Q4 2022 Community Health Systems Inc Earnings Call

February 16, 2023

Good day and welcome to the community Health systems fourth quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn the conference over to MS. Shelly usually.

Senior director of Investor Relations. Please go ahead ma'am.

Thank you Chad.

Morning, and welcome to community Health Systems' fourth quarter 2020 conference call.

With me on today's call.

Sure.

Executive Officer, Kevin Hammons, President and Chief Financial Chief Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical Officer.

Before we begin I would like to remind everyone. This conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts.

These forward looking statements are subject to a number of known and unknown risks, which are described in headings such as risk factors 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. We have also posted a supplemental slide presentation on our website, we will refer to those slides during this call.

All calculations, we will discuss exclude gain or loss from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses.

Access from government and other legal matters and related costs.

Or expense from the settlement of a professional liability claims for which the third party insurers all obligations to ensure the company for the underlying loss has been settled.

Expense related to employee termination benefits and other restructuring charges gain.

Again from fortress transaction data.

Gain on sale of equity interests, and making health care L. L C and a change in estimate for professional claims liability related to divested location.

With that said I will turn the call over to Jim Henson Chief Executive Officer.

Thank you Shelly and good morning, and welcome to our fourth quarter Conference call.

Before we begin I would like to take a moment to express our heartfelt sorrow for the loss of our friend and colleague Cross Como.

Ross served as our vice President of Investor Relations from 2016 until it's passing last month.

Many of the new Ross personally and I appreciate it it gets worked to build strong relationships with our shareholders and the analysts who cover our company.

Those of US who work closely with Ross This is a tremendous loss given.

He was a dedicated sun brother husband and father, our deepest sympathy goes out to his entire family and all of them called Roar of France.

Now turning to our fourth quarter and year end results.

22 was a challenging and in many ways a pivotal year for health care providers in terms of our work to rebuild volumes at the tandem exercise to stabilize our workforce and offset inflationary pressures.

At CHF, we made considerable progress in each of these areas, especially during the second half of the year.

Let me start with volume we finished the fourth quarter with our strongest volume performance of the year and that was true across all key volume categories.

Same store admissions increased by four 4% on a year over year basis to 3% sequentially and a 99% of our 2019 pre COVID-19 baseline.

Covid related inpatient admissions were 3% of total admissions compared to 8% in the fourth quarter of last year.

Our focus on expanding outpatient access that's what all of us capturing surgery and prestige raw cases that have shifted from inpatient to outpatient classification resulted in our same store adjusted admissions increase of eight 2% year over year and exceeded the 2019 baseline.

Same store surgeries increased four 2% from the prior year to 5% sequentially and continued to perform above the 2019 pre COVID-19 baseline.

Same store <unk> volumes were very strong in the quarter, increasing eight 7% year over year, three 6% sequentially and finished at 102% of 2019.

In the fourth quarter same store net revenue declined one 3% due largely to the decreased volume of Covid medical admissions in the prior year quarter.

However, our focus on building higher acuity service lines continues as demonstrated by further strengthening of our surgical case mix index compared.

Compared to the 2019 baseline the surgical CMI is now up 3%. Despite the large movement of orthopedic cases that have migrated to outpatient classification.

We continue to invest in service line development and provide a recruitment to further grow the acuity across our markets.

Inflationary pressure continues to impact operating expenses and margins, but we made progress reducing contract labor throughout 2022.

We have also managed non labor expenses below inflation.

Excluding pandemic relief funds EBITDA performance was at its highest level in the fourth quarter of the year in line with our expectations as well as historical trends.

In addition to the improving operational trends, we extinguished approximately $378 million of notes outstanding during the quarter, we continued to pursue opportunities to lower overall debt and leverage and to improve our capital structure, Kevin will talk about that more in his remarks.

Looking ahead, we remain focused on our four priority areas, which we believe remain essential to driving stronger results for our markets and the company.

The first is accelerated growth.

Strategic capital investments and access points outpatient services and inpatient capacity are enabling near term volume gains and increasing our potential for long term growth.

We have been consistently investing in our portfolio over the last five years, we have added more than 640, new licensed beds as well as 80 surgical and procedure suites to our existing health systems.

Across many markets, we continue to expand our geographic footprint and to increase market concentration with new primary care specialty care urgent care freestanding emergency centers and ambulatory surgery location.

And provided recruitment remains essential to continuous growth in 2022, we had our best recruitment year over the past five years.

Our transfer center received a record number of requests for placement last year, which is an important growth driver for the majority of our health systems last year inbound transfers increased 14, 5% over the prior year.

As we continue to recruit additional staff and further optimize capacity through our length of stay reduction efforts, we expect even more volume from the transfer center, including incremental higher acuity admissions.

Our secondary focus includes specific actions to strengthen our workforce.

We made very significant progress reducing contract labor during the year and ended 2022 with strong gains in employee recruitment and retention.

Contract labor totaled approximately $80 million in Q4 compared to $140 million in the prior year and $100 million last quarter.

Through our companywide centralized nurse recruitment function nurse hiring is up 18% for 2022 compared to the prior year and our retention rates have improved 500 basis points, resulting in a strong net gain in nursing ftes for the year.

Our Jersey College Nursing school relationship expanded with new campuses in Tucson, Arizona and Scranton, Pennsylvania in early January we now have seven active programs and expect three more to commence in 2023.

Our first cohort of students graduated last month, and Port Charlotte, Florida, which was a celebratory milestone for those new nurses and for us.

