Q2 2019 Earnings Call
Good morning, and welcome to Quorum Health Corporation second quarter 2019 earnings Conference calls.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, today's call is being recorded.
Before we begin the call I'd like to read the following disclosure statement.
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 the company's Form 10-K filing 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.
The company does not intend to update any of these forward looking statements.
Corn health issued a press release last evening with their financial statements and definitions and calculations of adjusted EBITDA and same facility adjusted EBITDA, including reconciliations to U.S. GAAP measures.
A slide presentation is available on the company's website to supplement today's call results discussed today consolidates. The results of corn 26 owned or leased hospitals and the results of Quorum Health resources same facility information excludes the results of the 12 facilities that have been divested or closed since the spin off through June Thirtyth 2019. In addition, the company filed quarterly report on Form 10-Q last evening all discussions today are supplemented by the press release the earnings presentation on the company's website and the Form 10-Q .
All non-GAAP calculations discussed will exclude certain legal professional and settlement costs charges related to the impairment of long lived assets and goodwill the net gain or loss on sale of hospitals. The net loss of closure of hospitals costs associated with associated with the transition of the transition service agreement or T. assays change in actuarial estimates severance cost for head count reductions and executive changes.
Please refer to the earnings presentation located in the Investor Relations section of the company's website at Www Dot for him help dotcom for further description in calculation of adjusted EBITDA and same facility adjusted EBITDA and a reconciliation of these non-GAAP measures to net income, they're most direct comparable GAAP measure.
With that I'd like to turn the call over to Mr., Bob fish Corms precedence.
Welcome and thank you for joining us to discuss Karen.
Second quarter, 2019 financial and operating results.
Joining me this morning are Alfred Lumsdaine, our Chief Financial Officer, and Marty Smith, our Chief operating officer.
On the call today I'll discuss highlights from the second quarter and provide an update on our strategic plan.
Before turning the call over to Marty to cover our second quarter operating results.
Our same facility net operating revenue in the second quarter was $442.4 million, a decrease of 3.5% compared to the second quarter of 2018.
I know that 34% of this decline comes from the two hospitals, which will be sold or closed by the end of this year.
Same facility adjusted EBITDA was $37 million in the second quarter the year over year decline of $3 million.
This entire decline relates to the pending divestitures.
While we experienced a decline in surgeries in admissions for the quarter on a year over year basis volumes improved sequentially due to reduced physician turnover and our ongoing initiatives to expand certain service lines in select markets.
Our volumes for the quarter were also impacted by several plants service line closures.
Looking to the second half of 2019, we anticipate volumes will improve on a year over year basis as we complete the two pending divestitures add or expand service lines in specific markets and continue to mitigate the impact of physician turnover.
Next I'd like to discuss the progress we've made on our strategic initiatives.
First regarding our cost reduction initiatives on our last call, we identified approximately $20 million annual cost reduction opportunity in corporate costs and medical specialist fees as planned we've implemented these and other reductions and expect to see corresponding benefits beginning in the third quarter.
Second I'd like to update you on our divestiture efforts in the first half of the year, we generated $12 million and proceeds from the divestiture of Cynic Mountain in Texas.
In June we announced the sale of Watsonville in California.
As we indicated in our press results in our press release yesterday.
On July 18, the local community healthtrust exercised their right of first refusal on the transaction.
Based upon the terms of the right of first refusal to trust must match the terms of our existing EPA and enter into a definitive agreement of their own.
If no agreement is reached the EPA with Halston health care what will continue.
This has resulted in a short extension of our timeline to close the transaction, but we still feel that we will close the sale by the end of the year.
Also in June we announced the planned closure of Metro South which will be effective by the end of third quarter.
Third, we're making great progress on transitioning our remaining T. assays, we've begun implementation and are on track to go live with our one by the end of calendar 2019 for end to end revenue cycle management services.
This includes the transition of over 700 corn colleagues to our while we continue to expect to achieve $10 million EBITDA improvement.
