Good day, and welcome to the Community Health Systems Fourth Quarter and Full Year 2024 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'd now like to turn the conference over to Anton Hie, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Scott. Good morning, and welcome to Community Health Systems's fourth 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. Miguel Benet, President of Clinical Operations and Chief Medical Officer. Before we begin, I must remind everyone 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 gains from early extinguishment of debt, impairment gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs, expense related to employee termination benefits and other restructuring charges and change in estimate for professional claims liability. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Anton, and thanks everyone for joining our fourth quarter earnings conference call. I want to highlight some key performance measures for the full year and later Kevin will cover results for the quarter. I'll start today with the strong growth we are achieving across our CHS-affiliated health systems, resulting in record same-store volume levels for the full year 2024. Versus prior year, same-store increased 3.2%, same-store adjusted admissions increased 2.7% and same-store surgeries increased 1.3%. Growth like this is enabled by our capital investments, strong capacity management and the pursuit of strategic value-generating opportunities across our core portfolio. In 2024, that included significant expansion in outpatient access such as primary care, specialty practices and urgent care centers. In addition to de novo projects, we acquired 10 urgent care clinics in Tucson, Arizona, broadening our geographic footprint and ability to care for more patients in this market. We opened two new free-standing emergency rooms in fast-growing communities, bringing our current count to 19 free-standing EDs across the portfolio.to We ended the year with a total of 47 ambulatory surgery centers. Within our markets, we are very well-positioned for outpatient surgery and as a result, same-store ASC cases increased 14% last year. We also completed two major campus expansion projects, including new inpatient bed towers, emergency department and surgical services capacity. These projects have further improved our competitive position in our Knoxville, Tennessee and Baldwin County, Alabama markets and both continue to ramp-up nicely and we invested in procedural capacity, such as expanding and upgrading cardiac cath lab and other procedural spaces in several health systems last year. Same-store net operating revenues for the year increased 5.5% and adjusted EBITDA for the year improved 6%, which includes the benefit from supplemental state-directed payment programs in the fourth quarter, which Kevin…

Thank you, Tim, and good morning, everyone. We continue to see strong demand for care in our markets, leading to the best same-store revenue growth of the year, up 6.5% in the fourth quarter on a 3.4% increase in inpatient admissions and 3.1% growth in adjusted admissions. Same-store ED visits were up 1% and surgeries were up 0.9%. In addition to the strong volumes, same-store revenue growth reflects a 3.3% increase in net revenue per adjusted admission, driven by rate growth, including the Medicare inpatient rate update and incremental reimbursement under Medicaid supplemental payment programs, partly offset by lower acuity. Adjusted EBITDA for the fourth quarter was $428 million, compared with $386 million in the prior year period. Margin for the quarter was 13.1%, up from 12.1% in the prior year period. For the full year of 2024, adjusted EBITDA totaled $1.540 billion, compared with $1.453 billion in 2023, with margin of 12.2%, an improvement of 60 basis points from the prior year. During the quarter, recognized an incremental net benefit of approximately $40 million from Medicaid supplemental payment programs versus prior guidance, primarily relating to the approval and recognition of the New Mexico program for the period July 1st through December 31, 2024. As Tim noted, the impact of payer downgrades and denials has stabilized for us since calling it out in the third quarter. Thanks to our ongoing utilization management efforts and physician advisor program. However, we will remain vigilant in our work and advocacy, regarding this troubling trend that is affecting all healthcare providers. Turning to expense management. We were again pleased with our performance on labor costs with average hourly rate up approximately 4.7% year-over-year in the fourth quarter, reflecting an increase in the number of employed physicians, and approximately 4% for the full year 2024,…

We will now begin the question-and-answer session [Operator Instructions] The first question will come from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys and congrats on the quarter. Maybe Kevin my first question for you, as I think about the guidance for 2025, maybe if you can just help us bridge 2024 to 2025? I know there's so many moving pieces here. And then, if there are any specific callouts for one timers that we need to consider maybe for Q1?