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

Next our work to control expenses includes our margin improvement program supply chain initiatives and productivity enhancements.

During 2022, we made positive strides including measures to consolidate service lines and some markets, creating greater efficiencies and those health care systems.

For 2023, we remain focused on incremental contract labor reduction and other specific tactics to mitigate the inflationary pressures and the operating environment.

Finally, our commitment to advanced safety and quality is at the heart of everything we do.

There are many measures that demonstrate results in this area, but today I'll just highlight one.

In 2012, CHS hospitals embarked on a journey to create inherently safe health care systems and now we have a full decade worth of data that shows how much progress we have made in.

In 2022, we achieved an 87, 9% decline in our serious safety event rates from the baseline established 10 years ago. This equates to thousands of patients who experienced better outcomes as a result of this focus.

Our safety program is one of the longest running and most successful in the industry.

Want to congratulate and thank our clinicians support teams leadership and everyone at CHS, who make safety their top priority every day.

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

Thank you Tim.

And good morning, everyone as Tim mentioned, we saw a meaningful volume recovery and expense management in the fourth quarter and as expected achieved our highest volume and earnings performance of the year.

While lower acuity of inpatient admission and Payor mix changes pressured our top line. The improvements we've made in length of stay and contract labor in our management of non labor expenses below inflation contributed to us having our best EBITDA quarter of the year, excluding pandemic relief fund.

Additionally, sequential improvement in same store net revenue key volume metrics and EBITDA bode well for us as we begin 2023.

In the quarter. We also continued to take advantage of opportunities to improve our capital structure by reducing our debt while maintaining adequate liquidity.

Moving to fourth quarter results net operating revenues came in at $3 billion $142 million on a consolidated basis.

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

This was the net result, with an eight 2% increase in adjusted admissions.

And an eight 7% decrease in net revenue per adjusted admission, which as I mentioned was pressured by lower acuity inpatient admissions and changes in payer mix, primarily attributable to the Delta wave of Covid experienced during the fourth quarter of 2021 during which we saw proportionately higher.

<unk> with commercially insured COVID-19 patients during that search.

Adjusted EBITDA was $404 million during.

During the fourth quarter, we recorded $2 million of pandemic relief funds compared to $46 million recognized in the prior year period.

Excluding pandemic relief funds adjusted EBITDA was $402 million with an adjusted EBITDA margin of 12, 8%.

As a reminder, we did not include any pandemic relief funds and our 2022 adjusted EBITDA guidance.

And going forward, we do not expect to receive or recognized.

A significant amount of pandemic relief funds from the government.

With regard to expenses on.

On the labor expense side, combined salaries wages and benefits and contract labor expense improved on a year over year basis by approximately $40 million and improved approximately $13 million sequentially.

Pacifically related to employee costs, we experienced an increase of four 5% and our average hourly rate for employees on a year over year basis on.

On a sequential basis based pay inflation grew at approximately one 5%.

On contract Labor expense, we continued our sequential improvement.

Well is making significant progress over the prior year.

During the fourth quarter of 2022 contract labor was approximately $80 million compared to $140 million in the prior year quarter on.

On a sequential basis in 2022, our contract labor was $190 million in the first quarter $150 million in the second quarter $100 million in the third quarter and $80 million in the fourth quarter.

We anticipate continued progress reducing our contract labor throughout 2023, albeit at a slower pace.

We have effectively executed several cost reduction initiatives and thats non labor expenses continued to trend below inflation.

Overall, we experienced a moderate increase of approximately 3% over the prior year. Despite a $30 million increase in medical specialist fees by $40 million increase in malpractice insurance and $8 million related to hurricanes and all other increases and decreases in non labor expense.

This netted to a reduction of approximately $40 million.

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

Turning to cash flows cash flows provided by operations were $300 million.

For 2022 compared to cash used in operations of $131 million for 2021.

Excluding the repaid Medicare accelerated payments in 2021 cash flows provided by operations were $950 million for 2021.

The timing of certain cash payments prior to year end and a few expected cash receipts, which we did which did not arrive prior to year end impacted our cash flows from operations for the year ended 2022, we.

We expect these cash inflows to now come in during 2023.

Also due to the timing of certain payments in 2022 that normalize next year, we expect our working capital to improve in 2023.

Moving on to Capex full year 2022.

Capex was $415 million compared to $469 million in the prior year and was in line with our expectations.

We mentioned on last quarter's call, we effectively adjusted our pace of spending on capital expenditures to reflect the operating environment without materially slowing our growth opportunities.

We continue to improve our capital structure through a combination of privately negotiated transactions and open market repurchases in the fourth quarter, we repurchased $378 million of debt with $171 million of cash capturing $193 million of discount.

As we look at the full year of 2022, we took advantage of market conditions in the early part of the year, while interest rates were favorable by refinancing and extending $1 $5 billion of debt maturities lowering our interest rate from 665% to 525%.

And in the second half of the year, we repurchased a total of $645 million of debt for an aggregate cost of $345 million of cash capturing $300 million of discount.

These transactions combined lower our cash interest on an annualized basis.

Over $58 million.

The company's net debt to EBITDA is currently seven nine times due mostly to lower EBITDA attributed to the current operating environment as.

As we manage through this environment, we remain focused on our longer term goals of lowering our leveraging and increasing our free cash flow.

Although we use more of our cash in order to repurchase debt and we experienced lower free cash flows than we anticipated we retained $118 million of cash on the balance sheet at the end of the fourth quarter and we still have the availability of substantially all of our ABL with $852 million of bar.

