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

Good afternoon, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, and joining me today is Kevin Hammons, CFO of Community Health Systems; and Ross Comeaux, Vice President of Investor Relations. Kevin has a great presentation lined up for us. So Kevin, the floor is yours.

Thank you, and good afternoon, everyone. And Andrew, thank you for hosting us at the Barclays Global Healthcare Conference this year. I'm joined today with Ross Comeaux, our Vice President of Investor Relations. It's great to be here with everyone today, and thank you for your interest in Community Health Systems. During this presentation, I'll provide an overview of CHS as well as our response to COVID-19, and I will walk through a number of our growth strategies. And then Ross will provide some recent financial highlights. But before I begin, I would like to mention that some of our comments today will include forward-looking statements. And so we would encourage everyone to read our risk factors in our SEC filings. Starting on Slide 4, let me provide a brief overview of the company. We are one of the largest publicly traded hospital companies in the United States, operating both acute care hospitals and outpatient facilities across the continuum of care. Our portfolio at the end of 2020 included 89 hospitals in 16 states, with approximately $12 billion of annual net revenue and $1.8 billion of EBITDA. On an annual basis, we care for approximately 500,000 inpatient admissions and 2 million emergency department visits each year. As a result of our strategic initiatives and divestiture program, we now operate a stronger portfolio in better markets from which we can drive sustainable long-term growth. The majority of our hospitals and access points are organized in regional networks or in close proximity to other CHS hospitals, with approximately 90% of our hospitals in markets with populations greater than 50,000 in the combined statistical area. And now I'm going to turn to Slide 5. If you think back over the past couple of years, the company has undergone a considerable transformation. And through this transformation, we've repositioned the company for future success. From 2017 to 2019, we strengthened the foundation through our divestiture program, strategic initiatives, net revenue initiatives and our strategic margin improvement program. As a result of these strategic initiatives, we delivered improved performance in 2019. We entered 2020 with strong momentum, but our progress was negatively impacted in March as a result of the global COVID-19 pandemic. Utilizing a dual-track strategy, we quickly restarted our operations, allowing the company to continue to treat patients throughout the pandemic. However, while we were managing COVID, the company also completed its divestiture program, continued to execute our growth and margin initiatives and improved the capital structure and significantly lowered our leverage. As we move into 2021, we're still managing COVID, while at the same time continuing to advance our strategic initiatives. We remain focused on strong execution and building upon our momentum through targeted net revenue growth initiatives, increasing profitability and expanding margins, improving positive annual free cash flow and further reducing our leverage. So the entire management team remains optimistic about the opportunities in front of us. Turning to Slide 6 now. This slide illustrates the locations of our hospital portfolio at the end of 2020. Our divestiture program has been very beneficial, resulting in a stronger portfolio of hospitals and markets with larger population and growth potential with a well-distributed and balanced revenue base. You can see we're in the more suburban and urban markets, with strong markets in Fort Wayne, Tucson, Northwest Arkansas, Birmingham, Huntsville, Knoxville as well as parts of Texas and Florida. It is worth noting 4 out of our top 5 revenue states are in the Sun Belt, including Alabama, Florida, Texas and Tennessee, all of which are markets with generally strong economic growth and growth prospects and states that are currently non-Medicaid expansion states. On Slide 7, I'll provide a brief COVID-19 update. From the beginning of the pandemic through today, safety has been our #1 priority for all of our patients, our staff and providers. Prior to COVID, the company has made a number of investments across the organization to improve our scale and efficiency, which were particularly beneficial as we navigated the pandemic, including Telehealth, our Transfer Center and our supply chain. Our scale and resources have remained valuable during this pandemic period. Importantly, we've remained agile during the various ways with good expense management. Our dual-track strategy, which includes clinical and operational management, has allowed the organization to safely deliver health care services for both COVID and non-COVID patients. As an organization, following the initial waves of COVID, we had a strong recovery in the second half of 2020 despite higher COVID case counts in our markets. As you can see, after a challenging second quarter, during which we experienced negative net revenue growth, our same-store net revenue and EBITDA margins improved in the back half of 2020. During the fourth quarter, COVID case counts increased during each month throughout the quarter, ultimately peaking in mid-January, with new COVID case counts declining over the past several weeks. Our teams continue to do an extraordinary job of caring for patients with COVID as well as those with other health care needs. And now I'll walk through a number of our growth and operating strategies. On Slide 9, I would like to cover our strategic imperatives, which are targeted areas of focus to drive success. We rolled out our imperatives in early 2018 and have created broad alignment across the entire company as a result. First, safety and quality is our primary strategic imperative. We are focused every day on creating a safe and high-quality environment of care, which is essential to all of our health care systems and communities we serve. Second, operational excellence includes strategies to effectively and efficiently operate hospitals and access points and provide exceptional service to patients, physicians and employees. Next, connected care embraces consumers. We have been