Community Health Systems, Inc. (CYH) Earnings Call Transcript & Summary

Okay. We are live. Good afternoon. Welcome to day 11 of the JPMorgan Health Care Conference. But certainly pleased to continue on here in our coverage. My pleasure to welcome Community Health Systems. It's one of the largest publicly traded hospital companies in the United States. Company owns -- operates 100 hospitals, approximately 100 hospitals, changing frequently so we'll get an update. In 17 states, will generate around $13 billion of revenue this year. We've got a fair amount of the senior management team here, CEO, Wayne Smith; Tim Hingtgen, who is the COO; and newly promoted Chief Financial Officer, Kevin Hammons. And I think we're going to -- we'll sit down and go through the slides. I know Wayne is going to critique my introduction. So I just will say Wayne has had one of the longest tenures in the hospital business. And then at Humana, before that, so he's been around to see a lot of evolution and change in the industry, and we'll appreciate his insights.

Thank you, Gary. I don't know how many times for the years you've introduced me here at JPMorgan, your last job, but that was probably the most outstanding one that you've ever done. I really appreciate for that.

I've been working on it.

Look, actually, we're actually very appreciate to be here. And you all -- let me see if I can get oriented here. You can read the disclaimer statement really quickly. I went to [ Alvern ] so I can read that really fast. And so hopefully, you can get through it, too. But just in terms of today, let me just kind of tell you where we are as a company. We have 99 hospitals in 17 states. We have 600,000 annual admissions, about 3 million ED visits, revenue about $13.4 billion and an EBITDA of about $1.6 billion. So as you probably know, and we'll talk about this in a second that we put out an 8-K this morning, talking about our guidance for 2020. And over the last couple of 2 or 3 years, we've had a lot of opportunities in terms of trying to improve our portfolio. We were the largest company at one time. We had over 200 hospitals. Over the last couple of 2 or 3 years, we've been working on rationalizing our portfolio. We're now down in terms of the number of hospitals. But the hospitals that we have are in great markets, and I'll talk a little bit about that, and so will Tim. But we have successfully we -- over the last 2.5, 3 years, we've successfully sold about 90 hospitals with multiples of 10x to 12x, which is a really good price for them. And it's been a difficult job, but it's worked out really well. We have clearly improved our portfolio in terms of where we are. We continue to improve as we kind of move forward. Going through all those divestitures is not an easy process, as you might expect, it takes a huge amount of resources. I want to show you a little bit about the portfolio here in a minute. But the most important thing that we've had to been deal with over the last number of years is our debt. And as we can go into 2020, our primary goal will be not -- it has never been really to eliminate all our debt but to rather reduce it and improve our free cash flow and our net leverage. And so debt should not be a burden for us in 2020 as we kind of look to it, it really is about operating issues. The -- this is how our portfolio looks in terms of 99 hospitals in 17 states. The most significant thing, I think it's happened to us as we kind of worked on this over the last few years is now, we are not a nonurban company or a rural company anymore. 80% of our hospitals are in markets with over 50,000 population. So we have moved up in the scale in terms of the size of markets. We moved up in the scale in terms of opportunities within those markets because the growth rate is so much better in those markets for us. Not only do we have good growth and opportunities in terms of internal services as far as our facilities are concerned, but also outpatient, and that's where we think we can see a lot of growth. I think last year, our outpatient growth revenue was about 7%. So as I said this morning, we released our guidance for 2020. And by the way, we've never done this before. But we feel like we've got pretty good insight into [ '20, too ] and our metrics -- our metrics are good and strong. You can read all about it in Gary's notes, he nailed it pretty good in terms of the -- we talked about the -- where we think we'll be in the fourth quarter. We haven't -- we won't release earnings until late February, but Gary nailed that pretty good. And so in terms of 2019, you can see there's a significant difference in terms of improvement from the third quarter margin to the fourth quarter margin. So our guidance in terms of the 2020 is operating revenue of $12.4 billion to $12.8 billion. That's because of the divestitures that's down from before, but that's really a divestiture issue. And EBITDA is $1.65 billion to $1.8 billion and adjusted admissions of 1.5% to 2.5$. And so we can -- we think that -- we believe that we will continue to improve the margin as we go forward in 2020. We think we'd be in the mid-double-digit sometime in the latter half of the year. So with that, I'd like to turn it over to Tim Hingtgen.

