Q1 2022 Community Health Systems Inc Earnings Call
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Good day and thank you for standing by welcome to community Health Systems' first quarter 2022 earnings call. Please.
Please be advised that east conference is being recorded.
I would now like to any conference over to your speaker for today, Mr. Roscoe Vice.
Vice President of Investor Relations.
Thank you Jay Good morning, and welcome to community Health Systems first quarter 2022 Conference call. Joining me today are Tim Henson, Chief Executive Officer, Dr. Lynn Simon President of clinical operations, and Chief Medical Officer, and Kevin Hammons, President and Chief Financial Officer.
Before I turn the call over to Tim I'd like to remind everyone that this conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts. These forward looking statements are subject to a number of known and unknown risks, which 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.
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.
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 loss or gain from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses with that said I'd like to turn the call over to Tim hedge.
<unk> Chief Executive Officer, Thank you Ross.
Morning, everyone and welcome to our first quarter conference call.
19, <unk> dynamic and specifically a surge in cases due to the omicron barrier impacted our results in the first quarter.
We provided care for approximately 13000 inpatient culvert admission 12% of our total admissions in the quarter.
Search was most acute in January when our hospitals care for approximately 9000 patient Covid cases are about one quarter of total admissions for that month.
While the acuity level of the Omicron variant was below the delta away a highly contagious nature of omicron affected our workforce with more staff members and health care providers, requiring time off due to exposure or illness. The.
The need for contract labor increased for our hospitals at the same time other healthcare systems also needed labor support driving up the cost of temporary staffing.
And even though we are intently managed capacity longer length of stay was unavoidable for some patients and in some markets.
Longer to discharge patients to various post acute services, such as skilled nursing facilities and home health because both organizations for dealing with their own labor challenges.
All of this negatively impacted elective volumes net revenue and EBITDA during the first two months of the year.
March was a much stronger month for the company as covered admissions decline and non COVID-19 demand accelerated for both inpatient and outpatient care and across most service lines.
As a result, we finished the quarter with much stronger net revenue and meaningful improvements in adjusted EBITDA corporate cases currently remained level and we have carryforward marches improved volume trends and to the second quarter.
With the exception of contract Labor expenses were well managed contract labor expense increased sequentially versus the prior quarter and the contract labor was higher than we anticipated.
And unlike prior Covid waves, where we saw contract labor expense moderate relative quick relatively quickly the expense remained elevated throughout the first quarter.
Contract labor was necessary as we upheld our commitment to provide essential health care services in the communities, we serve and remain available for the patients who rely on us.
Even with the difficult labor environment. We also believe that it was critically important to maintain momentum from recent capacity expansions and high acuity service line investments.
They remain key to CHS as long term strategic growth and success.
Currently our contract labor usage and rates are moving lower and contract labor expense has continued to decline.
We are very focused on executing upon opportunities to further reduce contract labor expense moving forward.
Specifically, we have recently completed the full rollout of our centralized nurse recruitment function with a specialized team of more than 60 clinical recruiters driving this work this.
This company less service utilizes digital marketing tactics and coordinated processes to expedite the recruitment process. We are also focused on repatriating nurses, who had left for travel or other opportunities.
As a result of these tactics are nurse hiring rate is up 10% compared to the prior year.
To further increase the number of qualified hiring candidates all of our hospitals have relationships with nursing colleges and their market.
And we are focused on deepening those partnerships.
Also sponsoring a new generation of nurses through our partnership with Jersey College, which enables nursing students to integrate into our health care facilities during their respective training programs.
We have commenced a number of cohorts already across four distinct campuses and we're seeing very strong applicant pools for each new class of students.
After a full rollout of 10 campuses and is complete in 2023, we expect to graduate approximately 1000 nurses annually through the Jersey College partnerships.
This week, we are excited to announce a significant investment into new and enhanced benefits for existing employees, which are designed to help team members eliminate student loan debt faster pursue additional professional education and advance their careers within our organization.