placing more resources around digitally connecting with patients, navigation programs, online presence, our Transfer Centers, all of which are designed to ensure we stay connected with our patients and helping them navigate our networks of care, while improving their experience. And finally, competitive position is about how we grow our market share and revenue. Our continued execution on all these imperatives is leading to improved adjusted EBITDA and adjusted EBITDA margin growth. Turning to Slide 10. We are completely focused on developing and growing our portfolio of hospitals and markets following the recent completion of our formal divestiture plan. This growth objective summarizes our strategy. First, we are focused on a balanced approach, which starts with a strategic planning process that identifies and advances opportunity to grow both outpatient and inpatient services based upon each market's unique opportunities. We believe this, coupled with the prudent leveraging of our resources and a heightened focus on execution, will continue to attract patients and providers to take market share and successfully advance our competitive position. Moving on to Slide 11. We have placed more emphasis on multiyear strategic planning at each hospital, market and region. And our teams work very closely with our hospital leadership teams, their Boards and medical staff, and leverage a number of data sources to identify additional development opportunities for growth. To further grow our ambulatory footprint and outpatient revenues, we remain focused on access point expansion, where we are adding scale to support specific markets by investing in freestanding emergency departments, urgent or walking care clinics, physician practices, ambulatory surgery centers and diagnostic centers. Next, our strong -- stronger core portfolio provides a number of opportunities to expand or enhance service lines in areas such as orthopedics, cardiology, neurology and others. And this is a key driver of net revenue growth in acuity, particularly on the inpatient side of the business. And to drive both outpatient and inpatient growth opportunity, medical staff development remains a priority as we continue to recruit the right physicians based on each individual market-specific opportunities and needs. Capital prioritization remains key, and we have a focused approach that aligns with strategic plans to ensure we are effectively allocating capital and investing in opportunities with strong long-term growth potential. Now turning to Slide 12. To support each market's unique strategic plan and growth opportunities, the organization has invested in a number of corporate-led initiatives. First, our Transfer Center, that continues to expand and grow, supporting more than 3/4 of our hospitals today by placing inbound patient transfers at our hospitals from both non-CHS as well as CHS-affiliated hospitals. The Transfer Center also continues to provide data analytics capabilities, and that helps the organization identify future opportunities for service line expansion or advancement as well as for opportunities to expand capacity due to increased demand. Our provider and clinical outreach is targeted towards health care providers, including physicians, EMS services and other health care centers across our markets to ensure our services are top of mind for their patients. We have been investing in digital and consumer engagement to provide more efficient communications with current and potential patients, with elements that facilitate scheduling and patient follow-up as well as a search engine for optimization and ideal placement of digital marketing strategies. Another key initiative that has been very successful is our Accountable Care Organizations, and I'll discuss that initiative further on the next slide. On Slide 13, first on the ambulatory development side, we operate 13 freestanding EDs, over 80 urgent care clinics, over 600 physician practices and 46 ambulatory surgery centers. And we have a good pipeline of additional development opportunities that are in various stages of development. We saw strong Telehealth demand during 2020, with over 650,000 annualized visits. Our previous investments in that platform allowed the organization to ramp up this service quickly during the COVID-19 pandemic, enhancing patients' access to physicians and accelerating our recovery. Through our ACO initiative, which just finished its third year, we're building upon strong partnerships with physicians, with a focus -- shared focus on outcomes and value. This initiative includes over 5,000 participating physicians and approximately 300,000 Medicare fee-for-service lives. And we're very pleased with the results, which include 8 out of the 15 ACOs achieving shared savings in year 2 of the initiative. As I mentioned, we have a good pipeline of development opportunities. As part of our strategic planning process, we conduct comprehensive market analytics, which have identified ample de novo expansion opportunities. We are also working on select acquisition and joint venture opportunities. And we remain committed to on-demand and digital channel development, which includes enhancing Telehealth and online capabilities for our patients. Slide 14 provides some examples of recent investments as we continue to target capital investments into high-growth opportunities. In the fourth quarter of 2020, we opened a new micro hospital in Tucson, Arizona, which is our third acute care hospital in that market. Also, during the fourth quarter of 2020, we completed a replacement hospital in LaPorte, Indiana. Since 2018, we added approximately 300 incremental inpatient beds in our facilities as well as over 50 new surgical and procedural suites to help meet increased demand in those markets. Our gross pipeline is strong, including a replacement hospital in Fort Wayne, Indiana that we expect to open in the fourth quarter of 2021 and a de novo hospital in Tucson and with a planned opening date in the first quarter of 2022. We also have additional facility development with de novo and expansion projects as well as additional service line expansion opportunities in areas such as cardiac, neuroscience and post-acute care. We believe all these investments will build upon and enhance our growth opportunities going forward. So let me now ask Ross Comeaux to go through some of our financial highlights. Ross?