In the back half of this year as a consequence of this effort.
In addition, we've begun the process of transitioning the responsibility for our IP services provided under our ITC has said.
The nature of this transition requires a staged hospital by hospital approach and it will take until the first quarter of 21.
To fully complete this transition.
As noted in our release yesterday, we've made the decision to remain with our current DHR provider med host.
We believe remaining on the med host platform will provide for the most efficient and effective transition.
We estimate capital expenditures associated with the meadows transition will be approximately $60 million to $70 million beginning in 2019 and continuing through 2024.
In short we have made substantial progress toward transitioning our t. assays and I'm appreciative of the hard work and collaboration that's occurring daily between the quorum team and our counterparts at CHS to ensure that these transitions will be as smooth as possible for both organizations.
A final comment about our progress against strategic goals.
Weve made good headway on divestitures year to date, and we're actively working on four more hospitals to be divested this year.
Combined with the improvement in our profitability as we described.
We expect to reach our goal of six times leverage on a run rate basis before the end of the year, which is an important milestone toward our refinancing.
In short we have made substantial progress this quarter and remain confident and achieving our full year targets I look forward to updating you throughout the second half of the year and now I will turn the call over to Marty for a discussion of our operations in more detail. Thanks, Bob and good morning, everyone.
At a high level, our operating results. This quarter can really be focused on individual trend at a few select hospitals. Most of our facilities are showing strong progress and performance relative to our expectations, while small select group of hospitals continue to work through their specific there specific near term issues, mostly related to independent provider turnover. This is especially true on the volume front, while our volumes on a whole are down year over year, we're seeing some positive underlying trends, particularly in surgeries across our portfolio. These trends give us confidence that we will see improvement in the second half of the year. Our total same facility admissions were down 5.7% in the second quarter of 2019 compared to a year ago and same facility adjusted admissions declined by 3.4% year over year same facility admissions and adjusted admissions were impacted largely by our decision to close negative margin service lines over the last four quarters.
And the impact of the announced closure of Metro South and blew out Illinois.
There is a lingering impact of physician turnover that is being mitigated going forward and Mary in Illinois in Springfield, Oregon.
We expect to see see continued second half recovery on both of those fronts.
This was also the case for our same facility surgical volume, which decreased 2.2% year over year, but importantly, our surgical volumes improved almost 9% sequentially compared to the first quarter.
You will recall in the first quarter that we had for facilities that were dragging on surgical volumes first due to our efforts to try and re syndicate to underperforming AMC than Illinois, and also provide our turnover in G.I. services in Springfield, Oregon in Orthopedics and Marion, Illinois.
While there continues to be some lingering impact on volumes. Our hospital teams have done an excellent job managing this disruption in these markets and recruiting and Backfilling positions that were lost on the front, we're actively assessing and talking to third party partners to work with us on the re syndication of the two facilities in Illinois.
When you normalize the impact of these items, our same facility surgical volumes actually grew 4.9% year over year in the second quarter outside of lower acuity G.
Which actually accounts for all our surgical volume declines in the quarter and ophthalmology and pain management declines.
The recruitment and surgical volume initiatives at the hospital level led to good growth this quarter and higher acuity NT general surgery, Neurosurgery, urology, and orthopedics, which were all up to prior year.
Turning to the same facility EDI visits we saw a 1% decrease year over year and a slight increase from the first quarter. Despite the nearly 3% reduction in IAR volumes associated with the flu season in the first quarter of this year, we continue to make consistent progress improving our mix over the past year and we are still targeting continued improvement going forward.
As we discussed last quarter, we have a new team, leading our managed care initiatives and theyve already begun making progress in negotiating better rates, we've seen some improvement in rates in the first half of this year and we expect to see a bigger lift in the second half of this year.
Finally, I want to provide a bit more detail on the cost reduction initiatives.
As of the end of July we have renegotiated nine medical specialists contracts, including emergency physicians hospitalist anesthesia provider contracts.