We expect this investment will further improve employee retention and satisfaction and support their career advancement for years to come.
We also believe that the enhanced benefit program will support recruitment efforts as well.
Now to our markets, we remain optimistic about the growth potential of our portfolio.
We operate in 48 distinct markets with more than 1000 sites of care and we are intently focused on building a comprehensive health care delivery systems offering the right blend of both inpatient and outpatient services.
During the first quarter, we added two new afcs once freestanding emergency department, and new behavioral health beds to the mix.
Our health care systems are in areas with attractive population and economic growth.
Looking at recent 2021 U S census data approximately 30% of our hospitals are in or adjacent to the 60 fastest growing counties with more than 100000 residents.
These areas include our hospitals across Florida, including the Western portion of the state in the Panhandle, and parts of Alabama, including Huntsville, and fully across northwest, Arkansas and parts of Texas, such as Cedar Park in the after market and like Grand Prairie and in other markets as well.
Continue to we continue to invest in growth projects, which includes building higher acuity service lines, and a new path and procedural suites and expanding our ambulatory surgery freestanding eds, and urgent care and walk in care footprint.
Our development pipeline is robust and our capital investment plan remains in flight.
Physician recruitment remains a cornerstone of our growth strategy, we are adding primary care and specialist providers align to the unique needs and growth opportunities of each health care system. During the first quarter on a same store basis, we increased the number of newly signed position, 11% over prior year and by more than 30% versus.
Our 2019 pre pandemic baseline.
As we move forward, we expect healthcare demand in our markets to grow and we are well positioned to serve more patients and capture more market share across the portfolio.
While the first quarter did not meet our expectations due to a number of the challenges I mentioned earlier, we remain focused on achieving our medium term and long term goals.
In March and April we have seen a number of key metrics incrementally improve including net revenue and volume along with reductions in various expense categories, including contract labor and premium pay we.
We expect these improved operational trends to continue as we capture healthcare demand leverage recent investments and appropriately manage our costs.
Finally, before turning the call over to Kevin I want to thank the employees physicians and our hospital leadership teams for rising to the challenge during the omicron surge and for always making quality patient care is our top priority.
Kevin I will now turn the call over to you to cover a number of financial topics, including our updated guidance.
Thank you, Tim and good morning, everyone.
As Tim highlighted our first quarter results were negatively impacted by Covid.
As the surge receded in Covid cases declined operational and financial results improved and we finished the quarter with positive momentum.
Our investment in labor, although coming in at a higher cost allowed us to make further progress around our strategic initiatives and strategic margin improvement program, which we believe will continue to benefit the company into the future.
Switching back to the first quarter net operating revenues came in at $3 billion $111 million on a consolidated basis.
On a same store basis net revenue was up three 8% compared to the first quarter of 2021.
This was the net result of a three 2% increase in adjusted admissions and the 0.5% increase in net revenue per adjusted admission.
Adjusted EBITDA was $409 million.
During the first quarter, we recorded approximately $47 million of pandemic relief fund with.
With approximately $82 million recognized in the prior year period.
Excluding pandemic relief fund adjusted EBITDA was $362 million.
With an adjusted EBITDA margin of 11, 6%.
Switching now to expenses I am going to highlight two expense bucket.
First of which is non labor expenses.
And the second is labor expenses.
In terms of non labor related expenses. This category include supply costs as well as vendor related expenses, such as insurance utilities and a host of other purchase services and fixed costs on.
On a year over year basis.
These non labor expenses were well managed as the cost declined approximately 120 basis points year over year as a percent of net revenue.
As a result of our margin improvement program and good expense discipline, we have very effectively manage non labor expenses throughout the pandemic period.
Holding absolute dollar spend flat offsetting growth both from inflation and expansion.
On the flipside, however, labor costs increase both sequentially and year over year, primarily due to higher contract labor usage and rates.
During prior Covid wave, we had seen contract labor usage and rates declined relatively quickly following a COVID-19 surge. However, following the delta wave in the fourth quarter and the Omicron peak in January contract labor usage and rates remained elevated throughout the remainder of the first quarter.
