Q3 2022 Community Health Systems Inc Earnings Call

October 27, 2022

Good day and welcome to the community Health Systems' third quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing Star then zero. After today's presentation, there will be an opportunity to ask questions to ask.

A question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ross Comeaux, Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone and welcome to community Health Systems' third quarter 2022 Conference call. Joining me on today's call are Tim Hudson, Chief Executive Officer, Kevin Hammons, President and Chief Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical 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.

Listening to live broadcast of this conference call a supplemental slide presentation has been posted on 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.

That's from government and other legal settlements and related costs expenses related to employee termination benefits and other restructuring charges and gain on sale of equity interest in making healthcare LLC with that said I'd like to turn the call over to Jim Henson Chief Executive Officer. Thank you, Rob Good morning, everyone and welcome to our third quarter Conference call.

During today's call I will share highlights of some of the progress being made across our organization and I'll discuss why we believe our strategies continue to position the company for long term growth.

Despite current industry dynamics, we are producing incremental and sequential improvements in many key areas.

I'll also cover some of the adjustments, we are making in light of inflationary pressures and other factors impacting health care operation.

First I want to acknowledge and express gratitude to our health care leaders and teams in Florida, who did it.

Truly remarkable job before before during and after hurricane and.

Our presence along the west coast of Florida, including eight hospitals and more than 80 outpatient sites of care are sharp point health network, which includes affiliated hospitals in port Charlotte and punch of Florida, where most directly impacted by the hurricane.

While our facilities sustained damage our team maintained operations and continued to care for patients throughout the storm and in the aftermath they've worked around the clock to ensure our emergency surgical and other services would be available to their community.

For several days short point health was functioning at the sole health Corp, healthcare provider within a 30 mile radius, while sharepoint provided emergency in acute care services, we experienced significant disruption to elective procedures, which continued into early October .

Work is ongoing to restore full operation, including one affiliated and independent physician practices.

One other important note we are pleased with the progress we've made across the capital structure. During the quarter, we took additional steps to improve our capital structure with the successful open market debt repurchase program extinguishing approximately $267 million of notes outstanding during the quarter, we continued to pursue our opportunities to lower.

Our overall debt and leverage Kevin will share more details in his remarks.

Now I will turn to our third quarter results as we shared last quarter and continuing into this quarter demand for non Covid health care services has return more slowly and later than most predicted leading to softer than anticipated volumes during the middle of the year.

Moving through the third quarter, we did see volumes, especially surgery and outpatient visits picked up by mid August coinciding with the end of summer travel return to school and more normal schedules those improvements continued throughout the rest of the quarter.

In the third quarter same store admissions were down two 2% on a year over year basis, reflecting a lower COVID-19 impact as well as continued migration of certain surgical and cardiac procedures to outpatient status for.

For comparison Covid related inpatient admissions were 5% this quarter compared to 13% in the third quarter of last year.

Our focus on expanding outpatient access and volumes as well as capturing procedural cases that shifted from inpatient to outpatient classification resulted in our same store adjusted admissions increased five 2%.

Same store surgeries increased five 3% and continue to beat the 2019 pre pandemic baseline we ended the quarter with surgeries at 101% compared to 2019.

Even though we are seeing a shift of some procedures to outpatient we are also experiencing higher surgical acuity overall as we focus on service line investments.

Michael case mix increased 5% compared to the 2019 baseline across service lines category, we saw the strongest growth in orthopedics spine, neuro Gi and colorectal procedures.

<unk> volumes are rebounding versus the 2019 baseline two ended the third quarter at 99%, we continue to invest in our services and capacity freestanding emergency departments, EMS partnerships, and our marketing and outreach programs and our communities.

While improving sequentially net revenue in the third quarter declined year over year due to both lower admission and lower acuity of inpatient admissions versus prior year, which again was the COVID-19 surge period.

Inflationary pressures continue to impact operating expenses margins, while we remain highly confident in the potential of our over overall portfolio the growth in margin development opportunities in a small number of market had been hindered in this rising cost environment, we are taking swift and necessary steps to mitigate these headwinds.

During the third quarter, we accelerated efforts to adjust operations in these markets by consolidated consolidating or reducing some services or even opting to close facilities. We expect an overall positive impact from these changes as we close the year and even more long term impact moving into 2023.

Last quarter, we discussed four areas of focus for this year and next and I'd like to provide some updates now the focused areas are opportunistic growth strengthening the workforce incremental expense reduction initiatives and leveraging CHS centralized resources.

Starting with opportunistic growth through prioritize capital investments and service line expansion, we continue to add more capacity in both inpatient and outpatient services.

For example, the addition of 112, new beds and our Naples, Florida market are slated for phased opening this quarter and into early 2023, adding capacity and service to all three of our campuses.

Our new northwest healthcare housing facility opened in the Tucson market in June and volumes are ramping up nicely, there and should benefit from a favorable seasonal impact in the coming months.

We will open a new 120 bed inpatient behavioral health facility, a joint venture with Acadia and the Fort Wayne market in December and as we've mentioned before we believe JV and other partnerships can help accelerate our growth strategies in a number of markets.

On the outpatient side of the business, we continue to add new primary care and specialty practices urgent care centers and freestanding eds in select markets with a good pipeline of future development opportunities.

And we had an ambulatory surgery centers in the Tucson in Huntsville market during the quarter as we continue our focus on ASD growth opportunities.

Our balanced growth strategy will remain a central theme as we continued to demonstrate the ability to shift from inpatient to outpatient settings within our systems of care. When that is the preferred are most appropriate setting.

Our proprietary transfer center is driving admissions with strong year over year and sequential growth in accepted patient placement. However.

However, as requests replacements have increased due to staffing and capacity constraints submarkets have had to occasionally decline some inbound transfers.

We expect incremental progress as our capacity optimization and workforce development initiatives opened up more available beds in key market.

As a result, we expect volumes from the transfer center to grow further and to be a continued source of incremental high acuity admissions.

