Community Health Systems, Inc. (CYH) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to Community Health Systems' First Quarter 2021 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Ross Comeaux, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Mike. Good morning, and welcome to Community Health Systems' first quarter 2021 conference call. Joining me on the call today are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer. Before I turn the call over to Tim, I'd like to 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 is described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, 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. For those of you listening to live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations we will discuss also exclude: gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal settlements and related costs, expense from settlement and legal expenses related to cases covered by the CVR and change in tax valuation allowance. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Ross. Good morning, everyone, and welcome to our first quarter 2021 conference call. We achieved strong operational and financial results in the first quarter during what was a milestone period for the health care industry as we mark the 1-year anniversary of the onset of the COVID pandemic. A year into this experience, we are still managing through extraordinary circumstances and adapting to constant change. During the first part of the quarter, especially in January, COVID surges continued to impact volume in many of our markets. In February and certainly by March, COVID cases subsided and other volumes began to notably improve. We provided care for approximately 9,500 inpatient COVID admissions in the first quarter. This compares to approximately 8,000 COVID admissions during the third quarter and another 14,000 COVID admissions during the fourth quarter of 2020. We finished the first quarter with good operational momentum progress in many strategic initiatives, which I will discuss in a minute, and a sense of optimism that if vaccination rates increase and COVID cases decline, we will continue to move to a more normal operating environment. In the first quarter on the top line, same-store net revenue growth increased 9.8%. On a year-over-year basis, net revenue growth was driven by higher acuity and an easier comp. Due to COVID-related government restrictions on elective procedures that started in March of 2020, which impacted volumes and net revenues last year. This quarter, admissions and surgeries were negatively impacted by the high COVID case counts that we experienced in January as well as severe snowstorms that hit much of the south in the middle of February. During the month of March, we were very pleased with our strong volume recovery, further closing the gap to our pre pandemic run rates. We believe the rollout of the COVID vaccine also impacted demand during the quarter, while some patients waited for their turn to receive the vaccine prior to returning for elective scheduled health care services. Throughout the pandemic period, we have been actively encouraging patients who have been reluctant to seek health care to return for any needed checkups, screening, postpone procedures and other deferred care. For the full quarter, year-over-year, same-store admissions were down 4.9%. Adjusted admissions were down 7.2% and surgeries were essentially flat. ER visits continue to lag other volume metrics with same-store ER visits down 17%. Our expense management initiatives remain on track and effective with more progress demonstrated during the first quarter. Adjusted EBITDA was $495 million, which increased 60% compared to the prior year. Adjusted EBITDA margin of 16.4% improved 620 basis points year-over-year. During the quarter, $82 million of pandemic release funds were recognized. If we exclude the pandemic relief funds from the quarter's results, adjusted EBITDA was $413 million with an adjusted EBITDA margin of 13.7%. Since comparative results are affected when looking at the first quarter of 2020 because of the government restrictions on elective procedures that took effect then, more helpful perspective can be found in a comparison to the first quarter of 2019. Excluding pandemic relief funds, first quarter 2021 adjusted EBITDA of $413 million increased 6% compared to the first quarter of 2019, despite operating 21 fewer hospitals as a result of our portfolio rationalization program. We