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

Thank you, everyone, for joining us for our next presentation. This is Larry Bland with the Bank of America team. Happy to say, with our next presentation, we have the team from Community Health. Joining us from Community Health is Tim Hingtgen, President and COO; Kevin Hammons, Executive Vice President and Chief Financial Officer; and Ross Comeaux, Vice President of Investor Relations. First and foremost, I want to thank the team from Community Health for joining us as always. They've always joined us in years past, and we always truly appreciate that. And before we proceed further, I'm going to turn it over to Ross for a couple of forward-looking statements, and then we are going to go ahead and open it right up to the fireside chat format. So Ross, I'll turn it over to you real quickly.

Great. Thanks, Larry, and thanks again for hosting us again this year at the BofA conference again. We always appreciate attending. So before we begin, I'd like to read a quick statement. Obviously, this 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 the headings such as risk factors in our annual report on Form 10-K and other reports filed with the SEC. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion, and we do not intend to update any of these forward-looking statements. With that said, Larry, thanks again for hosting us, and I'll turn the call back to you.

Okay. Thank you, Ross. Thank you, again, for everyone joining us. I just thought, I'd start it off with Tim. It has certainly been an interesting 2020. I don't know how you want to -- how do you want to put it. But you assumed the role back in January as CEO. Could you highlight us -- for us, your initiatives that you've laid out. And certainly, this has played out a little bit differently than I imagine you anticipated. But could you just give an idea of where you see both challenges and opportunities longer-term and within the current environment, if you will. I'd love to just kind of pick your brain that given maybe your 9 or 10 months into the seat and it's certainly been quite exciting. But I thought I'd just open it up to your thoughts on that front.

Yes. Larry, thanks. And as Ross said, thanks for hosting us this year. Always glad to be a part of your conference. Just a little clarification. I'm still in the President and COO role of the company, I've been in that role for about 4 years. I actually assume the CEO role on January 1 of next year. But with all that being said, it doesn't mean it hasn't been any less of an exciting year here, in our industry or Community Health Systems, but I just wanted to make sure we -- I clarify that. Obviously, following in the footsteps of a great leader of our company for nearly 25 years, Wayne Smith, I have the good fortune of working with him since I joined the company in 2008 as the Vice President of Operations, and as I said, as the COO for the last 4 years. We've been really focused on refining the strategy, the operational framework, obviously, improving the portfolio, improving the capital structure, improving the operations. It's been a hard charge for the last 4 years in particular. I'm just pleased to be a part of this organization. Every day we come to work, we're energized and motivated even though we've had to have a certain high dose of resiliency to work through our portfolio challenges, if you will, but also as we set the company on its new course. But I'm pleased with the progress we're making for sure, and I'm excited and optimistic about the future. And Larry, as you mentioned, the current operating environment is beyond very unique and not what we expected when we started out 2020. I'm obviously proud of how we've navigated it as a company, as an industry. And certainly the pandemic isn't over, we adapt, we demonstrate resiliency and agility throughout this. And we hope we can leverage those skills, frankly, into our ongoing operational model in the years to come. Clearly, again, the pandemic's and the management of it is not over, but I do want to point out, despite our core focus, we're making sure we provide safe care to all patients, including those who are affected by COVID-19. It has not sidelined our strategic focus in the least, nor our execution. We've