Community Health Systems, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Community Health Systems' Fourth Quarter and Year-End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Please be advised, that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ross Comeaux, Vice President of Investor Relations. Thank you. Please go ahead.

[Ross Comeaux:]

Thank you, Mike. Good morning and welcome to Community Health Systems' fourth quarter and 2020 year-end conference call. Joining me today -- on today's call are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everyone that this conference 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 risk, which are described in headings such as Risk Factors in our Annual Report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. 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. Yesterday afternoon we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations we will discuss also exclude gain or loss from early extinguishment of debt; impairment expense as well as gains or losses on the sale of businesses; income and expenses from government and other legal settlements and related costs; expense from the settlement of professional liability claims for which the third-party insurers obligations to insure the company for the underlying loss is being litigated; expenses from settlement and legal expenses related to cases covered by the CVR; expenses related to employee termination benefits and other restructuring charges; change in valuation allowances recorded for promissory notes; change in estimate for professional liability claims accrual. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer.

[Tim Hingtgen:]

Thank you, Ross and good morning everyone and welcome to our fourth quarter and year-end 2020 conference call. 2020 was a year like no other. COVID-19 has had a prolonged impact on our lives and the pandemic as certainly impacted the health care industry. I'm incredibly proud of the essential care provided for the communities we serve, the professionalism and compassion of our front-line health care workers and for the leadership resourcefulness and considerable efforts of our hospital and corporate teams that support them. We were laser focused on managing COVID throughout 2020, but we were also able to move other important strategic priorities forward. Because of this, we entered 2021 with meaningful opportunities in front of us and a sense of excitement regarding the future.

[Kevin Hammons:]

Thank you, Tim, and good morning everyone. As Tim described 2020 was a transformational year for the company. As we navigated the global pandemic, made considerable strategic progress and we finished the year strong. Today, I'm going to walk through some details on the fourth quarter and the full year as well as some other recent financial highlights. During the Q4 on a consolidated basis, net operating revenues came in at $3.119 billion, down 5.1% from the prior year due to divestitures. On a same-store basis, net revenues increased 4.5%. This was comprised of a 9.5% decrease in adjusted admissions and a 15.5% increase in net revenue per adjusted admission. Similar to last quarter, our net revenue per adjusted admission benefited from increased acuity, higher rates and better payer mix. Adjusted EBITDA was $614 million, up 37.4%. During the quarter and included in that EBITDA, we recorded $153 million of pandemic relief funds. Similar to the third quarter, our hospital leadership teams executed well with good expense management across a number of categories, including salaries, wages and benefits, which were 90 basis points lower year-over-year on a same-store basis and purchase, services and other expenses, which were 100 basis points lower year-over-year on a same-store basis.

[Ross Comeaux:]

Thanks, Tim and Kevin. At this point, Mike, we're ready to open up the call for questions. We will limit everyone to one question today, but as always, you can reach us at 615-465-7000.

[Operator:]

Your first question comes from Frank Morgan from RBC Capital Markets.

[Frank Morgan:]

Good morning. Great job, guys. When you think about this sub 6 times leverage target over the intermediate term, are you getting there? Is that more a function of margin expansion, because I mean your margins are getting pretty close to the mid-teens right now or is there something really more on the cash flow side, like longer-term view of CapEx? And I guess on the subject of CapEx, I just wanted to verify or excuse me just cash flow, I want to verify that the three hospitals that have already closed on January 1, is that already in your guidance and I think you said there was one more hospital there that had and I'm just curious if that was factored in either the procedure of the EBITDA? Thanks.

[Kevin Hammons:]

Sure, Frank. This is Kevin. I'll start off here. As we think about gearing below 6 times levered, we certainly expect to continue to grow our EBITDA and naturally grow into our capital structure and believe that we will get there through a lot of organic growth as well as some additional EBITDA margin growth. So as we think about some of the capital we're spending, the additional access points and growth opportunities we have in our markets with our core portfolio, I believe we'll get there. We'll also be generating positive free cash flow as we move out into the future and think that there are opportunities for some debt reductions through cash flow generation as well. With respect to the guidance, the hospitals that we did close already, those are all factored into our guidance at this point.

[Operator:]

Your next question comes from Josh Raskin from Nephron Research.

[Josh Raskin:]

Hi, thanks and good morning. Could you just give an update on your outpatient development. I think I heard three ASCs and three freestanding EDs this year. Maybe perhaps put that in the context of the $400 million to $500 million in CapEx that's expected this year?

[Tim Hingtgen:]

Hey, Josh, this is Tim. I'll kick it off and maybe Kevin can wrap it up with putting into perspective with our total CapEx spend. But, again really pleased over the last several quarters with our advancement of our access point strategies. We've given you regular updates on our quarterly calls right now, 13 freestanding EDs with the three that we opened last year, three more in the pipeline that is scheduled open this year. I'm also really bullish on our opportunities on the primary care side, the traditional primary care and in our urgent care and walking care centers, I'm seeing some really good lines of sight on where we can expand those access points. And generally, relatively low cost entry points for us in our market, so not really a capital-intensive at all. And then in our ASC front, again really pleased with the work of our ambulatory surgery group here at the company and partnership with our hospital leadership teams, surgeons in our markets, we have the three more of those scheduled to come online this year. So as we said in our remarks, very active pipeline, we are working every day. Just I could be more pleased with the status of the portfolio right now in terms of having these types of development opportunities and physician partners who want to join forces with us.