We will recognize savings on these contracts beginning in the third quarter that will also ramp up into next year. We're also targeting continued supply cost savings, particularly in our higher cost implant pricing.
Corporate overhead costs will also decline in the second half of the year based on the actions that have already been taken.
In summary, I'm optimistic about the trajectory of our hospitals as a whole and I'm proud of the efforts are hospital teams have put into positioning each market for success in terms of improved margin and volume the decisions. We've made particularly around closing a hospital and service lines are not easy, but they are ultimately appropriate in the best interest of making each market sustainable.
With that I'll turn the call over to Alfred will take a closer look at our second quarter financial results offer.
Thanks, Marty and good morning, everyone.
I'd like to start with an overview of our second quarter results and then discuss expectations for the second half of this year.
As Bob noted same facility net operating revenue of $442 million was down 4% year over year from four $459 million in Q2 of 2018.
This year over year decline was primarily driven by the same facility volume declines that Bob and Marty have already noted, which impacted our revenues by nearly $15 million on a comparative basis.
Included in this year over year reduction as of $6 million decline from the two hospitals that are pending divestiture.
On a sequential quarter basis same facility net operating revenue improved by $10 million or 2.3% in the second quarter of 2019.
Primarily as a result of increasing surgical volumes compared to the first quarter.
Second quarter same facility net operating revenue also reflects a sequential improvement in self pay patient collections from our secondary accounts receivable receivable vendors, which as we've discussed previously have ramped slower than we expected since the transition of these services under our TSC last July .
Moving onto expenses same facility salaries wages and benefits declined 5.1% year over year, primarily due to head count reductions as well as lower performance based benefit expenses.
Same facility supply expense declined 1.8% year over year as a result of the lower volumes, although on a per adjusted admission basis same facility supply expense increased nearly 2% due to our focus on higher acuity service mix.
Our second quarter 2019 results include a $24 million benefit from an actuarial adjustment on medical malpractice liability reserves that relates to prior years.
Excluding this $24 million benefit same facility other operating expenses in the second quarter decreased approximately 3.4% compared to the prior year.
This decrease again was primarily related to the current year impact from the same medical malpractice actuarial adjustment and I'll discuss that in more detail in just a moment.
Moving on our same facility adjusted EBITDA was approximately $37 million for the quarter compared to approximately $40 million in Q2 of 2018.
As Bob has already noted the $3 million decline in total company same facility adjusted EBITDA relative to 2018 matches. The adjusted EBITDA declined from the two pending divestitures.
Same facility adjusted EBITDA for the quarter was 8.3% of same facility net operating revenue.
Given our cost initiatives and the expected impact from our agreement with our one we anticipate expansion in our same facility adjusted EBITDA margins through the second half of this year, particularly once the pending divestitures are completed.
In terms of cash flow for the quarter cash flow from operations was a use of $10 million compared to a benefit of $17 million in the second quarter of last year.
This decline in cash flow from operations is primarily related to the timing of receipt of certain supplemental payments compared to the second quarter of 2018, as well as timing of certain accrued liability payments in the second quarter of 2019.
We would expect to see improved cash flow from operations during the second half of the year as a result of normal timing of cash receipts and payments as well as improved profitability.
For the full year, we expect to be slightly free cash flow positive.
Capital expenditures in the second quarter were $12 million compared to $11 million in Q2 of 2018, the small increase in capex relates to increase spending on IP infrastructure as we begin the transition of our GTS.
Moving onto the balance sheet, our net debt at June Thirtyth was approximately $1.2 billion. This includes $778 million outstanding on the term loan at $42 million outstanding on the revolver.
Cash and equivalents totaled $2 million.
Our senior secured net leverage ratio calculated under our credit agreement was 4.85 times at June Thirtyth 2019.
While the cushion under our net leverage covenant was clearly quite high at the end of the quarter. We expect the commission will expand as we go through the second half of the year in lock step with the anticipated improvement in operating results and the completion of the pending divestitures.