Regarding capacity optimization, our emphasis on reducing overall length of stay is also working with a 6% sequential improvement shown in the third quarter.

Finally on the subject of opportunistic growth provider recruitment enables more access and service line development. It is up 9% year to date compared to the prior year and continues to surpass 2019 levels.

Moving on to initiatives underway to strengthen our workforce, we are rapidly reducing contract labor contract labor declined each month of the third quarter and totaled $100 million in Q3 compared to $150 million last quarter.

Our centralized nurse recruitment team is generating solid results and our retention strategies are also working well.

On a year to date basis are in hiring is up 12% over last year and our retention rates have improved 300 basis points, resulting in a strong net gain in nursing ftes overall.

<unk> as we have hired more R and and other permanent workers over the past several months, we also incurred higher than normal onboarding and orientation expenses, especially in the third quarter.

Our Jersey College Nursing school relationship is expanding we just announced new campuses in Tucson, Arizona, and Scranton, Pennsylvania and in a matter of days had more than 900 potential students expressed interest.

Our first cohort of approximately 30 students in our store point market will graduate in January 2023.

When New Jersey College partnership is fully deployed we expect to graduate approximately 1000, new nurses every year.

And our investments in the pathways program, which includes enhanced tuition reimbursement and student loan repayment programs has been very well received and that is also having a positive impact on both employee recruitment and retention.

Under incremental expense reduction initiatives I've already mentioned, the service consolidation and closure activities and a small number of markets, which will reduce expenses and investments where we simply do not foresee long term return.

These were thoughtful and deliberate decisions and we have been careful not to disrupt long term growth potential while recognizing that in today's environment. Sometimes some operations are not sustainable given these dynamics.

Our margin improvement program now in its third year also continues to yield strong results and Kevin will provide more details in his remarks.

Finally, we are leveraging our centralized resources to benefit benefit all of our markets I've.

I mentioned several of our programs such as our transfer center centralized nurse recruitment and physician recruitment programs.

Other centralized programs include utilization review and case management, our patient access centers for physician practice scheduling acos and managed care contracting.

These programs continue to inform best practices and they help us to achieve efficiencies across the organization.

In closing we are pleased with many sequential improvements in the third quarter and believe this progress bodes well for the future.

We will continue to intentionally and aggressively adapt our portfolio services and operations to step over inflationary impact and other industry headwinds, which we believe will position us for better results in 2023 and beyond and we are supporting our markets with enhanced resources to accelerate growth and revenue.

Which we know is essential to addressed fixed and higher variable costs and to restore stronger earnings and margin performance.

Kevin at this point, let me turn the call over to you.

Thank you, Tim and good morning, everyone.

As Tim mentioned impacts from the topline, including lower admissions and acuity along with elevated contract labor and wage inflation continued to affect our EBITDA performance.

However, while navigating through these challenges and simultaneously focusing on future growth, we exceeded expectations in outpatient visits leading to strong year over year volume growth in adjusted admissions and surgeries.

Sequentially, we saw improvements in admissions adjusted admissions and ER visits.

We also improved length of stay.

Contract Labor expense made improvements to our capital structure maintain strong liquidity and produced positive free cash flow during the quarter.

Moving to the third quarter results net operating revenues came in at $3 $25 million on a consolidated basis.

On a same store basis net revenue was down two 3% compared to the third quarter of 2021.

This was the net result of a five 2% increase in adjusted admissions and a seven 1% decrease in net revenue per adjusted admission, which was negatively impacted by the reduction in Covid cases.

And lower non patient net revenue.

Adjusted EBITDA was $400 million.

During the quarter, we recorded $115 million of pandemic relief fund compared to $19 million recognized in the prior year period.

Excluding pandemic relief funds adjusted EBITDA was $285 million.

With an adjusted EBITDA margin of nine 4%.

As a reminder, we have not included any pandemic relief funds and our adjusted EBITDA guidance.

Further we do not expect to receive any meaningful pandemic relief funds going forward.

Hurricane and resulted in an approximate $10 million hit to the third quarter and on a sequential basis.

Closure costs and incremental healthcare provider orientations accounted for another $20 million of sequential headwinds.

So with regard to expenses on the labor expense side, combined salaries wages and benefits and contract labor expense.

Remain elevated on a year over year basis, specifically related to employee costs, we experienced an increase of approximately 5% and our average hourly rate for employees on a year over year basis, which was largely offset by a reduction in hours worked from a combination of.

<unk> adjustments lower inpatient days and conversion of employees to contract labor.

On a sequential basis baked pay inflation grew only 1%. However, an additional calendar day incremental costs associated with Onboarding, new employees and costs associated with increased physician starts which is typical in the third quarter led to an overall sequential increase in salaries wage.

And benefits of 4%.

On the contract labor expense.

Our contract labor expense, while still elevated over the prior year continued to show sequential improvement during the third quarter of 2022 contract labor was approximately $100 million.

Compared to $60 million in the prior year quarter. This.

This compares to $150 million in the second quarter of 2022 and $190 million in the first quarter of 2022.

We anticipate continued progress in reducing contract labor going forward.

Non labor related expenses continued to be well managed despite inflationary pressures, we experienced a moderate increase of two 5% over the prior year.

This is the first increase in seven quarters and it is primarily attributable to medical specialist fees increases in utility costs and the timing of certain provider tax payments.

All other increases and decreases netted to zero.

We've been able to make.

Able to keep the growth of these costs well below inflationary levels due to the commitment of our employees to execute on our margin improvement program.

Turning now to cash flows cash flows provided by operations were $291 million in the first nine months of 2022 compared to $400 million in the prior period.

Excluding the repaid Medicare accelerated payments made in the first nine months of 2021 cash flows provided by operations were $667 million for the first nine months of 2021.

The lower net revenue and higher labor costs contributed to the lower cash flows during the first nine months of this year.

That said, it's worth noting that despite lower year over year EBITDA, we still delivered positive free cash flow during the quarter.

