Community Health Systems, Inc. (NYSE:CYH) Q3 2023 Earnings Call Transcript

Community Health Systems, Inc. (NYSE:CYH) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning and welcome to the Community Health Systems Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anton Hie, Vice President, Investor Relations. Please go ahead.

Anton Hie: Thank you, Gary. Good morning and welcome to Community Health Systems third quarter 2023 conference call. Joining me on today’s call are: Tim Hingtgen, Chief Executive Officer; and Kevin Hammons, President and Chief Financial Officer. Before we begin, I’d like to remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not rely 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 on today’s call exclude gains or losses from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expenses related to the employee termination benefits and other restructuring charges. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Tim Hingtgen: Thanks, Anton and good morning and thank you for joining our third quarter conference call. Our performance in the third quarter included solid same-store volume gains overall, reinforcing the confidence that our strategic initiatives, targeted market development plans and investments continue to strengthen our competitive position. Year-over-year for the quarter, same-store admissions were up 3.7% and at the highest level since the fourth quarter of 2019 or pre-pandemic. Same-store adjusted admissions increased 4.2% and also reached record levels, demonstrating the strong demand for care in our markets and the favorable impact of our outpatient access point growth investments. We had our strongest ER volumes so far this year in the third quarter, and we had a record quarter for physician practice visits, which is typically a leading indicator for future procedural volumes.

Surgeries grew 1.6% year-over-year but sequentially reflected more normal seasonality, including more vacations by physicians and patients. Since the middle of 2022, we have been discussing our near-term priorities or our roadmap for navigating the overall industry and macroeconomic environment. I want to give you an update on these activities as we move towards the end of the year and prepare for 2024. As outlined in our supplemental debt, this organization-wide focus covers four main categories. They are: accelerate growth, strengthen the workforce, control expenses and advance safety and quality. First, we remain optimistic about our growth prospects and the ability to accelerate growth as we invest in our core markets and implement a number of operational initiatives to create more capacity for patient care.

Our campus expansion projects in Knoxville, Tennessee and Foley, Alabama are on schedule with the Knoxville project expected to open early next year and the Foley expansion on track to open at the end of 2024. Due to the high occupancy rates in both markets, that our admissions are integral to achieving our market share growth opportunities. Upon their completion, we will have added more than 500 incremental beds across our portfolio since 2018, all initiated to advance growth prospects and high opportunity markets. We are intensely focused on length of stay and capacity optimization work. Our efforts to safely and promptly discharge patients ready to leave the hospital and return home or move into a post-acute care setting resulted in an improved length of stay compared to last year and sequentially.

This resulted in strong admission growth in the quarter with a favorable net 1.3% reduction in total patient days. Strengthening our workforce remains another key priority. Our nursing and clinical recruitment and retention strategies continue to perform well, enabling further improvements in contract labor in the third quarter. In terms of our work to insource hospitalists and emergency medicine programs in select CHS hospitals, we have now more than 500 ED and hospitalist medicine providers working under this model. We are pleased with the strategic and financial benefits from this effort in the third quarter. We are confident in our ability to scale this solution as needed, and planning is currently underway to in-source anesthesia services in select markets as well.

Finally, a couple of notes about our safety and quality initiatives. Our clinical scorecard designed to better leverage clinical data at a market and company-wide level was launched just over one year ago. This resource has provided great insights into areas where we can further advance and excel in patient safety and quality, leading to very targeted areas of improvement. For example, the majority of our hospitals are now in the top quartile nationally for prevention of certain hospital-acquired infections, and a company-wide initiative to stop sepsis has resulted in a sustainable reduction in mortality due to sepsis. Healthcare providers continue to face headwinds, including reimbursement challenges, inflationary pressures, regulatory hurdles and evolving consumer behaviors, and all of which are areas of dedicated focus for our management team.

As we navigate through these industry dynamics, we will continue to exercise control where we can and adaptability when we need to in order to further strengthen our results. With that, Kevin, let me turn the call over to you.

Kevin Hammons: Thanks, Tim and good morning, everyone. We are encouraged by the continued return in core demand for healthcare services, the progress from our ongoing investments and further reductions in contract labor as well as the early evidence of success in Project Empower and our physician in-sourcing initiative. Moving on to quarterly financial results. Net operating revenues were $3.1 billion, representing a 2% year-over-year growth on a consolidated basis. On a same-store basis, net revenue increased 5.1% over the third quarter of 2022, driven by a 4.2% growth in adjusted admissions and a 0.9% increase in net revenue per adjusted admission. Commercial mix was flat sequentially at 47.9% of total net revenue, while Medicare Advantage was down 60 basis points from the second quarter.

Commercial volume grew faster than the company average from the second quarter as expected. However, growth in medical admits outpaced surgical admits as Tim noted. Adjusted EBITDA was $360 million, representing 11.7% margin. When excluding the $115 million of benefit from provider relief funds from third quarter 2022 results, margin was up more than 200 basis points year-over-year and declined only 30 basis points sequentially as CHS stepped over the typical third quarter seasonal pressures on profitability. We were very pleased to deliver strong labor cost management as strong nurse recruitment and retention helped us outperform expectations and driving down the contract labor expense, which was $54 million, improving sequentially from $72 million and versus our previous expectation for $60 million to $70 million exiting the year.