Thank you, Wayne. All the work that we put into the portfolio as Wayne has walked us through. I wanted to just to spend a few moments on a couple of key slides. Kind of walking you through the improvements in our core metrics. And what this slide does is it's a recast of our 99 hospitals we have in operation as of today, backing out any of the divestitures from the portfolio rationalization project. And as you can see, a strong performance across all of the key categories. And as we've mentioned, it gives us a much stronger portfolio of hospitals and markets to develop and grow as we reported in our guidance for 2020. Our EBITDA margins also have shown nice improvement. And what we are showing on this slide is our trailing 12-month EBITDA margin starting in the first quarter of 2018 through the third quarter of 2019, you can see the nice upward slope, which we like to see in margin and earnings performance. But it just shows that as we've gone through all of this work. We've focused on the growth in the revenue and the cost improvements. We are indeed seeing that strengthening of the margin, which leads into our forecast for 2020. So how did we do it? We started out by really reframing out our strategic imperatives for the company about 2 years ago. And I would say that these are the most highly focused areas of -- I guess, energy, key initiatives, resources, and we rolled these out across our entire organization, whether it be our hospital operators, our corporate leadership and employee team. We all know what we're working toward to really strengthen our asset base and the company's trajectory into the future. At the forefront, which is always the case for CHS, an intent and strong focus on safety and quality. I'll give you our most recent update on that in just a few moments. Next is operational excellence. And again, pretty core to our business is running hospitals in a very cost efficient, but also a very consumer and physician-friendly way. So as I sum up operational excellence, I always say, hey, we have to really perform in terms of well-run hospitals, making sure that we are indeed doing all the things we can with the right employees, the right doctors and the right metrics, measurements along the way. Next is connected care, and this is basically all of the efforts and initiatives and investments we've made to really swim with the tide of consumerism. It goes to patient connected strategies with digital technologies, online scheduling, ACOs, transfer centers, all of these things in terms of aligning our systems of care to be more consumer and patient friendly. Sorry, I went too quick there. The next one is competitive position. And obviously, we want to strengthen our core position in all of the markets we serve. I'll give you some of the insights as to how we're doing that. But if we do safety and quality extremely well, have well-run hospitals attract patients and doctors through our connected care strategic imperative, we believe the fourth one competitive position is certainly likely to follow. So first up on safety and quality. Again, this is a slide we've shared for several quarters now. But you see the continued improvement in our serious safety event rate reduction. And just as a refresher for those who perhaps don't know what a serious safety event is it would be harm that reaches a patient like a wrong site surgery, a medication error of a certain magnitude. So we do continue to see progress being made a slight uptick in the last quarter. But in general, we're very pleased with over 80% reduction in the 8 years, we've been really investing and driving this type of cultural transition in our hospitals. Now safety is driven by people, process and technology. We continue to enhance our processes, training our people. But the initiatives for 2020 that we're really setting our sights on are more environmental factors in terms of how we design our renovations, our new capacity with more patient safe materials to shelter them from falls. So some impact absorption, materials and things along those lines. We've also started to pilot artificial intelligence in certain areas of the hospital like OB to help the nursing staff be more vigilant in monitoring fetal rhythm or any distress to the mom or the baby. In terms of the growth strategies, we've been at this for quite a while. But we are very focused on building our health care footprint in all of our markets across the continuum of care, outpatient, inpatient and post-acute care. We really know by market where our opportunities -- I'm sorry, lie in each one of these indicators. So outpatient, it may be in terms of freestanding emergency department opportunities, urgent care, primary care practices, whatever the case may be. Inpatient, traditional inpatient and service line driven strategies, which I'll cover in a few moments. Then on post-acute, we offered all of our hospitals, a plethora of resources in terms of operations management and consulting on our own behavioral health units, rehab and SNF programs. And we have a partnership for home health. So when you look at our development along the outpatient continuum of care, we've been really invested in a really smart strategy over 3 to 5-year planning horizons for all of our hospitals and markets to understand where do we put our energy, our resources, where do we see the opportunity and the market share data, and then we design a very detailed strategic plan around