Moving to Capex for the first nine months of 2022, our Capex was $284 million compared.

Compared to $334 million in 2021, we.

We are effectively adjusted our capital expenditures without materially slowing down our growth opportunities.

On the capital structure side, we executed an open market debt repurchase program in the quarter during which we purchased $267 million of debt with $174 million of cash, resulting in an approximate gain of $78 million.

The company's net debt to EBITDA increased to seven three times due mostly to lower EBITDA impact attributed to the current operating environment.

Our free cash flow was positive in the quarter as we manage through this environment, we remain focused on our longer term goals of lowering our leverage and increasing our free cash flow.

In terms of liquidity at the end of the third quarter, we have $300 million of cash on the balance sheet.

And we have no outstanding borrowings under the ABL with $935 million.

The borrowing base capacity.

As a reminder, we have no debt maturities due until 2020.

We continue to receive interest related to potential divestitures. As this occurs we analyzed for future growth and earnings profile specific assets and.

And assess the impact potential divestitures would have on our future financial leverage and free cash flow generation.

During the quarter, we divested one small facility in Oklahoma.

We are engaged in advanced discussions about other potential transactions.

If these transactions come to fruition, we believe that in addition to paying down debt opportunities also exist to reinvest resources.

And those can be directed to areas of our portfolio to advance their long term growth and earnings.

Tim highlighted a number of initiatives to deliver growth.

Many of these strategies are delivering the desired results now some are ramping up we're expanding to generate greater returns and others are in the development phase to enhance our revenues and earnings potential.

We remain committed to our objectives and focus on our opportunities, which are designed to position the company for long term and sustainable success.

For us at this point I'll turn the call back to you. Thank you Kevin at this point, we're ready to open up the call for questions. We will limit everyone to one question. This morning.

Always you can reach us at 6154 657000.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

And our first question will come from Brian <unk> with Jefferies. Please go ahead.

Hi, Good morning, everyone. This is Todd Phillips on for Brian . Thanks for taking my question. So just thinking through bridging your year to date numbers and your EBITDA guidance for 2023.

This is assuming if you back out Covid relief fund.

Projections for Q4 between $400 million of $500 million. So can you just talk about what's informing that procurements for Q4 also within the context of normal seasonality, where Q4 is.

Higher just providing any color on.

Q4, EBITDA performance would be great. Thanks.

Sure.

As Kevin and I think I can take that so as we think about Q4 seasonally Q4 has always been our highest EBITDA quarter of the year and we would expect that to be the same this year as we think about our volume trends as we came out of.

What was really impacted second quarter and early part of third quarter.

With some disruption.

We did see improvement throughout the third quarter on those volumes as we mentioned.

Catch returned to school.

<unk>.

The end of the summer travel season.

Return to some normalcy.

We did see volumes pick up in the back half of the quarter and continuing on into the fourth quarter. So we would expect that.

After continue throughout the remainder of the quarter.

Couple of other things I would point out we did have.

Sequential reduction in contract labor and that contract labor even throughout the third quarter each month that declined each month. So we would expect our.

Fourth quarter results from our contract labor expense.

Continue to trend in the same direction, albeit probably not reduce as much as the 33% reduction we saw sequentially in Q3, but we would still expect Q4 contract labor to be lower than.

And then Q4, the other last item, maybe I would point out.

We think about inflation and the potential recession, that's ahead of us.

We think that there is a theory that as.

As most people try to get healthcare in before the end of the year before their.

Copays and deductibles reset.

Think.

Kind of economic environment will actually add to that pressure. This year for people to think about getting their health care and before the end of the year. So we think again, it's going to look a little more.

What we've seen in the past with more services performed in <unk>.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Alright, great. Thank you.

I mean, I guess, it's been a little bit of confusion on our part about what you were saying for Q4.

Could you just.

Clarify everyone exactly what the Q4 guidance range actually is but then.

The real question, just just about labor costs.

I guess, everyone seems to be saying that labor is getting better everyone seems to be saying, it's getting better slower than they thought. So I guess can you give us a sense about how you think about labour trending into 2023, and then what factors.

In retrospect made it made it improve more slowly than you thought this year. Thanks.

Sure so.

Our full year guidance, which does not include any pandemic relief funds I think for the fourth quarter would imply.

Something in the 400 range to get to the low end of our guidance of $1 three.

So I think hopefully that clarifies that for you.

In terms of labor, we did see.

Labor inflation in the third quarter and about 5% on a base pay.

Rate basis.

That was a little higher than we had previously expected sequentially the base pay increased only about 1% so.

And if we think about the first couple of quarters of the year and we were in the eight to eight 5% year over year inflation. So we are seeing some moderation.

That.

And labor and we think going into 2023.

Although as you know.

Probably we will make.

Remained higher than it has been historically, but we do think that there'll be some continued moderation and we're probably looking at something in the 3% to 4%.

Labor inflation range for 2023.

Our next question will come from Jason Cazorla with Citi. Please go ahead.

Great. Thanks. Good morning, just wanted to ask a couple of quick questions on your balance sheet and cash flow just first on the balance sheet.

English the $267 million in the quarter you have no maturities until 2026 and I was curious if there's more opportunity for similar actions down the line and then on cash flow you've done just shy of about $300 million of operating cash flow year to date on a 1.6 billion EBITDA baseline, including cares what you've maintained.

In your cash flow guide that would suggest also a pretty sizable step up in cash conversion in the fourth quarter. So I guess anything on your confidence on that conversion in <unk> and how should we think about the EBITDA to operating cash flow conversion down the line as you continue to grow your EBITDA base. Thanks.

Yes.

Things there so yes, I mean, we do feel confident in our cash flow.

For the fourth quarter historically.

Long with the.

The fourth quarter being the highest EBITDA quarter of the year historically cash flows are the strongest.

Quarter of the year in the fourth quarter. So we would expect.

Some of the.

There is some one time payments.

It can come in.

In the fourth quarter and generally your fourth quarter is your best cash flow quarter of the year. So.