<unk> based capacity.

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

As we previously mentioned we continue to have interest from outside parties related to potential divestitures and we are also assessing opportunities to add to our portfolio.

As these opportunities emerge.

We analyze the future growth and earnings profile of specific assets and assessed the impact potential transactions would have on our future financial leverage and free cash flow generation.

During the quarter, we received $85 million of cash proceeds for the sale of one facility in West, Virginia, which closed on January one 2023.

And we also signed an agreement to sell our last remaining facility in West, Virginia, which we expect to close on March 31 2023.

We remain engaged in continuing discussions about other potential transactions. We believe these transactions if they come to fruition, we will provide opportunities to further pay down debt as well as allow opportunities to reinvest resources to areas of our portfolio to advance their long term growth in earnings.

Now I will walk through our full year 2023 guidance.

Net operating revenues are anticipated to be 12, two to $12 6 billion.

This represents a 4% to 6% growth in same store net revenue.

Adjusted EBITDA is expected to be $1 billion $4 75 to $1 $625.

Net loss per share diluted is anticipated to be a 65 loss to a <unk> <unk> per share based on weighted average diluted shares outstanding of 130 to 131 million shares.

Cash flow from operations are anticipated to be 675 million to $825 million.

Capex is expected to be $450 to $500 million.

And cash interest is expected to be $760 million to $780 million.

In summary, we are optimistic about 2023, we expect to accelerate our growth initiatives strengthen our workforce and advanced safety and quality, while leveraging expense management to drive positive financial results in free cash flow.

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

We are focused on the opportunities, which lie ahead for us.

Kelly at this point ill turn the call back over to you. Thank you Kevin.

At this point Chad, we're ready to open the call for questions. Yes, Ma'am, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then two please limit yourself to one question and if you have additional questions.

Re enter the question queue and at this time, we'll pause momentarily to assemble our roster.

Yes.

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

Good morning, you have <unk> on for Brian just wanted to say congrats on the quarter. So I think I'll go ahead and touch on contract Labor clearly are executing well on this front just wanted to know what's driving the sequential improvement and can you quantify how much more space do you think you have to bring that down this year. Thanks.

Sure. Thank you for the question and I can start that off and Tim.

Now if I Miss please feel free jump in.

Early in 2022.

We began our centralized recruiting efforts for nursing.

By April we had all of our hospitals kind of rolled into that centralized recruiting effort.

Doing so has really allowed us to improve and expand our ability to bring in new employed nurses, which ultimately been the hurdle.

Being able to take out contract labor. So as we've made progress and I believe our nurse recruiting is up 18%.

Year over year in 2022, DAP has allowed us to take out contract labor.

And reduce those costs.

Be it at a significantly lower cost to the company.

As we go forward in 2023, certainly the pace of reduction is going to come down.

You think about fourth quarter and first quarter, historically has been higher quarters for utilization of contract labor, particularly around our markets in Florida.

Where we have more seasonality.

But.

I would expect this ultimately when things level out to be somewhere in the $50 million to $60 million per quarter on average range for contract labor. So I think we have some room.

Although I think it still takes a little time for us to get down there.

In the current environment.

Thanks.

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

Alright, Thanks, Sam sort of a related topic, but a little bit bigger just the midpoint of 2023 guidance on a year over year basis ex cares grant EBITDA margin improvement about just under 200 basis points. So maybe you can help talk to the specific buckets of that improvement be very interested in the <unk> line specifically in that.

It sounded like you think contract labor may be able to get down to that.

That could be down $150 million to $200 million, if my math I'm just curious if that's the right ballpark.

Yes. Thank.

Thank you are absolutely right I think contract labor base.

Based on.

Full year of.

2022, we had about $520 million of contract labor.

At our current run rate.

Even if we stayed flat in 2023, we would see it $200 million reduction in contract Labor I think we will make a little more progress.

In that throughout 'twenty three.

Guess, it's $200 million to $250 million year over year reduction now.

That does come back to us in terms of of Sal.

Salaries and wages as we replace some of the contract labor with employees.

Estimate somewhere in the neighborhood of 30% to 35% of that reduction in contract labor comes back to us as employee cost in terms of inflation on SW B, we're estimating for 2023 about a 5% inflation rate on.

The average hourly rate.

So that combined with some additional employees as we.

Takeout contract labor would be how you get to SBB.

Estimate for next year.

Got you and then.

Could you just remind us what is the total EBITDA contribution if it was positive for the facilities that were divested in 2022 and may be including the one that closed on 123.

Yes.

Overall for the facilities that were closed divested and I would also lump in some of the consolidated services.

And service line closures probably had.

Small net negative contribution.

During 2022, so those should be accretive going into 'twenty three.

Okay, so slightly great. Okay. Thank you.

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

Okay.

Great. Thanks.

So it sounds like Youre, making a lot of progress, but I guess when you updated your medium term outlook.

You changed the margin target a little bit.

EBITDA.

Leverage numbers.

Higher now so I was wondering if you could kind of maybe.

The breakdown for US exactly what maybe has changed in your view about where things are I guess I think about things right now.

Kormos volumes pricing labor and other costs is there one of those four or some of those companies in those four things maybe coming in worse than you thought when you provided the original guidance anyway to think about that.

Sure.

Go back.

Year ago, when we initially started putting out those medium term targets and looked at where we are today.

Certainly inflation.