believe this clearly demonstrates our progress so far and the underlying strength and growth potential of our go-forward portfolio. We continue to fuel the portfolio with attractive capital investments based upon defined growth strategies, and of course, through the determination and hard work of our hospital leadership teams across the country. The results of the quarter demonstrate that the transformation of the company that started a few years ago is progressing, and we are excited about all of the opportunities in front of us as we look toward the future. In the medium term, we continue to target 15% plus adjusted EBITDA margin, positive annual free cash flow generation and reducing our leverage below 6x. During the last quarter, we did lower our leverage, and we made a number of other improvements across our capital structure, which Kevin will highlight later. Now I'd like to spend a minute on strategic initiatives and the opportunities in front of us, especially as our divestitures have been completed, and we are completely focused on our core portfolio. We have been making investments in these markets over time to enhance our competitive position and to drive long-term growth. Our company's growth objective is to advance opportunities for both inpatient and outpatient care development, based upon each market's unique characteristics and opportunities. On the inpatient side, we've recently opened two new hospitals, in Indiana and Arizona, and both are performing quite well. Another new hospital will open in Fort Wayne later this year and one additional de novo campus and Tucson early next year. And over the past 3 years, we've added nearly 300 new beds to the core portfolio, along with more than 50 new surgical and procedural suites to meet increased demand and to drive higher acuity. We have also added several new service lines at hospitals throughout our portfolio. On the outpatient side, we recently completed a comprehensive study of several key markets to identify our best investment opportunities in ambulatory access and services, including more primary care, specialty care and urgent care locations as well as freestanding ERS and ambulatory surgery centers. In terms of progress, we opened our 14 freestanding ER during the first quarter, with two more locations scheduled to open this year. We have also added two additional ASCs to the portfolio so far this year and we will add a de novo center in our Knoxville market this summer. Adding all of this together, we continue to manage a very robust development pipeline of opportunities that we believe align well with our inpatient services, expands our outpatient access more broadly across our markets, and that improves our overall market position. We continue to think strategically about capital investments and how they can drive high impact, high-growth returns as we deliberately build out and advance our networks. We are also investing in what we call Connected Care Strategies. We have been regularly sharing progress updates on our proprietary transfer center operations since 2017. We continue to see impressive results from this initiative, and we are leveraging the visibility it provides into areas for facility expansion, physician recruitment or service line enhancements will enable us to provide care for even more patients within a region. We are also implementing proprietary patient access centers, which initially provide centralized scheduling services for our primary care practices. We are seeing good initial results, including volume improvement with nearly 600 providers now being served by these centralized scheduling centers. Over time, our goal is to use these scheduling hubs to enable outbound patient outreach to close gaps in care and to provide other services to ensure that patients can more easily navigate the health care system and receive the services they need. We believe all of our investments are generating the intended results and positioning us for greater success in the long run. I'm extremely proud of the progress we've made in so many areas, thanks to the strong leadership of our local market executives, the support of our corporate team, and most importantly, the incredible care provided by the physicians, nurses and other clinicians who continue to put their patients first by providing safe, high-quality care in their community. They continue to earn our respect and admiration every single day. With that, let me turn the call over to Kevin.

