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

Good morning, again, everyone. I'm David [indiscernible] , and I'm very happy to be introducing Community Health to our conference again this year. We have with us full slate: Tim Hingtgen, Chief Executive Officer; Kevin Hammons, Chief Financial Officer; and Ross Comeaux, covering Investor Relations. So I think we're going to spend about half the time on some prepared remarks and slides, I'll go off camera, and then return for Q&A. You're welcome to use the Q&A feature, and I have a few questions of my own to get things going. So with that, I guess I'll turn it over to you, Tim.

Great. Thank you, David, and good morning, everyone. As you said, I'm joined by Kevin Hammons, our CFO; Ross Comeaux, our VP of Investor Relations. And we're very pleased to be with you today to share some of our recent highlights and our future opportunities. But before we get started, I'd like to first comment on 2020, which was clearly an unprecedented year. Throughout the pandemic, I have been incredibly proud of the professionalism and compassion demonstrated by our frontline workers and for the leadership, resourcefulness and the considerable efforts of our hospital and corporate teams as they cared for patients across our communities. Now while we've been focused on managing COVID, we also continued to advance some very important strategic priorities of the company. And because of this, we have entered this year with meaningful opportunities and some excitement as we move forward and that's what we plan to share with you this morning. But before I begin, I would like to mention that some of our comments today will include forward-looking statements. So we would encourage everyone to read our risk factors in our SEC filings. Turning to Slide 3 in your packet. I'd like to provide a brief company overview, including where we are today, and also walk through a number of recent highlights. As shown on Slide 4, CHS is one of the largest publicly traded hospital companies in the U.S. As of December 31, we have 89 hospitals in 16 states, over 0.5 million annual admissions, more than 2 million annual ED visits, about $12 billion of revenue and $1.8 billion in adjusted EBITDA at the end the year. Our portfolio rationalization is complete and we were very pleased to announce that in our fourth quarter earnings call. And as a result, we have a stronger core base of assets and markets to grow and develop as an organization. And at present, about 90% of our markets are in larger service areas, over 50,000. So no longer that nonurban profile as an organization, but a higher concentration of markets that serve in regional networks, more in urban and suburban markets, which we believe gives us a better base for growing the company, demonstrating our ability to really prosper in health care in the years to come. These markets have faster-growing population density and some solid fundamentals. So we really look forward to leveraging that. Slide 5 outlines our efforts over the past 4 years to transform and strengthen the company as well as some of the benefits we've seen as a result. So starting in 2017 through 2019, we really focused on strengthening our foundation and that began with our divestiture program, which I just discussed. Throughout the course of those 3 years, we really went through a very focused effort to prune the portfolio and come up with that stronger asset base that I just described. We also introduced some strategic imperatives, which I'll walk you through in a few moments. We identified and really invested in some key net revenue initiatives. And then we kicked off our strategic margin improvement program in 2018 and 2019. So as a result, we left 2019 with some solid momentum. And in January and February, we actually had 12% adjusted EBITDA growth showing that our plans were working. And then in 2020, as you all know, we were impacted by the COVID pandemic in the middle of March. As a result of that, we certainly put some energy and focus to really make sure that we were supporting our hospitals and our communities to effectively manage the impacts of COVID-19. But we also made a focused effort to not stop with our strategic work that started in the years prior. We completed our divestiture program. We executed upon a number of growth and margin initiatives. And as Kevin will describe in a few moments, we improved our capital structure and lowered our leverage. So our plans for 2021 and beyond, we're really focused on executing our game plan, turning our attention to growth. Without the work of divesting assets and spending our time on really fortifying and building out our new stronger portfolio, we see a great line of sight into future earnings potential. We also have focused our efforts on increasing profitability and expanding our margins and continued to improve our positive free cash flow, thereby reducing our leverage. Slide 6 illustrates the locations of our hospitals and markets at the end of 2020. And as I just noted, we have 89 hospitals in 16 states. And with this, you can see the predominance of our asset base is in the Sun Belt states. We now have a very strong and distributed and balanced revenue base as a result of the portfolio work. And we're serving in more suburban and urban markets like