those opportunities. For the last several years, we've opened 3 to 5 freestanding EDs per year. We opened up 3 last year that excludes any of our divestitures, so 3 in our remaining portfolio. We have 3 more that are on track to be opening in the first half of this year. So as you can see, we continue to invest in this access point. We like what we're seeing in terms of the ability to expand our acute care offerings via the freestanding ED as an endpoint. Urgent care, primary care, we have over 700 locations for primary care practices. We have almost 3,000 primary care providers in our employee networks. And I want to point out, those are our employee networks. We certainly work with a lot of independent primary care physicians across all of our markets. Among ASCs, we continue to open up new ASCs as well as find new opportunities to partner with providers in established ASCs. We find that a quicker-to-market strategy, helps with our alignment with the physicians, and we are able to, again, make sure that we are skating where the puck is going in terms of outpatient access and migration to payer to the ambulatory setting. Speaking of the outpatient developments. In third quarter, 54% of our net revenues were from outpatient services, that was an increase. So we do see our ambulatory strategies working and driving the net revenue as we would expect. I mentioned the access point expansion, our primary care development, I'll give you some more insights in just a few moments. Our ACO is the same thing. But on consumer-friendly scheduling, we really have introduced platforms because we know patients want the easiest way to gain access to our providers and our systems of care, and we've had really good ramp-up as we deployed our scheduling software platforms throughout our markets. And interestingly enough, about 36% of every patient who's scheduling on that platform, they're new to our system. So we believe it's a strong intake process for our systems to grow our market share for the long run. And then last, digital and online marketing. We have an in-house team of experts. We've been investing in that for about 2 years, really liking the results we're able to modify our marketing strategies at a lower cost with this in-house team. And we also know from Google's own research that about 7% of online searches is related to health care searches. So we need to make sure that we have search engine optimization and digital marketing strategies that really tap into where the consumer is looking for their next point of care. In terms of primary care development, we break it into 2 categories: on demand care, meaning no appointment needed and traditional primary care, and we believe we have to be well positioned in both parts of that. This is our, again, our own employed assets, only does not include independent practices out there. But we now have 80 urgent care and walk-in clinics across our portfolio. We also offer virtual health services across the organization. We have our own app, our own branded app called Virtual Health Connect. On traditional primary care, as part of that multiyear strategic planning process, we always want to make sure we have a strong foundation of primary care. We've added quite a robust number of primary care physicians to our employed physician clinics over the last 2 years. We now have about 1,200 employed primary cares and about 400 primary care locations, and we deem that as a very pivotal point of access for us across the markets. In 2018 -- I'm sorry, in 2019, about 4 million annual visits, which was a 20% increase over 2018. So we do like that we're seeing better positioning across the primary care continuum. In terms of our Accountable Care Organizations, we're now in our third year of the ACOs. And when we launched it, we were -- and still, I think, are one of the largest ACOs operating in the country. We now have our first year of results back to see how we performed on the ACOs. And again, for those who aren't aware, ACOs are for Medicare fee-for-service patients. We have about 4,000 participating providers are employed and independent providers in that mix, over 500 participating locations and about 260,000 to 300,000 attributed lives, Medicare fee-for-service lives. But through our first full year of results, we got those in August, about 60% of our ACOs have achieved shared savings and about half of those achieved shared savings, meaning there was some payments from the Medicare program for achieving certain savings thresholds. So in our first year, that's a very good result. We're very pleased with that. More importantly, as we build these competencies and value-based care and population health management, building our alignment with independent doctors in the markets we serve. We also like the fact that we're able to really demonstrate doctors staying with the ACOs. We have over a 97% retention rate, and every year, we have more doctors, independent doctors joining our ACOs, about 150 to 180 per year. So we do feel like we're demonstrating the value that we can bring as a health care partner. The other big takeaway from our Medicare ACO success stories, the fact that all of our doctors who participate, achieved their MIPS and MACRA or their value-based care component. So it's a qualification for them. And in the future years, it will be more for pay for performance. But in the first year, they all meet -- met their qualification thresholds and had a Medicare rate boost as a result of their joining our ACOs. Moving to the inpatient service line side of things, we still are very focused on driving the acute care side of our business, as I mentioned, very important that we have good ambulatory access and strategies and service lines, but inpatient is still a core focus of our organization. On medical staff development, we employ a large number of recruiters at the corporate level that are helping our hospital leadership teams, facilitate the physician recruitment that comes out of their strategic planning process. Again, another good recruitment year in 2019. 