Good day and welcome to the Community Health Systems, Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, signal a conference specialist by pressing the star key followed by zero. Please note today's event is being recorded. I would now like to turn the conference over to Anton Hie, Vice President, Investor Relations. Please go ahead.

Thank you, Rocco. Good morning, everyone, and welcome to Community Health Systems' first quarter 2025 conference call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer, and Kevin Hammons, Chief Financial 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 and 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 have also posted a supplemental slide presentation on our website. All calculations we will discuss today exclude impairment, gains or losses on the sale of businesses, and expense from business transformation costs. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Thanks, Anton. Good morning, everyone, and thank you for joining our first quarter 2025 conference call. We ended last year with very strong volume growth, and we were pleased to carry that momentum forward into 2025. For the first quarter, same-store admissions increased 4%, same-store adjusted admissions increased 2.6%, and on a same-store basis, net operating revenues increased 3.1%. We have been pleased with the demand for health care services across our core portfolio markets. The first quarter growth was driven by an outsized impact from a heavier flu season than the prior year quarter. Additionally, we continue to realize returns on targeted capital investments and expansions and the benefits of our strategic and operational initiatives, including capacity management, transfer center operations, service line development, and growth in our physician practices and other outpatient types of care. We are especially pleased with our progress towards our target of $1 billion plus in divestiture proceeds which we plan to use to reduce debt and improve the company's leverage. Since our last quarterly earnings call in February, Community Health Systems, Inc. completed the previously announced divestitures of ShorePoint Health System in Florida and Lake Norman Regional Medical Center in North Carolina as well as the unannounced sale of our 50% ownership interest in Merit Health Biloxi. Last week, we announced plans to sell our 80% interest in Cedar Park Regional Medical Center in Texas to the current joint venture partner, which we expect to close in late second quarter or early third quarter. While divestitures are not yet complete, we expect that activity to slow down substantially as the year goes on, enabling us to fully focus on further growth opportunities across our core markets. Yesterday, we announced debt refinancing and buyback transactions that will further reduce leverage and improve our maturity profile. Kevin will cover that in more detail in a few minutes. Now, I'd like to touch on some of our strategic objectives moving forward into 2025. This year, we are highly focused on three foundational areas essential for every health care provider. First, delivering high-quality care and exceptional patient outcomes. Next, ensuring operational expertise and rigor in every market. And finally, demonstrating financial discipline and performance. We are making progress in each area and have very specific activities underway to advance in these critically important functions. Next, we have been strategically developing both acute care and ambulatory services including our acquisition of ten urgent care centers in Tucson late last year as well as incremental investments in ASCs, and we have added new freestanding EDs to the portfolio too. In each Community Health Systems, Inc. affiliated health system, our ability to balance acute care hospital services with ambulatory sites of care leverages the unique benefits of each care setting to create comprehensive service options for our patients. We believe this approach, which we have been pursuing for nearly a decade now, further positions us well for the future of health care delivery. And we continue to invest in innovation including AI, emerging technologies, and partnerships that advance patient care, support our workforce, and relieve administrative burden. As the year goes on, we will highlight some of these areas more specifically and share the progress we are seeing. Before turning the call over to Kevin, I want to acknowledge the fact that health care providers are currently facing a number of uncertainties. Navigating any potential changes that may come out of Washington in the weeks and months ahead makes planning more challenging. But our team is closely following these developments and advocating for policies that maintain and strengthen our health systems. And all health care delivery systems to ensure Americans will have needed access to essential health services. As we complete the first quarter, I want to express my appreciation to our team, leaders across our organization, our physicians, nurses, clinicians, and caregivers, and all of our support teams sharing the commitment to help people get better and live healthier, and for that, I am grateful. Now let me turn the call over to Kevin Hammons, who will offer more information about the first quarter and the year ahead.

