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

Thank you, [ Abby ], and thank you, everyone, for joining us for our next presentation. And with that presentation, I'm proud to have the team from Community Health Systems. From the team, we have Kevin Hammons, Chief Financial Officer; and Ross Comeaux, Vice President of Investor Relations. Kevin, before I turn it over to you and Ross, I'd like to first thank you, as always, for taking the time to come to our conference. I've always appreciated that, especially I appreciate this year winds virtual and not actually in Florida. But anyway, thanks as always. Thanks to both of you, as always. And with that, everyone on the site should have access to the presentation Kevin is going to take us through that presentation accordingly. So please reference that -- reference the presentation up on the website. So again, thanks, Kevin, and I will go ahead and turn it over to you.

Well, thank you, Larry, and thank all of you for joining us today. It's good to be with you in this virtual format this year. Hopefully, next year, we can meet again in first. So today, as Larry mentioned, we are going to walk through our investor presentation, which is posted on our company website. But before we get started, I would like to turn to Page 2 of the presentation. And I'd just 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 now to Slide 3. We're excited to provide you with an update of the company. So today, I'll present an overview of CHS, to discuss our management of COVID, then a walk through progress across our growth and operating strategies have repositioned and strengthened the organization for what we believe is long-term success. And then Ross Comeaux, our Vice President of Investor Relations, will highlight some of our financial items. Moving to Slide 4. CHS is one of the largest publicly traded hospital companies in the United States. Our current portfolio includes 84 hospitals in 16 states, with over $12 billion of annual net revenue. Our strategic focus is on markets with attractive grower profiles, with the majority of our hospitals now located in regional networks or within close proximity to other CHS hospitals. Because of our company's scale and resources, along with the operating strategies we've deployed, the company has been able to safely and effectively manage through the various ways of COVID. As an organization, we're very proud of the response to COVID of our [ opco ] leader ship teams and our clinical teams. And while managing COVID, we've also continued to invest into our growth is across our markets. On Slide 5, this highlights our journey over the past few years to transform, strengthen and reposition the company for growth. Looking back at 2017 to 2019 time frame, we took a number of steps to strengthen the foundation of the company. These included our divestiture program, the introduction of our strategic imperatives, the rollout of a number of net revenue initiatives. And at the end of 2019, we initiated a strategic market improvement program. As you know, COVID presented a number of challenges in 2020. And while we effectively manage the pandemic, we continue to transform the company through efforts by completing our divesture program, executing on our growth and margin initiatives as well as improving the capital structure and lowering our leverage. Throughout 2021, we've obviously continued our response to the pandemic. Meanwhile, we remain focused on the future as well as on continued execution related to ongoing net revenue initiatives, expanding our EBITDA margins, improving annual positive free cash flow and further reducing our leverage. Slide 6 includes the locations of our hospital portfolio now at the end of the third quarter. Our portfolio is strong and what we believe to be well positioned with the well distributed and balanced revenue base across parts of the country with attractive population trends and favorable economic conditions. The portfolio today is in suburban and midsized metropolitan markets with strong presence in markets such as Portland, Indiana, Birmingham and Huntsville, Alabama, Maxville, Tennessee, Tucson, Arizona, [indiscernible] as well as along the Gulf Coast of Florida and throughout Texas. Additionally, 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. Going forward, we're focused on growing our market share across all of these markets. Now I'll move on and provide a few comments on COVID-19 on Slide 7. [indiscernible] is always a key focus of our organization for our patients, our staff and our providers, and that has certainly remained the case throughout the pandemic. As I mentioned, our scale and resources have been valuable as we've managed pandemic, and we continue to leverage existing and ongoing investments into Telehealth, the [indiscernible] and our supply chain. During the pandemic, there have been a number of coated waves across our markets and by utilizing our dual-track strategy that includes clinical and operational management. We've kept essential services open and safely operating for COVID as well as non-COVID patients. In the third quarter, we saw our most prominent surge of COVID cases, admitting approximately 15,000 positive patients into our hospitals. During the third quarter, although we did experience some deferred care and suppressed levels of non-COVID patients, the level of non-COVID demand during the third quarter remained higher than in previous surges. And we're proud of the care that we were able to provide both, again, those COVID and non-COVID patients, which has continued on into the fourth quarter. Overall, our teams continue to do an extraordinary job of managing the pandemic across the communities that we serve. And going forward, we expect that deferred health care demand to return over the next several quarters. Now let me walk through a number of our growth and operating strategies. Turning to Slide 9. We rolled out our strategic comparatives in the early part of 2018, creating broad alignment across the company on these specific areas to drive success. First strategic comparative is safety and pallet. We remain committed to creating safe and high-quality environment of care, which is essential to our organization. Second, operational excellence include strategies to improve our efficiency and our execution for our physicians, patients and employees. In terms of Connected Care, we've invested resources digitally connecting with patients, the navigation programs, online presence and our transfer center all of which held to ensure we stay connected with our patients. These strategies help patients more easily navigate the continuum of care In competitive position include growth strategies that are focused on growing market share and net revenue. We believe our continued execution across strategic imperatives will continue to deliver improved adjusted EBITDA and adjusted EBITDA margin growth. On Slide 10, we utilize a detailed multiyear strategic planning process across all of our markets. This involves a deep dive per hospital on market area demographics as well as hospital specific strategies for growth. This process helps to formalize plans, investments and execution to drive market share across each specific market. While the divestiture program is underway, we were actively investing across our core markets ,high growth opportunities and a balanced philosophy with investments in both the inpatient and outpatient side of the business. Across our markets, we are investing in access point expansion to support our hospitals and further build scale and breadth in the communities we serve. These investments include ambulatory surgery centers, urgent walk-in care, freestanding emergency departments as well as physician practices. Our current core portfolio provides great opportunities to expand our enhanced service lines. And we're continuing to develop and enhance our service lines, which are -- which is increasing our acuity as well as inpatient revenues. Our centralized recruitment function and strategies around hiring, retention and training are helping to further develop our clinical standards. And finally, we continue to invest in capital across our markets with a focus on investments with strong growth potential. Now turning to Slide 11. To support these markets growth opportunities, we've invested in a number of corporate-level initiatives to help drive [indiscernible] First, as we've talked about, our transfer center and the value-add of increased visibility into our markets for future development. Our transfer center currently serves approximately 75% of our markets and the enhanced visibility provides additional data regarding opportunities for potential capacity expansion, new service lines, in recruiting new providers to drive incremental market share. And we look forward to further optimizing this initiative in quarters and years to come. We continue to invest in provider clinical outreach, which includes physicians, EMS services and other health care centers in our communities. And we're also investing in digital and consumer engagement [indiscernible] current potential patients, and we're investing in online digital marketing strategies. And lastly, on this page, our accountable care organizations have been very successful, and I'll talk a little bit about that on the next slide. On Slide 12. Here, first let me point out on the inventory side, we currently have 16 freestanding emergency departments, with our 17th opening soon in the Northwest Arkansas market. We care clinics and over 600 physician practices as well as 41 ambulatory surgery centers. We also have a strong pipeline for future development. During our market-by-market strategic planning process, we continue to utilize comprehensive market analytics to identify de novo expansion opportunities. And we're pleased with the 3 recent joint ventures that we announced a few months ago, 1 each with Acadia, Select Medical and Kindred. And we're also working on some additional joint venture opportunities. And again, we remain committed to on demand and digital channel development. Our accountable care organizations are in our fourth year and our ACO strategies continues to strengthen our partnerships with independent and employed physicians with a shared focus on outcomes and value. I'm extremely pleased with the results as our ACOs are continuing to achieve shared savings. On Slide 13, this includes some recent investments on the inpatient side, which are also driving growth. In the fourth quarter of 2020, we opened a new micro hospital in Tucson, Arizona, and a replacement hospital in the Fort Wayne, Indiana. Since 2018, we've added over 300 additional inpatient beds in our hospital as well as over 50 new surgical and procedural suites to help meet increased demand. Our growth pipeline on inpatient side remains strong, including a replacement hospital in Fort Wayne, Indiana, which we just opened up a few weeks ago in November as well as a de novo hospital in Tucson, Arizona, which will be our fourth hospital in that market, which we plan to open in the first quarter of 2022, and we're working on some additional facility development and expansion projects that will be announced in future quarters. We're continuing to expand our service line areas -- in areas such as cardiology, neuroscience, spine, post-acuity specialty care. And with that, Ross, let me now turn it over to you, and you can go through some financial highlights.