Thank you, and good morning, everyone. As Tim just mentioned, it was a strong start to the year. We delivered good financial performance, continued meaningful improvements across our capital structure and made additional strategic progress during the first quarter. Net operating revenues came in at $3,013 million on a consolidated basis, down 0.4% from the prior year due to divestitures. On a same-store basis, net revenues increased 9.8%. This was the net result of a 7.2% decrease in adjusted admissions and an 18.3% increase in net revenue per adjusted admission. Similar to the back half of 2020, our net revenue per adjusted admission benefited from increased acuity, higher rates and better payer mix. Adjusted EBITDA was $495 million, up 60.2%. This included $82 million of pandemic relief funds. Adjusted EBITDA, excluding the pandemic relief funds, was $413 million, an improvement of 34% over the prior year and an improvement of 6% over the first quarter of 2019. Our adjusted EBITDA margin was 13.7% versus 10.2% in the prior year and 11.6% in the first quarter of 2019. We continue to make progress toward improving adjusted EBITDA margins. During COVID, we experienced various ways of new COVID cases from month-to-month, which has impacted our volumes and increased our operating expenses. Our hospital leadership teams have continued to adjust extremely well to the changing business environment. And that was evident again this quarter. While effectively executing our cost reduction programs, we have seen increased expense related to certain supply costs, contract labor and other expenses related to COVID. With COVID cases declining, we expect these additional costs to decrease. Switching to cash flow. Cash flows provided by operations were $101 million for the first quarter of 2021. This compares to cash flows from operations of $57 million during the first quarter of 2020. Looking at the quarter-over-quarter increase. Cash interest payments were approximately $60 million lower in the first quarter of 2021. The company repaid approximately $18 million during the quarter related to Medicare-accelerated payments due to divestitures, and other increases and decreases, including improved EBITDA and working capital changes were offset. As we look at the rest of the year, we expect our cash flow from operations to improve. During the first quarter, in addition to the first quarter being a historically lighter cash flow quarter, due largely to the resetting of co-pays and deductibles and the timing of certain payments. Our cash flow from operations was also negatively impacted by the COVID peak in January and the weather-related disruptions during February. As such, our strongest net revenue month during the quarter was March. And as a result, we expect our cash collections to improve moving forward into the second quarter. Turning to CapEx for the quarter. Our CapEx was $105 million compared to $99 million in the prior year, keeping in mind that we are operating fewer hospitals than a year ago. We continue to invest capital into our core portfolio to strengthen our existing markets. And we are excited about a number of our recent investments, along with a number of future opportunities that are in the pipeline. We are pleased to have completed our formal divestiture plan, and we continue to receive inbound interest regarding potential transactions, and we will continue to assess the benefits of any future deals. But as we move forward, we are focused – we are most focused on driving growth across our stronger portfolio, which we believe will continue to benefit from our targeted investment focused strategies and improving economic, and population demographics within our markets. In terms of liquidity, at the end of the first quarter, the company had $1.3 billion of cash on the balance sheet. At March 31, the company had no outstanding borrowings and approximately $633 million of borrowing base capacity under its ABL, with the ability for that to increase up to $1 billion. Switching to the CARES Act and the pandemic relief funds. At the end of 2020, we had $104 million of unrecognized pandemic relief funds, of which we recognized approximately $82 million during the first quarter of 2021. As a reminder, we have not included the pandemic relief funds in our full year 2021 guidance. Moving to the balance sheet and capital structure. We've made significant improvements. At the end of the first quarter, we had approximately $11.9 billion of total debt which was approximately $300 million lower compared to the prior quarter. On the capital structure side, as a reminder, through 2020 and the first quarter of 2021, we lowered our debt by over $1.3 billion, reduced our leverage ratio by over 2 turns, down to 6x levered compared to over 8x last year and lowered our annual cash interest by approximately $190 million. In the first quarter, we completed a number of capital market transactions that further lowered annual cash interest and removed near-term maturities. In January, we extended $1.8 billion second lien notes to 2029 and $1.1 billion first lien notes to 2031. Following these transactions, we called the remaining $126 million of 2022 unsecured notes, paying that with cash on hand. On Slide 13 of our supplemental slide presentation, we have included our debt maturity profile at the end of 2019 compared to the end of the first quarter of 2021. During the past few quarters, we've significantly extended debt maturities, paid down debt and lowered our annual cash interest. Our next maturity is now not due until June of 2024. Now I'd like to quickly comment on our full year 2021 guidance. Net operating revenues are anticipated to be $11.7 billion to $12.5 billion, unchanged from our previous guidance. And adjusted EBITDA is anticipated to be $1.65 billion to $1.8 billion, which does not include pandemic relief funds. Overall, the first quarter was a good start to the year. And as a result, we have tightened our adjusted EBITDA range by raising the low end of our EBITDA guidance. As we look forward, we continue to expect our expense savings from our strategic margin program to build throughout the year, with more significant cost reduction in the back half of 2021. We also expect this program to drive incremental savings into 2022 and beyond. Due to this program, along with the net revenue initiatives that Tim mentioned, we expect to achieve our medium term financial goals over the next several years, which will benefit all of our stakeholders. And Ross, with that, I'll turn the – return the call back to you.