Sure. Thanks, Brian. Appreciate it. As I mentioned, the guidance does not include Tennessee and New Mexico DPP and only includes the announced divestitures. So maybe to do a high-level bridge, starting with EBITDA, where we finished up 2024 to $1.54 billion, I think we could take out approximately $40 million of DPP funds that were recognized in 2024 in the fourth quarter. That was the New Mexico piece. Take out $50 million to $60 million related to the announced divestitures as we go in, so roughly, call it, $100 million reduction, add in organic growth of $75 million to $100 million in 2025, and that gets you back to the midpoint of our guide of about $1.525 billion. Even without the DPP, at that midpoint, it would still be deleveraging given that we have about $550 million of proceeds coming in related to those divestitures. And then, factoring in if or when Tennessee and New Mexico get approved, and we do fully expect them to get approved that would add an additional $100 million to $125 million to that annual run rate of EBITDA.

Got you. Okay. That makes sense. And then maybe, Tim, as I think about some of the things that you've done in 2024, you're still looking to do some divestitures here, but you've also added some urgent care locations. Just curious how we should be thinking about where you stand today on kind of the strategic moves that you still want to do and I know you mentioned that, you've got a couple of deals here in the pipeline, but once we get past that, I mean, how should we be thinking about kind of like the moves that we should expect out of you guys?

Sure. Thanks, Brian. I'm happy to shed some color on that. Obviously, we're pleased with our ability to invest in and grow the core portfolio. We've been speaking to our investable opportunities for the last several years and it's always good to see that pull through in terms of the volume and earnings progression. I think we called this out in a number of occasions, but it's a smaller portfolio generating roughly these similar amount of net revenue as three or four years ago. So we know that our investments are yielding the intended outcomes, caring for more patients and driving that type of growth. Now in terms of where we go next, we still have some runway left on, obviously some past capital investments, particularly around our expansion projects. I called out that, they're ramping up nicely that by any stretch of the imagination. We built them for further growth capabilities in the quarters ahead. Also, we've also talked extensively about where we're investing our capital dollars and it goes beyond just inpatient capacity and procedural capacity on our campuses. They're really driving that access point strategy. So, we have a pipeline of incremental ASC expansions or de novo projects underway. We also have more freestanding ED projects, in flight, some of them going through certificate of need processes. So, we still see a good portion of portfolio still having investable opportunities for more organic growth. In terms of the post-acute and behavioral health side of the business, we think we've done a nice job of growing that side of the business. We believe there's also more expansion opportunities and growth opportunities in that regard. And then the last thing I'll put out there, again speaking to where we have insights into the business, beyond just the ERP implementation of seeing where we can better manage the business, for the last, I'd say, seven or eight years, we've leveraged the Transfer Center rather extensively to always help us identify new opportunities for service line expansion. We continue to see in the majority of our transfer center markets the ability to expand our service areas by taking in patients from further out as we add those specialties, so we don't believe we've reached the end of that road either. Again, a lot of growth opportunities on an organic basis.

Hi, Tim, maybe if I may follow-up, just as I think about your mid-teens EBITDA margin guidance and you did 13% -ish coming out of Q4. So putting all this the things that you mentioned together and then maybe considering medical specialist fees, what's that line of sight like and what will it take for you to hit that mid-teens target number?

I'll let Kevin start with the answer kind of where we peg that mid-term guidance. I'll add a few things at the end, which I think tie back to my comments.

Sure. There's a couple of things. We've had a little bit of drag with some medical specialties, which even though we do believe they're continuing to increase, we are getting some stabilization. Our work with ERP and getting that project completed, which has also been a little bit of a drag on us, but should turn into a tailwind. And with the functionality and the work and visibility we have and improving decision support, we think we can take out some material cost. We've made some -- what we believe to be really good investments in capital growth projects and then we continue to believe we can get some leverage on both acuity and payer mix as some of our markets grow.

Yes. And I would layer onto that opportunities for margin expansion, obviously, over the next couple of years, hopefully with some moderation in inflation and continued strengthening in payer mix and rates on the commercial side of the business. Obviously, there is some risk embedded with the governmental programs. But in general, targeting the payer mix through our access point strategy has worked out really well for us. We also see some opportunities, as I said to ramp up these projects and improve our fixed cost leverage. So I think that will pull through in terms of being that midterm target as well.

Maybe the last point I'd make is, as we continue to delever and have opportunities for deleveraging, we are getting to positive free cash flow, able to get our debt down and lower our cash interest. Even if we aren't at those mid-teen margins being positive on those other things will generate sufficient cash flow and sufficient EBITDA to continue to progress and make the investments that we need.

The next question will come from Ben Hendrix with RBC Capital Markets. Please go ahead.