made great progress across all of our initiatives along the way. In terms of the opportunities, I actually see a number of positives for our company in the years to come. As I said, the divestitures are nearly complete. We've refined that portfolio to clearly a stronger core group of assets and we're 100% focused on building out those assets versus some of the time and attention we've obviously dedicated to the divestiture process over the last couple of years. Clearly, we like the delevering aspects of the asset sales over the last couple of years. But more importantly for me as an operator, it really has gotten us to a place where we can dedicate our time, energy, capital to really driving a good group of hospitals into the future, solid EBITDA and margin profile along the way. In terms of the company, I think we're building a stronger culture. You asked about our strategies. We put a lot of energy over these last 4 years, not to let our operators or our corporate team get distracted with the divestiture process, but instead, really aligning around our strategic imperatives that we talk about frequently and often, and we shared with all of our investors. The first one, obviously, is safety and quality at the forefront. We continue to improve upon our serious safety event reductions, providing better safe procurers, obviously the core product that we offer. Operational excellence, very focused on well-run hospitals, both from a throughput and also from a cost and margin perspective. The next strategic imperative is our connected care focus. That's where we've navigated the consumerism aspects of the industry. Upcoming on that will be some pricing transparency. But for the most part, we focused on direct care of our patients through navigation, through scheduling convenience, through access points, all the things that consumerism drives in our industry, more so in the last couple of years than it has in the preceding decades. And then last, but not least, our competitive position. As I said, stronger core group of hospitals, making smart investments, growing our market share and our volumes, obviously, leads to a stronger profile for the company going forward. And obviously, there's a lot of initiatives that drive those strategic imperatives, but on the net revenue side, strong primary care development. We've invested heavily to a transfer center that we launched in 2017. That's performing, frankly, better than we could have expected. Our Accountable Care Organization or payment innovation strategies are taking root and improving year-over-year. And then our CapEx investments, I think, we're very capital smart. I think we've done the right things. I'll certainly share more details on that if you'd like later, but we certainly have added, I think, good capacity and services across our markets. From an expense management perspective, as I said, driving margin improvement is a key focus of all of ours. We've initiated a strategic margin improvement program, teed it up throughout 2019, formally launched it in the third quarter of 2019 it has a comprehensive array of OpEx improvements, involves our corporate office, shared service centers, supply chain and non-patient facing hospital costs. And we've received some really good results out of the gate with that, and we believe more opportunities in the years to come that should really lead to incremental margin and EBITDA growth for the long term. So to wrap all that up, very excited about 2021 and the future of our company. I clearly believe our opportunities far outweigh our challenges, particularly the current challenges of COVID-19. I believe we've proven to be very adaptive at working through the dual-track philosophy, not letting it derail our improvements of the company and our assets. Go forward, again, just a key focus on execution, being nimble and opportunistic when the opportunities allow, being relevant with the industry as it transitions to perhaps more ambulatory care. Last, but not least, really solidifying our management team. We've got a great group of executives here at the corporate office and in our hospitals and employees across the country who want to do the right thing for our communities we serve. So we're pretty excited about what the future holds for CHS.