Thanks.

Kind of coming into the fourth quarter gives us some confidence.

We will continue or we will be able to meet our guidance for.

For that.

Again, if you have a question. Please press Star then one our next question will come from Andrew Mok with UBS. Please go ahead.

Hi, This is robin on for Andrew can you walk us through the sources of the $115 million in pandemic Cade and some of your peers have indicated you think pandemic really funding has largely ceased thanks.

Sure.

If you recall there was a rule grant and a phase four grams.

That was announced back in December of 2021.

And that was the source.

What was paid to us this quarter.

Just been delayed and did not get to us until this quarter.

We recognized it accordingly.

And going forward, we do not expect there to be any.

Future material pandemic relief fund grants coming from the government.

Our next question will come from Stephen Baxter with Wells Fargo. Please go ahead.

Yeah, Hi, Thanks, a couple of questions here I guess some companies have help size the magnitude of Covid support received in 2022.

As we think about maybe the moving parts going into next year would be curious if you could update us on what your thinking is there and to be clear I'm thinking about it.

Excluding things like the $115 million that you received this quarter. So like DRG support sequestration $3 were to be changes items like the absent any sizing you could provide on those as we think about next year.

Yes.

We really haven't given any guidance.

For next year, particularly kind of the all the moving parts and there are several including some prop.

Probably the largest increase in inpatient.

Lift as well I think the way we're thinking about it at this point, maybe what I would say about that as we're thinking about 2023, as we expect kind of consistent with our medium term goals that our same store net revenue growth into 2023 would be in the mid single digit range.

<unk>.

And that would be a combination of kind of the net impact of these programs as well as the brain lift that we're seeing on commercial from commercial payers, which is also.

Higher than we have historically.

<unk> received in the past, we're probably in the.

The 5% range or 4% to 6% range on commercial contracts, so all that being said.

I would look at it is about a mid single digit same store net revenue growth going into next year.

And this is Tim I'll jump in just a little additional color around that and we also believe our focus on driving acuity and service lines will be a net impact positive impact for 2023 am I referenced some of the declines in the transfer center due to capacity and typically those are against some higher acuity admissions were able to bring into our.

Locations of care and I also mentioned the large increase in provider recruitment in 'twenty three that we onboard at those dose levels of procedural specialists and we should see more surgical acuity growth through that as well so that should really pull forward with some nice uplift in 2023.

Our next question will come from Josh Raskin with Nephron Research. Please go ahead.

Hi, Thanks.

Quick one on the divestitures it sounded like you were in advanced discussions if you could just flesh out what the potential sizing of that would look like just on.

Just the ones that are in advanced discussions there.

And then my real question just.

If you think about the margins of roughly 11, this year and ultimately trying to get to that long term, 16% could you just refresh us where you think the major buckets of improvement sort of what line items.

Obviously, a focus on fwb's with contract labor and maybe what that means for volumes and then I guess the specific question would be how much progress do you think you can make next year, what's a reasonable assumption for margin improvement.

In 2023.

Yes, so starting with the divestitures I think we're a little early to size it because theres a couple of different deals.

And we're probably a little bit early to size that.

We will certainly give more indication.

As we continue to progress.

In those discussions in terms of some of the other moving parts and improving our margin into next year, So I kind of mentioned.

Mid single digit.

Revenue increase and some higher than historical rates lift.

It should.

Help us certainly get there.

It's a little early we have not yet kind of commented on volume trends for next year.

If we think about labor as I mentioned kind of in the 3% to 4%.

<unk> for labor inflation is how we're thinking about next year contract labor.

Probably an interesting one and we will certainly contribute to the lift in EBITDA and margin.

Next year, if you think about the progress we've made already coming down from.

$240 million in the first half of the year and one.

$100 million in the third quarter.

And continued reduction that we expect in the fourth quarter I would look at next year and we believe we will see a 40% 40% to 50% production in.

In contract labor compared to 2022, so that should give us some meaningful lift on the supply side.

It's a variable cost but we.

With our margin improvement program with the efforts in our supply chain team has been executing on that we think that we can keep that relatively consistent or offset any inflationary pressures on our supplies.

Well is on some of the other non labor expenses, where we've made.

Made great progress over the past couple of years, we still believe that there is some runway on that to continue to to hold prices down and although we may not.

Have as much success and keep it absolutely flat likely have for a number of quarters and we think we can certainly keep those non labor expenses.

Increasing at less than inflationary trends.

Josh This is Tim good morning, just a few things to add in terms of margin improvement for 2023.

We really believe that the fixed cost leverage opportunity exist. We saw what happened obviously with lower revenues on higher costs in the second quarter and some of that certainly believes into the third and as we pointed out we're working through that with our initiatives, making really good sequential progress. So as we grow the volumes and the revenues obviously, we still looks.

The higher net revenue conversion rate to lift earnings and margin.

The other part of that equation is taking some cost out that we're not being paid for in terms of length of stay management.

<unk> been very very vigilant in our efforts to control, what we can control and that goes into <unk>.

Our length of stay of our case management programs as well, we did see great improvement in the third quarter.

With our non COVID-19 length of stay.

It's better than 2019 better than sequential quarters better than last year at this time, so for what we can control, we're definitely making improvements and bringing down patient days that in many cases were not being reimbursed for that has another benefit as I pointed out in terms of opening up capacity for us to bring in new incremental admissions through the transfer center.

Through the recruitment of initiatives that we have in place to further expand our market share in our patient base in our communities.

Our next question will come from Jason Kessler Wheeler with Citi. Please go ahead.

Great. Thanks for the follow up I, just wanted to ask quickly on that on that market share argument clearly the hospital industry in its entirety is realizing heightened inflationary pressures, but from a competitive perspective not for profits are also dealing with investment income declines given what's going on in the equity and bond market. So.

I'm curious, if you're seeing perhaps opportunities to take share in that context, and what it could mean on building out capacity of heightened investment in general just given the overall backdrop. Thanks.