[Lynn Simon:]

And I think Tim really Kevin touched on a key point there was related to our capital spending. These are not overly capital-intensive type projects. So those are our pipeline of those initiatives are all baked into our capital guidance and projections, and we also have some opportunity with leasing and so forth to accelerate and make sure that we get these access points moving along quickly.

[Operator:]

Your next question comes from Brian Tanquilut from Jefferies.

[Brian Tanquilut:]

Hey, good morning guys. I guess, I'll just follow-up on Frank's question. Tim, you gave that sort of guidance 15% EBITDA margin, 6 times -- less than 6 times leverage medium-term guidance. How do you define medium term I guess is my first part of my question. And then as we just think about the drivers, right. I mean is this going to be mostly SWB or is this kind of like a shifting in the mix between outpatient and inpatient and service line mixes -- mix changes and also, what kind of capital do you think you need to spend to get to that target?

[Kevin Hammons:]

Hey, Brian, this is Kevin. I'll start off here. So in terms of medium term, we're kind of defining that as two to four years, certainly not anticipating getting there in one year but sooner than five years. So we'll define that has two to four years. And with regard to, I think a lot of it does come through our growth initiatives, some of the margin expansion. In terms of capital spending, I think what you'll see and we've talked about this in the past is our capital as a percent of net revenue has been somewhat diluted because of the divestitures revenue that's been in there as we get to 2021 and a year with fewer divestitures in more of a normalized run rate on revenue and just the core portfolio of hospitals. You'll see our capital spending as a percent of the net revenue of our core hospitals but much more like a normalized run rate. And I think that the current $400 million to $500 million that we're estimating to spend will give us everything we need to do this year.

[Tim Hingtgen:]

Hey Brian and this is Tim. I'll add on to Kevin's comments. We're preaching a lot of balanced in the organization right now, balanced in terms of where the margin expansion comes from, still seeing opportunities on the cost side. I mean also improving our -- frankly our margin because we're backing it as some fixed cost with incremental revenue expansion in so many of our markets, and a stronger portfolio, the investments we made over the last couple of years into incremental capacity. The other part of balance that we preach is looking at opportunities on both the outpatient and the inpatient side with our transfer center, with our investments into service lines, medical staff development and driving acuity, we think that's key to our long-term prospects and as we go through strategic planning processes with our markets we see just tremendous opportunities to continue to leverage that.

[Operator:]

Your next question comes from Ralph Giacobbe from Citi.

[Ralph Giacobbe:]

Great, thanks. Can you give us perhaps a sense of how the year started, just in terms of COVID and core trends and then more recently, just given weather across the south and particularly Texas, I was hoping you give us a little bit of sense of whether that -- there has been impact there and maybe frame what that's been or how it could affect the first quarter? And if I could squeeze in just one more quick one. Can you give us a little bit of a sense of underlying assumptions baked in the guidance specifically for volume and pricing either off of 2020 or maybe that 2019 baseline? Thank you.

[Tim Hingtgen:]

Ralph this is Tim, I'll go ahead and kick it off in terms of the COVID progression. As I pointed out earlier, we had about 8,000 -- I'm sorry 14,000 COVID positive admissions to our hospitals in the fourth quarter, which was a sizable increase over the third quarter. We were relatively, I'll say spared from the way it as evolved our markets. So as the year progressed, obviously, we felt the impact in the second quarter with the shutdown, no elective revenue as we speak of and very little COVID cases, and the third quarter and the second wave we were a little bit more impacted that is about 8,000 COVID positive inpatients in that quarter. We had a really good balance for the quarter as we shared in our earnings release. I mean our discussion with you guys, last time that we had really strong reopening efforts underway. It didn't have nearly a series of an impact on elective volumes because frankly our colleagues were able to manage that dual track program still effectively. With the latest wave was about 14,000 again COVID inpatient. We did see some limitations in terms of having to preserve more capacity for COVID and patient care. We also had I think an increase in consumer reluctant to step into our hospitals for elective care is helping frankly and it was best to deferred and wait for vaccination and whatever the case may be. Now with that being said, in this quarter in particular we're very focused on our reopening game plan to be deployed so successfully from the prior ways. Again right now we are on a pretty good run rate of getting the business back in. We have had this major weather event happen this past week in particular impacting a lot of our markets, but intra-quarter, so that's good news, it gave us an opportunity to continue to work with patients just like we have in the past with COVID, and we had to unfortunately cancel our defer care. Lynn do you have anything to add in terms of the COVID response or results?