Great. Great. And maybe just following a little bit on that, Tim. Your -- certainly, your metrics improved kind of 2Q into 3Q with the pandemic. Can you just talk about what you're seeing kind of as we sit here today, COVID is obviously, you have a resurgence in the pandemic. Do you have a sense of just how that is different -- the same from what we're kind of seeing as we went into the March, April time frame or earlier this year. Is it kind of this dual-track strategy playing out? Just trying to get a sense of what you're seeing today relative to what we -- as I said, we've seen in the past and a little bit about maybe what you -- from that?

Sure. If you look at the pandemic, obviously, kind of hit us all hard, middle of March. There was pretty rapid shutdown orders, a curtailment of elective cases through regulatory orders. So we were basically, I'll say, from -- for all intents and purposes, out of business for a good portion of elective and schedule care, and we saw immediate degradation of our ED volumes, other things that, obviously, patients have choices to provide particular care. At this point in the game, fortunately, we are not seeing that broad-based legislative or regulatory actions for shutdown. And we, as an industry, I think, if proven we can dial up and dial down our elective cases relative to what the local community demands for COVID care are. So that has not changed. I think we're hopeful that, again, in the 15 states, we serve that we're able to limit the amount of time that state agencies feel they have to come in and step in to tell us when it's appropriate or not appropriate to provide elective care. Now obviously, the shutdowns in the first and into the second quarter had serious impacts on our operations and on our earnings that we released in the second quarter. But we bounced back really well in the third quarter because of that dual-track strategy. Again, identifying how can we take the best, safest care of COVID patients, but also have another safe care track for the elective and scheduled business so that patients felt safe, providers felt safe and staff felt safe. And again, we bounced back really quickly with targeted back-to-business plans. We stayed connected with patients who canceled their care or we had to cancel their care due to shutdowns. We actually did more direct outreach to the most vulnerable patients to make sure that they were well and safe and got their care back into our health care systems. Our key staff did not get back to pre-COVID levels in the third quarter, but we are obviously pleased with the consistent recovery throughout the quarter. Despite our strongest surge at that point, which was July into August in the Sunbelt states, which as you know, about 75% of our states where we offer services are in Sunbelt states. So again, overall, pleased with the third quarter results and how we managed expenses. I think we have a better definition of what fixed versus variable is in our industry, but particularly in our company as a result of some of the shock of the system we had early on, and that leads to that resilience and agility that I talked about earlier. In terms of the fourth quarter, what we're seeing now, we haven't changed our approach, if you will. But we've had to refine it. Obviously, as an industry, and frankly, the CDC, regulatory agencies, the government, we've all learned a lot over the last 8 months. So we refined our approaches. We have a very active corporate command center that supports our hospitals by digesting all of that latest and greatest information and helping them put in plans locally to meet their local needs or demands for COVID care, making sure we're compliant with all the CDC and government regulations along the way. There's been a lot of clinical advances, working now through the monoclonal antibodies and the vaccination programs. How do we lead that into our markets? So a lot is going on in terms of how we adapt our response to the current state. We've invested in the past into telehealth, supply chain and transfer centers. I'll be honest, even though we did those purely, I think, for margin and growth perspective, all of those investments served us so well throughout the pandemic, being able to flip in-person visits to telehealth. We continue to do that. And actually, these last couple of weeks, we've seen a large upswing again in telehealth visits because of some of the patients' concerns about coming back to their providers with that current surge that's underway. Now this wave for us, I would say, is more broad. We'll call this the third wave. The fourth quarter wave, a little bit more broad than the previous ones. It's beyond the Sunbelt state, a little bit more focused perhaps up in the north. And -- but for the most part, the majority of our markets are in really good shape of being able to manage the pandemic from -- again, the support we provide them with our investments into those initiatives in terms of our supply chain, our PPE, all those things have us in pretty good standing right now.

Okay. Have you experienced any true staffing challenges? I know we're hearing a lot of that played out in the median. So -- for it's a lot of discussion. Are you experiencing any of that in the way of staffing?

Yes. I think, not broadly, but in select markets that are seeing the most surge. Obviously, it's put us in a situation where we are ebbing and flowing our elective volumes to make sure we'll reach our staff, as I said earlier, to the necessary COVID care in the communities that have the largest uptick in case counts. Where we do have staffing challenges, we're fortunate in Texas, for instance, they have a state staffing tool. Doesn't mean you get staffed instantaneously. But for the most part, there's a pretty good process to go through to get some support from the state staffing pools to support that. And again, in our border communities, in particular, we benefited from that greatly. There was a note this morning I saw from Kevin, from the BofA Analytics Group. And I'd say pretty broad-based across the country, we're seeing, I think some of those trends that he called out. Not every day is perfectly staffed, but the resilience of our care teams, I think the support of all of our operators, we've managed to pull-through rather effectively, as I said earlier. We know we're not through this yet, but again, trying to leverage all of our past learnings and all the resources available to keep moving through the surge without impacting our go-forward strategies.

Okay. Just again to follow-on some of your commentary earlier, and this is one of the questions coming in here. Can you -- in terms of your strategic margin improvement program that you highlighted back kicking off late '19, the margin in the quarter came in at about, I guess, high 13.8%, I believe, was EBITDA margin -- just EBITDA margin. Can you speak to that improvement? And more importantly, is that sustainable longer term? Is that a mindset of how we should be thinking that you can maintain margins in that 13% to 14% range? Or is that a fair question?