Great. Jason This is Tim I'll kick us off on that one on.

And to answer your question it varies by market, we have some really really strong not for profit non tax paying competitors, but in other markets. We do see that type of opportunity, we kind of label it as being appropriately after opportunistic in this environment kind of leveraging our ability to shift resources and capex into markets.

Where we have a really good line of sight on long term growth, we do see some opportunities to accelerate that I don't want to call out any market specifically today for fear that the competition will know we've got our sights set on them, but at the end of the day, we do see some opportunities in that regard.

Demonstrated I believe some really good capital controls across the company throughout the course of the last couple of years in particular and as Kevin pointed out we were able to moderate the spend I'm quite nicely, but we still have a whole host of bed expansion projects service client addition.

<unk> program initiatives underway that will again, I think bode well for us to really take advantage of this somewhat challenging inflationary operating environment.

Yes, and maybe I'll, just add to that and I think he covered it really well Tim but is there some demographics in our markets are improving and if we think about our footprint.

Crop, primarily southeast and southwest.

Many of those states being lower tax jurisdictions.

Are benefiting from some of the demographic move as well as some of the economic move.

As companies are relocating to lower tax jurisdictions. So all of that we believe bodes well for many of the markets. We're in and we think that not only can we capture some incremental market share, but we'll also be capturing our share of larger mark.

My last question is a follow up from Stephen Baxter with Wells Fargo. Please go ahead.

Yeah, Hi, Thanks for the follow up just wanted to ask real quick that's helpful commentary on some of the swing factors as you move from Q3 to Q4 can you just remind us are you expecting to record in the fall.

Fourth quarter any any dollars related to any other.

Like period, Medicaid payments things like Florida D P P or Texas queue up anything of that nature, just remind us I guess, how you guys approach accruing for any of those programs are presenting else that we should be considering thank you.

Sure.

Have probably every quarter. Some some puts and takes on those programs. There's nothing material that I would call out for the fourth quarter.

This concludes our question and answer session I would like to turn the conference back over to Tim mention for any closing remarks.

Thanks, Matt and thanks to everyone for spending time with US today, let me end by thanking our local health system and company leadership teams, who share our commitment to achieve the best results possible and we remain optimistic about our company and where we're headed now and into the future with afford to forward to updating you on our progress as we move forward.

And to continue to work diligently to achieve our goals.

As always if you have any additional questions you can reach us at 615465 to 7000 have a good day.

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

[music].

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Yes.

Sure.

Okay.

Yes.

[music].

Yes.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Sure.

Yeah.

Thank you.

[music].

Sure.

Okay.

[music].

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ross Comeaux, Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone and welcome to community Health Systems' third quarter of 2022 Conference call. Joining me on today's call are Tim mentioned, Chief Executive Officer, Kevin Hammons, President and Chief Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical 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 risk 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.

Consequently, actual results may differ significant 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 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 loss or gain from early extinguishment of debt impairment expense as well as gain or losses on the sale of businesses.

Central government and other legal settlements and related costs expenses related to employee termination benefits and other restructuring charges and gain on sale of equity interest in making healthcare LLC with that said I'd like to turn the call over to Tim mentioned, Chief Executive Officer. Thank you Ross Good morning, everyone and welcome to our third quarter Conference call.

Despite current industry dynamics, we are producing incremental and sequential improvements in many key areas.

I'll also cover some of the adjustments, we are making in light of inflationary pressures and other factors impacting health care operations.

First I want to acknowledge and express gratitude to our health care leaders and teams in Florida, who did a truly remarkable job before before during and after hurricane Ian.

Our presence along the West coast to Florida includes eight hospitals and more than 80 outpatient sites of care are sharp point health network, which includes affiliated hospitals in port Charlotte and punch of Florida, where most directly impacted by the hurricane.

Our facilities sustained damage our team maintained operations and continued to care for patients throughout the storm and in the aftermath. They worked around the clock to ensure our emergency surgical and other services would be available to their community.

For several days sore point health was functioning at the sole health health care provider within a 30 mile radius.

I'll sure point provided emergency in acute care services, we experienced significant disruption to elective procedures, which continued into early October work is ongoing to restore full operations, including affiliated and independent physician practices.

Our overall debt and leverage Kevin will share more details in his remarks.

Now I will turn to our third quarter results.

As we shared last quarter and continuing into this quarter demand for non Covid healthcare services has returned more slowly and later than most predicted leading to softer than anticipated volumes during the middle of the year.

Moving through the third quarter, we did see volumes, especially surgery and outpatient visits picked up by mid August coinciding with the end of summer travel return to school and more normal schedules. Those improvements continued throughout the rest of the quarter and.

For comparison Covid related inpatient admissions were 5% this quarter compared to 13% in the third quarter of last year.

Same store surgeries increased five 3% and continue to beat the 2019 pre pandemic baseline we ended the quarter with surgeries at 101% compared to 2019.

Even though we are seeing a shift of some procedures to outpatient we are also experiencing higher surgical acuity overall as we focus on service line investments.

Michael case mix increased 5% compared to the 2019 baseline across service lines category, we saw the strongest growth in orthopedics spine, neuro Gi and colorectal procedures.

80 volumes are rebounding versus the 2019 baseline to ending the third quarter at 99%. We continued to invest in ER services and capacity freestanding emergency departments, EMS partnerships, and ER marketing and outreach programs in our communities.

Inflationary pressures continue to impact operating expenses and margins, while we remain highly confident in the potential of our over overall portfolio the growth in margin development opportunities in a small number of market have been hindered in this rising cost environment, we are taking swift and necessary steps to mitigate these headwinds.

Last quarter, we discussed four areas of focus for this year and next and I would like to provide some updates now the focused areas are opportunistic growth strengthening the workforce incremental expense reduction initiatives and leveraging CHS centralized resources.

Starting with opportunistic growth through prioritize capital investments and service line expansion, we continue to add more capacity in both inpatient and outpatient services.