Has had a much bigger impact than we had previously anticipated, particularly around labor.

So just being realistic about where we are a year later and having.

Endured kind of the increases in labor contract labor, which no one anticipated.

A year ago to even be where what we experienced during 'twenty two let alone where we're still at today.

Still a headwind.

For us, albeit improving and we believe it will continue to improve.

And in terms of.

Kind of on the net revenue line I would say Theres continued pressure, particularly from government payers.

On net revenue and on rate.

Is there any reason to think that the.

<unk> will eventually catch up.

Over time, we always thought about it catching up on a lag is it just the lag part that you are updating this four or do you kind of feel like it's.

As Matt said permanently.

Yes, I think this is more of a lag.

We're just kind of factoring in.

To the equation here.

And beyond beyond medium term.

Certainly focused and believe we'll continue to make improvements in.

Ultimately get back to two where we had originally anticipated.

Just a matter of timing and the insight we have today as we look out over the next three to five years.

As things the closer we get to that the more insight will give more clarity as we sit here today, we just thought it was reasonable.

<unk>.

Make a small adjustment to those to those goals.

Alright, great. Thank you.

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

Great. Thanks, I was just hoping you can unpack the volume outlook within that 4% to 6% same facility revenue guidance, perhaps in terms of how youre expecting surgical volumes and develop inpatient versus outpatient.

Trajectory of volume growth over the course of the year and then if you're considering any volume headwind from the recent cyber security incident at all at this point. Thanks.

Sure. Let me start off so you are right, we have kind of quarter.

4% to 6%.

Net revenue growth in terms of volume.

I would anticipate.

Probably 2% to 3% so about half of the net revenue growth was volume half is right.

And in terms of kind of where we're at in our recovery.

We still have opportunities.

To increase our admissions.

Made significant investments over the last couple of years and we are still experiencing some recovery.

From Covid.

Outpatient, particularly our clinic visits we've seen.

Great growth over these last couple of quarters and ultimately.

Those will translate into more procedures.

More surgeries in inpatient admissions down the road now Tim if there's something you might add share in terms of the migration of.

Inpatient cases to outpatient that seems to have leveled off so we don't believe that's going to be as large of a headwind, but just to reiterate for those cases broad broad majority of those cases that did move from inpatient to outpatient.

I believe we've captured them within our existing health care delivery systems, and our hospitals are in our ASC environment. So we feel really good about that contribution going forward into 2023 and beyond with a full pipeline of additional access points afcs. What have you that we are adding to the portfolio in terms of the near term growth opportunity.

And we called out accelerating growth as priority number one for community Health systems. We believe we've invested really wisely for that and some of our highest growth markets. We have new capacity that has just recently come online or will be coming online.

Throughout the rest of this year, so adding incremental beds, leveraging our focus on strengthening the workforce recruiting more staff. So we can open up every one of those that should be a strong catalyst for us for incremental volume growth.

Okay and anything on the cyber security incident, you want to add.

Sure.

Not a whole lot to add there, but just for clarity.

We have a third party.

We had contracted with for secure file transfers this third party <unk>.

<unk> the data breach.

And in the process of that.

The.

A couple here.

File CHS files.

We're able to be accessed.

<unk> did not occur to.

To best of our knowledge within our system. There's no. We have no evidence that there was any breach of the CHS systems and we've not experienced any type of disruption in service nor do we anticipate any.

Any disruption in service.

Great. Thank you.

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

Hi, Thanks.

Our condolences on Ross, it's really sad to hear about that.

So just wanted to ask about you know of course, just wanted to ask about some of the drivers of the operating cash flow improvement year over year. So can you.

You talked a little bit about this it looks like Youre looking for I think a $450 million pick up some of that is the EBITDA growth Youre looking for and you talked to them about the kind of the onetime items maybe impact in 2022 that are now 223 collections.

Get a sense of whether you could maybe size some of those for us and talk about any other factors, we should be considering in the year over year improvement and it does look like your working capital was already down a decent amount year over year in 2022, and you are expecting to make more progress so any insight into kind of how much. Further you think you can manage working capital lower would be great to hear about.

Sure. So a couple of items I'd point to.

One is the repayment of deferred payroll taxes.

$73 million. This was COVID-19 related benefit that allowed us to defer payroll taxes.

Half of that was repaid in 2000.

'twenty, one and half of it was repaid in 2022.

<unk> done that payment.

We will not we will not occur again that deferral.

<unk> back in 2020.

We did.

Decrease our days in AP during 2022 near the end of the year, we took advantage.

Some discount opportunities and paid some things early we'll be able to turn that around in 2023 kind of pick that back up which will be a positive cash flow item. Similarly, we lost a day in a R. During.

During 2022, we would expect to be able to recapture that day. So.

So those items of working capital.

I would say it would be positive impacts.

In 2023, the other thing that I would point out in terms of kind of positive impact on free cash flow for our cash flow from operations would be our interest payments as we continue to.

Refinance some of our debt pay down some of our debt our cash interest will be significantly lower in 'twenty three than it was in 'twenty two.

In addition in 2022 as part of the refinancing and.

Debt pay off we did have to accelerate some of our cash interest payments.

Which resulted in effectively on a couple of those tranches paying more than 12 months of interest in the year. So as that goes away and then with the lower interest rate on the piece that we financed and a lower debt balance will have have approximately.

Uh huh.

$50 million to $60 million.

Lower interest cash interest.

2023.

Our next question will come from Andrew Mok with UBS. Please go ahead.