Great. Thank you guys very much. Just wanted to follow-up on some of your thoughts on DPP. First of all, in 4Q, the $40 million of New Mexico DPP that you recognized, just wanted it seems to be about twice what you'd expected. Does that reflect just conservatism around this program initially versus your expectations, or was there something structurally that changed that drove that outperformance? And then just secondly, the exclusion of DPP and guidance suggests a more cautious stance than what we heard back in October. Clearly, just wanted to get your latest thoughts on your assessment of the risk of these programs and how you're thinking about them under the new administration. Thanks.

Sure. Thanks, Ben. We did not include the New Mexico or Tennessee programs in our guidance in 2024. So although we've been working closely with the state and following very closely with that program, we weren't sure of the timing of approval, so we did not include it in the guidance. It was approved, I believe, in December, so that we were able to recognize and we recognized the period from July 1st through December. So two quarters' worth recognized all in the fourth quarter. I think kind of, at the end of the day, what we had provided on an outlook back after the third quarter was those two states combined, we believe should contribute about $100 million to $125 million to an annual run rate of EBITDA. We still believe that that's the right number, so it's in line. New Mexico is really in line with our expectations around that, but we just did not have it in the guidance for 4Q, because of timing and uncertainty around the approval process. Going forward, again, we do expect those programs to get approved, New Mexico, which is basically a renewal and then Tennessee to get approved here. Right now, I understand, there's a freeze on communications from CMS until we get confirmation of the secretary and leadership there. But that should be coming hopefully soon and we don't see that there is probably going to be a big headwind. We believe, these programs will continue relatively in their current form going forward. They've been successful programs. Many states -- actually, there's been bipartisan support in both red states and blue states. And if I think about the current administration and where some of these programs are used to a high degree in states like Texas and Florida and more recently Mississippi, Tennessee also being a red state that has applied for one. I don't see that they will not be approved going forward.

Yes. And then I'll add on to that. I think Kevin's spot on. Obviously, Medicaid has traditionally been an under-funded payer source for us. So, these programs are critically important to sustaining the level of services to the Medicaid population and irrespective of whether it's a red state or a blue state, giving people coverage and access to healthcare is such a critical issue for their well-being, but also just from I guess I'll say from a political agenda as well, making sure that we're not taking things away from people that are so important to them, especially as we transition to the new administration. I do think, in terms of the programs, we're doing a lot of work around lobbying activities. Obviously, making sure that the reason why these programs are important is clearly understood by our elected officials. And as Kevin said, we've had broad support in our discussions with many of them to get these programs adjusted or modified to strengthen the access to healthcare in their communities. So we hope that bodes well for us going forward in terms of the durability of the supplemental programs.

The next question will come from A.J. Rice with UBS. Please go ahead.

Hi, everybody. Thanks for the question. On the organic growth of $75 million to $100 million is this part of the bridge you talked about earlier. Can you imagine just giving us some sense of what you're thinking of for same store revenues, same store volume, same store margins perhaps. I know you've had a slight uptick in the overall margin, but I don't think that teases out what the same store number is. I apologize if I missed it. But just some metrics around what you think the underlying same store portfolio is doing.

Sure. Thanks AJ So in terms of kind of volume, we're looking at 2 to 3% volume growth in 2025, similar in pricing. So you can think about net revenue growing, growing in the mid-single-digit area contributing margin wise, slight increase in same store margin is more of that organic growth we would expect to flow through to the bottom line. In terms of some inflationary trends, we're thinking about something in the neighborhood of 3.75% on salaries and wages. That's a little bit less than 2024, but still not back to where we had previously thought. You know, something probably in the 3% range on most other expenses from an inflationary trend with the exception of medical specialist fees, we're probably looking at and we budgeted for an increase in the 8% to 12% range on medical specialist fees. It was up 12% this year, or I'm sorry, 10.9% for the full year. And so we're kind of budgeting in that 8 to 12% and then on ERP to help offset some of those inflationary increases. We're looking at some offsetting savings as a result of our ERP work. And now having that fully implemented in the $40 to $60 million range.

Okay, that's helpful. And then just not to belabor the DPP program questions, but some of your peers felt like Tennessee got approved at least for the 6 month stub in ‘24. It doesn't sound like you booked any either in 24 or in your guidance for ‘25. Can you comment on that? And then also I know for some time you're one that has some major states that have not yet adopted DPP programs or at least have not upgraded DPP programs to the extent that they might and specifically people typically call out Alabama, Indiana and Arkansas. Any update on where those stand at this point?