2018 was a banner year for us, about 20% more signed versus 2017. So we continue to really focus on recruiting the right doctor for the right opportunity in the right market. Capital and technology prioritization is really huge for us. We believe we've got a really capital smart way to look at where we put our dollars. And with the better and stronger core portfolio of hospitals, we continue to invest heavily in those markets to go long and to go deep. Over the last 12 months, we've opened up pretty significant capital expansion projects on the acute side in our major markets, Birmingham, Knoxville, Naples, Florida, Tucson, Arizona. We really are focused on investing in those markets, taking advantage of the better population growth and demographics. Our transfer center is still growing quite well, I'll give you an update on how we're progressing in just a moment. We still are focused on the emergency departments, really well-run EDs with the outreach strategies with EMS to drive volume. We actually turned ED volumes positive on a year-to-date basis, following the third quarter, which we believe shows some stabilization in the ED environment. Our freestanding ED strategy certainly helped that, our outreach strategies, our transfer centers are really helping us grow our ED business back into positive territory. And then last is our provider in clinical outreach programs, a sales function that's targeted to the appropriate physicians to make sure that our services are top of mind when they have a patient who has the need. Our transfer center, basically, for those who don't know, is a patient logistics center, it runs 24/7 staffed by our in-house model clinicians, nurses answer those phones. They help facilitate placements from another hospital that perhaps doesn't offer the clinical service helps facilitate them into one of our tertiary or higher secondary service area hospitals. At the end of 2019, we had 25 markets -- I'm sorry, 25 markets with 63 hospitals. And we thought that was going to be the end of our deployment of the transfer center strategy, but we really like the visibility, the insights and the growth rates we're posting that we decided to expand it to about 75% of the portfolio by the end of next year. And these are some of our, again, nontertiary, more secondary level of care markets where we get visibility into where we can grow service lines for the long run. So in summary, for the transfer center, it's really met our expectations, and we see further growth potential in our existing markets and the remainder to bring on board in 2020. So in addition to our focus on growth, we've also been really strongly coordinated and organized around improving our margins as Wayne mentioned earlier. So I wanted to walk you through real quick from an operations perspective, how we're doing that. We've talked about our analytics and our focus on strong salary wages and benefits management, and 2019 was certainly a continued progression along those lines. Shared service centers, those are our business offices, HR, payroll, supply chain. We continue to expand and look for initiatives where we can leverage our scale and deploy more technologies to really drive even a better product across the organization. Supply chain. In 2019, we spent most of the year really building out a very strong in-house team of supply chain leaders, and I'll talk about that in just a few moments, but it will drive more margin expansion opportunities for us into 2020. And in 2019, we actually completed some pretty large lifts on some physician preference categories and partnership with clinicians to achieve some meaningful supply expense savings. And then on vendor efficiencies, that's really our key focus right now. We're in the middle of a strategic expense reduction program as a company. The proceeds from that or the benefits from that, we've factored into the guidance that we've released. We see some upside on the vendor efficiency side as well as further opportunities on supply chain, real estate, other areas of focus for the organization. And instead of just talking about what we're doing, we thought it'd be helpful to show you kind of the progress we've made with our expense reduction and margin improvement opportunities that we've been talking about for the last several quarters. So what you'll see here is a year ending 2019, SW -- salary, actually, this is the salary line compared to Q3, year-to-date 2019. You can see a 90 basis point improvement in our salary line. And then on supplies, it's 40 basis point improvement. And then the opportunity through those strategic expense reduction programs really seeing a lot of that opportunity sitting on the other operating expense line, that's our runway for margin improvement. So with that, I'd like to turn it over to Kevin for a financial update.

