Community Health Systems Inc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Community Health Systems' Fourth Quarter and Year-End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. 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' fourth quarter and 2020 year-end conference call. Joining me today on today's call are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, Executive Vice President and Chief Financial Officer. Before we get started, 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 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 Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. And 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 the 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; income and expenses from government and other legal settlements and related costs; expense from the settlement of professional liability claims for which the third-party insurers' obligations to insure the company for the underlying loss is being litigated; expenses from settlement and legal expenses related to cases covered by the CVR; expenses related to employee termination benefits and other restructuring charges; change in valuation allowances recorded for promissory notes; change in estimate for professional liability claims accrual. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Ross, and good morning everyone and welcome to our fourth quarter and year-end 2020 conference call. 2020 was a year like no other. COVID-19 has had a prolonged impact on our lives and the pandemic has certainly impacted the health care industry. I'm incredibly proud of the essential care provided for the communities we serve, the professionalism and compassion of our front-line health care workers, and for the leadership, resourcefulness, and considerable efforts of our hospital and corporate teams that support them. We were laser-focused on managing COVID throughout 2020, but we were also able to move other important strategic priorities forward. Because of this, we entered 2021 with meaningful opportunities in front of us and a sense of excitement regarding the future. Let me start with just a few comments about our experience during the pandemic. We provided care for more than 25,000 COVID-19 inpatient admissions last year. The majority of those patients were in our hospitals during the back half of the year, with more than 14,000 COVID inpatient admissions in the fourth quarter alone. COVID volumes increased each month throughout the quarter, potentially peaking in January. In turn, this negatively impacted elective volumes and non-COVID health care demand as well as certain expense categories. During the course of the pandemic, in addition to supporting the CARES Act for the hospital industry, we believe our ability to recover from the negative impact of COVID-19 has been due to three factors. First, we implemented a dual track operating philosophy in which we prioritized care for COVID-19 patients. But we also committed to rapidly restoring and maintaining other essential health services. Our hospital teams were very proactive regarding the reopening of services, balancing the demands of both COVID and non-COVID patient care in a safe and effective manner. Second, we are continuously monitoring adjusted operational activities throughout the year in real-time to ensure effective cost management. And third, we worked hard to provide the necessary support and resources for our medical staff and employees who again have been very courageous and committed during the challenges of the pandemic. Additional alignment was particularly important this year and we are grateful for strong partnerships between our hospitals and their medical staffs as they work together to care for patients, especially following various shelter-in-place orders and required shutdowns in certain medical services. While managing the pandemic, we also continued to execute across our most important priorities and strategies throughout the year. We completed our formally announced divestiture plan with proceeds coming in above our expectations. Investments in our core portfolio showed promising returns, and we identified more opportunities for network expansion. Many of our company-wide initiatives continue to add value. For example, our Accountable Care Organizations or ACOs continue to perform very well and in partnership with nearly 5,000 providers across our market, we care for approximately 250,000 Medicare fee-for-service patients with a focus on quality and value. We have continued to increase our shared savings from the program each year since its inception. Our telehealth program continues to provide convenient virtual access to our providers with more than 500,000 telehealth visits in 2020. And our transfer center expanded again, delivering more admissions from non-CHS hospitals as patients requiring higher levels of care are transferred