Next I'd like to provide some more color on the adjustment to medical malpractice practice expense and the corresponding reserve reduction that we recognized in the quarter.
Cumulatively this adjustment was for $29 million at our same facility hospitals with $5 million of this benefit relating to 2019 and as I previously mentioned $24 million relating to prior periods.
The adjustment itself results from a change in accounting estimate largely attributable to a greater reliance on the now more than three years of actual medical malpractice claims history. Since the company was spot on as well as added consideration for industry trends.
Ultimately the change in estimate captures a decline in the frequency and severity of our med Mal claims.
Which we attribute to both we attribute to both initiatives that weve implemented in the areas of patient safety risk management and claims management.
As well as certain external factors such as tort reform in key states.
Moving on I'd like to provide additional color on our revenue cycle management transition.
In May we announced that we selected our on RCM for end to end revenue cycle management services. We're currently on track to complete the transition of our revenue cycle functions to our one by year end.
Additionally, our one has committed extra resources to support near term collections and to help to ensure a seamless transition.
We continue to expect that we'll realize a $10 million EBITDA benefit from our agreement with our one over the second half of this year.
And we continue to expect a substantial long term benefit ramping to $45 million of incremental EBITDA in 2021.
You'll note that we've revised our expectations for the long term benefit of our agreement with our one slightly downward as a result of the two hospitals that are currently pending divestiture.
I'd also like to provide some additional comments on the announcement, we made yesterday regarding our agreement with Medhost.
We currently utilize the host platform across almost all of our hospitals through our ITC aside.
As we begin the process of transitioning IP services provided under our existing TSA. We've made the important decision to remain on the meadows platform.
The ITC as they transition will begin in earnest during the third quarter 2019, and is expected to be complete by the end of the first quarter of 2020 Ron.
As Bob noted, we expect the total capital expenditures associated with the menopause transition will be approximately $60 million to $70 million with this cash outlay spread over the next five years.
This estimate includes all hospitals with the exception of the two pending divestitures and could be lower depending on any divestitures that occur before meadows is implemented at a hospital.
As it relates to 2019, the anticipated impact on capital expenditures for the transition falls within the range of our previous expectations for the year.
One last topic I'd like to touch on before moving to guidance is the California Hospital quality assurance fee program our HQLA.
As of the end of the second quarter, the fifth iteration of the H block program ended as scheduled.
The state of California is expected to submit a waiver application to CMS for H. plus six by September Thirtyth of this year and approval is anticipated to take several months.
Given the minimal changes between the fifth and six H block programs. We are optimistic that approval will take less time than in the past.
Nevertheless, until CMS approval is received we will be unable to accrue revenue associated with the H block program.
Which excluding our Watsonville hospital represents approximately $2 million and EBITDA per quarter.
So moving onto our financial guidance, we are reaffirming our full year same facility adjusted EBITDA guidance range of $160 million to $180 million.
While revising our same facility net operating revenue guidance to $1.55 billion to $1.6 billion.
This guidance reflects the expected completion of the two pending divestitures as well as the expected renewal of the H block program before the end of the year.
That concludes my prepared remarks, and I'd like to turn the call back to Bob for some closing comments.
Thanks, operator, once again I'd like to thank all my colleagues for their continued hard work and dedication.
I'm very proud of the progress we've made and look forward to providing more updates as the year progresses. Operator at this time I'd like to open the call for questions.
Lee if he would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question.
And your first question in queue comes from the line of Elie Radinsky with Cantor Fitzgerald. Please go ahead.
Ali Rudinsky. Please UN mute your line you go ahead.
Can you hear me now.
Okay, well can you hear me.
So I just wanted to come from the six times leverage figure for the company as a place for this year for the end of the year. So the mid point of your EBITDA would be approximately 170.
So that would time six will mean that you'll be slightly more than a billion dollars of total debt outstanding European handover year is that.
Correct.
Your math is correct when.
Referred to our six times leverage target that would be on a run rate basis looking at the back half of the year, which has come in.
Go ahead.
