland is anticipated to close in the third quarter – and we believe that one or more additional transactions could close within the calendar year, providing substantial capital for the company to redeploy. Net debt to trailing adjusted EBITDA was 7.7x, slightly improved from 7.88x at year-end 2023. With $618 million of borrowing capacity under the ABL, along with pending asset sale proceeds, we believe we have more than adequate liquidity to meet our needs going forward. Regarding Project & Power, we are continuing to make progress, having now gone live with the second wave of hospitals on April 1, without experiencing any disruption in care delivery. The progress we are making is right in line with our scheduled time line, and we believe we are already experiencing the benefits of incorporating automation technologies to remove certain manual administrative tasks from our nurses workflows and improved insight into our business at the sites that are live.

We believe these benefits will translate into realized cost savings beginning later this year and into future periods. At this time, we will turn the call back over to our operator for Q&A.

Operator: Thank you. [Operator Instructions] And our first question will come from Jason Cassorla with Citi. Please go ahead.

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Q&A Session

Jason Cassorla: Great. Good morning. Thanks. I was just hoping you could dig a bit deeper on the cash generation in the quarter. Obviously, there’s seasonality considerations. You talked about that AR release. Was there any impact from change in the cyber, I didn’t hear that? And then, I guess, now that we’re through the first quarter, how would you expect cash generation to play out for the rest of the year, just in context of your $500 million to $650 million embedded in guidance. Thanks.

Kevin Hammons: Thanks, Jason. So in typical or historical fashion cash flow in the first quarter is typically our lowest cash flow quarter is a result of the reset of patient copays and deductibles and more of your receivables being patient responsibility. We did have the benefit in Q1 of getting some additional cash flow in as a result of the accounts receivable that build up in the fourth quarter, including that from the Mississippi Supplemental Medicaid program that was collected in the first quarter of this year. In terms of other kind of working capital items, they were all pretty much in-line with our expectations. We always have a little bit of a headwind in Q1 with the payment of our annual bonuses, which occurs just once a year.

And then throughout the remainder of the year, as bonuses are accrued, that kind of turns itself around. Similarly, we’ll have that situation in the second quarter as we fund our 401(k) plan just once annually. And therefore, that also has a negative impact on second quarter cash flows, but turns around throughout the remainder of the year as we build our accruals back up. In terms of our guidance on cash flow, at this point of the year, I think we’re right in-line and are comfortable with where we’re guiding at.

Jason Cassorla: Okay. Got it. Thanks. Maybe just as a follow-up, I wanted to ask on the Tennessee Hospital sale agreement, can you give us a sense on what the revenue and EBITDA contribution of that asset is – and then what would the EBITDA multiple be implied if the Tennessee supplemental payment program is approved. It sounds like – I guess, broadly on divestitures, it sounds like you’re keeping the potential for $1 billion in proceeds. Just if there’s any other incremental color you can offer around your divestiture plans, how they’re tracking and what you’re seeing out there would be helpful. Thanks.

Kevin Hammons: Sure, we will. And let me follow-up to the second part of your first question as well related to change. We did not see any impact or nothing material as a result of any cash flow slowdown from Change Healthcare’s breach. We did not use them for billing and collection purposes. So that did not have an impact on us. Relating to the divestitures, the base price of the $160 million is essentially a 10x EBITDA multiple on trailing EBITDA for Cleveland. So then any contingent payment above that, we would anticipate putting the complete purchase price somewhere in the low teens multiple on a trailing basis. And then in terms of how Cleveland, their margin profile, they operate pretty similar to our kind of corporate average margins. So you can probably do the math in terms of getting a revenue contribution.

Operator: The next question will come from Brian Tanquilut with Jefferies. Please go ahead.

Brian Tanquilut: Hey, good morning. Congrats on the quarter.

Kevin Hammons: Good morning.

Brian Tanquilut: Good morning. I guess my first question, there’s a lot of discussion among investors on the monthly flow or monthly trend in volumes, obviously, with the calendar moves in Q1. Just curious what you can share with us in terms of what January or February and March look like? And how is that translating to April in terms of, obviously, we’re on a more normalized calendar this quarter.

Kevin Hammons: Sure. So probably like most people, we saw pretty strong January and February, some softness year-over-year in March. But I would really attribute that to how the calendar lined up with February having an additional business day this year with leap year and then March’s calendar had really two things going against it had one fewer business day with just how the calendar lined up. And then you also moved Good Friday and the Easter holiday into March, it was in April of last year. So that has some impact, not only from being a holiday, but also around spring breaks in a number of markets that schools often schedule spring breaks around the holidays. So we think that, that probably had some contribution to some of the volume trends that we saw in March.

In terms of how we view that going forward, I think, overall, strong volume quarter for us, and we see the momentum from that continuing on and don’t believe that, that calendar – the volatility monthly in the first quarter really influence as much about how we’re thinking about future quarters.

Brian Tanquilut: Got it. Okay. And then maybe, Kevin, just a quick cash flow question, the payout to the NCI during the quarter was probably higher than typical. So just curious what the moving pieces are there? And how should we be thinking about NCI payments going forward?

Kevin Hammons: Yes. We’re still comfortable with where we kind of guided for the full year, which is about $150 million, I believe, on total NCI payments for the year. There was just some timing with some items accrued from the fourth quarter that carried forward into Q1 on NCI payments. But I would expect those to be on a more regular run rate beginning in Q2.

Brian Tanquilut: Awesome. Sounds good. Thank you.

Kevin Hammons: Yes. Thank you.

Operator: The next question will come from Ben Hendrix with RBC. Please go ahead.

Ben Hendrix: Thank you very much. Good morning. It looks like SWB was a little favorable to our assumptions and to – and perhaps to what you had guided to for the year. I was just wondering you’re thinking about the rest of the year? And if any outperformance in the first quarter kind of pads the year expectations or if there’s any reason to think that we might see some added inflation in later quarters. Thanks.