into our facilities. Our strategic margin improvement program produced strong results and significant savings and we are confident it will generate incremental results going forward as well. In 2020, we significantly improved our capital structure due to a number of successful transactions. In summary, as a result of our focused execution across both operational and strategic priorities, the company had a strong finish to the year. Our 2020 fourth quarter same-store net revenue increased 4.5%. Adjusted EBITDA was $614 million in the quarter, up from $447 million last year. Excluding pandemic relief funds, adjusted EBITDA was $461 million, which represents a 3% increase over the prior year quarter. While showing sequential improvement in admissions and adjusted admissions, COVID continued to impact our volumes during the fourth quarter, particularly on the surgery line as more patients deferred care due to COVID cases indirectly affecting their willingness to seek treatment. Looking forward, we see strategic opportunities that should produce growth on both the inpatient and outpatient sides of the business. Our portfolio of hospitals is now primarily concentrated in Sunbelt states with attractive demographics, higher population growth, and economic opportunity. Our stronger portfolio, coupled with high return on investments, positions the company for growth going forward. Across our core portfolio, we are continuing to utilize a detailed planning process in each market that leverages multiple data sources along with market intelligence to pinpoint and then prioritize the most effective investment strategy within each particular market. This enables the effective allocation of capital and other resources to drive growth. Through this process, we've added 250 incremental beds over the past few years and 50 new surgical and procedural suites. These capital investments help meet demand and bolster positive volume trends in markets like Birmingham, Tucson, Naples, Knoxville, Northwest Arkansas, Fort Wayne, and others. In 2020, we opened a new micro hospital in Tucson and a replacement hospital in La Porte, Indiana. We will open another replacement hospital in Fort Wayne later this year and add another de novo hospital in Tucson in early 2022. We continue our emphasis on the development of service lines, thereby further increasing our acuity levels on the inpatient side. Our investments on the outpatient side are designed to expand entry points into our networks, providing a more convenient out-of-hospital care environment that satisfies evolving consumer expectations about the availability and accessibility of health care services. In 2020, we opened three new ambulatory surgery centers and three new freestanding emergency departments. More ASCs, freestanding EDs, urgent care centers along with further expansion of our physician practice locations are in the pipeline and under active development. With our stronger portfolio, we are on a path to successfully develop growth in both acute care services and our ambulatory networks moving forward. Health care consumers continue to be in sharp focus as a development area for the company. We continue to implement digital tools that help us interact with our patients, and these interactions help fill gaps in care, elevate capital deployment rates, and improve patient communication and experience as well as quality. Telehealth, which I mentioned before, continues to be an opportunity for further development. We have also been focused on leveraging processes and technology expectations from one care setting to the next, which helps navigate across network services and further builds brand loyalty. Going forward, our hospital leadership teams are enthusiastic about the opportunities in their markets and our corporate team continues to support strategic, clinical, and operational initiatives designed to enhance patient care and increase market share, so that we continue to provide enhanced value for our patients in the communities we serve. We are focused on driving incrementally higher net revenue, EBITDA, and EBITDA margin and improving positive free cash flow while lowering our leverage. In the medium term, we are targeting 15% plus EBITDA margins and reducing our leverage below six times. As we've seen all of these strategies in 2021, we are doing so as a stronger and even more resolute organization. Our portfolio is strong and our entire organization is excited about the future. I could not be more proud of where CHS is today, responding to the needs of the patients throughout this pandemic, while also achieving marked progress on our greatest strategic and operational priorities throughout the year. As a result, I remain confident that we are continuing to position and strengthen the company to build long-term value for all of our stakeholders. With that, let me turn the call over to Kevin.

