Q3 2019 Earnings Call

Yes. It they are done they said only bought with theater, we will conduct a question and answer session and instructions will be given at that time as a reminder, today's call is being recorded.

Before we begin to call I'd like to read the following disclosure statement.

This conference call me contains certain forward looking statements, including all statements that did not relates to older to historical or current track.

These forward looking statements are you talking to a number of known and unknown risks, which are described in heading such risk factors in the company's Form 10-K filing and other reports filed with or furnished to the Securities Exchange Commission.

As a consequence actual results may differ significantly from those expressed in any forward looking statements in today's discussion the company does not impact junction any of these forward looking statements.

Gordon Health issued a press release last night with their financial statements and definitions and calculations of adjusted EBIDTA in same facility adjusted EBITDA, including reconciliations to U.S. GAAP measurement.

A slide presentation is available on the company's website to supplement to the school.

So let's discuss today consolidate the results of corn screening for owns or Nick hospitals and results of Quorum health resources.

Steve I feel that the Anthony can excludes there were sold off the 14 facilities that have been divested or closed since the spin off through September 32019. In addition, the company filed their quarterly report on Form 10-Q last night.

All discussions today, our supplemented by the press release the earnings presentation on the company's website and the Form 10-Q .

All non-GAAP calculations this cost.

Exclude certain legal professional and settlement costs.

Charges relating to the impairment of long lived assets and Goodman.

The net gain or loss on sale of hospitals, the net loss on the closure of hospitals.

Cost associated with the transition also transition service agreements or T I see.

Changing actuarial estimates.

Siberians gossip headcount reductions and it's good that could have changed.

Please refer to the earnings presentation located on the Investor Relations section of the company's website at Www Dot Quorum health Dotcom.

For for a description and reconciliation of adjusted EBITDA and see facility adjusted EBITDA.

In a reconciliation of these non-GAAP measures to income or loss there most directly comparable GAAP measures.

With that I'd like it turned to go over to Mr., Bob Fish, Corvus, President and Chief Executive Officer Mr. Fish you May proceed.

Thanks, a lot for her.

Good morning, Thanks for joining us on today's call.

With me. This morning are Alfred Lumsdaine, or Chief Financial Officer, and Marty Smith, our Chief operating officer.

On the call today I'll discuss results from our third quarter and provide information on our revenue cycle and divestitures before turning the call over to Marty do cover.

Third quarter operating results and Alford for financial results in a discussion of updated guidance.

Despite the soft results, which I'll discuss further in a moment I'm pleased with many aspects of the progress we've made operationally during the third quarter.

Same facility net operating revenue in the third quarter was 378.6 million a decrease of 2.7 per cent compared to the third quarter of 2018.

Same facility adjusted EBITDA was $30.6 million.

These results were negatively affected by the timing of two items first compared to the prior year quarter.

We were unable to recognize $2 million in revenue from the California Hospital quality assurance fee program at our hospital in Barstow.

We received the needed information in October of this year and we'll recognize these revenues in the fourth quarter of 2019.

Second compared to the prior year quarter or EBITDA.

Results were negatively impacted by $4.2 billion as a result of a change in the timing for recognizing proceeds from the sale of property tax credits in the state of Illinois.

Normalized for these timing items, our same facility net operating revenue declined by approximately 1.1% year over year, which I will describe in greater detail in a moment.

In terms of underlying volume our results for the quarter reflect a year over year increase in adjusted admissions for the first time in six quarters.

As well as continued strengthening and patient acuity.

In particular, we experienced growth in our outpatient surgeries, which were up 2.5%.

Despite these positive trends, we experienced an estimated 8 million dollar impact during the quarter from a deterioration in our revenue cycle performance ahead of the transition of revenue cycle responsibilities to our one RCM, which began October 1st.

As of that date, we completed the transition of our Bakken revenue cycle functions and are on track to complete the full end to end transition by January 2020.

The situation in a revenue cycle activities began prior to the third quarter of this year, but accelerated as we got closer to the October 1st go live date.

We continue to remain confident any improvements that are ones revenue cycle capabilities will bring to our business and expect that the negative impact we see in the third quarter results were normalize over the next few quarters.

This recovery is in addition to the expected annual EBITDA improvement a $45 million by 2021, which we've discussed previously.

Moving on I'd like to discuss the progress should mean on divestitures.

In those terms we've announced.

At the ended the quarter the sale of Watsonville community Hospital on September Thirtyth for $39 million, a net cash proceeds.

Plus $5 million in a note receivable.

We used the cash proceeds from this transaction to pay down our term loan facility.

During the quarter. We also made the difficult decision to close Metro self Medical Center and Blue Island, Illinois.

Closing hospitalist decision of last resort and we're convinced however that it was the best solution for the company as a whole and we continue to work with a number of parties to determine the optimal use of the physical plant to benefit, but the Blue Island community.

Well, we don't currently anticipate completing additional divestitures this year.

Actively working on up to four more potential divestitures that could transact, but he ended the first quarter of next year.

With that I'll turn the call over to Marty for review of our operations Marty.