Tucson; Birmingham; Naples, Florida; Knoxville, Tennessee; Huntsville; and Northwest Arkansas, all really good markets that are showing some good growth fundamentals. And as I said, we're heavily concentrated in the Sun Belt states. And presently, 4 of our 5 top revenue states are in the Sun Belt, those being Alabama, Florida, Texas and Tennessee. And I do want to point out that currently those are non-Medicaid expansion states, so there may be some potential in the years to come. On Slide 7, I'd like to provide you with a brief summary of our organization's COVID-19 response. And at the onset, we made it a clear focus that we would put safety at the forefront and that's for our patients, our staff and our providers. Our supply chain team, our caregivers, our infection control staff really work to take all the information that was rapidly evolving and make sure that we could help our hospitals define and execute the best response plans possible. We're able to leverage our previous growth investments like Telehealth, our Transfer Center and our supply chain in ways that we frankly did not contemplate before the pandemic, but we were so grateful that we've made those investments into net revenue growth that could then help us manage through the pandemic. And the organization proved to be very adaptive and responsive in terms of our operational adjustments. Particularly after we had the forced shutdowns in the second quarter, we were able to rapidly reopen as those shutdowns were released and that was through our dual-track strategy. And what that means is we really set up defined care paths and units and locations for COVID-positive patients, while setting up a separate track for non-COVID, more elective and routine or scheduled care. And that served us very well in terms of bouncing back very successfully, as you can see on the charts to the left, in the third and the fourth quarters. Despite having greater case counts in the third and fourth quarters in our hospitals, we actually had a very strong finish to the year, which demonstrated that our operational focus, our safety focus and our ability to reopen quickly and bring back elective business, it was relatively successful. Now the most recent wave, which just concluded in January, throughout the course of the fourth quarter, we did see monthly case growth. We peaked in the middle of the month. And as I said, as we see -- working into the month of February and into March, we're at much lower case counts than we were throughout the entire fourth quarter. But the one content I want to point out, as I said on the onset, is really the impressive performance of our health care teams. They did a fantastic job. As I mentioned a few minutes ago, with our stronger portfolio, our organization is very focused on growing our markets. And over the next few slides, I'll walk you through our framework, our strategies, and of course, some recent results. I'd like to start by covering our overarching strategic imperatives, and that's on Slide 9 in your deck. Our strategic imperatives are the targeted areas of focus designed to drive success across the company and they've served as a consistent framework to drive broad alignment and prioritization of our resources. We introduced them in 2018, and really, they forged a very broad and strong alignment across the organization, serving us very well. The first imperative is safety and quality. It's our primary focus, and obviously, it's essential to all of our stakeholders and never has that been more true than through the battling of the COVID-19 pandemic. Next is operational excellence and I summarize this one by saying we need to have well-run hospitals, and that's for the benefit of our providers, our employees and our patients Efficiency matters on certainly throughput, convenience and also on the cost side. On connected care, that's our embracing of consumerism. We have a variety of initiatives surrounding digital connections, patient navigation, our transfer center and they're all designed to simplify the health care journey for our patients and our communities. And we have a mantra that goes with this, which is never discharge a patient, but appropriately help them find that next point-of-care in their health care journey, preferably within our networks. And then lastly, if we do the first 3 extremely well, we know we will advance our competitive position, grow our revenue base, and as a result, improve our market share. Turning to Slide 10. I mentioned previously, following the completion of our divestiture program, we are completely focused on developing and growing our stronger portfolio of our hospitals in our markets. Our growth objective summarizes our approach and has 4 main components. First, we're taking a very balanced approach, meaning that both outpatient and inpatient growth opportunities are being pursued aggressively. We find those opportunities through a very defined strategic planning process that's unique to each market and network to make sure that we're finding the right level of company resources and initiatives that we can invest in to really grow that market. And obviously, really focusing, as I've said a number of times throughout my comments this morning, on crisper, higher levels of execution across the organization. And our expectation is that we will