Hi, This is Thomas on for Andrew.

Walk us through the trend in patient acuity throughout the year.

And with your focus on investment in higher acuity service lines, how do you expect that acuity to trend in 2023.

Sure Sir Thomas This is Tim I'll kick it off and Doctor Simon feel free to weigh in in terms of our acuity progression throughout the year as we pointed out in our earlier remarks, some lower Covid Bruce.

Related to lower medical case mix index.

And so depending on the level of Covid in the prior year quarter, It certainly impacted our year.

Year over year comps as the year went on and as I mentioned, we grew some of our inpatient surgeries.

So some of those volumes improve throughout the year, we did see our surgical case mix improve which yielded a stronger gained by yearend and overall case mix index.

Versus 2019, I don't know if we pointed this out earlier, but we did actually grow our case mix index versus 2019 across both medical and surgical. So we believe that's evidenced of our investments in the service line strategies, the recruitment strategies and the transfer centers success, bringing higher acuity patients into our health care systems.

So while we saw a dip in last year versus 2021, we're really pleased with what we saw versus 2019 than anything that I think the only.

The thing that I would add.

Our certified thing.

Our acuity cardiovascular.

Services and then also some neurology.

We are focusing on some of that procedure as well.

Their service lines, putting effort into and we're seeing some of the gains from that.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Mr. Tim Hansen for any closing remarks. Please go ahead, sir thanks.

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

And today by thanking the caregivers and support teams across our organization to provide patients with safe quality health care. They do a remarkable remarkable job I also want to acknowledge our local health system and CHF CHF leadership teams, who share our commitment to achieve the best results possible working together we've.

Look forward to reaching our goals and providing value for all of our stakeholders in 2023 and as always if you have additional questions. You can always reach us at 6154 657000.

Thank you.

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

[music].

Senior director of Investor Relations. Please go ahead ma'am.

Thank you Chad.

Morning, and welcome to community Health Systems' fourth quarter 2022 Conference call. Joining me on today's call are Jim Henson, Chief Executive Officer, Kevin Hanigan, President and Chief Financial <unk> Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical Officer.

Consequently, 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.

All calculations, we will discuss exclude gain or loss from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses.

Expense from government and other legal matters and related costs.

Where expenses from the settlement of professional liability claims for which the third party insurers obligations to ensure the company for the underlying loss has been settled.

Expense related to employee termination benefits and other restructuring charges gain.

Came from core trust transaction data.

Gain on sale of equity interest in making healthcare health LLC and a change in estimate for professional claims liability related to divested locations.

With that said I will turn the call over to Tim mentioned, Chief Executive Officer.

Thank you Shelly good morning, and welcome to our fourth quarter Conference call.

Before we begin I would like to take a moment to express our heartfelt sorrow for the loss of our friend and colleague Ross Comal.

Rob served as our vice President of Investor Relations from 2016 until it's passing last month.

Many of the new Roth personally and I appreciate that this work to build strong relationships with our shareholders and the analysts who cover our company.

Those of US who work closely with Ross This is a tremendous loss given.

Given the dedicated Sun, rather husband and father, our deepest sympathy goes out to his entire family and I welcome calls Ross of France.

Now turning to our fourth quarter and year end results.

122 was a challenging and in many ways a pivotal year for health care providers in terms of our work to rebuild volumes at the tandem exercise to stabilize our workforce and offset inflationary pressures.

At CHF, we made considerable progress in each of these areas, especially during the second half of the year.

Let me start with volume we finished the fourth quarter with our strongest volume performance of the year and that was true across all key volume categories.

Same store admissions increased by four 4% on a year over year basis to 3% sequentially and a 99% of our 2019 pre COVID-19 baseline.

Covid related inpatient admissions were 3% of total admissions compared to 8% in the fourth quarter of last year.

Our focus on expanding outpatient access as well as capturing surgery and procedural cases that have shifted from inpatient to outpatient classification resulted in our same store adjusted admissions increase of eight 2% year over year and exceeded the 2019 baseline.

Same store surgeries increased four 2% from the prior year to 5% sequentially and continued to perform above the 2019 pre COVID-19 baseline.

Same store <unk> volumes were very strong in the quarter, increasing eight 7% year over year, three 6% sequentially and finished at 102% of 2019.

In the fourth quarter same store net revenue declined one 3% due largely to the decreased volume of Covid medical admissions in the prior year quarter.

Our focus on building higher acuity service lines continues as demonstrated by further strengthening of our surgical case mix index.

Compared to the 2019 baseline the surgical CMI is now up 3%. Despite the large movement of orthopedic cases that have migrated to outpatient classification.

We continue to invest in service line development and provide a recruitment to further grow the acuity across our markets.

Inflationary pressure continues to impact operating expenses and margins, but we made progress reducing contract labor throughout 2022.

We have also managed non labor expenses below inflation.

Excluding pandemic relief fund EBITDA performance was at its highest level in the fourth quarter every year in line with our expectations as well as historical trends.

Kevin will talk about that more in his remarks.

Yes.

Looking ahead, we remain focused on our four priority areas, which we believe remain essential to driving stronger results for our markets and the company.

First with accelerated growth strategic capital investments and access points outpatient services and inpatient capacity are enabling near term volume gains and increasing our potential for long term growth.

We have been consistently investing in our portfolio over the last five years, we have added more than 640, new licensed beds as well as 80 surgical and procedure suite to our existing health systems.