In terms of contract labor.
During the first quarter of 2022, our contract labor expense was approximately $190 million.
This was up year over year from when it was approximately $70 million in the first quarter of 2021.
And also higher sequentially from when it was approximately $140 million in the fourth quarter of 2021.
It's worth noting that our contract labor costs have declined sequentially during the second and third quarters of 2021, but if now increase during the past two quarters.
Although we anticipate contract labor to remain elevated and to cause some near term headwinds on our progress our contract labor usage and rates are declining in April and we expect this to continue to decline throughout the remainder of the year due to lower Covid case, count coupled with a number of the internal initiatives that Tim walked through earlier.
<unk>.
Turning to cash flow.
<unk> flows provided by operations were $101 million in the first quarter of 2022.
Changed from the prior period excluding.
Excluding repaid Medicare accelerated payments made in the first quarter of 2021 cash flows provided by operations were $119 million for the first quarter of 2021.
The comparison versus the prior year includes the impact of Medicare accelerated payments, just mentioned as well as working capital changes as a reminder, all outstanding Medicare accelerated payments were repaid at the end of 2021.
Now receiving 100% of Medicare fee for service reimbursement.
Moving to Capex for the first quarter of 2022, our Capex was $97 million compared to $105 million in 2021.
In terms of liquidity.
We have no outstanding borrowings under the ABL with $897 million borrowing base capacity.
So at the end of the first quarter, we had $460 million of cash on the balance sheet.
During the past two years, we've made significant improvements to our balance sheet, because we have reduced our annual cash interest by approximately $230 million and lowered our leverage by two turns.
And we now have no debt maturities due until 2026.
At the end of the first quarter the company's net debt to EBITDA was six two times.
We remain focused on further lowering our leverage and increasing our free cash flow during the next several years.
Now I'll walk you through our updated full year 2022 guidance.
Net operating net operating revenues are anticipated to be 12, six to $13 1 billion adjusted.
Adjusted EBITDA is expected to be $1 $775 million to $1 billion $925 million, which is $50 million lower than our prior range net.
Net income per share is anticipated to be 75.
The $1 30 based on weighted average diluted shares outstanding of 133 million to 134 million shares.
Cash flows from operations is now anticipated to be $900 million to $1.050 billion Capex is expected to be 500 million to $600 million.
And cash interest is expected to be $820 million to $840 million.
In summary, despite progress in a number of areas our first quarter financial performance did not meet our expectations. However, we exited the first quarter with strong momentum and we expect to deliver improved financial and operational performance moving forward.
As we think about the remainder of the year, we expect adjusted EBITDA to improve sequentially during the balance of the year with the fourth quarter of 2022, being our highest adjusted EBITDA quarter of the year.
Ross at this point I'll return the call back to you.
Thank you Kevin and thank you Tim at this point, Jay we are ready to open up the call for questions. We will limit everyone to one question. This morning, but as always you can reach us at 6154 657000.
Thank you and as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad do we do a question. Please press the bounce.
Standby, while we compile the Q&A roster.
Our first question comes from the line of EQT Rice of Credit Suisse. Your line is open.
Good morning, everybody, it's Nick on for a J today, thanks for taking the question.
It looks like surgery growth was pretty strong in the quarter, even with homochrome impacting they're really part of that can you talk about the dynamics you saw there in terms of inpatient and outpatient surgical growth and how much of that outpatient growth.
Seizures that have moved from more of an inpatient to outpatient setting.
Great. Nick This is Tim I'll go ahead and start this off.
Very pleased with our ability to grow surgeries are both sequentially and on our baseline 2019 comp now at 100% of 2019, so the investments and service lines and acuity the capacity expansions. The target physician recruitment is definitely generating the results that we had expected in terms of.
The service lines that really showed the most promise throughout the first quarter and continues to be the orthopedic service line, including spine procedures. We had some growth in neurosurgery. We also had good growth and just basic general surgery cases coming back into the system in terms of the general dynamics related to the migration from inpatient.