Right. Thank you, Kevin, and good afternoon, everyone. Now I'm going to walk through a couple financial topics. Moving to Slide 15. Slide 15 includes a number of accomplishments that we've achieved over the past few quarters. First, as a reminder, we completed our divestiture program during the back half of 2020. While we were executing that multiyear divestiture program, we were at the same time making strategic investments in our core markets. Kevin just walked through a number of those investments that we've been making over the past couple of quarters. As a result, our markets are well positioned to continue to drive EBITDA growth going forward. Second, on the operational front, we've implemented a number of efficiency improvements that are delivering cost savings. And moving forward, we expect to deliver additional savings from these programs. And then on the balance sheet side, we've made significant improvements since our notes offering back in January of 2020 and the results of capital market transactions in 2020 and 2021. We lowered our leverage by over 2 turns, paid off over $1.3 billion of debt and reduced annual cash interest expense by approximately $210 million. [indiscernible] we've also extended over $7 billion of debt maturities. Moving now to Slide 16. This slide includes some financial performance for both the third quarter and on a year-to-date basis. Overall, as you can see, our 2020 results -- 2021 results have been strong. For 3Q '21, same-store net revenue increased 7.1% year-over-year. Consolidated EBITDA was up almost 12% to $482 million. This did include about $19 million of pandemic refunds, and there were no pandemic relief funds reported in the prior period of 3Q '20. Excluding the pandemic relief funds, adjusted EBITDA was up 7% to $463 million. If we look back at our performance versus the pre-pandemic period, we've driven good growth over the past couple of quarters compared to the third quarter of 2019. And excluding pandemic relief funds, adjusted EBITDA increased 19%, and our adjusted EBITDA margin was up 280 basis points despite operating 19 fewer hospitals. This points to a stronger portfolio as well as continued operational improvements that Kevin just walked through. Turning now to Slide 17. Here, we highlight our debt maturity profile at the end of 2019 compared to the third quarter of 2021. As you can see, we've significantly improved the balance sheet and capital structure through a number of transactions. Recently, in the second quarter of 2021, we extended $1.4 billion of second lien notes from 2024 to 2030. And now our next senior note maturity is not due until 2025. So we have a really nice runway to continue to execute our strategies and drive incremental growth over the next several years. Also, it's worth noting that last week, we announced that we extended our $1 billion ABL facility from 2023 to 2026. And then now turning to Slide 18. Here, this slide kind of walks through our EBITDA margin improvements over really the last 4 years. This is on a trailing 12 on basis net revenue growth investments that we've highlighted today and cost efficiency programs have helped to drive these adjusted EBITDA margin improvement. As we -- as Kevin mentioned, we initiated a margin improvement program in the second half of 2019. That program remains on track, and we expect the plant [Audio Gap] plan when we introduced it back in January. However, we've really made significant [Audio Gap] We're continuing to target adjusted EBITDA margins of 15% or higher into 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 of 6x. Beyond this current medium-term financial plan, we all remain focused on further reducing the company's leverage in the outyears. Finally, we believe that our continued execution will deliver increased value for all of our stakeholders. Thank you, everyone, for your time today. And Larry, thank you again for hosting us, and we look forward to touching up with everyone again in the near future.