[Lynn Simon:]

No, I think you covered it well, I think that they increased particularly in the fourth quarter.

[Kevin Hammons:]

And Ralph, this is Kevin, related to your question on guidance. So how we're looking at this is in terms of coming up the guidance. We started with a kind of bottoms-up approach. We looked at it from a top-down a number of different scenarios and really due to the variability of what may happen as a result of COVID, the current site that we have seen to start off the year and uncertainty around when the vaccination may really have some impact, we gave a little wider range. There is really multiple scenarios and multiple variables with related to build volume, acuity in payer mix and it's difficult to kind of give a specific range on any one of those variables without really considering all of them. So I think if you just think about the midpoint of the range and the way we're thinking about it, there is multiple ways, if you can get there with less volume and higher acuity or more volume and lower acuity and still get to the same answer.

[Operator:]

Your next question comes from Kevin Fischbeck from Bank of America.

[Kevin Fischbeck:]

Okay, great, thanks. I was wondering how you were thinking about labor costs for the year? I guess that there's maybe some competing or conflicting views on whether the labor shortage that you were seeing will exacerbate as the year goes on as people look to retire etcetera or whether it will get better as you don't need nurses in quarantine anymore? Could you see the snapback back in utilization? Are you expecting labor cost pressure or is that going to be a source of margin expansion you're looking for?

[Kevin Hammons:]

We have -- and I'll start off here Kevin. We have, I think done an extremely good job of managing our labor cost this past year in terms of our productivity and as well as in terms of taking care of our employees through the pandemic. I think there is, as we look forward, there is certainly some pressure right now on labor costs and as everyone is aware of the cost of traveling nurses and so forth and just because of COVID some of the pressures that that's put on, we think that -- we'd expect that to decrease over the course of the year as some of the pressure is relieved on the system. And overall, I think we'll be able to manage through the labor costs as well as continuing some of the productivity programs that we have in place, which will offset as well as some of the labor pressures.

[Tim Hingtgen:]

Hey, Kevin, this is Tim. Just to add to that, obviously mindful of the macro dynamics out there with particularly nursing staffing, clinical staffing resources. We've always put a close line on in as a company in before COVID we set up some internal nursery recruitment functions using the company's resources to support key markets where we've invested our capital and certainly need to have a ready supplier of nurses and clinicians to fill that capacity. That service went throughout the COVID pandemic, In general, always focused on retention of our nurses, always focused on recruiting and building a stronger pipeline over the long run. 30

[Operator:]

And our last question comes from Andrew Mok from Barclays.

[Andrew Mok:]

Hi, good morning. Cases declined from January peak. So I was hoping you could provide an update for how quickly non-COVID utilization is re-entering the hospital system and maybe comment on any differences you're seeing between the commercial and Medicare populations? Thanks.

[Tim Hingtgen:]

Andrew, this is Tim. I'll go ahead and kick it off. In terms of the rebound of this current wave as I said earlier, cases peak in mid-January. We are already active in our redeployment plan, just like we have in the subsequent ways. I'm sorry, previous ways of COVID of wave 1 and wave 2. A little bit slower to rebound in some of our communities. I think largely due to some patient hesitancy, we're hearing a little bit more from our providers that patients are getting the vaccine and now want to wait for that vaccine to take effect. So we say that with optimism that bringing patients back into the healthcare system, vaccinated, reducing the spread all that would bode well for us in the near to mid-term. But the same playbook is underway in terms of staying close with our patients. As patients have rescheduled, we've worked with physician practices, our employee practices as well as independent practices to make sure that when we have capacity we're working those schedules to get patients back in as quickly as they're comfortable doing so. The other part I think that's important here, as I said earlier, is we were seeing some weekly improvements in our revenue and our volumes. This week, we did have a little bit of a setback with the weather event that hit the Sunbelt. Frankly we're not quite built for that in this part of the country and in our Southern markets, but for the most part, still doing that same game plan of keeping track of what's canceled, I'm looking at extending schedules on the Saturdays and in many cases to be convenient for patients and providers to make up for what the weather impact has put upon us. Kevin, anything else to add?

[Kevin Hammons:]

I think the only other thing I would add and I think you captured it well there is, at this point, we've not seen any real change in the patient mix as the procedures start to come back in.

[Operator:]

I will now turn the call over to Mr. Tim Hingtgen for closing remarks.

[Tim Hingtgen:]

Thank you, Mike. We would like to thank everyone for spending time with us today. I would like to once again express how grateful we are to all of our employees, physicians, providers, regional presidents and hospital leadership team who have all been at the forefront of this pandemic and we remain committed to providing exceptional care across all of the communities we serve. And I also want to express my gratitude to our company's leadership team for demonstrating the ability to effectively plan and execute upon all of our opportunities throughout the past several quarters, which included was a strong finish to 2020. This concludes our call for today. We look forward to updating you on our progress throughout 2021. And once again, if you have any questions you can always reach us at 615-465-7000. Thanks again, and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.