Outpatient consistent with our peers in the industry.
We are seeing more and more cases, new to the ambulatory care setting, which is creating some some pressures on our admissions numbers, but in general the overall orthopedic service lines are growing at a really nice rates for us as we invested in projected.
Other service lines in terms of migration.
To lower acuity settings would be some of the lower acuity spine procedures shoulder procedures etcetera. So again all of that is in flight now to make sure that we're positioned well for that migration as we've been reporting to you. We are investing in a broad number of ambulatory surgery partnerships the majority of them de novo or.
Majority in consolidating but even a small number of minority interest in some markets, where we can find that that fit and make that work for us. All we remained very focused on building out the continuum of care on both the ambulatory and.
On the inpatient side of the business.
Thank you next question comes from the line of Ben Hendrix of RBC Capital. Your line is open.
Hey, guys. Thank you very much I wanted a quick question on <unk>.
On the margin progression through the quarter kind of based on your slide eight it seems like that would that would imply kind of seven 5% margin context through January and February and then kind of a.
Strong $18 five or so in March.
Some timing SKU in there, but just kind of wanted to get an idea of where youre thinking.
Kind of that the baseline margin is heading into the second quarter.
Given that kind of that $18 six in March versus your intermediate and longer term targets.
Just trying to size up where you are with regard to this targets. Thanks.
Sure. Thanks, Ben This is Kevin and I will take that one.
The purpose of this slide a couple things that we wanted to point out.
One to be clear that Covid is not a margin driver for the business and as you can see.
During the peak.
<unk> of Covid, we were not.
Not creating a lot of EBIT.
EBITDA.
The other thing we wanted to point out is we did get traction and we are gaining momentum.
We exited the quarter now in a normal March March is typically the highest EBITDA quarter and margin of the first.
Our month of the first quarter.
Being that there are more.
These days.
More business days during the month of March and if you think about fixed cost being somewhat.
Fred evenly month to month, you do have more revenue in the month of March.
Being said, we expect to get.
Our margin back in line with what we had projected and what our guidance is.
In line with where we had exited the year in 2021.
Thank you next question comes from the line of Brian <unk>.
Of Jefferies. Your line is open.
Hey, good morning, guys its Jackson on for Brian .
Yes.
I appreciate all the color and quantification on contract labor and sort of how you're thinking about progression throughout the year I guess when we look at.
The move into 'twenty, two guidance right revenue, maintaining the revenue guide and pulling down EBITDA little bit as we think about those medium term targets.
How are you feeling about the out years beyond 'twenty two does it seem like there is any structural change on contract labor that could.
Extend further or are we still feeling good about the medium term targets.
We still feel very good about the medium term targets and believe that we're going to achieve those.
<unk>.
As I mentioned earlier, we did have some very good momentum.
<unk> achieved a lot of our initiatives during the first quarter all of that being offset by the higher labor costs, but we did make good progress not only on some top line initiatives.
Gaining momentum on some of our capital investments that we've made we've improved our reputation our patient experience all the things that we made.
And investment with this labor.
Cost to do that we achieved we also had very good.
Non labor expense management all of those things as we get past. This current labor headwind, we believe will set us up well to achieve those.
Near term within two years and medium term targets that we have out there.
Yes.
Thank you next question comes from the line of Kevin Fischbeck of Bank of America. Your line is open.
Hey, great. Thanks, maybe just to kind of follow up on that question I think that the.
The big question hospitals, generally, but obviously you guys are giving longer term guidance is about the margin sustainability.
Any more color you can provide there I guess in particular.
Given the pressure on labor so far this year and then unexpectedly.
Unexpectedly coming in higher why shouldn't we be expecting longer term labor pressure and margin compression.
Versus kind of.
Still being on that same track that you expect it to be at a quarter or two ago when labor wasn't quite the same issues. This year.
Kevin a couple of things I'll start off and Tim feel free to jump in.
As we continue to.