Our average hourly rate for contract labor also improved 10% sequentially. Additionally, overall wage inflation came in slightly better than expected, up approximately 3% year-over-year versus our forecasted 5% for the full year. Medical specialist fees as reported in other OpEx line, increased slightly from the second quarter, which included a gross up of expenses for physicians in-sourced from the former APP contract. When factoring in the net revenue associated with in-sourcing those physicians, we estimate we benefited by approximately $4 million sequentially compared to the subsidy payments previously paid to APP. As Tim noted, the progress with our in-sourcing initiative has been very encouraging and we expect further improvement in the coming quarters as we scale this effort.

Moving on to the cash flow statement. Cash flows from operations were $29 million compared with $137 million in the third quarter of 2022. The cash performance was temporarily affected by more than $100 million in various items that should reverse in the fourth quarter. Most notably, billing delays related to clinical system upgrades in two of our markets and our physician in-sourcing initiative as we work to get certain providers credentialed under our network agreements. Importantly, these have been successfully completed and related claims are being submitted. So we expect to begin receiving these payments in the fourth quarter. Capital expenditures for the quarter were $130 million, and for the first nine months were $357 million, on track with our guidance of $450 million to $500 million.

We continue to expect significant improvement in free cash flow performance in the fourth quarter as is typical. However, in light of the performance to-date and the current legislative environment, we are updating our guidance for operating cash flows to $400 million to $450 million. Net debt to trailing adjusted EBITDA at the quarter end was 8 times and with $91 million of cash and equivalents on hand, and approximately $680 million of borrowing capacity under our ABL, we remain well positioned from a liquidity standpoint to meet our needs going forward. Additionally, we continue to expect proceeds from the planned divestiture of the Bravera Health assets in Western Florida to be used primarily to pay down debt. We continue to receive inbound interests in certain of our assets, and we will consider the transaction when it makes financial and strategic sense as we recycle capital towards achieving higher returns with lower risk, including debt reduction, capacity and service line expansions and potentially select acquisitions in certain key markets.

Project Empower, our enterprise-wide modernization and optimization initiatives kicked off October 1st, and we are very pleased with the early results. As part of our first wave of deployments, we have implemented our new workflows and the Oracle Supply Chain and finance functionality at 15 of our facilities and have stood up our shared services with no disruption in patient care. We are increasingly confident in the business case for Project Empower and believe that the significantly improved visibility and insights will reveal opportunities within CHS’s markets and business lines from which our operators can capitalize upon to drive further shareholder value. We look forward to providing you further updates as we press forward with Project Empower in the coming months and quarters.

As we noted in last night’s press release, we are updating the guidance range for 2023. Specifically, we now anticipate net operating revenues of $12.4 billion to $12.5 billion and adjusted EBITDA of $1.45 billion to $1.5 billion. We remain confident in our three to five-year targets in the longer-term opportunities in our markets and our continued volume growth and recovery gives us reason for optimism heading into the fourth quarter. However, we believe this update is prudent with just one quarter remaining in the year. With that, I’ll turn the call back over to the operator to poll for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question is from Ben Hendrix with RBC. Please go ahead.

Ben Hendrix: Thank you very much. I was hoping for some more color on the magnitude of the cash flow guide down versus the EBITDA revision. Can you help us bridge from the prior to current cash flow guidance I think you flagged a number of items there. I was just hoping you could quantify those and help us get to the new range? Thanks.

Kevin Hammons: Sure. Thanks, Ben. I appreciate the question. Yeah. So if we think about the new guide for cash flows, it really starts that we’re at the lower end of the EBITDA range. And then there are a couple of items that are really more timing related than anything. But we did expect a cash tax refund, a federal tax refund in the current year. This actually goes back a couple of years that we now know will not come until 2024 that represents about 30% of the reduction. We also became a cash taxpayer predominantly in the second half of this year as a result of the interest deduction limitation going into effect this year, that’s a 163(j) is the IRS code on that. That is also approximately one-third of the guide down.

And we do expect that interest limitation deduction to be rolled back. And if so, that would turn into another refund that we would expect to get in the coming year. Another item that is included in guidance is, we made some retirement and deferred compensation payouts this year. This actually has a net zero impact on our overall cash, but the accounting rules require us to include the outflows in operating cash flows. And then there’s a corresponding inflow in investing section, because we had investments on hand that we sold to make these payments. So that was really a net zero cash impact. But to reflect the accounting in cash flow from operations, we included that that was about 20% of the guide reduction. The other couple of items in there, we called out an increase in some governmental litigation reserves during the quarter as an adjustment to EBITDA of about $24 million that the payment of that is expected in the fourth quarter of this year.

So we’ve included that. And then as we mentioned, the billing related to the in-sourced physicians has been delayed a little bit as we ramp up, get those physicians credentialed. There’s some cash flow drag, but those bills are going out, as I mentioned, and that we would expect that to turn around either partially in the fourth quarter, maybe flowing into the early part of ‘24 and that’s probably about 5% of the guide down. So, I think that covers substantially all of the adjustments and majority of those are just timing issues.

Ben Hendrix: Great. Appreciate that. And with regard to the very last one with the billing for the APP physicians you’re bringing on, can you give us an idea of how much revenue that accounts for? And how much top line exposure you have related to billing. And are you guys asking for subsidies from other providers in that regard? Thanks.

Kevin Hammons: Sure. So all of the physicians are practicing in our hospitals. So we are either have completed or in process of getting those physicians credentialed under our agreements with the payers. So there are no subsidies from other providers involved in that. In terms of kind of the magnitude of this for this quarter, for the two months this quarter represented only approximately $20 million of revenue and cost expenses, approximately $25 million. So a net $5 million kind of EBITDA impact related to those physicians that we in-source. So not overly material, but that is approximately a $4 million benefit compared to the subsidies that we were previously paying to APP.