Thank you, Kevin. And at this point, Mike, we're ready to open the call for questions. We will limit everyone to one question this morning, but as always, you can reach us at 615-465-7000.

[Operator Instructions] Your first question comes from Josh Raskin from Nephron Research.

Hi, thanks. Good morning. Appreciate you taking the questions. I guess my question is around the operations for rural hospital operators. And if you're seeing any changes in the competitive nature, I'm thinking about sort of this proliferation of urgent care and some new hub-and-spoke models, even telehealth. So I'd be curious to get your perspectives on how sort of rural and even to suburban care as your hospitals are located or being impacted?

Sure, Josh. This is Tim. I'll go ahead and kick it off, and obviously, welcome anyone else to chime in here. In terms of changes to the operations, from a competitive standpoint, again, don't see much influence from other operators entering those markets. I think it's partly because we were well positioned for some of this migration to the ambulatory care settings through our own investments historically, even predating the pandemic as well as our telehealth investment. So I think, in general, the consumer is in what’s remaining of our nonurban portfolio, which as you know, is much smaller than it was even 3 years or 4 years ago. We are not seeing entrants as being a major competitive threat. In the suburban markets, again not seeing a tremendous amount of expansion in the ambulatory space. Again, I think largely because we have really good growth strategies and have positioned ourselves to make those investments to not crowd out others, but to make sure that we are well positioned across our networks that are creating better and broader access.

Perfect. Thanks.

Thank you.

Your next question comes from Frank Morgan from RBC Capital Markets.

Good morning. Appreciate the color around guidance, but I was hoping you might be able to give us a little more granularity in terms of just sort of the cadence over the balance of the year and some of your assumptions in the recovery. Anything in particular we should call out in the second quarter? And I know at the very end, you mentioned that some of the cost-saving initiatives will kick in later. But maybe just any color that you could provide about kind of the sequencing and timing there across the year? And I think you called out COVID is one of the factors as well. So, if you had to prioritize sort of between those different elements, which would be the most impactful to help driving those margins higher and getting to that 15% target level? Thanks.

Thanks, Frank, and I will take this question. So, as we think about the cadence of adjusted EBITDA throughout the year, we believe that we will sequentially improve each quarter. Certainly, with COVID cases subsiding and some of the recovery, it’s still early in the year, and there are still some uncertainties, but we are seeing the effectiveness and the delivery of the vaccines continue to grow and COVID cases coming down and moderating at a much lower level than they had hit their peak. So with that, we expect to continue to recover a lot of the deferred procedures that have been out there, particularly around some of the deferred higher acuity elective procedures that have not yet come back. And we believe those will start to come back as well. So with that, I think revenue will continue to grow throughout the year. And then as I mentioned, some of the margin improvement program initiatives that we are working on, of course, we have been very successful throughout 2020 with those initiatives. But as we look at the initiatives that are in effect for 2021 and beyond, we believe that some of those will deliver more savings in the back half of the year, which will allow us to continue, as I mentioned, kind of sequentially grow each quarter.

Your next question comes from Brian Tanquilut from Jefferies.

Hi, good morning. Thanks. This is Jack Slevin on for Brian. Wanted to turn on to margins, you all have put out that 15% plus EBITDA long-term target for margins there. And obviously, ex-COVID – or ex-CARES Act, excuse me, a little bit below 14% in the quarter. Just wanted any color if you could walk us through kind of the steps you see to get there, and particularly how you are thinking about navigating this year with the lower acuity procedures probably coming back online throughout the year and possibly some payer mix headwinds?