And a focus as we said our balanced approach of organic growth in our market capital investments in our markets and margin improvement program, we believe.
In the longer term.
We will be able to kind of step over some of these labor issues and the increased rates that we're seeing both unemployed labor and contract labor, we certainly expect the contract labor situation to moderate.
And we're already seeing.
<unk>.
Some relief I think I would say on the employed labor or at least getting to the point where sequentially. We did not see.
Labor inflation rates remained relatively flat sequentially. So although we saw last year, some higher labor inflation on employees that were not seeing that continue into the earlier parts of this year.
We think theres a lot of.
Room and runway on our margin improvement program to continue to gain efficiencies.
To make progress on some of our supply chain initiatives.
That will help drive down costs and as I pointed out with our non labor.
Related expenses, we actually reduced staff by 120 basis points year over year during the quarter. So we did get good traction and we think all of that.
Leads to our confidence in our ability to kind of hit our longer term goals.
Yes, Kevin I'll jump in this is Tim I agree with everything Kevin said.
Other note I'd add understanding that the labor pressures may take a little bit longer to moderate than we had expected. There are other things in our control just in the operations and one of them being that the length of stay management are focused on capacity optimization and being able to drive down the length of stay appropriately back to its historical levels.
Assuming there'll be some easing in the post acute acute care sector as well as they resolve their staffing challenges that frees up our beds for inbound traffic. We did have increased declines or patients we weren't able to accept through our transfer center in the first quarter, because we were running at higher capacity.
Even with the contract labor. So we do need to stay focused on reducing that that length of stay. So I think we call capacity optimization in terms of our mid and long term prospects for the labor pool, the nursing labor pool, I mentioned, a centralized nursing recruitment team that now supports a 100% of our hospitals, we have much better and.
Site and resources available to recruit nurses into our health care delivery systems and as I said, we're seeing some good progress with hires on a net higher basis. We're all seeing and also seeing improvements and then at hires are based upon a calculation of hires less terminations or resignation.
Seen that moderate as well so there is some improvement sequentially and over prior year in terms of.
Net hires that were saying to help us move through some of the some of the vacancy rates that we're experiencing right now the other thing I'll mention is the investment we announced this week into and to our employees for the further meant of their education and to help them pay down their student debt, we think that does create.
Stifle investment into our workforce that should improve retention and also will help us.
We recruit more more employees and repatriate those that may have left us for a travel assignment. So we're very focused on direct outreach to those individuals who may have left our health care systems and then the last thing I'll say is we are seeing some improvements in the international nursing pipeline I'm seeing increased orders being filled and being able to onboard.
Our new international nurses, which is another component of helping us rebuild a really solid and stable internal workforce.
Thank you next question comes from the line of Josh Raskin of Nephron Research. Your line is open.
Alright, Thanks, just to clarify on the labor expenses and apologize for staying here, but your overall margins in the quarter. Excluding grant income were down 210 basis points and you said non labor cost improved by 120. So is it just simply labor as a percentage of revenue.
All of the buckets was up 350 basis points year over year, and then how much of that is base labor versus contract paper.
Yes.
Matt is right I believe Josh.
I don't have Ellen do math here on the phone for you.
But I think as we've said and I think we've given the components, where you can do that our contract labor expense was $190 million.
In the quarter compared to $70 million in the prior year.
And Thats included in other operating expenses.
So we had $120 million increase just in contract labor expense year over year.
And that was $50 million increase sequentially from the fourth quarter.
Thank you next question comes from the line of Keeton Cazorla CD. Your line is open.
Alright, great. Thanks, I wanted to ask about payer mix in the quarter, maybe can you help frame how payer mix developed between COVID-19 patients and non COVID-19 or core patients on a year over year basis, and how you expect core payer mix trend for the rest of 'twenty, two including assumptions around the impact of the resumption that Medicaid redetermination.
And then if I could just squeeze one more in here you didn't change capex guidance, but I guess in context of this labor environment does it change how you're thinking about the pacing or timing of future capital deployment priorities just specific to service line build out our investment equipment at this juncture.