Example, the addition of 112, new beds, and our Naples, Florida market are slated for phased opening this quarter and into early 2023, adding capacity and service to all three of our campuses, our new northwest healthcare Houghton facility opened in the Tucson market in June and volumes are ramping up nicely there and should benefit.

<unk> from a favorable seasonal impact in the coming months.

And we had an ambulatory surgery centers in the Tucson in Huntsville market during the quarter as we continue our focus on ASC growth opportunities.

Our proprietary transfer center is driving admissions with strong year over year and sequential growth in accepted patient placement.

However, as request for placements have increased due to staffing and capacity constraints Submarkets have had two occasionally decline some inbound transfers.

We expect the incremental progress as our capacity optimization and workforce development initiatives opened up more available beds in key market.

As a result, we expect volumes from the transfer center to grow further and to be a continued source of incremental higher acuity admissions.

Regarding capacity optimization, our emphasis on reducing overall length of stay is also working with a 6% sequential improvement shown in the third quarter.

Moving onto initiatives underway to strengthen our workforce, we are rapidly reducing contract labor contract labor declined each month of the third quarter and totaled $100 million in Q3 compared to $150 million last quarter.

Our centralized nurse recruitment team is generating solid results and our retention strategies are also working well.

On a year to date basis are at hiring is up 12% over last year and our retention rates have improved 300 basis points, resulting in a strong net gain in nursing ftes overall.

<unk> as we have hired more R&D and other permanent workers over the past several months, we also incurred higher than normal onboarding and orientation expenses, especially in the third quarter.

Our first cohort of approximately 30 students in our store point market will graduate in January 2023.

When New Jersey College partnership is fully deployed we expect to congratulate approximately 1000, new nurses every year.

Under incremental expense reduction initiatives I've already mentioned, the service consolidation and closure activities and a small number of markets, which were reduced expenses and investments, where we simply do not foresee long term return.

Our margin improvement program now in its third year also continues to yield strong results and Kevin will provide more details in his remarks.

Finally, we are leveraging our centralized resources to identify and benefit all of our markets I've.

I've mentioned several of our program such as our transfer center centralized nursery treatment and physician recruitment programs.

Other centralized programs includes utilization review and case management, our patient access centers for physician practice scheduling acos and managed care contracting.

These programs continue to inform best practices and they help us to achieve efficiencies across the organization.

In closing we are pleased with many sequential improvements in the third quarter and believe this progress bodes well for the future.

Which we know is essential to address fixed and higher variable costs and to restore stronger earnings and margin performance.

Kevin at this point, let me turn the call over to you.

Thank you, Tim and good morning, everyone.

As Tim mentioned impacts from the topline, including lower admissions and acuity along with elevated contract labor and wage inflation continued to affect our EBITDA performance.

Sequentially, we saw improvements in admissions adjusted admissions and ER visits.

We also improved length of stay.

Contract Labor expense made improvements to our capital structure maintain strong liquidity and produced positive free cash flow during the quarter.

Moving to the third quarter results net operating revenues came in at $3 $25 million on a consolidated basis.

On a same store basis net revenue was down two 3% compared to the third quarter of 2021.

This was the net result of a five 2% increase in adjusted admissions and a seven 1% decrease in net revenue per adjusted admission, which was negatively impacted by the reduction in Covid cases.

And lower non patient net revenue.

EBITDA was $400 million.

During the quarter, we recorded $115 million, a pandemic relief fund compared to $19 million recognized in the prior year period.

Excluding pandemic relief funds adjusted EBITDA was $285 million with an adjusted EBITDA margin of nine 4%.

As a reminder, we have not included any pandemic relief funds and our adjusted EBITDA guidance.

Further we do not expect to receive any meaningful pandemic relief funds going forward.

Hurricane and resulted in an approximate $10 million hit to the third quarter and on a sequential basis.

Closure costs and incremental healthcare provider orientations accounted for another $20 million.

A sequential headwinds.

Now with regard to expenses on the labor expense side.

Combined salaries wages and benefits and contract labor expense.

Adjustments lower inpatient days and conversion of employees to contract labor.

On a sequential basis.

A inflation grew only 1% however, an additional calendar day.

Incremental costs associated with Onboarding, new employees and costs associated with increased physician starts which is typical in the third quarter led to an overall sequential increase in salaries wages and benefits of 4%.

On the contract labor expense.

Our contract labor expense, while still elevated over the prior year continued to show sequential improvement during the third quarter of 2022 contract labor was approximately $100 million.

Compared to $60 million in the prior year quarter.

This compares to $150 million in the second quarter of 2022 and $190 million in the first quarter of 2022.

We anticipate continued progress in reducing contract labor going forward.

Non labor related expenses continued to be well managed despite inflationary pressures.

We experienced a moderate increase of two 5% over the prior year.

This is the first increase in seven quarters and it is primarily attributable to medical specialist fees increases in utility costs and the timing of certain provider tax payments.

All other increases and decreases netted to zero.

We've been able to make payroll to keep the growth of these costs well below inflationary levels due to the commitment of our employees to execute on our margin improvement program.

Turning now to cash flows cash flows provided by operations were $291 million in the first nine months of 2022 compared to $400 million in the prior period.

Excluding the repaid Medicare accelerated payments made in the first nine months of 2021 cash flows provided by operations were $667 million for the first nine months of 2021.

Lower net revenue and higher labor costs contributed.

Contributed to lower cash flows during the first nine months of this year.

That said, it's worth noting that despite lower year over year EBITDA, we still delivered positive free cash flow during the quarter.

Moving to Capex for the first nine months of 2022, our Capex was $284 million compared.

Compared to $334 million in 2021, we.

We effectively adjusted our capital expenditures without materially slowing down our growth opportunities.

The company's net debt to EBITDA increased to seven three times due mostly to lower EBITDA impact attributed to the current operating environment.

Our free cash flow was positive in the quarter as we manage through this environment, we remain focused on our longer term goals of lowering our leverage and increasing our free cash flow.