Thanks, Bob Good morning, everyone.

The high level volume and expense operating results came in as expected as Bob mentioned adjusted admissions increased 0.2% year over year net patient revenue per adjusted admission decline, 2.7% year over year, well net revenue per adjusted admission decline compared to the third quarter 2018.

When normalized for the estimated impact of revenue cycle deterioration head of the transition and the timing of recognizing revenue for board for both the sale property tax credits in Illinois, and the California age crop program net revenue per adjusted admission would've increased approximately 0.7% year over year.

Merely due to both inpatient and outpatient increases in acuity.

Our same facility admissions during the third quarter declined 5.9% year over year. The majority of this decline is attributable to our decision to close close some select a researcher Ob Servicewatch. Some continued shift in services from inpatient outpatient and an overall continued decline in Medicaid volume has it.

Percentage of our overall volume Medicaid was down approximately 210 basis points to prior year.

Same facility surgery volumes decreased 1% due to declines in G.I., primarily in one market surgery volumes associated with the close Oh, we do why its services and select termination of someone Coolidge surgeons, we have been able to mitigate the impact of this led to continued growth the other service line.

And new surgeon recruitment.

Turning to our same facility de visits we saw a 0.4% decrease year over year and visit but a 260 basis point improvement in the percentage of admissions from that Youre overall, our emergency room volumes quarter over quarter basis. This year have been very stable.

Our volume and acuity trends are reflective of the strategic decisions to term select Medicaid Mcs to rationalize negative margin service for an underperforming physicians, which began in the second quarter of 2018.

We have successfully reduced negative margin volumes and improved the overall acuity or service works as we move forward, we expect to see targeted year over year volume growth as we continue to strategically focused on growth drivers as well the underlying profitability of our service March 29 team.

Has been a stronger year for right of recruitment was 71 preferred provider side year to date, which is 20 ahead of prior year through three quarters.

Finally, I'd like to provide some color on our expense initiatives and trends during the quarter.

As we've noted on previous calls we have implemented various initiatives to reduce our costs over $20 million annually.

These initiatives include reducing corporate overhead expense lowering our cost associated with medical specialist terminating certain underperforming positions.

Lowering our supply costs.

As the end up as of the end of October we have renegotiated 13 medical specialist contract since the beginning of 29 team, including emergency physicians hospitalist anesthesia provider contracts 10 of those contracts are now active and three more will take effect in Q4.

We expect the impacts of these savings initiatives to be realized beginning in Q4 and expect an incremental 5 million dollar in cost savings relative to the third quarter.

With that I'll turn the call now over to Alfred for a closer look at our third quarter financial results.

Thanks, Marty good morning, everyone I'll start with an overview of the third quarter financial results and then discuss the revised expectations for the year.

Same facility net operating revenue of $379 million was down approximately 3% year over year from $389 million in Q3 2018.

George piece of this year over year decline was driven by the two timing items, Bob mentioned first start and ability to recognize revenue associated with the California H class six program.

Second a change and the timing of recognition for the sale of property tax credits in Illinois.

Combined these two timing items resulted in more than $6 million decrease on the same facility net operating revenue year over year.

In addition, as Bob mentioned, our third quarter revenues were impacted by an estimated $6 million that we associate with deterioration and the collectability of self pay accounts receivable.

Which we attribute to disruption ahead of the transition of revenue cycle functions to our one RCM beginning October 1st of this year.

I'll note that although this financial impact accelerated as we approach. The October one transition date, we can't say smaller impact that was present in our results during the first two quarters of the here.

And the total is more than $15 million for all of 29 team through the through the end of the third quarter compared to the same period in 2018.

Moving onto expenses same facility salaries wages and benefits were generally flat year over year. That's a result of normal wage growth that was mostly offset by employee health benefit cost reductions attributable to plan design changes.

Same facility supply expenses increased 6.5% year over year, that's primarily a result of the acuity increases that Marty mentioned, particularly as it relates to outpatient services.

Same facility other operating expenses increased just over 1% year over year, primarily from some small increases in contract labor and purchase services.

In summary, same facility adjusted EBITDA was $31 million compared to $42 million in Q3 in 2018 or a decrease of $11 million and as I've noted. This decline is more than accounted for in the estimated 8 million dollar deterioration in our revenue cycle.

Our inability to recognize that benefit from the California, aged six program revenues and then the more than 4 million dollar impact from the timing of recognizing the property tax credits sale and Illinois.

So in terms of cash flow for the quarter, our cash flow from operations was $25 million compared to $28 million and the third quarter of last year.

Cash flow from operations during the quarter included $7 million of cash costs that are associated with the closure of Metro South.

Capital expenditures in the third quarter, where approximately $10 million, which is comparable to Q3 of last year.

Our free cash flow for the quarter. Similarly reflects the impact that we attribute to the deterioration from revenue cycle management activities.

Although we've seen our cash collections improved significantly during the month of October from September levels.

We would now expect free cash flow for the full year to come in slightly negative.