Across many markets, we continued to expand our geographic footprint and to increase market concentration with new primary care specialty care urgent care freestanding emergency centers and ambulatory surgery location.

And provided recruitment remains essential to continuous growth in 2022, we had our best recruitment year over the past five years.

Our secondary focus includes specific actions to strengthen our workforce.

We made very significant progress reducing contract labor during the year and ended 2022 with strong gains in employee recruitment and retention.

Contract labor totaled approximately $80 million in Q4 compared to $140 million in the prior year and $100 million last quarter.

Our first cohort of students graduated last month, and Port Charlotte, Florida, which was a celebratory milestone for those new nurses and for us.

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

Next our work to control expenses includes our margin improvement program supply chain initiatives and productivity enhancements.

During 2022, we made positive strides, including measures to consolidate service lines and some market, creating greater efficiencies and those health care systems.

For 2023, we remain focused on incremental contract labor reduction and other specific tactics to mitigate the inflationary pressures and the operating environment.

Finally, our commitment to advanced safety and quality is at the heart of everything we do.

There are many measures that demonstrate results in this area, but today I'll just highlight one.

In 2012, CHS hospitals embarked on a journey to create inherently safe health care systems and now we have a full decade worth of data that shows how much progress we have made.

In 2022, we achieved an 87, 9% decline in our serious safety event rate from the baseline established 10 years ago. This equates to thousands of patients who experienced better outcomes as a result of this focus.

Our safety program is one of the longest running and most successful in the industry.

Want to congratulate and thank our clinicians support teams leadership and everyone at CHS, who make safety their top priority every day.

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

Thank you Tim.

And good morning, everyone as Tim mentioned, we saw meaningful volume recovery and expense management in the fourth quarter and as expected achieved our highest volume and earnings performance of the year.

While lower acuity of inpatient admissions and Payor mix changes pressured our top line. The improvements we made in length of stay and contract labor in our management of non labor expenses below inflation contributed to us having our best EBITDA quarter of the year, excluding pandemic relief fund.

Additionally, sequential improvement in same store net revenue key volume metrics and EBITDA bode well for us as we begin 2023.

In the quarter. We also continued to take advantage of opportunities to improve our capital structure by reducing our debt while maintaining adequate liquidity.

Moving to fourth quarter results net operating revenues came in at $3 billion $142 million on a consolidated basis.

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

This was the net result of an eight 2% increase in adjusted admissions.

<unk> is commercially insured COVID-19 patients during that search.

Adjusted EBITDA was $404 million during the fourth quarter, we recorded $2 million of pandemic relief funds compared to $46 million recognized in the prior year period.

Excluding the pandemic relief funds adjusted EBITDA was $402 million with an adjusted EBITDA margin of 12, 8%.

As a reminder, we did not include any pandemic relief fund and our 2022 adjusted EBITDA guidance and.

And going forward, we do not expect to receive or recognize.

A significant amount of pandemic relief funds from the government.

With regard to expenses.

Specifically related to employee costs, we experienced an increase of four 5% and our average hourly rate for employees on a year over year basis.

On a sequential basis based pay inflation grew at approximately one 5%.

On contract Labor expense, we continued our sequential improvement.

As well as making significant progress over the prior year.

During the fourth quarter of 2022 contract labor was approximately $80 million compared to $140 million in the prior year quarter.

On a sequential basis in 2022, our contract labor was $190 million in the first quarter $150 million in the second quarter $100 million in the third quarter and $80 million in the fourth quarter.

We anticipate continued progress reducing our contract labor throughout 2023, albeit at a slower pace.

We have effectively executed several cost reduction initiatives and thats non labor expenses continued to trend below inflation.

Overall, we experienced a moderate increase of approximately 3% over the prior year. Despite a $30 million increase in medical specialist fees, the $40 million increase in malpractice insurance and $8 million related to Hurricanes and all.

All other increases and decreases in non labor expenses netted to a reduction of approximately $40 million.

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

Turning to cash flows cash flows provided by operations were $300 million for 2022 compared to cash used in operations of $131 million for 2021.

Excluding the repaid Medicare accelerated payments in 2021 cash flows provided by operations were $950 million for 2021.

We expect these cash inflows to now come in during 2023.

Also due to the timing of certain payments in 2022 that normalize next year, we expect our working capital to improve in 2023.

Moving on to Capex full year 2022.

Capex was $415 million compared to $469 million in.

In the prior year and was in line with our expectations.

As we mentioned on last quarter's call, we effectively adjusted our pace of spending on capital expenditures to reflect the operating environment without materially slowing our growth opportunities.

As we look at the full year of 2022, we took advantage of market conditions in the early part of the year, while interest rates were favorable by refinancing and extending $1 5 billion of debt maturities lowering our interest rate from 665% to $5 two 5%.

And in the second half of the year, we repurchased a total of $645 million of debt for an aggregate cost of $345 million of cash capturing $300 million of discount.

These transactions combined lower our cash interest on an annualized basis by over $58 million.

The company's net debt to EBITDA is currently seven nine times due mostly to lower EBITDA attributed to the current operating environment.

As we manage through this environment, we remain focused on our longer term goals of lowering our leveraging and increasing our free cash flow.

Borrowing base capacity.

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

As we previously mentioned we continue to have interest from outside parties related to potential divestitures and we are also assessing opportunities to add to our portfolio.

As these opportunities emerge.

We analyze the future growth and earnings profile of specific assets and assessed the impact potential transactions would have on our future financial leverage and free cash flow generation.