Thank you, Tim, and good morning, everyone. As Tim mentioned, we have made progress across many fronts, so before walking you through operating results for the quarter, which were generally in line with expectations, I would like to provide a brief update on the progress we made in continuing to position the company for future success, particularly through opportunistic divestitures and management of our debt. In early March, we completed the divestiture of ShorePoint Health System in Florida, and on April 1st, closed on the sale of Lake Norman Regional Health System in North Carolina. Total gross proceeds for these two transactions of $544 million were received and recorded in the first quarter. Last week, we announced an agreement to divest 80% ownership in Cedar Park Regional Medical Center to the minority partner Ascension Health for $460 million, which we expect to close late in the second quarter or early in the third quarter of 2025. Completion of the Cedar Park transaction will bring the total in-year proceeds to just over $1 billion. Consistent with our commentary last quarter and along with an additional potential divestiture now in advanced discussions, we could exceed this target materially. Each of these transactions reflects attractive double-digit multiples on trailing EBITDA, leading to meaningful deleveraging and increased shareholder value. Last night, concurrently with earnings results, we announced the issuance of $700 million in new 10.75% senior secured notes due 2033, with the proceeds to be used to redeem all $700 million of our outstanding 8% senior secured notes due 2027 at par. Additionally, we have commenced a cash tender offer for all of the $626 million outstanding 6.875% senior unsecured notes due 2028 at a price of 75, utilizing cash on hand and availability under our revolver to retire these notes. These transactions will further reduce the company's net leverage, improve our maturity profile, and enhance shareholder value while not meaningfully affecting free cash flow. Furthermore, we are getting all of this done despite the recent dislocation in the capital markets. At quarter end, net debt to trailing adjusted EBITDA was 7.1 times, improved from 7.4 times at year-end 2024 and 7.9 times at year-end 2023. Now turning back to operating results, in the first quarter of 2025, we saw continued momentum with strong overall volume trends and cost controls across most categories, leading to financial results that were generally in line with our expectations and representing a solid start to the year. The continued strong demand in our markets led to same-store admissions growth of 4% year over year, adjusted admissions up 2.6%, and ED visits up 2.4%, while same-store surgeries were down 3%. Same-store net revenue per adjusted admission was up 0.5% year over year as rate growth from commercial plans and the Medicare fee-for-service annual update were partly offset by unfavorable shifts in payer and acuity mix, as well as declining Medicaid rates. Adjusted EBITDA for the first quarter was $376 million compared with $378 million in the prior year period, and margin was 11.9% versus 12% in the prior year period. The impact of payer downgrades and denials remained stable in the first quarter of 2025 relative to the prior quarter, reflecting our ongoing utilization management efforts and physician advisor program. However, that benefit was erased by the delays in payments under certain state supplemental programs. Money is now flowing from these programs, so we believe we are on track to meet our annual cash flow guidance. With our enterprise modernization initiative, Project Empower, we continue to implement new workflows to generate savings opportunities and gain new insights into our business as the Oracle environment further hardens. I believe our stabilization is on track, and I am confident in the value this project will produce for the company. As it relates to the 2025 financial guidance, we are maintaining the outlook that we provided in February. Consistent with prior practice, we have not considered in our guidance any additional divestitures beyond those that have already been announced, and we have also not included directed payment program reimbursement for New Mexico or Tennessee as those programs have not yet been approved by CMS for 2025. We do not have any update relative to either of those programs, but still expect their eventual approval. Recall, we believe if those programs are approved, they would add an incremental $100 to $125 million to our annual guided run rate of EBITDA. This concludes our prepared remarks. So at this time, we will turn the call back over to our operator Rocco for Q&A.

Thank you. At this time, we will pause for a moment to assemble our roster. And today's first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning guys and congrats on the quarter. Maybe, Tim, as I think about, you know, just the volume performance here, and balancing it, obviously, with the revenue per adjusted admission, I think that is mostly flu and the margins. I mean, just curious how you are thinking about where the business can go going forward, both from a volume perspective and your ability to manage or flex through the cost structure. And, also, any thoughts you can share with us on how you are thinking about tariffs potentially impacting your supplies and other input costs that you have to deal with.

Sure, Brian. I will kick that off, and I will turn over to Kevin to touch on the tariff question. In terms of the quarter and the flu impact, we, you know, we did see, you know, an outsized impact from the flu as I commented on earlier. It did have, I think, some squeeze effect on some of our lower acuity surgery volumes in the quarter, largely on the outpatient side. You know, due to either provider illness, staff illness, or perhaps patient illness. We also are tracking to see if there are any consumer changes in terms of the reset of co-pay and deductibles and their willingness to take or receive care with the reset of those deductibles. We are tracking that very closely. But in general, in terms of how the core book of business performed, excluding the flu impact, we are really pleased to see so many strong signs of success across the portfolio. We had really strong EMS volumes with gains in trauma. So it was not all related just to basic influenza-related illness volumes. We also saw strong physician practice visits in both primary care but also in our surgical and procedural specialists. Good growth in our cardiac service line as it relates to procedures in our cath labs, particularly higher acuity cardiac service lines as we continue to invest. And then we also saw an outsized growth in our robotic surgery case loads again, reflecting our investments into some new advanced platforms across various robotics platforms out there. Again, in terms of the durability and the investability in our markets, to attract and grow new lines and higher levels of business, we still see that line of sight as straight and narrow through the portfolio. The other thing I would point out is transfer center continues to perform really, really well and provide, you know, basically daily insights as to where we can go next to continue to invest. Whether that be in service lines or technology or new capacity. We still see growing opportunities throughout the portfolio, which lets us build into future quarters and future years. And then the last thing I would point out is just in the ASC space. Despite the drop in some of our lower acuity cases, primarily GI, we did have another strong growth quarter in our ASC environment as we continue to incrementally add one to two ASCs per quarter. So we still see durability for the long run as we diversify the mix of surgeries happening in various sites of care across our markets.