Yes on the payer mix question. So on non Covid business, we did not see any material change in payer mix.
But on Covid related business during the first quarter, we did see.
A much higher percentage of Medicaid and self pay patients presenting themselves.
As Covid cases.
Going back Theres been a lot of movement in Covid cases, among payer mix in the early waves. If it's primarily Medicare as it was affecting an older population than during Delta. We saw the average age of the Covid.
Emissions come down and we saw a higher.
Our commercial business and Covid.
With omicron, we saw higher Medicaid and self pay.
Kind of going forward I think.
Again, since we're not seeing a big change in payer mix.
<unk> two non Covid business, we would kind of anticipate that to stay relatively the same moving forward.
In terms of your question around Capex.
We did not change the capex guidance.
But we are focused on continuing to make sure that we generate positive free cash flow. So we will continue to manage.
Both our cash flow from operations as well as our Capex.
And they kind of interconnecting interconnection between those two.
As it relates to labor, we certainly don't want to get out ahead of ourselves and spending on initiatives, if we can't staff them.
So we're certainly cognizant of that and we'll be working closely not only with our recruiters and managing our staffing levels, but to make sure that we're opening these initiatives and some of our larger projects. When we are able to staff them. So that we get the highest return.
<unk> possible.
Thank you our last question.
<unk> comes from the line of Stephen Baxter of Wells Fargo. Your line is open.
Yes, hi, thanks.
I was hoping you could talk a little bit about the non labor expenses in a bit more detail maybe with some specificity around what the drivers are there obviously, it's been a huge driver for the company given the size of the company has slowed down a little bit over the past few years I just wanted to get a sense of what the remaining key opportunities you have when you are and then it does feel like something on the non <unk>.
Labor expense, but potentially is getting better and the balance of the year, maybe than what you thought if youre thinking that you can basically hold the rest of the year from an EBITDA perspective, despite the expectation of contract labor just would love to understand that dynamic better. Thank you.
Sure.
And we've mentioned our margin improvement program, a number of quarters now largely focused in supply and purchase service areas.
Continued to make some improvements in our national contracting over a number of supply areas.
<unk> commodities.
We're purchasing.
And continue to get traction as we.
Renegotiate contracts consolidate vendors and so for similarly in the purchase service side, we've made improvements in how we are purchasing some of these services being able to consolidate among vendors to get better pricing.
Also had a reduction in some of our insurance cost as we think about and it was we talked about improvements in quality over the past several years.
Our quality program had gone back a number of years.
That is all benefiting us in terms of malpractice and professional liability and we're starting to see some of that.
Run through there is a pretty long lead time on a number of these claims but certainly expecting.
We're seeing that benefit now run through our insurance expense and seeing declines in insurance expense.
We've also as we have cleaned up a number of our.
The litigation cases.
You can see as you read through our public reporting we do not have any large litigation claims out there right now we're seeing a reduction in legal expenses. So all of that as we add together. We've also made had some reduction in rent.
And lease cost.
Over the current period, so all of that leading to improvement in these non labor expenses going forward again further focus as we are focused in a number of those areas as well as others that we will continue to get traction specifically around supplies.
A number of our contracts are multiyear contracts. So we're not able to attack all of those in any single year. So there's more of those contracts anniversary.
Have further opportunities to.
Negotiate pricing going forward.
Thank you we will now turn the call over to Mr. <unk> for closing comments.
Great. Thanks, Jay and thanks to everyone for spending time with US today, while the first quarter presented a number of inherent challenges. We remain focused on the opportunities that lie ahead. We are confident in our portfolio convinced that our strategies will produce strong results and we look forward to delivering long term sustainable success.
Across our organization are fulfilling our purpose of helping people get well and live healthier. Thanks to more than 66000 people, who have chosen to make that their top priority. Every day, we look forward to updating you on our progress as we move forward and work diligently to achieve all of our goals.
If you have any additional questions you can reach us at 615 465 7000, Thank you and have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
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