advance our competitive position in each of our networks and markets because of this focused approach. On Slide 11, there are key target elements in each market strategic plan that I'll walk you through. And we work very closely with the hospital leadership teams, with their boards, their medical staff and we leverage a number of data sources to identify that clear line of sight on opportunities for growth, and there's plenty of them. On the outpatient side, we focus primarily on access point expansion, really developing our ambulatory footprints. We've leveraged some new data sources to find new opportunities across the majority of our portfolio and that's for new physician practices, urgent care centers, walk-in care locations, freestanding EDs and ambulatory surgery centers. On the inpatient side, we certainly know we have opportunities to advance service lines and acuity with our stronger portfolio and our network base. This is just providing greater options to really identify with some of our leverage strategies to find out where we can expand services in cardiology, oncology, neurology, whatever the case may be, taking a look at the market share data and our Transfer Center data and then figuring out where we can go deeper and longer and broader to service our communities. Now to take advantage of both of those access points and service line strategies, we need to have qualified medical staff. And we go about that through focused recruitment plans by market and by, frankly, taking doctors from competition because they like all of our focus on the safety, the quality and the operations of our facilities. So certainly seeing opportunities within markets to repatriate or bring new doctors on to our medical staff. And then, lastly, the capital prioritization remains key. We really have an effective allocation process, taking a look at those strategic plans, making sure that we are putting our capital into our strongest growth potential markets. On Slide 12, we have some corporate -- or company-supported key initiatives that drive each market's unique strategic plan options and their growth opportunities, and I'll quickly cover those with you. We've talked quite extensively about our CHS Transfer Center. That's a proprietary system that we operate here out of Franklin, out of our Lutheran, network, to really support about 75% of our portfolio. And it's basically patient logistics from non-CHS or CHS-affiliated hospitals in our networks who need a higher level of care that we can service within our networks. We use robust data analytics capabilities to help us pinpoint future opportunities for service line growth and where we need to expand our capacity and capabilities if, for some reason, we're declining transfers due to being at occupancy. So it's really given us some good daily insights and helped us frame out our capital planning. And then on provider and clinical outreach, as I said earlier, once we built out our services, we built out our relationships, we're able to bring in more providers to help us service those patients at our sites of care. On digital and consumer engagement, we've made key investments into online scheduling, centralized scheduling and a variety of digital connectivity tools to support our patients on their health care journey. And then our Accountable Care Organizations, and just as a reminder, we have 15 of those servicing all of our markets. They performed exceedingly well. We're in our third year of the initiative. We continued to grow our shared savings as a result of that value-based care focus. But equally important, it has really helped us align with physicians and providers in new and innovative ways in our markets to fortify those relationships. And I'll give you some of those results in a moment. On Slide 13, I'll provide you some data points to show that our plans are working. First, on the ambulatory development side, our current ambulatory location inventory consists of 13 freestanding emergency departments, and we'll have 3 more that will come online in 2021. We have 46 ambulatory surgery centers with 3 more coming online in 2021. And we have over 80 urgent care, walk-in care and retail on-demand locations as well as more than 600 physician practice locations. And also spurred by the COVID pandemic, we've provided over 650,000 annualized Telehealth visits last year. So it really was a way to connect patients in ways that we had not seen before despite our prior investments. In terms of our ACOs, we have over 5,000 participating providers with over 300,000 attributed Medicare fee-for-service lives in the model. And last year, 8 of our 15 ACOs achieved shared savings in their second year. So again, very, very successful endeavor for the organization and the providers. In terms of our pipeline for growth, we've leveraged, as I said, some very comprehensive market analytics and we've identified even more de novo and expansion opportunities across our market profile to make sure that we're really going to where the patients and the providers see opportunities to really be convenient, but also expand our access points into our networks of care. And then in terms of acquisitions and joint ventures, this is primarily in the ASC space, and we have an active development pipeline underway. On-demand and digital channels