Brian, I will touch on just a couple of other points of your question. In terms of expenses, you know, we feel that even with some of the softness resulting from the flu, we still had very strong inpatient admissions, and we were able to control our expenses with the added load of inpatients. And we believe that we will be able to continue to maintain and control expenses throughout the year. We also think that there are some tailwinds for us as we continue to stabilize our new ERP and gain insights into the business, and see there, you know, some tailwinds being able to take out some additional costs. Relative to tariffs, you know, just a reminder, we are a member of HPG, our group purchasing organization. Approximately or in excess of 70% of our supplies are purchased through the GPO. With that, we have fixed pricing. Typically, contracts are three years through the GPO, so we have some price protection there. Approximately half of our purchasing through the GPO is domestic purchasing, which is so would not be subject to tariffs. And then, you know, beyond that, it is a mix of countries. Less than 5% of our purchases are from China, which would have the most risk, I think, in the current environment relative to tariffs. So it is a very small part. And again, the excuse me, the other purchasing is spread out across a number of different countries, and I think it is yet to be determined what the risk is there.

I appreciate that. And then maybe my follow-up, Kevin, is I think about the balance sheet and know, obviously, you have a refi that was announced yesterday. So just curious how we should be thinking about, number one, you called out the potential upcoming divestiture, and then maybe curious about free cash flow guidance and what is embedded and what is not in the guidance. And also just proceeds from the recent divestiture announcements. You know, Lake Norman, I know it came in on April 1st. So just anything you can share with us as we try to think about modeling the balance sheet and cash flows for the next one to two years? Thanks.

Sure. So the proceeds from Lake Norman that closed on April 1st, those proceeds were actually received on 3/31, so they were on our balance sheet. Sitting in the cash balance. As was the proceeds from ShorePoint, which were received earlier in March. A portion of that was still sitting in cash. A portion of it had been used to pay down some on the ABL. Those proceeds will largely be used to do the tender of the unsecured notes that we meant released yesterday or announced yesterday. In terms of the remainder of the year, you know, I think we are on track in terms of our cash flow guidance. Even with the additional divestiture of Cedar Park Regional Medical Center that we announced, in that, you know, taking place or anticipating closing late in the second quarter, early third quarter, I do not think it is going to have a material impact on the cash flow equation for the remainder of the year. So that is part of why we have not made any adjustments to that. And with the refinancing, you know, although we are paying a higher interest rate on the $700 million that we are refinancing, net of the impact of the tender offer for the unsecured, it will have a slight benefit in reducing interest expense for the year, but still within our guidance range.

Thank you. And our next question today comes from AJ Rice at UBS. Please go ahead. Thanks. Hi, everybody. I understand the comment on the Tennessee and New Mexico DPP programs. Are you hearing anything about whether that is business as usual or those been put on hold for any particular reason? And I know in your case, you had three states, Alabama, Arkansas, and Indiana that had some level of discussion about potentially expanding or adding a program. Any updates on what's happening with those?

Thanks, AJ. So it has really been, you know, kind of quiet. We have not heard anything specific about Tennessee or New Mexico, nor have we expected to hear anything. Best we can tell, things are moving forward. We do know that in the recent past couple weeks under this current administration, there have been a couple DPP programs approved in other states. I believe New Hampshire and Arizona were the states that programs have been approved. So it does appear that things are moving and that there is not a complete moratorium on these plans, which I would tend to believe is a positive. Absent hearing anything else. But we are just still in a wait and see. And as we sit here today, we know of no reason that they will not be approved going forward. In terms of the other states, Indiana has been discussing a program. It has passed the state house. I believe a bill has also passed the state senate, maybe with some revisions. The state legislature is still in session for another week or two, so nothing final has come out. But it is looking positive that they may pass a program in Indiana. Alabama is still early on in their discussions, and I do not expect to hear anything at this point. It is just too early to know.