Thank you.

Thank you, Ross. Thank you, Kevin. Thanks for taking the time today. I truly appreciate it. I don't know if you want to fill any questions. Do you want to go ahead, wrap it up or -- what's your preference?

Yes. Happy to take a couple of questions.

Happy to take a couple of questions. Okay. Okay. Kevin, you gave or maybe Ross your commentary on the guidance side. The divestitures are largely behind you. You kind of hit your 15-plus percent margin target, both on adjusted and nonadjusted certainly in the last 3 or 4 quarters. I mean does -- the current labor environment -- I know it's possessing certain challenges. But how do you feel that that's going -- how do you feel that playing out as you kind of look a little further into the -- into kind of 4Q 2022, you sense that there could be any relief as it relates to the labor equation?

Sure. I think it's a great question, something we're paying close attention to. Certainly, in the near term, I think you have a little bit of a headwind as a result of labor. We are seeing -- as we did in the third quarter, pretty significant utilization and costs associated with contract labor and higher utilization of travel nurses. We're seeing some of that continue into the fourth quarter. As COVID cases, although certainly coming down, not coming down at the same rate as some of the previous surges declined. And you're also seeing some spikes in COVID cases kind of sporadically in some places throughout the country, which what we're seeing is [indiscernible] keep the rate -- contract labor rate for traveling nurses in an elevated level. Rates not coming down as quickly as we may have otherwise expected. It's likely to continue on kind of through the fourth quarter, maybe into the first part of '22, depending on what COVID does. But I think at some point, as we look out into the middle part of 2022. And I believe we get past COVID. We think that moderates I think we -- although you may still see some elevated pressure on the labor inflation going into the year, again, some moderation in less utilization of contract labor, less impact from a premium pay and over time and sign-on bonuses and so forth as things moderate back to a more normal level.

Okay. Kevin, to that extent, has -- had the mandates or most recently, the preliminary injunction against the mandate, I mean -- has that -- does that create an ebb and flow in some of these challenges within certain markets and so forth?