Thank you, Tim, and good morning everyone. As Tim described, 2020 was a transformational year for the company. As we navigated the global pandemic, made considerable strategic progress, and we finished the year strong. Today, I'm going to walk through some details on the fourth quarter and the full year as well as some other recent financial highlights. During the fourth quarter on a consolidated basis, net operating revenues came in at $3.119 billion, down 5.1% from the prior year due to divestitures. On a same-store basis, net revenues increased 4.5%. This was comprised of a 9.5% decrease in adjusted admissions and a 15.5% increase in net revenue per adjusted admission. Similar to last quarter, our net revenue per adjusted admission benefited from increased acuity, higher rates, and better payer mix. Adjusted EBITDA was $614 million, up 37.4%. During the quarter, we recorded $153 million of pandemic relief funds included in that EBITDA. Similar to the third quarter, our hospital leadership teams executed well with good expense management across a number of categories, including salaries, wages, and benefits, which were 90 basis points lower year-over-year on a same-store basis and purchase, services, and other expenses, which were 100 basis points lower year-over-year on a same-store basis. Our strategic margin improvement program continues to deliver cost reductions with additional savings from this program planned for 2021 and beyond. During the fourth quarter, however, our supply costs continued to be negatively impacted by COVID-19, increasing 50 basis points year-over-year on a same-store basis, owing to increased pharmaceutical, PPE, lab, and testing supplies expense related to the pandemic. Switching to cash flow; cash flows provided by operations were $76 million for the fourth quarter of 2020. This compares to cash flow from operations of $194 million during the fourth quarter of 2019. Looking at the quarter-over-quarter decrease, cash interest payments were approximately $73 million higher in the fourth quarter of 2020 due in part to the timing of payments. The company paid a professional liability claim of approximately $50 million during the fourth quarter. The company repaid approximately $75 million during the recent quarter related to Medicare accelerated payments, and pandemic relief funds due to divestitures and other increases and decreases in cash flows were offset. For full-year 2020, our cash flows provided by operations were $2.2 billion. This compares to cash flows from operations of $385 million during the full year of 2019. The increase in the 2020 cash flows over the prior year was attributable to the company receiving approximately $1.1 billion of Medicare accelerated payments. The company also received approximately $705 million in Provider Relief Grants under the CARES Act. The company was able to defer approximately $140 million of payroll tax as a result of the CARES Act, and other increases and decreases were generally offsets, including improved cash from AR collections and working capital management. Turning to CapEx for the year. We invested a similar amount of capital despite our divestitures. Our CapEx for the full-year 2020 was $440 million or 3.7% of net revenue, compared to $438 million or 3.3% of net revenue in the prior year. As Tim mentioned, we continued to invest capital into our core portfolio to strengthen our markets. And as we look forward, we have a good pipeline of additional high-growth opportunities. At the end of the fourth quarter, the company had $1.7 billion of cash on the balance sheet. At December 31, the company had no outstanding borrowings and approximately $679 million of borrowing base capacity under the ABL with the ability to increase it up to $1 billion. During 2020, we received approximately $705 million through the Public Health and Social Services Emergency Fund in both general and targeted distributions. We recognized in the income approximately $153 million of relief funds from the CARES Act during the fourth quarter and approximately $601 million for the full-year. The remaining $104 million is currently on our balance sheet as a deferred liability, and we anticipate being able to recognize a substantial portion of that in 2021. In terms of our divestiture program, we are pleased to have completed the formal plan. From the transactions completed in the fourth quarter, we generated approximately $300 million of incremental proceeds. We continue to receive inbound interest regarding potential transactions and we will continue to assess the benefit of any future events. Moving to the balance sheet and capital structure. We made significant improvements during the year. At the end of the fourth quarter, we had approximately $12.2 billion of long-term debt and no near-term maturities. On the capital structure side, we executed a number of recent transactions. As a reminder, in the third quarter, we executed an open market debt repurchase program during which we used $143 million of cash to purchase $261 million of debt. In late October, we launched a cash tender offer, which ultimately allowed us to use $78 million of cash to repurchase $87 million of debt. And in December, we executed an exchange utilizing $400 million of cash and 10 million shares of company stock to retire $700 million of debt. Combined, these transactions captured approximately $340 million of discount on our debt retirement. Following these transactions, we extended approximately $5.7 billion of debt. In December, we extended our 2023 first lien bonds up to 2027 and 2029, and then in January, we extended $1.8 billion second lien notes to 2029 and $1.1 billion first lien notes to 2031. In the past year, we have paid off over $1.1 billion of debt, lowered our leverage by approximately 1.5 turns, and reduced our annual cash interest run rate by approximately $190 million. In the past few quarters, we have significantly extended debt maturities and lowered annual cash interest. Our next maturity now is not due until June 2024. Now, I will walk through our full-year 2021 guidance. Net operating revenues are anticipated to be between $11.7 billion to $12.5 billion. Adjusted EBITDA is anticipated to be between $1.6 billion to $1.8 billion, which does not include the potential recognition of additional pandemic relief funds. Net income per share is anticipated to be $0.00 to $0.60 per share, based on weighted average diluted shares outstanding of 129 million to 130 million shares. Cash flow from operations is forecasted at $600 million to $750 million, excluding the repayments of Medicare accelerated payments. CapEx is expected to be between $400 million to $500 million, and cash interest is expected to be $830 million to $840 million. In terms of 2021, we expect expense savings from our strategic margin improvement program to build throughout the year with more significant cost reductions in the back half of 2021. As such, in terms of the EBITDA performance for the year, we expect the cadence of EBITDA to generally increase sequentially during the year, with our fourth quarter being our strongest EBITDA quarter. Ross, I'll now turn the call back over to you.