During the quarter, we received $85 million of cash proceeds for the sale of one facility in West, Virginia, which closed on January one 2023 and.

And we also signed an agreement to sell our last remaining facility in West, Virginia, which we expect to close on March 31 2023.

Now I will walk through our full year 2023 guidance.

Net operating revenues are anticipated to be 12, two to $12 6 billion.

This represents a 4% to 6% growth in same store net revenue.

Adjusted EBITDA is expected to be $1 billion $4 75 to $1 $625.

Net loss per share diluted is anticipated to be a 65 loss to a <unk> <unk> per share based on weighted average diluted shares outstanding of 130 to 131 million shares.

Cash flow from operations are anticipated to be 675 million to $825 million.

Capex is expected to be $450 to $500 million.

And cash interest is expected to be $760 million to $780 million.

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

We are focused on the opportunities, which lie ahead for us.

Kelly at this point ill turn the call back over to you. Thank you Kevin.

May reenter the question queue and at this time, we'll pause momentarily to assemble our roster.

Yes.

And the first question will come from Brian Tim Quillin with Jefferies. Please go ahead.

Good morning, you had <unk> on for Brian just wanted to say congrats on the quarter. So I think I'll go ahead and touch on contract Labor clearly are executing well on this front just wanted to know what's driving the sequential improvement and can you quantify how much more space do you think you have to bring that down here. Thanks.

Sure. Thank you for the question and I can start that off and Tim.

Now if I Miss please feel free jump in.

Early in 2022.

We began our centralized recruiting efforts for nursing.

By April we had all of our hospitals kind of rolled into that centralized recruiting effort.

Doing so has really allowed us to improve and expand our ability to bring in new employed nurses, which ultimately it's been the hurdle.

Being able to take out contract labor. So as we've made progress and I believe our nurse recruiting is up 18%.

Year over year in 2022 that has allowed us to take out contract labor.

And reduce those costs.

Be it at a significantly lower cost to the company.

And as we go forward in 2023, certainly the pace of reduction is going to come down.

You think about fourth quarter and first quarter, historically has been higher quarters for utilization of contract labor, particularly around our markets in Florida.

Where we have more seasonality.

But.

I would expect this ultimately when things level out to be somewhere in the $50 million to $60 million per quarter on average range for contract labor. So I think we have some room, although I think it still takes a little time for us to get down there.

In the current environment.

Thanks.

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

Alright, Thanks server related topic, but a little bit bigger just the midpoint of 2023 guidance on a year over year basis ex cares grants EBITDA margin improvement about just under 200 basis points. So maybe you can help talk to the specific buckets of that improvement be very interested in the <unk> line specifically in that.

It sounded like you think contract labor may be able to get down to it.

That could be down $150 million to $200 million, if my math I'm just curious if that's the right ballpark.

Yes, I think you're absolutely right I think contract labor.

Based on.

Full year of <unk>.

2022, we had about $520 million of contract labor.

At our current run rate.

Even if we stayed flat in 2023, we would see it $200 million reduction in contract Labor I think we will make a little more progress.

In that throughout 'twenty three.

Guess, it's $200 million to $250 million year over year reduction now.

That does come back to us in terms of of Sal.

Salaries and wages as we replace some of the contract labor with employees.

Estimate somewhere in the neighborhood of 30% to 35% of that.

Reduction in contract Labor comes back to us as employee cost in terms of inflation on FWB.

Estimating for 2023 about a 5% inflation rate on the average hourly rate.

So that combined with some additional employees as we.

Takeout contract labor would be how you get to <unk>.

Estimate for next year.

Got you and then.

Could you just remind us what is the total EBITDA contribution if it was positive for the facilities that were divested in 2022, it may be including the one that closed on 123.

Yes overall for the facilities that were closed divested and I would also lump in some of the consolidated services.

And service line closures, probably had a small net negative contribution.

During 2022, so those should be accretive going into 2003.

Okay, so slightly great. Okay. Thank you.

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

Okay.

Great. Thanks.

So it sounds like Youre, making a lot of progress, but I guess when you updated your medium term outlook.

You changed the margin target a little bit.

EBITDA.

Average numbers half a turn higher now so I was wondering if you could kind of maybe.

The breakdown for US exactly what maybe has changed in your view about where things are I guess I think about things right now.

Kormos volumes pricing labor and other costs as they are one of those four or some of those companies in those four things maybe coming in worse than you thought when you provided the original guidance anyway to think about that.

Sure.

Go back.

Year ago, when we initially started putting out those medium term targets and looked at where we are today.

Certainly inflation.

Is at a much bigger impact than we had previously anticipated, particularly around labor.

So just being realistic about where we are a year later and having indoor.

Endured kind of the increases in labor contract labor, which no one anticipated.

A year ago to even be where what we experienced during 'twenty two let alone where we're still at today.

Still a headwind.

For us, albeit improving and we believe it will continue to improve.

And in terms of.

Kind of on the net revenue line I would say Theres continued pressure, particularly from government payers.

On net revenue and on rate.

Is there any reason to think that the.

<unk> will eventually catch up.

Over time, we always thought about catching up on a lag is it just the <unk>.

AG part that you are updating this four or do you kind of feel like it's.

Mismatch there permanently.

Yes, no I think this is more of a lag.

We're just kind of factoring in.

To the equation here.

And beyond beyond medium term.

Certainly focused and believe we'll continue to make improvements in.

Ultimately get back to two where we had originally anticipated.