So Larry, this is Kevin. Let me jump in on this one, a little bit on the strategic margin improvement program. So here, as Tim mentioned, we implemented this program in the third quarter of '19, really when we kicked it off. We've included a number of kind of corporate office-type expense initiatives, our shared service groups, and nonpatient-facing hospital costs that we've targeted. So we really kind of came up on the third quarter this year, our first anniversary of that program. If we continue to refine that program to include some revenue cycle enhancements, we've targeted some of our outpatient operations to obtain some efficiencies, and we're continuously adding new initiatives to that program as we go forward. So much of what we saw, I think, in terms of expense reductions coming out of this program, are items that will be kind of have a lasting impact. And we think this is more of a continuous improvement type program. So we do anticipate that we'll continue to get further benefit through this initiative. And just -- it's really about how we are identifying the savings opportunities, the discipline we're putting around, tracking and measuring, and it's really becoming part of our culture. So I would say, yes, we believe that kind of the 13.8% margin improvement is partially due to that, along with some of the revenue enhancements that we've achieved and some of the divestitures that we've also were able to divest some low-margin hospitals. But we continuously are targeting kind of the mid-teen margins. It is a kind of a benchmark for us going forward. And we think we're well on our way there and think that these initiatives are lasting. If you go back to the fourth quarter of last year kind of shortly after we kicked off this program, and we saw about kind of mid-13% margins, which was a fairly significant lift over the fourth quarter of '18. And we saw it coming into this year, January and February, our EBITDA was up significantly over the prior year until the pandemic hit in March. And then really kind of the third quarter, as we saw volumes start to improve, we saw our margin really come right back to this 13.8%. So we think we're well on our way to achieving those mid-teen margins.

Okay. Great. Just in fielding a couple of the questions coming in here. Again, a question on the stimulus and the funding of the hospitals through the stimulus programs. Can you talk about kind of your thoughts on what you expect in the next stimulus package to include hospitals in a meaningful way? Or to that end, do you think there'll be incremental payments from kind of residual stimulus programs funding if you will?

I'll start, and Tim, feel free to jump in if you have any other thoughts. At this point, I think it's -- there's still approximately $50 billion left to be spent under the CARES Act that's not yet been distributed. We don't know exactly how that's going to be allocated out. I mean, we expect some of that to go to hospitals. But we don't know how they're going to allocate it out. If they go back to some of the formulas they've used in the past, with the kind of the number of COVID cases and if they refresh that because I believe the last payment for COVID-related cases went through the first week of June. So I would expect that, that's part of it. And given where some of the surges have been subsequent to that, I would expect that we may qualify for some additional relief in that way. And as you are all well aware, they continue to kind of refine some of the guidelines around how you qualify for this. And I still think there is some open question about that, but we would expect there to be some amount of additional money under the CARES Act. And then whether the administration -- the new administration coming in decides to have an additional stimulus package, I still think it's kind of up in the air.

Okay. But it sounds like you do expect additional dollars here from the existing stimulus program. Okay. Great. And Tim, as well, could you speak to obviously, the advanced payments that have been deferred now. Can you speak to when the question coming in about the cadence of those repayments as you look into 2021? I guess, it's kicking off April '21.

Right. So the repayment period really got delayed and now begins April 2021, where the government will start to basically hold back a portion of the Medicare payments that they give to us. For the first 11 months beginning April '21, that recoupment is at 25% of the Medicare payments to us. And then after 11 months, that increases to 50%, that goes for an additional 6 months at that rate. And then anything unpaid at that point begins to accrue interest that, I believe, 4%. So it's a relatively small amount of interest compared to kind of the original program, which was at 10.25%. So as we think about just if the normal -- and under a normal run rate of Medicare business, if we return to that in 2021, we would probably repay over that period from April until the end of the year, approximately $400 million to $450 million of the accelerated Medicare would be paid back.

Okay. That's at 2021?

Correct.

I thought through the end of '20. Okay. Just to be clear. Okay. A couple more questions coming in. The team has done a great job with portfolio rationalization strategy. Kudos to the team. Can you speak to -- have those rationalization efforts had any impact on your recruitment efforts? And have you, in any way, incentivize employees and physicians through this process.

I'll start that off and obviously, Kevin, any thoughts, super to add them. But really, we have not had challenges with recruitment or retention because, number one, we try to really demonstrate our commitment to our ongoing portfolio with ongoing capital investments. We didn't necessarily publish a list of what was going to stay in the portfolio and what was not. But for the most part, our go-forward markets were pretty, I guess, assured that we were going to be a long-term player with them in building out health care services for their community, just based upon our service line developments, our access point expansions, our visibility expansions. So we never -- I shouldn't say never. I mean, most of our markets, I just did not hear a lot of concerns related to the stability of our position as an operator in that market in partnership with that hospital. I think, as I said, we didn't broadcast the divestiture new group. We still supported those hospitals throughout, obviously, but we probably weren't as intent on investing our long-term capital dollars into those markets. That did allow us to redeploy capital to the remaining portfolio. That's where we've seen such gains and as it increased NAV growth, ASC growth. We've added 200 beds -- over 200 beds to our remaining portfolio over the last 2.5 years. So we've demonstrated, I think, through our spend and our service line development, that we're long term players.