Thanks, Tim and Kevin. At this point, we are ready to open up the call for questions. We will limit everyone to one question today, but as always, you can reach us at 615-465-7000.

Good morning. Great job, guys. When you think about this sub 6 times leverage target over the intermediate term, are you getting there? Is that more a function of margin expansion? Because I mean your margins are getting pretty close to the mid-teens right now or is there something really more on the cash flow side, like a longer-term view of CapEx? And I guess on the subject of CapEx, I just wanted to verify or excuse me just cash flow, I want to verify that the three hospitals that have already closed on January 1, is that already in your guidance and I think you said there was one more hospital there that had and I'm just curious if that was factored in either the procedure of the EBITDA? Thanks.

Sure, Frank. This is Kevin. I'll start off here. As we think about gearing below 6 times leveraged, we certainly expect to continue to grow our EBITDA and naturally grow into our capital structure and believe that we will get there through a lot of organic growth as well as some additional EBITDA margin growth. So as we think about some of the capital we're spending, the additional access points and growth opportunities we have in our markets with our core portfolio, I believe we'll get there. We'll also be generating positive free cash flow as we move out into the future and think that there are opportunities for some debt reductions through cash flow generation as well. With respect to the guidance, the hospitals that we did close already, those are all factored into our guidance at this point.

Hi, thanks and good morning. Could you just give an update on your outpatient development? I think I heard three ASCs and three freestanding EDs this year. Maybe perhaps put that in the context of the $400 million to $500 million in CapEx that's expected this year?

Hey, Josh, this is Tim. I'll kick it off and maybe Kevin can wrap it up with putting it into perspective with our total CapEx spend. But, again really pleased over the last several quarters with our advancement of our access point strategies. We've given you regular updates on our quarterly calls right now, 13 freestanding EDs with the three that we opened last year, three more in the pipeline that are scheduled to open this year. I'm also really bullish on our opportunities on the primary care side, the traditional primary care and in our urgent care and walking care centers. I’m seeing some really good lines of sight on where we can expand those access points. Generally, these are relatively low cost entry points for us in our market, so they are not overly capital-intensive at all. And then in our ASC front, again really pleased with the work of our ambulatory surgery group here at the company and partnership with our hospital leadership teams, we have three more of those scheduled to come online this year. So as we said in our remarks, we have a very active pipeline and we are working every day. I could not be more pleased with the status of the portfolio right now in terms of having these types of development opportunities and physician partners who want to join forces with us.

And I think Tim really touched on a key point here related to our capital spending. These are not overly capital-intensive type projects, so those initiatives are all baked into our capital guidance and projections, and we also have some opportunity with leasing and so forth to accelerate and make sure that we get these access points moving along quickly.

Hey, good morning guys. I guess, I'll just follow-up on Frank's question. Tim, you gave that sort of guidance of a 15% EBITDA margin and less than 6 times leverage medium-term guidance. How do you define medium-term, I guess is my first part of my question. And then as we just think about the drivers, right? I mean is this going to be mostly same-store growth or is this kind of like a shifting in the mix between outpatient and inpatient and service line mix changes and also, what kind of capital do you think you need to spend to get to that target?