We haven't experienced that yet. As a company, we had not mandated the vaccine. Our plan was to comply with the federal rules and now it looks like that at a minimum is going to be delayed, and maybe the mandate will not take effect. We are in 1 state that mandated in New Mexico, did have a mandate back over the summer. And although we saw a few instances where nurses left our facilities, and were able to cross over state lines and work in Texas where there was not a mandate. If you have a mandate at the federal level, that kind of takes that option away from them to be able to go work somewhere else. And we did not experience any sort of disruption in New Mexico when that mandate into effect. So we're still continuing to encourage our medical staffs and nursing staffs to be vaccinated. We're continuing to get an increased number of employees get vaccinated. That continues to rise. And at this point, we do not expect to see any sort of disruption.

Okay. Okay. Great. I have a question coming here from the line. The thoughts around refinancing the callable first lien notes in '22 were the preliminary plans for refinancing the callable first [indiscernible] 2022. And I guess I would maybe just add on to that. I know your interest savings are north of $200 million at this point. I mean do you have a kind of a soft circle number in your mind as to what incremental opportunities you could have on interest savings?

We're certainly keeping a close eye on that. We do have approximately $3.6 billion that becomes callable in the first quarter of next year, another $700 million that's callable in December of next year. A big portion of that has an 8% coupon and about $1.4 billion at 6 and 5 8s. Given where the market is today, and presumably, the markets hold pretty close to that. We'll keep a close eye on it into the first quarter and kind of measure -- I think the math is pretty easy to do on that, and we can calculate some savings potential, which we believe there's great opportunity for us to further improve our cash flow, it is resolved and get that financing activities.

Yes. And to that extent, in terms of capital deployment, you obviously freed up a considerable amount of excess cash in the past couple of years through performance and the balance sheet activity. Your thoughts. Deployment of capital, it seems that there's a pretty attractive growth profile on the development front internally from an organic perspective. Is that kind of your -- would it be safe to say that you're kind of your #1 priority that in fact tuck-in acquisitions or anything of that magnitude would not come into play a strictly organic growth profile?

Yes. Our strategy -- our focus right now is on our existing markets where we can invest capital in those markets to continue to grow market share, continue to expand services leverage some of those fixed costs that we already have in place and believe that, that has a much quicker and higher return on investment at this point, then going out into, say, a new market. So in the near term, certainly, our focus is on our existing markets and being opportunistic with some of the improved cash flow that we'll add.

Okay. Just to wrap up, Tim. Our -- the divestiture plan, obviously, is that completely behind you now with their any potential asset monetizations going forward opportunistically or anything of that magnitude?

Yes. Formally, that plan is behind us. And we're not out there currently marketing anything for sale. We continue to get some inbound interest. We would certainly be opportunistic, and we're continuing to monitor kind of market conditions across our portfolio. If the business environment changes in a particular market or some inbound interest comes [indiscernible] overly compelling, certainly something we would consider. With the pandemic, we believe that our current portfolio is kind of positioned to benefit largely from some demographic shifts, population and economic shift into some of the Sun Belt states particularly where we're located, we think that's going to be a benefit as we come out of the pandemic for us. If we find that we have a market that business environment changes or having to go the other way, certainly something we would consider.

Okay. I said one last question. I go to just jump in one last one. The last -- I'm going to say in the last hour or so, we've seen the markets take a turn for the worst off of a bit, the new variant hitting the U.S. and some news out of South Africa. Third quarter -- and I'm tying that to your third quarter, which was one of the best quarters you had in quite some time. In a quarter, we also had -- your pandemic exposure was that -- I mean does that -- in light of a potential wave here, forthcoming, does it give you an element of comfort that you can continue to perform? And in that environment, have you adjusted your model such that you can adapt to incremental volumes, pandemic volumes coming through the system?

Sure. It does. I think we were able to demonstrate kind of through the peak of the surge, the highest surge we've had to date in the third quarter. And really, one of the things that was different about this third quarter surge was that we continue at a higher level of non-COVID business continue to keep that moving through the health care system as more patients, more of the population was vaccinated, people were still comfortable coming into the health care setting. So we had a higher level of non-COVID business as well. It's not to say that there wasn't deferred care because there was. And in some instances, we had to manage capacity at our hospitals and into per care because of the severity of the surge. At this point, as it relates to this most recent variant, way too early to tell. Don't know if that will resolve. Some of what we're hearing at least coming out of South Africa is it's less severe. It is not resulting in hospitalizations. But even that, I think the information is way too early to tell. I would expect not to see much of an impact at this point in the fourth quarter. And as we get close to already in December, and thinking about just how at least some of the other surges if kind of spread throughout the country, and we look at our markets, probably are not the first markets to be hit [indiscernible] Given that, I don't expect there to be much of a change for us in the fourth quarter.

Okay. Wonderful. I think that about wraps us up on time. I -- as is always the case, thank you so much for the time today and for joining us at the conference, and said all the best. And to everyone on the line, thanks for joining us as well. And be safe and [indiscernible]

Thank you, Larry.

Thank you.