like Telehealth and online scheduling really do have a lot of potential. We're currently enhancing our Telehealth platforms, creating virtual waiting rooms so that we can do more on-demand day of care remotely. And we've invested in some other really unique offerings that we'd be rolling out through 2021. And on Slide 14, we highlight some recent investments, primarily on the inpatient side as we continue to target our CapEx into our high-growth opportunities. Our progress clearly demonstrates that while we are going through the divestiture program, we were actively investing across our core markets to generate near-term growth. So let me walk you through some of our key investments. And at the latter part of 2020, we opened a new micro-hospital in Tucson, Arizona, really expanding our network with the third acute care asset. We also opened a replacement hospital in La Porte, Indiana in the fourth quarter. And throughout 2018, 2019 and 2020, we added more incremental capacity to our markets leading to more than 250 new beds to take advantage of service line expansion opportunities or some of the capacity constraints that we identified through our Transfer Center model. We also added more than 50 surgical and procedure suites like cath labs to really advance service lines and acuity in our hospitals. And then looking to the future, our growth pipeline consists of the opening of a new downtown hospital in Fort Wayne, Indiana -- actually a replacement hospital in the fourth quarter of 2021. And then we have a new de novo hospital opening on the east side of Tucson in the first quarter of 2022. So again, really looking at expanding our networks with new de novo acute care capacity. We also have additional beds coming online. We opened up some new beds in our Cedar Park, which is a suburb of Austin, Texas, in the course of January and February. And then right now, under construction, we have some de novo joint venture post-acute projects under construction in our Knoxville market. And then as I said previously, very focused on service line expansion in terms of cardiac, neuroscience and specialty care. So in summary, I'm confident that with our plans, the resources and our demonstrated ability to execute, our portfolio is very poised for ongoing growth. So with that, I'd like to turn it over to Kevin.

Thank you, Tim, and good morning, everyone. Tim has just highlighted the company and walked through a number of the strategies we've executed on as well as some of our strategic focus going forward. I'm now going to walk through a number of financial topics. Turning to Slide 16. 2020 was a transformational year for the company, and we achieved a number of accomplishments during the year. First, I'd like to point out that during the second half of 2020, we completed our previously announced divestiture program, of which we initially announced back in 2017. In total, under this program, we generated approximately $1.6 billion of divestiture proceeds. These proceeds have been used for debt reduction, along with strategic and capital investments in Transfer Centers, access points, service line enhancements and other of our growth initiatives. On the operational side, we've implemented key improvements, which delivered significant cost savings in 2020. Going forward, we expect to deliver incremental savings from the program in 2021, 2022 and beyond. In terms of the balance sheet, we made significant improvements and lowered our leverage. Since our notes offering in January of 2020 and as a result of a couple of capital market transactions, we paid off over $1.1 billion of debt, lowered our leverage by approximately 1.5 turns and reduced our annual cash interest expense by approximately $190 million. We were pleased to have accomplished all of this all while managing through a global pandemic. Turning to Slide 17. This is our debt maturity profile at the end of 2019 and on a pro forma basis, reflecting transactions in 2020 and early 2021. Again, we've significantly improved our balance sheet and capital structure through a number of our capital market transactions. Just to recap these transactions. Early in the first quarter, we extended $1.5 billion of first lien notes from 2021 to 2025. We then paid down our ABL in the first half of the year and it remains undrawn. In the third quarter, through an open market repurchase program, we purchased $261 million of debt with $143 million of cash. During the fourth quarter, we launched a cash tender offer, reducing our debt by $87 million. We executed an exchange utilizing $400 million of cash and 10 million shares of stock to retire $700 million of debt. In December, we then extended our 2023 first lien bonds out to 2027 and 2029. And then in January, we extended $1.8 billion of second lien notes to 2029 and $1.1 billion of first lien notes to 2031. With these transactions, in total, we extended $5.7 billion of debt, we retired approximately $1.1 billion of debt and captured $340 million of discount on our debt retirement. Following these transactions, we most recently have called the remaining $125 million stub of our 2022 notes and retired that with cash on hand. Through these efforts in 2020 and early 2021, we have meaningfully reduced our total debt, we've reduced our annual cash interest and we've significantly extended