In terms of liquidity at the end of the third quarter, we have $300 million of cash on the balance sheet.

And we have no outstanding borrowings under the ABL with $935 million.

Our borrowing base capacity.

As a reminder, we have no debt maturities due until 2026.

We continue to receive interest related to potential divestitures. As this occurs we analyzed for future growth and earnings profile specific assets and.

And assessed the impact potential divestitures would have on our future financial leverage and free cash flow generation.

During the quarter, we divested one small facility in Oklahoma.

We are engaged in advanced discussions about other potential transactions.

If these transactions come to fruition, we believe that in addition to paying down debt opportunities also exist to reinvest resources.

And those can be directed to areas of our portfolio to advance their long term growth and earnings.

Tim highlighted a number of initiatives to deliver growth.

We remain committed to our objectives and focus on our opportunities, which are designed to position the company for long term and sustainable success.

Ross at this point I will turn the call back to you. Thank you Kevin at this point, we're 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 615 465 7000.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys.

Anytime you question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

And our first question will come from Brian <unk> with Jefferies. Please go ahead.

Hi, Good morning, everyone. This is Todd Phillips on for Brian . Thanks for taking my question. So just thinking through bridging your year to date numbers and your EBITDA guidance for 2023.

This is assuming if you back out Covid relief fund.

Projections for Q4 between $400 million of $500 million. So can you just talk about what's informing that procurements for Q4 also within the context of normal seasonality, where Q4 is.

Higher just providing any color on.

Q4, EBITDA performance would be great. Thanks.

Sure.

What was really impacted second quarter and early part of third quarter with some disruption.

We did see improvement throughout the third quarter on those volumes as we mentioned.

His kids return to school.

The end of the summer travel season.

Return to some normalcy, we did see volumes pick up in the back half of the quarter and continuing on into <unk>.

Fourth quarter, So we would expect.

To continue throughout the remainder of the quarter.

Couple of other things I would point out we did have.

Sequential reduction in contract labor and that contract labor even throughout the third quarter each month that declined each month. So we would expect.

Our fourth quarter results for contract labor expense.

To continue to trend in the same direction, albeit probably not reduce as much as the 33% reduction that we saw sequentially in Q3, but we would still expect Q4 contract labor to be lower.

Then Q4, the other last item, maybe I would point out is.

We think about inflation and the potential recession, that's ahead of us.

We think that there is a theory.

As most people try to get healthcare in before the end of the year before there.

Copays and deductibles reset and we think.

Kind of economic environment will actually add to that pressure. This year for people to think about getting their healthcare and before the end of the year. So we think.

Again, it's going to look a little more.

What we've seen in the past with more services performed in <unk>.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Alright, great. Thank you.

I mean, I guess, it's been a little bit of confusion on our part about what you were saying for Q4.

Could you just clear.

Clarify everyone exactly what the Q4 guidance range actually is but then.

The real question, just just about labor costs.

In retrospect made it made it improve more slowly than you thought this year. Thanks.

Sure so.

Our full year guidance, which does not include any pandemic relief funds I think for the fourth quarter would imply something in the 400 range to get to the low end of our guidance of $1 three.

So I think hopefully that clarifies that for you.

In terms of labor, we did see.

Labor inflation in the third quarter at about 5% on a base pay.

Rate basis.

That was a little higher than we had previously expected sequentially the base pay increase only about 1% so.

And if we think about the first couple of quarters of the year and we were in the eight to eight 5% year over year inflation. So we are seeing some moderation.

In that.

And labor and we think going into 2023.

Although.

Probably we will make.

Remained higher than it has been historically, but we do think that there'll be some continued moderation and we're probably looking at something.

The 3% to 4%.

Labor inflation range for 2023.

Our next question will come from Jason Cazorla with Citi. Please go ahead.

Great. Thanks. Good morning, just wanted to ask a couple of quick questions on your balance sheet cash flow just first on the balance sheet.

English the $267 million in the quarter you have no maturities until 2020. So I was curious if there's more opportunity for similar actions down the line and then on cash flow you've done just shy of about $300 million of operating cash flow year to date.

1.06 billion EBITDA baseline, including carriers, but you've maintained your cash flow guide that would suggest also a pretty sizable step up in cash conversion in the fourth quarter. So I guess anything on your confidence on that conversion in <unk> and how should we think about the EBITDA to operating cash flow conversion down the line as you continue to grow your EBITDA base.

Hi.

Yes, a couple of things there. So yes, we do feel confident in our cash flow.

For the fourth quarter historically along with.

The fourth quarter being the highest EBITDA quarter of the year historically cash flows are the strongest.

Quarter of the years, the fourth quarter. So we would expect.

Some of the.

There is some one time payments.

It can come in.

In the fourth quarter and generally your fourth quarter is your best cash flow quarter of the year. So.

Thanks, Ken.

Coming into the fourth quarter gives us some confidence.

We will continue or we will be able to meet our guidance.

For that.

Again, if you have a question. Please press Star then one our next question will come from Andrew Mok with UBS. Please go ahead.

Sure.

If you recall there was a rule grant and a phase four grams.

That was announced back in December of 2021.

And that was the source.

Of what was paid to us this quarter.

Just been delayed and did not get to us until this quarter.

So we recognized it accordingly.

And going forward, we do not expect there to be any.

Future material pandemic relief fund grants coming from the government.

Our next question will come from Stephen Baxter with Wells Fargo. Please go ahead.

Yeah, Hi, Thanks, a couple of questions here I guess some companies have help size the magnitude of Covid support received in 2022.

As we think about maybe the moving parts going into next year would be curious if you could update us on what your thinking is there and to be clear I'm thinking about it.

Excluding things like the $115 million that you received this quarter. So like DRG support sequestration <unk> changes items like that is any sizing you could provide on those as we think about next year.

Yes.

We really haven't given any guidance.

For next year, particularly kind of the all the moving parts and there are several including some prop.

Probably the largest increase in inpatient.