Great, Jack. This is Tim. I will start us off. And as always, we try to have a balanced approach as to how we solve most of our problems. So, I will cover the net revenue and top line work that’s underway and ask Kevin to cover more of the expense management. So again, with good balance, that’s where we see the long-term prospects for margin expansion in the company. But starting at a higher level and maybe pulling together some of the comments we made earlier, more concisely to answer this question, we definitely believe in the strength of this stronger portfolio. Larger hospitals, larger markets with good growth potential, a greater percentage of these hospitals in the Sunbelt states, which we all know have more favorable population growth and job prospects. So again, that’s number one. I think some looking forward some opportunity for us particularly as COVID cases subside and a more routine operating environment is restored. Also, the transformation of the company in terms of our focus on driving higher acuity in this better portfolio, leveraging our investments in the transfer centers, building out access points, recruiting the right providers to provide necessary services and reduce out migration or to steal volumes from competition is well underway. I also want to point out that I believe we did a really, really good job of demonstrating margin expansion even before COVID. We exited 2019 with really some good strength and headed into the first quarter of 2020 with some really strong margin numbers up until the pandemic hit in March of 2020. So we believe even predating the pandemic, we were showing strong signs of margin strengthening across the organization. And as I have said, on the macro level, with the normalization of volumes post COVID and as Kevin just mentioned, I see more of the higher acuity elective business by orthopedic procedures really get restored to their pre-COVID levels. We believe that really will drive further revenue and margin expansion. In terms of some other top line revenue growth items, our growth objective is really targeted on both inpatient and outpatient, and I don’t think we can emphasize that enough. We see great visibility through our transfer center model as to where we can add new capital, new services, new providers to really retain more patients within our networks of care, but also to attract more patients from smaller nonurban hospitals within a region. So, we have a really clear line of sight. And throughout the first quarter, Dr. Simon is with me here today. I just spent an incredible amount of time with our regional leaders and our hospital CEOs really getting into the granularity of that data to see where we go in excess to really leverage the experience we gained throughout COVID at treating higher acuity, primarily respiratory illnesses in our critical care units. We don’t want to see, frankly, that higher acuity business flip away. We believe there is opportunities for us to strengthen our foothold and as to what we demonstrated within the regions we serve. Also with the investments in beds and procedural suites that I called out earlier, obviously, as we add new capacity and fill it up, we are getting better fixed leverage coverage. We are expanding our margins just by not adding a lot of fixed cost when we have incremental variable volumes coming into our networks. So, we think that will be a key driver of margin for us going forward. And then as we pointed out, de novo access points on acute care, adding all of these new sites of care will drive incremental revenues and drive margins for the company. So again, a lot of things going on that has us really bullish on our prospects for not just a revenue growth and margin expansion for the company. I will let Kevin cover some of the expense items.

Sure. And maybe if I just give a little more color on the expense items and how we are thinking about that and getting to our 15% plus margins. Certainly, as we come out of COVID, we have had some additional cost pressures because of COVID with higher salaries and wages, contract labor and supply costs that we expect those pressures to also subside as COVID cases come down. But as we look back at even the margin improvement program, certainly, we were targeting some of our corporate office costs, some shared service, cost and efficiency opportunities and primarily non-patient facing hospital expenses that we got a really good start to and got traction on in 2020. And we believe that a number of these initiatives are really multiyear initiatives that will continue to drive savings as we move forward and continue to dig deeper into these individual initiatives. Also moving forward, we believe there is more opportunity on the supply expense side with how we are negotiating with vendors, negotiating more contracts on a national basis, taking advantage of our scale and our position now with our refined portfolio of hospitals gives us some leverage on many types of purchase services and some of our supply spending as well as contract labor, which we, again, expect to be able to move lower. So the other thing I would point out is, we have numerous active initiatives, but because we look at this as more of a continuous improvement process as initiatives get completed or removed for the list, we are adding additional initiatives to that list. So, we expect this to again be a multiyear process.

Your next question comes from Ralph Giacobbe from Citi.

Hi. Thanks. Good morning. I guess first, just given the upside in the quarter and the sequestration benefit, the guidance bump doesn’t seem to kind of fully reflect those updates, so maybe hoping to reconcile there. And then I was also interested in your comments that EBITDA grew 6% over the first quarter of 2019 despite 21 fewer hospitals, certainly impressive. I was hoping maybe to get same-facility revenue and EBITDA growth off that same-facility sort of hospital base using that 1Q ‘19 as the base if you had it? Thanks.