Thank you, Tim. As Tim talked through earlier, we've seen strong net revenue performance through the third quarter. As you can see here, on our slide of payer mix, our managed care and other payer classification increased 80 basis points in the third quarter and year-to-date is up 50 basis points with corresponding decreases across the other payer categories. On a same-store basis, year-to-date, our net revenue has improved 4.3%, and our net revenue per adjusted admission has increased 2%. And importantly, we've seen strong improvement in our same-store volume metrics, driven by the operating initiatives that Tim mentioned earlier, including primary care development, the transfer program, ACOs and our targeted capital investments. It's particularly worth noting that on a same-store basis year-to-date through the third quarter, we've seen the strongest same-store net revenue performance that we've seen since 2012. And on a volume basis for admissions, adjusted admissions and surgeries, the highest volume since 2010. Switching to cash flows. Our cash flows through the third quarter of '19 were $191 million compared to $440 million in the same period prior year. This decrease is largely due to the timing of payments around some of our recent refinancing. Interest payment -- cash interest was up about $175 million. Also, we had higher malpractice claim payments of approximately $70 million related to the settlement of some older claims, primarily related to the facilities that we no longer own. We expect cash flow performance to be improved in the fourth quarter and into 2020. Turning to CapEx. We've invested $322 million in property and equipment through the third quarter of '19 compared to $413 million in the same period prior year. Year-to-date, we've added bed capacity in several of our markets, along with surgical, GI and cardiac capacity and several others. We continue to invest more of our capital into our strongest markets, which offer better returns and continue to invest towards high-growth opportunities across additional access points and service line build-outs. We expect these investments will continue to drive EBITDA growth and cash flow performance as we move forward. As we've highlighted in this presentation, our portfolio rationalization plan has strengthened the company and positioned us for future growth. That's worth repeating that with the sale of the Virginia hospitals at the end of 2019, we've now generated $1 billion in proceeds towards our target of $1.3 billion, and we expect to complete this program in the first half of 2020 and reach our total target of $1.3 billion in proceeds. In terms of our capital structure, we've recently extended our debt maturities with the recent exchange that we completed in November of 2019, pushing out our 2022 debt into '27 and '28. We also issued a $500 million tack on to our 8% 2026 first lien note issuance. So along with improving our maturity profile and strengthening our liquidity, these transactions will also provide us runway to continue to execute on our growth strategies. In summary, we are pleased to continue -- with our continued improvements and our initiatives remain on track as we enter into 2020. Going forward, we expect to further leverage these investments to drive improved volumes, market share, acuity and net revenue adjusted admission growth. We expect to drive additional expense savings through these initiatives. And improve our EBITDA margin. After all these efforts, we anticipate improving our leverage as well as our cash flow performance. Thank you for your attendance today. This concludes our presentation.

We'll break out across the hallway in Borgia.