Lift as well I think the way we're thinking about it at this point, maybe what I would say about that as we're thinking about 2023 as we expect.

Consistent with our medium term goals that our same store net revenue growth into 2023 would be in the mid single digit range.

And that would be a combination of kind of the net impact of these programs as well as the rate lift that we're seeing on commercial from commercial payers, which is also higher than we have historically.

<unk> received in the past, we're probably in the.

The 5% range or 4% to 6% range on commercial contracts, so all that being said.

I wouldn't look at it is about a mid single digit same store net revenue growth going into next year.

This is Tim I'll jump in just a little additional color around that and we also believe our focus on driving acuity and service lines will be a net impact positive impact for 2023 on my reference some of the declines in the transfer center due to capacity and typically those are again, some higher acuity admissions were able to bring into our.

Locations of care and I also mentioned the large increase in provider recruitment in 'twenty three that we onboard at those dose levels of procedural specialist and we should see more surgical acuity growth through that as well so that should really pull forward with some nice uplift in 2023.

Our next question will come from Josh Raskin with Nephron Research. Please go ahead.

Hi, Thanks.

Quick one on the divestitures it sounded like you were in advanced discussions if you could just flesh out what the potential sizing of that would look like just on.

Just the ones that are in advanced discussions there.

And then my real question, just if you think about the margins of roughly 11, this year and ultimately trying to get to that long term, 16% could you just refresh where you think the major buckets of improvement sort of what line items and obviously a focus on fwb's with contract labor and maybe what that means for volumes and then I guess the specific question would be how much.

Progress do you think you can make next year, what's a reasonable assumption for margin improvement in.

In 2023.

Yes, so starting with the divestitures I think we're a little early to size it because theres a couple of different deals.

And we're probably a little bit early to size that but we.

We'll certainly give more indication.

As we continue to progress in those discussions in terms of some of the other moving parts and improving our margin into next year, So I kind of mentioned.

Mid single digit revenue increase and some higher than historical rates lift.

Good.

Help us certainly get there.

It's a little early we have not yet kind of commented on volume trends for next year.

Think about labor as I mentioned kind of in that 3% to 4% range for labor inflation is how we're thinking about next year contract labor.

Probably an interesting one and we will certainly contribute to the lift in EBITDA and margin.

<unk> year.

Think about the progress we've made already coming down from.

$240 million in the first half of the year.

$100 million in the third quarter.

And continued reduction that we expect in the fourth quarter I would look at it next year and we believe we will see a 40% 40% to 50% production.

And contract labor compared to 2022.

That should give us some meaningful lift.

The supply side.

It's a variable cost that we.

As well as on some of the other non labor expenses, where we've made.

Made great progress over the past couple of years, we still believe that there is some runway on that to continue to to hold prices down and although we may not.

<unk> have as much success and keep it absolutely flat likely have for a number of quarters and we think we can certainly keep those non labor expenses.

Increasing at less than inflationary trends.

Josh This is Tim good morning, just a few things to add in terms of margin improvement for 2023.

We really believe that the fixed cost leverage opportunity exist. We saw what happened obviously with lower revenues on higher costs in the second quarter and some of that certainly believes into the third and as we've pointed out we are working through that with our initiatives, making really good sequential progress. So as we grow the volumes and the revenues obviously, we still looks.

The higher net revenue conversion rate to lift earnings and margin.

The other part of that equation is taking some cost out that we're not being paid for in terms of length of stay management.

We've been very very vigilant in our efforts to control, what we can control and that goes into <unk>.

Our length of stay of our case management programs as well, we did see great improvement in the third quarter.

With our non COVID-19 length of stay.

Through the recruitment of initiative that we have in place to further expand our market share in our patient base in our communities.

Our next question will come from Jason <unk> with Citi. Please go ahead.

I'm curious, if you're seeing perhaps opportunities to take share in that context, and what it could mean on building out capacity our heightened investment in general just given the overall backdrop. Thanks.

Great. Jason This is Tim I'll kick us off on that one on.

And to answer your question it varies by market, we have some really really strong not for profit non tax paying competitors, but in other markets. We do see that type of opportunity I'll be kind of label it as being appropriately after opportunistic in this environment kind of leveraging our ability to shift resources and capex into markets.

<unk> program initiatives underway that will again, I think bode well for us to really take advantage of this somewhat challenging inflationary operating environment.

Yes, and maybe I'll, just add to that and I think he covered it really well Tim but is there some demographics in our markets are improving and if we think about our footprint.

Crop, primarily southeast and southwest.

Many of those states being lower tax jurisdictions.

Benefiting from some of the demographic move as well as some of the economic move.

As companies are relocating to lower tax jurisdictions. So all of that we believe bodes well for many of the markets. We're in and we think that not only can we capture incremental market share, but we'll also be capturing our share of larger market.

My last question is a follow up from Stephen Baxter with Wells Fargo. Please go ahead.

Yes, hi, thanks for the follow up just wanted to ask real quick that's helpful commentary on some of the swing factors as we move from Q3 to Q4 can you just remind us where you would see.

Specced into record in the fourth quarter or any any dollars related to.

Like period, Medicaid payments things, like Florida, DPP, or Texas or anything of that nature, just remind us I guess, how you guys approach accruing for any of those programs are presenting else that we should be considering thank you.

Sure.

Have probably every quarter.

Some puts and takes on those programs, there's nothing material that I have.

On the call out for the fourth quarter.

This concludes our question and answer session I would like to turn the conference back over to Tim mentioned for any closing remarks.

Thanks, Matt and thanks to everyone for spending time with us today.

Let me end by thanking our local health system and company leadership teams, who share our commitment to achieve the best results possible and we remain optimistic about our company and where we're headed now and into the future. We look forward to forward to updating you on our progress as we move forward and to continue to work diligently to achieve our goal as always.

If you have any additional questions you can reach us at 6154 657000.

Have a good day.

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

Q3 2022 Community Health Systems Inc Earnings Call

Request a DemoDemo

CYH

Community Health Systems

Earnings