And I would just add one thing to that. And our relationships with our physicians, too, are largely driven locally, and we have really good relationships, particularly in our core markets between our hospital executive teams and those physicians as opposed to the relationships really being anchored and the corporate relationship that's really anchored locally.

Okay. Great. I'm going to try to -- we're getting to close to the end here. I'm going to try to sneak a couple more in. Is really, last year, really getting to kind of capital cash flow deployment. But again, the getting back to portfolio rationalization efforts. Can you speak to whether there is any kind of catch-up capital expenditures the company needs to take within its current kind of core portfolio going forward?

I think we've been really capital smart. And we've continued to make capital investments kind of throughout the period that we've been divesting hospitals, we've still focused our capital on those core hospitals that we intended to keep in our portfolio that are meaningful to us from a growth strategy going forward, and we continue to make those investments. I think that is -- sometimes, as you look at some of the metrics around our capital spending and capital spending as a percent of net revenue is kind of a common one, and it may look low compared to some of our peers, and there's probably a couple of reasons for that. One, just being in some smaller markets -- smaller suburban and a little more rural markets as opposed to the urban areas. But also, we were not making some of the larger growth capital expenditures in the markets that we were divesting. Yes, we still have the revenue in our numbers until those divestitures are completed. So that had a little bit of a dilutive effect. And now that we're down to kind of a core group, I think, some of that, from a metric standpoint more normalizes.

Okay. Is the -- is still the way to think about it in that 3.5% to 4% kind of CapEx range as a percent of revenues?

I think that probably steps up a little bit higher going forward now that we're done with the divestiture program.

Okay.

As alluded, we just don't have the dilutive effect of the revenues from those divested hospitals in there going forward.

Okay. And maybe just a question for Kevin as well. The -- you obviously had very sizable cash balances at the end of 3Q. If I recall, I think your asset close -- asset sales post 3Q that generated well north of a couple of hundred million in additional proceeds, if my memory serves me correctly. Can you just give us an idea of what your thoughts are from a capital structure perspective as you're looking out in the '22 and 2023, is -- can you touch on kind of your mindset as it relates to the deployment of capital against your capital structure?

Sure. So yes, I mean, we are in a position right now, I think where we have very good liquidity. We've made some really good progress throughout this year of paying down our ABL, which is approximately $240 million. We did an OMR in the third quarter to pay down about $260 million of our debt and capture some pretty significant discount. We did an early tender -- or we did a tender offer that we launched here a couple of weeks ago, the early tender period closed and we repurchased about $86 million of debt. That was a $400 million tender offer. Really where we're at because of how the market's traded and maybe we're fortunate to come out with some very strong earnings in the third quarter. And then we had an election that I think people have viewed generally favorably with the split government. And then good news on the vaccines allowed our bonds to trade up kind of above our offer. So we still have some cash available to us that we'll continue to look for opportunities to put to use and delever over the coming periods. And then we're in a position now, we've reduced some interest expense. We're getting some EBITDA growth and margin improvement that we've been talking about. And we're looking to be kind of cash flow positive going into -- free cash flow positive going into 2021. And I think that continues to build into '22 and '23 and with kind of solid liquidity, we'll look for opportunities to be kind of delevered over the course of time as the markets permit as well as to kind of begin to refinance some of our debt at favorable interest rates.

Yes. Okay. I appreciate it. I think we probably go and wrap up. I think we're 2 or 3 minutes over here. I want to thank everybody for joining us on the call. Especially, again, I want to thank Tim, Kevin and Ross for taking the time, as always, to join us at our conference. And best of luck in the meetings today and best of luck to everyone throughout the day. Okay. Thank you, again.

Thank you, Larry.

Thanks, Kevin.

Thank you.

Thank you, guys.