Hey, Brian, this is Kevin. I'll start off here. So in terms of medium-term, we're kind of defining that as two to four years, certainly not anticipating getting there in one year but sooner than five years. So we'll define that as two to four years. And with regard to, I think a lot of it does come through our growth initiatives and some of the margin expansion. In terms of capital spending, I think what you'll see and we've talked about this in the past is our capital as a percent of net revenue has been somewhat diluted because of the divestitures. Revenue that's been in there as we get to 2021 and a year with fewer divestitures and more of a normalized run rate on revenue and just the core portfolio of hospitals, you'll see our capital spending as a percent of the net revenue of our core hospitals be much more like a normalized run rate. I think that the current $400 million to $500 million that we're estimating to spend will give us everything we need to do this year.

Hey Brian, this is Tim. I'll add on to Kevin's comments. We're preaching a lot of balance in the organization right now, in terms of where the margin expansion comes from. We are still seeing opportunities on the cost side. I mean, we're also improving our margin because we're backing it with some fixed cost with incremental revenue expansion in so many of our markets. The other part of balance that we preach is looking at opportunities on both the outpatient and the inpatient side with our transfer center, with our investments into service lines, and medical staff development and driving acuity, we think that's key to our long-term prospects. As we go through the strategic planning processes with our markets, we see just tremendous opportunities to continue to leverage that.

Great, thanks. Can you give us perhaps a sense of how the year started, just in terms of COVID and core trends? And then more recently, just given weather across the South and particularly Texas, I was hoping you could give us a little bit of a sense of whether there has been an impact there and maybe frame what that's been or how it could affect the first quarter? And if I could squeeze in just one more quick one, can you give us a little bit of a sense of the underlying assumptions baked in the guidance specifically for volume and pricing either off of 2020 or maybe that 2019 baseline? Thank you.

Ralph, this is Tim. I'll go ahead and kick it off in terms of the COVID progression. As I pointed out earlier, we had about 14,000 COVID positive admissions to our hospitals in the fourth quarter, which was a sizable increase over the third quarter. We were relatively, I'll say, spared from the way it has evolved in our markets. So as the year progressed, obviously, we felt the impact in the second quarter with the shutdown and little elective revenue as we speak of and very few COVID cases, and in the third quarter, the second wave we were a bit more impacted that is about 8,000 COVID positive inpatients in that quarter. We had a really good balance for the quarter as we shared in our earnings release and our discussions with you guys last time that we had really strong reopening efforts underway. It didn't have nearly as severe an impact on elective volumes because frankly our colleagues were able to manage that dual track program so effectively. With the latest wave, it was about 14,000 again COVID inpatient. We did see some limitations in terms of having to preserve more capacity for COVID care. We also had an increase in consumer reluctance to step into our hospitals for elective care due to COVID. Now with that being said, this quarter in particular, we're very focused on our reopening game plan to be deployed so successfully from the prior waves. Right now, we are on a pretty good run rate of getting the business back in. We have had this major weather event happen this past week in particular impacting a lot of our markets, but it gave us an opportunity to continue to work with patients just like we have in the past with COVID, and we had to, unfortunately, cancel or defer care. Lynn, do you have anything to add in terms of the COVID response or results?

No, I think you covered it well. I think there was increased activity, particularly in the fourth quarter.

And Ralph, this is Kevin. Related to your question on guidance. So how we're looking at this is in terms of coming up with the guidance. We started with a kind of bottoms-up approach. We looked at it from a top-down a number of different scenarios and really due to the variability of what may happen as a result of COVID, the current site that we have seen to start off the year and uncertainty around when the vaccination may really have some impact, we gave a little wider range. There are multiple scenarios and variables regarding volume, acuity in payer mix, and it's difficult to give a specific range on any one of those variables without really considering all of them. So I think if you just think about the midpoint of the range and the way we're thinking about it, there are multiple ways to get there with less volume and higher acuity or more volume and lower acuity and still get to the same answer.