Thank you, Kevin, and good morning, everyone. As Kevin mentioned, I'm going to walk through a number of financial highlights, and then I'll turn the presentation back over to Kevin to talk about some of our medium-term financial goals. Moving now to Slide 16. 2020 was really a transformational year for the company, and we achieved a number of accomplishments that strengthened the foundation of the company and positioned us for future growth. In terms of the portfolio, during the back half of 2020, we completed our previously announced divestiture program, which we initially introduced back in 2017. As a result of the program, we generated $1.6 billion of divestiture proceeds, with the proceeds being used for debt reduction, along with strategic and capital investments in our Transfer Center, access points, service line enhancements and a number of the other growth initiatives that Kevin walked through earlier. On the operational side, we have implemented key improvements, including revenue cycle enhancements, shared service efficiencies and new contracting strategies. These programs delivered expense savings in the back half of 2019 and during 2020. And as a result of these programs, we expect to deliver additional cost savings for years to come. Looking at the balance sheet, we achieved meaningful improvements and lowered our leverage. Since our notes offering in January of 2020 and as a result of a series of capital market transactions, we paid off over $1.1 billion of debt, lowered our leverage by approximately 1.5 turns and reduced annual cash interest expense by approximately $190 million. Turning now to Slide 17. This slide includes our debt maturity profile at the end of 2019 and pro forma reflecting transactions in 2020 and earlier this year. Looking at the slide, you can see that we have meaningfully extended maturities through a number of capital market transactions. To highlight those, early in the first quarter of 2020, we extended $1.5 billion of first lien notes to 2025. We paid down our ABL in the first half of the year, and it remains undrawn. In the third quarter, through the open market, we purchased $261 million of debt with $143 million of cash. During the fourth quarter, we launched a cash tender offer, reducing debt by $87 million with $78 million of cash. We then executed an exchange, utilizing $400 million of cash and 10 million shares of stock to retire $700 million of debt. In December, we extended 2023 first lien bonds out to 2027 and 2029. And then in January of 2021, we extended $1.8 billion second lien notes to '29 and $1.1 billion first lien notes to 2031. Adding all this together, we've extended $7 billion of senior notes, retired $1.1 billion of debt and captured approximately $340 million of discount from debt retirement. Following these transactions, we call the remaining $125 million of 2022 notes with cash on hand earlier this quarter. So through these efforts over the past 15 months, we have meaningfully reduced annual cash interest and significantly extended debt maturities. Our next debt maturity is not due until June 2024. Turning now to Slide 18. Here, we've included some recent financial performance in the fourth quarter as well as for the full year of 2020. Our 2020 results were strong compared to the prior year. On a consolidated basis, net revenue was lower versus 2019 due to our divestitures as well as from lower volume related to the impact of COVID-19. Adjusted EBITDA for the fourth quarter was $614 million, which increased 37.4% year-over-year and included approximately $153 million of pandemic relief funds. And if we back out the pandemic relief funds during the fourth quarter, adjusted EBITDA increased 3.1% year-over-year to $461 million compared to $447 million of last year. In the fourth quarter, acuity, payer mix and improvements across a number of expense categories helped to drive the year-over-year EBITDA growth. We also delivered strong cash flow from operations for the year. And as a reminder, during the full year 2020, the company recognized $601 million of pandemic relief funds. On Slide 19, we've included a few highlights related to our ongoing expense management initiatives. Over the past couple of quarters, we've been focused on opportunities to utilize the company's technology and scale to drive expense savings. And these efforts will remain a future priority for the company. Our management team initiated a strategic margin improvement program during the third quarter of 2019, and that plan continues to deliver savings. The program included a detailed analysis of corporate shared services and hospital administrative costs. And we continue to refine and execute that program and continue to add additional opportunities to the plan. During 2020, the strategic margin improvement program stayed on track despite COVID-19. Looking at the fourth quarter, we delivered strong savings on the SWB and other operating expense lines as a percent of net revenue. Throughout 2020, our supply expense line was negatively impacted due to our higher pharmaceutical lab, PPE and other supply costs associated with our management of the pandemic. That said, we expect to drive supply expense savings going forward. As we think about full year 2021, we expect expense savings from the strategic margin improvement program to build throughout the year, with more significant cost reductions in the back half of 2021. Switching now quickly to Slide 20. We delivered improved EBITDA margin performance over the past several years. This slide displays our consolidated adjusted EBITDA margin from the fourth quarter of 2017 to the fourth quarter of 2020 on a rolling 12-month basis. As you can see, adjusted EBITDA margin has improved, from 10.7% since the end of 2017, to 15.3% at the end of 2020. This improvement has been due to both the divestiture of lower-performing hospitals as well as the execution of our growth and margin initiatives. We expect to continue to deliver strong EBITDA margin performance going forward as we execute across all of our strategic initiatives that we walked through today. And at this point, I'll turn the presentation back to Kevin.

Thanks, Ross. And finally, on Slide 21, we've been pleased with our recent performance and execution and we are focused on continuing this momentum as we move forward. And as we think about medium-term financial goals in 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 we plan to reduce the company's leverage below 6x. Beyond that, we will remain focused on further reducing the company's leverage. Our entire management team is very optimistic about the opportunities in front of us, and we believe that our focus will deliver increased value for all of our stakeholders. I want to thank everyone for your time today. And Andrew, thank you for hosting us today. I'll turn this call back over to you, and we'll look forward to catching up with everyone in the near future.

Great. Thanks to Kevin and Ross for that wonderful presentation. That concludes track 4 of the Barclays Global Healthcare Conference. Thank you to all for participating, and please enjoy the rest of your day.