Sure. So as we think about the tightening of the range, we started the year with a little wider range of our guidance for EBITDA at $200 million. As the raise on the low end is a combination of our beat for the first quarter as well as we expect the sequestration moratorium to add approximately $40 million to the remaining 9 months of the year, so really just a tightening of the range. It’s still early in the year. So – but we just feel much more confident and certainly confident enough to raise that low end of the guidance and more confident to where we can end up within that range. So that’s a little bit of thinking, and we will continue to watch our guidance and adjust accordingly throughout the year. In terms of comparing back to 2019, our net revenue on a same-store basis, I have that. It was about 5.5% net revenue growth over the first quarter of ‘19. I don’t have an exact EBITDA lift, but it was significant EBITDA lift over the first quarter on a same-store basis as well.

Our last question will be from Kevin Fischbeck from Bank of America.

Great. Thanks. Wanted to see if – you mentioned a couple of times in the call that you have had some kind of onetime costs related to supply and temporary labor from co. But I was wondering if you could actually kind of give us some sort of ballpark for that number. And then secondly, I think you referred to a view that there was pent-up demand that come back into the system. Are you thinking about it in the context of getting back to normal or are you thinking that because of the pent-up demand, we could see volumes be above normal at some point during the end of the year?

Sure. With some of the costs, it’s hard to define an exact cost pressure, because for instance, with salaries and wages, not only was there some wage pressures. Some of that moved to contract labor, and we know that the rates for contract labor are all much higher. But because of COVID, you also had some of your own staff that was out that you are needing to replace or backfill. And as we get beyond COVID, we will have fewer of our own staff that will be out on leave or on sick time, which will also help relieve some of those pressures. And then on the – you also had the impact of the deferral of procedures and just the interruption of business that it gets a little harder to assess the actual cost impact of those. As we move beyond COVID and start to recover a lot of this business, we will be able to leverage some of these fixed costs better and recapture a lot of the revenue without necessarily the same level of expense recapture.

Yes. Kevin, this is Tim. Thanks for the question. In terms of our prospects on deferred care and volume recoveries just to give you the thought process that we are deploying here. We do most of our comparisons, which make sense for the first quarter or at this point, now the second quarter of 2019 on a same-store basis because of the shift in the portfolio that we have covered. And as we pointed out, and as you have heard, I think, from most of our peers, really a strong March, somewhat benefited from some deferred care, likely from the winter event in February and some of the earlier COVID volumes in the quarter, in addition to an extra business day, so really a strong March. We really saw strong lines in March. But more encouraging, we do see that continuing and building momentum into April. The one thing about COVID, it’s taught us all to be very resilient and focused and determined on how we track our patients and get them into the care they need. And the way we have been able to bounce back even more quickly and effectively with every wave of COVID and then the winter weather event, now with vaccinations and patients feeling more confident of coming back into the system for, again what we call the higher acuity elective business, like total joints or spine care, things that really can’t be put off, we are starting to see that business come back. Admissions can get a little choppy to analyze on that book of business because, as you know, much of that care in 2019 was listed as an inpatient only procedure for Medicare patients. Now it is migrated to outpatient. So, we obviously do some adjustments to make sure that we are tracking across both inpatient and outpatient assets of our very important and high acuity orthopedic service lines. But we have got a really clear line of sight on this, adding new doctors, new services, leveraging the transfer center. We believe there are some strong growth prospects in the quarters to come.

I will now turn the call back over to Mr. Hingtgen for closing comments.

Great. Thanks Mike and thanks to you all for spending time with us today. In closing, I would like to mention again just how grateful we are to all of our employees across the organization, our physicians, providers, regional presidents and hospital leadership teams who continue to demonstrate our true purpose of helping people get well and live healthier by providing safe, high-quality care for their communities. I also want to thank our company’s leadership team for their important role in supporting our market and for their continued focus on successful execution. We are pleased with our strong start to the year, and we look forward to updating you on our progress throughout 2021. Once again, if you have any questions, you can always reach us at 615-465-7000. Thanks again, and have a great day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.