Okay, great, thanks. I was wondering how you were thinking about labor costs for the year? I guess that there are maybe some competing or conflicting views on whether the labor shortage that you were seeing will exacerbate as the year goes on as people look to retire etcetera or whether it will get better as you don't need nurses in quarantine anymore? Could you see the snapback back in utilization? Are you expecting labor cost pressure or is that going to be a source of margin expansion you're looking for?

We have done an extremely good job of managing our labor costs this past year in terms of our productivity and taking care of our employees through the pandemic. I think there is, as we look forward, there is certainly some pressure right now on labor costs and as everyone is aware of the cost of traveling nurses. Overall, I think we'll be able to manage through the labor costs as well as continuing some of the productivity programs that we have in place, which will offset some of the labor pressures.

Hey, Kevin, this is Tim. Just to add to that, obviously mindful of the macro dynamics out there with particularly nursing staffing, clinical staffing resources. We've always put a close line on in as a company before COVID. We set up some internal nursery recruitment functions using the company's resources to support key markets where we've invested our capital and certainly need to have a ready supply of nurses and clinicians to fill that capacity. That service went throughout the COVID pandemic. In general, always focused on the retention of our nurses and always focused on recruiting and building a stronger pipeline over the long run. We are doing some on-campus nursing programs in select markets, partnering with nursing colleges to really start with those nurses early in their journey, and then bring them into our networks of care. So we'll watch that development over the next couple of years, but those are the types of partnerships that are new. We also have some long-standing relationships with nursing programs across most of our communities where we fund scholarships for faculty positions. So we're trying to stay on the front end of supporting the development of high-quality nurses.

Hi, good morning. Cases declined from January peak. So I was hoping you could provide an update for how quickly non-COVID utilization is re-entering the hospital system and maybe comment on any differences you're seeing between the commercial and Medicare populations? Thanks.

Andrew, this is Tim. I'll go ahead and kick it off. In terms of the rebound of this current wave, as I said earlier, cases peaked in mid-January. We are already active in our redeployment plan, just like we have in the subsequent waves. A little bit slower to rebound in some of our communities, largely due to some patient hesitancy. We're hearing from our providers that patients are getting vaccinated and now want to wait for that vaccine to take effect. So we say that with optimism that bringing patients back into the healthcare system, vaccinated, reducing the spread will bode well for us in the near to mid-term. But the same playbook is underway in terms of staying close to our patients. As patients have rescheduled, we've worked with physician practices, our employee practices as well as independent practices to make sure that when we have capacity, we are working those schedules to get patients back in as quickly as they're comfortable doing so. We are seeing weekly improvements in our revenue and our volumes. This week, we did have a little bit of a setback with the weather event that hit the Sunbelt, but for the most part, we are still doing that same game plan of keeping track of what's canceled and looking at extending schedules on Saturdays in many cases to be convenient for patients and providers to make up for what the weather impact has put upon us. Kevin, anything else to add?

I think the only other thing I would add and I think you captured it well there is, at this point, we've not seen any real change in the patient mix as the procedures start to come back in.

Thank you, Mike. We would like to thank everyone for spending time with us today. I would like to once again express how grateful we are to all of our employees, physicians, providers, regional presidents, and hospital leadership teams who have all been at the forefront of this pandemic, and we remain committed to providing exceptional care across all of the communities we serve. I also want to express my gratitude to our company's leadership team for demonstrating the ability to effectively plan and execute upon all of our opportunities throughout the past several quarters, which included a strong finish to 2020. This concludes our call for today. We look forward to updating you on our progress throughout 2021. And once again, if you have any questions, you can always reach us at 615-465-7000. Thanks again, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.