It's just a matter of timing and the insight we have today as we look out over the next three to five years.

As things the closer we get to that the more insight will give more clarity as we.

We sit here today, we just thought it was reasonable.

Two.

Make a small adjustment.

To those to those goals.

Alright, great. Thank you.

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

The trajectory of volume growth over the course of the year and if you're considering any volume headwind from the recent cyber security incident at all at this point. Thanks.

Sure.

Let me start off so you are right, we have kind of quarter.

4% to 6% net revenue growth in terms of volume.

I would anticipate.

Probably 2% to 3% so about half of the net revenue growth was volume half is right.

In terms of kind of where we're at in our recovery, we think we still have opportunities.

To increase our admissions.

Made significant investments over the last couple of years and we are still experiencing some recovery.

From Covid are.

Outpatient, particularly our clinic visits we've seen.

Great growth over these last couple of quarters and ultimately.

Those will translate into more procedures in.

More surgeries in inpatient admissions down the road, Tim if there's something you might add share in terms of the migration of inpatient cases to outpatient that seems to have leveled off. So we don't believe that's going to be as large of a headwind, but just to reiterate for those cases, the broad broad majority of those cases that.

Did move from inpatient to outpatient.

We've we've captured that within our existing healthcare delivery systems and our hospitals are in our ASC environment. So we feel really good about that contribution going forward into 2023 and beyond with a full pipeline of additional access points afcs. What have you that were exited the portfolio in terms of the near term growth opportunity.

Throughout the rest of this year, so adding incremental beds, leveraging our focus on strengthening the workforce recruiting more SaaS. So we can open up every one of those that should be a strong catalyst for us for incremental volume growth.

Okay and anything on the cyber security incident, you want to add.

Sure.

No.

Not a whole lot to add there, but just for clarity.

We have a third party.

We had contracted with for secure file transfers this third party <unk>.

<unk> the data breach.

And in the process of that.

The.

A couple here.

File CHS files.

We're able to be accessed the breach did not occur.

To best of our knowledge within our system. There is no. We have no evidence that there was any breach of the CHS systems and we've not experienced any type of disruption in service nor do we anticipate any.

Any disruption in service.

Great. Thank you.

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

Hi, Thanks.

Our condolences on Ross, it's really sad to hear about that.

So if you just wanted to ask about yeah of course, so wanted to ask about some of the drivers of the operating cash flow improvement year over year. So can you.

You talked a little bit about this looks like Youre looking for I think a $450 million pick up some of that is the EBITDA growth Youre looking for and you talked to them about the kind of the onetime items maybe impact in 2022 that are now 223 collections.

Sure. So a couple of items I'd point to.

One is the repayment of deferred payroll taxes.

$73 million. This was COVID-19 related benefit that allowed us to defer payroll taxes.

Half of it was repaid in 2000.

'twenty, one and half of it was repaid in 2022.

<unk> done that payment.

We will not we will not occur again that deferral.

<unk> back in 2020.

We did.

Decrease our days in AP during 2022 near the end of the year, we took advantage.

Some discount opportunities and paid some things early we'll be able to turn that around in 2023 kind of pick that back up which will be a positive.

Cash flow item. Similarly, we lost a day in AAR during 2022.

We would expect to be able to recapture that day.

So those items of working capital I.

I would say it would be positive impacts.

In 2023, the other thing that I would point out in terms of kind of positive impact on free cash flow for our cash flow from operations would be our interest payments as we continue to.

Refinance some of our debt and pay down some of our debt our cash interest will be significantly lower in 2003 and it was in 'twenty two.

In addition in 2022 as part of the refinancing and.

Debt pay off we did have to accelerate some of our cash interest payments.

Approximately.

$50 million to $60 million.

<unk>.

Lower interest cash interest in 2023.

Our next question will come from Andrew Mok with UBS. Please go ahead.

Hi, This is Thomas on for Andrew could.

Could you walk us through the trend in inpatient acuity throughout the year and with your focus on investment in higher acuity service lines. How do you expect acuity to trend in 2023.

Related to lower medical case mix index.

And so depending on the level of Covid in the prior year quarter, It certainly impacted our year.

Year over year comps as the year went on and as I mentioned, we grew some of our inpatient surgeries.

So some of those volumes improve throughout the year, we did see our surgical case mix improve which yielded a stronger gained by yearend and overall case mix index.

Versus 2019, I don't know if we pointed this out earlier, but we did actually grow our case mix index versus 2019 across both medical and surgical. So we believe that's evidence of our investments in the service line strategies, the recruitment strategies and the transfer centers success, bringing higher acuity patients into our health care systems.

So while we saw a dip in last year versus 2021, we're really pleased with what we saw on versus 2019 than anything that I think the only thing that I would add Andrew.

Certified and we're seeing an increase in higher acuity cardiovascular.

Services and then also some neurology.

We are focusing on some of those high end procedures as well.

Other service lines, putting effort into and we're seeing some of the gains from that.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Mr. Tim Hansen for any closing remarks. Please go ahead Sir.

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

Let me end today by thanking the caregivers and support teams across our organization to provide patients with safe quality health care. They do a remarkable remarkable job I also want to acknowledge our local health system and CHF CHF leadership teams, who share our commitment to achieve the best results possible working together we.

Look forward to reaching our goals and providing value for all of our stakeholders in 2023 and as always if you have additional questions you can always reach us at 6154657.

Thank you.

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

Q4 2022 Community Health Systems Inc Earnings Call

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