Moving onto the balance sheet, our net debt at September Thirtyth was approximately $1.2 billion. This includes $778 million outstanding on the term loan and $25 million outstanding on the revolver.

Cash and cash equivalents totaled $44 million and that reflects the cash proceeds from the sale of watsonville at the end of September .

Our senior secured net leverage ratio calculated under our credit agreement was 4.49 times at September Thirtyth 2019.

We anticipate being fully in compliance with our credit agreement covenants through the end of this year.

As we look to 2020 and the step down in the secured leverage covenant that occurs at the end of the first quarter.

As we noted on our lease we plan to engage with our secured debt holders to try and ensure we remain in compliance and have sufficient flexibility within our credit agreement. During this important inflection period for the business.

Moving to our financial guidance, we are revising our full year same facility adjusted EBITDA guidance from a range of $160 million to $180 million to arrange up $140 million to $155 million.

In addition, we are revising our same facility net operating revenue guidance from a range of $1.55 billion to $1.6 billion.

To a range of 1.5 to $5 billion to $1.575 billion.

Our guidance reflects the previously communicated expected $5 million revenue benefit in the fourth quarter from the our one transition.

As well as approximately $5 million and expected cost reductions and the fourth quarter from a number of ongoing expense initiatives at our hospitals and corporate that Marty mentioned.

The size of the same facility adjusted EBITDA guidance range represents uncertainty as to the precise timing of the expected improvement and revenue cycle poor performance from the deterioration we experienced thus far in 29 team.

However, our discussions with our one give us confidence that the deterioration as temporal and can be fully recovered from in the coming quarters.

That concludes our prepared remarks with that operator, I'll open the call for any questions.

As a reminder to ask a question people need to press Star then the number one on your telephone I don't get Star then the number one on your telephone. Please enjoy your question you me prices Alky me standby lobby compiled it can many roster.

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I will first question is from the line line of Frank Morgan from RBC capital markets. Your line is hoping.

Hey, guys say Anton on for Frank I'm just.

Thank you and I'm thinking you mentioned that Medicaid volumes down a bit can we talk about kind of what may have driven that as a service line closures or whats really behind that.

That's really a combination of two things both both those items in there kind of a kind of working in tandem a we did term primarily in Illinois. Some Medicaid MC is and we continue to kind of rationalize that portfolio, just because it's either ability to pay timeliness of payment a increase into.

And I always all the things associated with some of the struggles and a lot of the Medicaid volume was embedded into some of the service lines or physician terminations that we had in particular Toby service lines and then there were few select markets, where we had some negative.

Margin volume just coming out of certain surgical programs in certain markets, where we turn providers at some point in the second half 2018, and Thats still kind of flowing through 2019.

Okay, and I guess, so that that does that come back to some of the managed care.

If I remember right you guys and put in some.

Additional resources to get managed care negotiated rates better that kind of come back to that.

Some of that I mean, we put in some new managed care resources in the first first of this year and so there's still a lot of work going on in that in that area and Theres still lot of analysis on the on the Medicaid MC goes in certain states, but some of that activity was done even prior to two.

Two rig coming on board with us.

Okay, and then how about just overall commercial commercial right renegotiations.

Overall, it that continues to be a very positive for us I think we've done a nice job. One securing contains secure some rates that are favorable and and using our strength in certain areas to continue to to bring good plan design going forward, what we what we really had covered as a lot of our plans had.

But touched in the.

A number of years and so there were some opportunities there and Rick and his team have done an outstanding job for us.

Okay, and then back on the RCM there the collections issue I mean, you say things better.

Now that you've moved over onto the Arlon platform is that.

Are you kind of back to where you were before this.

Sort of deterioration or do you think it's.

Improved from from even there prior to the deterioration, yes, so I'll speak to it into pieces and there's the Weve long talked about the expected improvement and Bob noted in his comments about the 45 million.

At full maturity that we expect to to say from a flow through and of course as I mentioned on the call today would change deterioration and Rev cycle cycle fidelity, particularly profound in the third quarter. The closer we got to the transition date.

Conversations with our one give us confidence we can fully recover from that deterioration.

But your question is how quickly.

I think it would be it's going to be or it would be early for me to speculate we see good process data as I mentioned, we've seen collections significantly improved from September Although September was a very low amount of course.

So yes, we think it's going to take a few quarters in in our conversations with our one so and again it goes to the with.

The of the range of same facility adjusted EBITDA for the year, because it's difficult to predict just how quickly and will will likely never be able to tease out what was the.

What was the expected improvement versus what was kind of I'll call that recovery piece. It will all look the same as it happens but.

From where we are of course, we would expect to to achieve more than the 45 million that we quoted because of that in previous calls because of the deterioration that we've seen I hope that makes sense, but the short answer is we think it's going to take a few quarters.

I think I got it thanks.

There are no further questions at this time I will now turn to go back to Mr. Bob Fish. Please go ahead.

Thanks, operator.

Thanks for joining the call everyone and we appreciate your interest in corn belt.

We would have a great day.

This concludes today's conference call. Thank you all for joining you may now disconnect.