Okay. And maybe my follow-up question, I'll just ask you a little bit about the public exchanges. Do you have an update as to how much of your volume and what kind of year-to-year growth you are seeing on the public exchanges this year and any updated thoughts on or advocacy that you see for extensions?

Sorry. You broke up a little bit, but I believe our net revenue from the exchanges is less than 6% of our total net revenue. We are seeing growth in that business, but it is still a relatively small portion of our total net revenue. And then in terms of advocacy for the extension of the enhanced premium tax credits for the exchange volume, I think, you know, reading the current headlines, we are very active in the advocacy efforts there. I think it is too soon to tell as to whether those will be extended beyond their current expiration. We remain very active in our advocacy efforts to ensure for the people who depend on those programs.

Thank you. And the next question today comes from Joshua Raskin with National Research. Please go ahead.

Hi. Thanks. Good morning. You guys hear us okay? It sounds like you guys are breaking up. Hopefully, you hear this. So just in response to the first question in response to an answer you gave before, can you speak more to the strong primary care and surgical specialist visits? Do you have a good sense of how much of that is sort of overall the market versus your specific initiatives? And are you seeing follow-through care, you know, after and procedures after those visits?

Sure, Joshua. Can you hear me okay? I just want to do a mic check here.

Yeah. A little in and out, but I think you are okay now.

Okay. Sorry about that. In terms of our clinic visit, again, I will speak to our employed provider base. Although we have some anecdotal information from independent providers across our health systems as well. But in terms of our employed affiliated provider base, we saw strong growth in both primary care, you know, you could argue is related to the spike in influenza. So again, not using that as our canary in the coal mine. We focus more intently in terms of how our specialist volumes were pulling through the quarter. We did see good gains in same-store and in non-same-store specialists throughout the first quarter. Again, we have been sequentially adding on to those volumes for the last several quarters, so we see it as a good read-through for long-term prospects in our markets. In terms of the procedural pull-through, in some specialties like cardiology, the growth in new patient visits we do believe did improve our cath lab pull-through within the quarter. I also mentioned some strengthening of higher acuity cardiac services. So we believe there is some attribution to the growth of those employed in the cardiology practices, for instance. We did see some slowdown in GI even though we had good practice visits; we saw a slowdown in GI procedures throughout the quarter. Again, that is the one that we somewhat attribute to perhaps timing with co-pays and deductibles resetting and summary apprehension by patients to take that elected care so early in the year until their co-pays and deductibles have been met. So we will track that one throughout the year. That was the one area of softness that we did not expect.

Alright. Perfect. And then my big question is just in terms of payer behavior, I heard you talk about sort of stability there. But just specifically around denials and pre-authorizations. Are there variations on a geographic basis, on a line of business basis, on a specific plan basis that you are seeing?

Please stay on by for a moment while we come on here. Please stand by. And we have reconnected the speaker location. Please proceed.

Alright. Can you hear us better now?

I do hear you. Yeah. We didn't hear much of the answer though. So I don't know if you don't mind starting over.

Apologies. Which one, Joshua? Was it for both the clinic visits and the denials and downgrades?

No, we heard all the procedural pull-through commentary. It was you sort of cut out after the plan behavior and, you know, segments, plan specific geography.

Sure. So to your question for denials and downgrades, we are really seeing it across all regions and across all service lines. So it is nothing that I would call out as being very specific to a payer or service line or a region, but more general in nature.

Thank you. And our next question today comes from Andrew Mok at Barclays. Please go ahead.

Hi. Good morning. You reiterated the guidance despite absorbing additional denials and medical specialist fees. I guess based on that, should we be thinking about the lower half of guidance or is there anything coming in stronger to offset those incremental headwinds?

So the headwinds, you know, related to downgrades and denials, were baked into our original guidance. We had indicated, you know, we started to see an increase in the third quarter of last year. They really stabilized in the fourth quarter and remained consistent. We will anniversary that or anticipate anniversaring that in the back half of this year. And so we did build that in to our original guidance. So I don't think that would be an incremental headwind as we think about where we're at, you know, relative to our full-year guidance. We are absorbing the additional divestiture as you indicated. You know, for the back half of the year. But it's still early. It's only after one quarter, and I think that we're, you know, within the guidance range. And, you know, we do obviously reserve the rate as we think about any future divestitures if we get anything else across the finish line. And with potentially DPPs being approved, those could all further change how we think about guidance, and we would think about updating at that point. But as we sit here right now, I don't think the one divestiture was material enough to make a change to our guidance.