our debt maturities. Our next maturity now is not due until June of 2024. On Slide 18, we've included some recent financial performance. Our 2020 results were strong compared to the prior year. Overall, on a consolidated basis, net revenue was lower compared to 2019, but that was primarily due to our divestitures as well as lower volume related to the impact of COVID-19. However, the adjusted EBITDA for the fourth quarter was $614 million, which increased 37.4% over the prior year. We did record $153 million of pandemic relief funds during the fourth quarter. If we back out the pandemic relief funds, adjusted EBITDA increased 3.1% year-over-year from $447 million to $461 million. And in the fourth quarter, acuity, payer mix and improvements across a number of expense categories did help drive that growth. We also delivered strong cash flow from operations for the year. As a reminder, during the full year of 2020, the company recognized $601 million of government Provider Relief Funds. Turning to Slide 19. This slide highlights our expense management initiatives. We have been focused on opportunities to utilize scale and their technology as well as data to drive expense savings, and this will remain a future priority for the company. As a reminder, our management team did initiate a strategic margin improvement program during the third quarter of 2019. This program included a detailed analysis of corporate expenses, shared services and hospital administrative costs. Our management team continues to refine and execute this plan, which now also includes revenue cycle enhancements, outpatient operating efficiencies as well as other new initiatives. Despite COVID, we have continued to execute the strategic margin initiative program and we will continue to execute on this plan going forward. We expect expense savings from this program to build throughout 2021 with more significant cost reductions in the back half of 2021 as well as incremental savings beyond just this year. Looking at the fourth quarter, we delivered strong savings on the salaries, wages expense line and other operating expense lines as a percent of net revenue. During 2020, our supply expense line was negatively impacted, owing primarily to higher drug, lab, PPE and other testing supplies related to the pandemic. That said, we expect to drive supply expense savings into the future. Moving to Slide 20. We have delivered improved EBITDA margin performance, and this slide displays our consolidated adjusted EBITDA margin on a rolling 12-month basis. Since the end of 2017, our rolling 12-month adjusted EBITDA margin has improved from 10.7% to 15.3%. This improvement has been due to both the divestiture of lower-performing hospitals as well as the execution of our growth and margin improvement initiatives that I just mentioned. We expect to continue to deliver strong EBITDA margin performance going forward as we execute across all of the strategic initiatives that we've walked through today. In summary, on Slide 21, we've been pleased with our recent performance and execution, which we have highlighted throughout this presentation today. As we think about our medium-term goals and moving into 2021 and beyond, we will continue to execute on our net revenue growth initiatives and our strategic margin improvement program. We are continuing to target being above 15% adjusted EBITDA margins in the future. We plan to deliver positive free cash flow on an annual basis. And in the medium term, we plan to reduce the company's leverage below 6x. Beyond that, we will remain focused on further reducing the company's leverage. Finally, I'd like to say that the company is extremely excited about the future. We believe our focus will deliver increased value for all of our stakeholders. And want to thank everyone for your time today. So David, I'll now turn the presentation back to you.

Great. I do have, as you probably know, a bunch of questions. But since we also have some client questions, I'm going to put them to the front of the queue to make sure that they get taken care of. The first one, I can sort of merge with one of my own. The question reads, how should we think about the sustainability of EBITDA margins? And I'll merge that with my question about EBITDA margin expansion. To me, it sounded like you were referring mainly to leveraging fixed costs in key markets rather than cutting costs. So maybe you could smoosh that together and take a whack?

Sure. Let me start off, and Tim, feel free to jump in. I think we have really a balanced approach to improving our margins. Certainly, the growth initiatives that we're talking about will contribute to margin improvement. And I would probably say that a portion of that being in much stronger markets today with our new portfolio of hospitals, we will get some natural organic growth. Our growth initiatives will allow us to take market share and bring in new business. And we're focused on, with our capital investments, in getting a return on that capital. And then probably 1/3 of it does then come from better expense management, reducing cost and our margin improvement program.

Yes, David, I'll add to that. In general, as we walked through in the presentation today, we see a lot of great growth opportunities in these markets. We're very bullish on that. [Audio Gap]