Yes, I can give you an update on those. So Tennessee in January we did get word that the program in Tennessee was approved. At least the structure of the program. But the funding for Tennessee's DPP program has not yet been approved. So just being prudent and conservative in our guidance, without the funding being approved and the freeze on communications coming out of Washington or out of CMS, we decided not to put that in our guidance, but again, fully expect that that funding does get approved. Tennessee, the TennCare program was a block grant program. So I think there was an additional level of approval that was needed or waiver for that going forward and we're just waiting on that final step. In terms of additional states, we do have some pretty meaningful states. Indiana, Tennessee and Arkansas and Alaska, which do not have programs, do not have DPP programs or at least not fully implemented. Indiana is probably the farthest along, although no certainty of where that ends up. We do know that the state legislature is considering it. They're in session right now and there's a plan that's been presented for them for approval, so that is farthest along. We are in discussions in Alabama and Arkansas. I would say that they're a little farther behind or maybe said differently there at the earlier, earlier stages of considering and developing plans in those states. But all of those states have certainly expressed interest in taking a look at these programs and looking for additional Medicaid funding through these. We view these programs really as just part of Medicaid funding overall. We typically consider Medicaid or delivery of Medicaid business at a loss. These programs help bridge that gap as part of the reimbursement for Medicaid and I know the states are looking for some additional money, so we would expect some potential there but Alabama and Arkansas probably not in 2025. That's probably a 2026 is the earliest.

Your next question will come from Andrew Mok with Barclays.

It looks like you're forecasting operating cash flow to improve the $150 million to $200 million in 2025 on a lower EBITDA base. So hoping you could flesh out the drivers of that better conversion? And then as a follow-up, to the extent that there's an incremental $100 million plus from the state-directed payment programs, would that all drop through to operating cash flow?

Sure, Andrew. Thanks for the question. So there are a couple of moving parts on the cash flows. So the New Mexico DPP program that we did recognize in 2024, that was in the fourth quarter. That $40 million roughly would be paid in cash received in 2025 and so that's a nice carryover and would contribute to the cash. Also, as we wrapped up our implementation of our ERP conversion, that has been a drag on cash flows for us. Although we've been backing out the income statement impact or at least a portion of the income statement impact of that program from adjusted EBITDA. We've not backed out the cash component of that from cash flows. So I think that also contributes to some improved cash flow generation in 2025. Another positive impact is we've gotten word that our tax refund is being processed by their IRS. This is the tax refund that we've been waiting on for a number of years. So we would expect roughly $70 million to $75 million of cash coming in on that. Those will be offset. We will have higher cash interest payments in 2025 primarily related to the timing of cash interest payments, particularly around the refinancing, which we did refinance some debt this past year at a higher interest rate. But just the timing of payments will cause cash interest to increase about $40 million in 2025. So that will be offsetting.

Got it. That's helpful. And then just to clarify a point on the state-directed payments. I think you called out $100 million to $125 million in incremental annual benefit from Tennessee and New Mexico. That doesn't include the retro Tennessee piece. Is that correct?

That is correct. That does not include the retro Tennessee piece. So that would be in addition. And those programs will accrue to our cash flow will flow through EBITDA and cash flow as well.

The next question will come from Stephen Baxter with Wells Fargo.

This is Mitchell on for Steve. I wanted to see if you could quantify the continued hurricane impacts in Q4. And do you expect volumes to fully recover in 2025?

Sure today, we had -- as we indicated in our guide for Q4, we expected about a $10 million impact from the hurricane. It was as expected, and really didn't see any additional impact. We have one hospital that continues to be shut down as a result of that hurricane was shut down for the entire quarter and into Q1. The assets that were impacted by the hurricanes Shore Point Health System, our assets that we are being sold. Those were deal was announced, and we expect that deal to close here in the first quarter. So we do not expect any ongoing impact since those assets will be gone.

[Operator Instructions] Our next question will come from Josh Raskin with Nephron Research. It seems that our questioner has disconnected. This leaves no questions in the question queue. I would like to turn the conference back over to Mr. Tim Hingtgen for any closing remarks.

Great. Thank you, Chuck, and thanks to all of you for joining our call today. As always, if you have additional questions, you can reach us at (615) 465-7000. Thanks again, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.