Got it. And maybe just a follow-up. So it sounds like you guided for elevated medical specialist fees, but it still sounds like it is maybe outpacing those early expectations. Can you comment on the categories where you are seeing incremental specialist fee pressure? Thanks.

Yeah. So we guided to an 8 to 12% increase in medical specialist fees, so that's what we baked into our guidance for the full year. We were at 9%. So, you know, call that within the range of where we were expecting. It is a pain point and continues to be a pain point. The majority of that is in anesthesiology. Probably over 50% of the increase is in anesthesiology or 50% of our medical specialist fees. We are seeing a little bit in radiology starting to pick up. But the primary pain point at this point is still anesthesiology.

Yeah, I agree. And if I could just add on to that, in terms of our mitigation tactics for that. As you know, we built out a platform to insource hospital-based provider services successfully, managing the transition of APP to, you know, the ED and hospice side over the last, I'd say, almost two years. We've since added anesthesia insourcing to the mix. We called out last quarter one of our major markets moving that to an in-source platform. When the cost increase or the ask from the outsourced provider we believe is unreasonable, and we can in-source at a lower cost and drive better quality and value, we are doing so. We have a couple more programs that are being in-sourced already on the docket for this year. We're trying to leave some cap space, if you will, for us to be able to pivot really quickly in other markets should we get further demand that we don't believe are reasonable for outside services. We also have just begun the insourcing process in our first radiology program, leveraging again our internal expertise and skills to try to mitigate any future cost pressures or extraordinary cost pressures across that hospital-based specialty as well.

Great. Thank you.

Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question, our next question comes from Stephen Baxter at Wells Fargo. Please go ahead.

Hi. Thanks. Just wanted to follow-up on AJ's question about DPP programs. I know that there's nothing in your guidance for the 2025 components of the Tennessee or New Mexico program, but I believe there were retroactive portions of that related to 2024 if they were approved. I think towards the end of the year. Just could you remind if you recognize those in the first quarter or if not, you know, what would you expect recognition to occur?

Sure. Sure. So you're correct. There is a retro piece for Tennessee back to July 1st of 2024. That actually has not received full approval yet. So we have not recognized that component either. So that is still out there. And that would be in addition to the $100 to $125 million run rate that we've talked about on an annual basis, pending approval of that.

Okay. And then just to expand a little bit on, you know, the payer mix dynamics you discussed. You know, I think I understand some of the, you know, discussion around acuity, but I guess specifically on, you know, the lower year over year commercial mix. I mean, is that lapping the, you know, the denials and downgrade impacts, or is there something else to consider there? And then just hoping you could expand a little bit on you mentioned Medicaid rate decreases. I was hoping you could potentially flush that out a little bit.

Sure. Let me start off. And Tim, feel free to jump in. So, you know, the flu certainly, we believe, had an impact on care in the first quarter, not only on acuity but also some disruption. We also have seen, you know, a reduction in elective procedures and we're seeing more of that reduction in commercial business. And I think it's a combination of potentially the flu, but also some of the disruption in the economy, some of the discussion of recession and fear of tariffs or potential impacts of tariffs. And what that may have. When you think about your patient population, those with higher deductible co-pays and, you know, high deductible plans are probably the most at financial risk in the first quarter before their co-pays and deductibles have been met. And that's where we saw the biggest declines in elective procedures, particularly outpatient and in the elective surgeries within that commercial space.

Yeah, I agree. And the other item that's impacting the net revenue per adjusted admission, we did, because of the outsized impact of flu, I think, have some of the highest levels of medical volumes relative to surgical volumes that we've had in some time. Roughly, you know, again, 75% of our case volumes in the quarter were medical, and typically, we'd be running two-thirds. So I think there was just some dilution impact there. We did see our case mix index increase for both medical and surgical in the quarter, but overall, it kind of came in a little bit lower than the prior quarter because of that dilution impact of the higher medical, which typically runs a lower acuity index.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Tim Hingtgen for any closing remarks.

Great. Thank you, Rocco, 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.

Thank you, sir. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.