Okay. So I just want to confirm that the front half of the year.
As you have.
First on your slide number 19 is approximately $60 million of EBITDA for the.
The first two quarters, where does that include other things.
Including other losses or something that that is in addition to that.
30 million.
The 50 million is correct of course it includes the two pending divestitures, which if they close as anticipated.
For the year would.
It would come out of our same facility adjusted EBITDA.
Okay.
So that would therefore means that you're expecting to get approximately $110 million at the midpoint of your guidance.
Any losses for those two facilities.
That 110 would include those losses coming out of this is that correct. Your understanding is correct.
Okay and then also the debt figure would include.
Any cash proceeds that you may get from the additional I believe you said four facilities or that you're planning on selling in addition to walk watsonville.
And.
The sooner.
Correct correct.
Yes, I just wanted to make sure my math is correct yes.
Okay excellent. Thank you very much thank you.
And your next question comes from the line of Frank Morgan with RBC Capital. Please go ahead.
Hi, you mentioned some of the supplemental programs I was just curious about the wage index adjustment came out for rural hospitals like how much of that is factored in and.
Seems like that's an upside for most folks, but just kind of any handling the size magnitude of that particular payment and how much of that is factored in thanks.
Yes, yes.
I would suggest and Marty correct me, but it's not material.
Thinking about our guidance for this year, yes, you're correct in thinking frankly would be net positive for us, but we have not factored it into the number at this point.
You know watsonville is actually a negative on that and they'll move out. So you take lots of go out of the mix to look at the rest of the hospitals it will be slightly positive, but again, we have we have included in these numbers.
But to Marty's point were not expected to be material.
Thank you.
Thank you.
And again, if you would like to ask a question just press Star then one on your telephone keypad.
And we have a question from the line of sounds Okay with Morgan Stanley . Please go ahead.
Hi, Thank you for the time. This is more just calling in for like subtract just a quick question on the physician turnover.
Was this.
Primarily I'd two facilities or is this something that you've seen in several facilities and.
You've talked about mitigating this and just curious if you have any detail on how how you're planning meeting I had with this and how does this.
Impact your view on admissions for the second half of the year.
Yeah. The color on that simply this is really mitigated to the two hospitals a that I mentioned earlier, primarily Springfield, Oregon, and Marion, Illinois, a Springfield, Oregon actually is the bigger one where we lost independent you guys in the market, who basically made a decision to leave their independent multi specialty group and lead the market that left is that all happened in the fourth quarter of last year, which left us with about a 600 Gi surgery variants for the first half of this year. They have mitigated some of that into the second quarter by some locum services and they've got some recruitment initiatives that are ongoing and will be we think have a better impact in the second half of the year, but if you look at their variance of surgeries in Q1 on Gi in Oregon. It was about 350, they mitigate it down to a variance of about 200 in the second quarter. So they're moving it into right direction on the other one married Illinois right Orthopedics, some orthopedics moved out of the market we have now.
Backfield and they're going to be net positive for the second quarter and then going forward. So it's really primarily relegated to those two markets.
All right. Thank you that's helpful and my last question is and.
10 million benefit you expect from revenue cycle.
Changes could you.
Provide more color on that.
Sure Happy to you can really think of that 10 million a split between $5 million of cost benefit of taking all of our costs that were providing that it takes to provide RCM across the enterprise today and having a lower price point in what we're buying are one for the science of surfaces and that yes. So thats a impact that we'll feel beginning in July .
And over the last half of the year and then the remaining 5 million is expected from revenue cycle improvements in the back half of the year across the continuum of services.
And that really began beginning in October so thats, a fourth quarter impact on the revenue expected revenue improvement versus the costs, which will be spread over the last six months.
Alright, thank you.
Thank you.
And again, that's star then one to ask a question.
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And it appears there are no further questions in the queue I turn the call back over to the presenters.
Thanks, operator again, we'd like to thank everyone for their interest and warrants have a great day.
And this concludes today's conference call you may now disconnect.
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