Community Health Systems, Inc. (NYSE:CYH) Q2 2023 Earnings Call Transcript

Community Health Systems, Inc. (NYSE:CYH) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning, everyone, and welcome to the Community Health Systems Second Quarter 2023 Earnings Conference Call. Please note that today’s call is being recorded. At this time, I’d like to hand the floor over to Anton Hie, Vice President of Investor Relations.

Anton Hie: Thank you, MJ. Good morning, and welcome to Community Health Systems’ Second Quarter 2023 Earnings Conference Call. Joining me on today’s call are Tim Hingtgen, Chief Executive Officer; and Kevin Hammons, President and Chief Financial Officer. Before we begin, I must remind everyone that this conference call may contain certain forward statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in 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.

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. We have also posted a supplemental slide presentation on our website. All calculations we will discuss on today’s call exclude gains or losses from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense related to employee termination benefits and other restructuring charges, expense from business transformation costs as well. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Tim Hingtgen : Thanks, Anton. Good morning, and thank you for joining our second quarter conference call. We were pleased to deliver both year-over-year and sequential improvements in key operating metrics in the second quarter as we expected, with notable progress in the areas of patient volumes, net revenue and adjusted EBITDA. We are seeing increasing demand for our health care services because of investments to expand in key markets, strong physician recruitment success and other volume-generating initiatives we are well positioned to capture more growth as the year continues. Before I get into the specifics of the quarter, I’d like to touch on 3 strategic developments, which should be very positive for our company. First, I want to address recent changes that will continue to sharpen and strengthen our portfolio as we remain focused on markets with the greatest potential to produce meaningful long-term growth.

To this end, last week, we announced the planned divestiture of Bravera Health. This health care system includes 3 acute care hospitals about an hour north of Tampa. This is a good market, but divestitures like this one and others such as El Dorado, Arkansas, Seminal Oklahoma and 2 other small health systems in West Virginia enable us to deliberately focus our resources in markets that we aim as most investable and that can produce greater growth and returns over the long term. Proceeds from the Bravera transaction are expected to be approximately $290 million. At the same time that we are divesting certain assets we are making significant investments in markets where we see more attractive growth opportunities. We have added nearly 200 beds in key health systems over the past 18 months, and we continue to add outpatient locations such as ambulatory surgery centers and freestanding emergency departments and communities where we have opportunities to gain further market share.

Our new hospital in the Houghton area of Tucson, Arizona just celebrated its 1-year anniversary and is delivering strong operational results and in fact, exceeding its year 1 pro forma. Another de novo hospital that we opened in this market in late 2020 continues to grow and perform very well. Northwest Healthcare now has the largest overall presence to Tucson covering all quadrants and the fastest-growing areas of the region. We expect similar strong results for major Bed Tower expansion projects underway in 2 other high-growth markets, Troy, Alabama and Nashville. On the outpatient side of the business, we recently acquired an ambulatory surgery center in Key West, Florida and opened a third orthopedic focused ASC as part of Butran Health Network.

Expanding health system partnerships with highly reputable and skilled surgeons remains a very high priority. We will continue to methodically work our development pipeline and invest for the future where we have the best strategic opportunities. Next, as you likely know, American Physician Partners, or APP, has ceased operations effective July 31, amidst severe financial challenges. APP was contracted for ED and hospital provider services in a number of our markets. As it became likely that APP would not be able to continue operations, our team moved swiftly to transition the employment of more than 500 APP hospital-based providers working in our hospitals to affiliates of our company. We believe this arrangement with APP accomplishes several things.

Most importantly, it presents any disruption to patient care in the facilities where they were the contracted provider. It also strengthens the alignment between our hospital-based physicians and clinical care teams delivering quality care and strong safety and patient satisfaction scores. And finally, it mitigates potential future financial risk as we will be in a better position to bring contracts in-house at other facilities where we see opportunity to improve operating performance. While in-sourcing such a large number of programs in approximately 1/4 of our market and all at once was not in our immediate plans, we view this as an attractive opportunity to stand up a scalable in-house solution with long-term benefit for CHS. While our existing capabilities and physician clinic operations and with the addition of local management talent from APP we are very confident that we can operate these programs efficiently, effectively and in strong partnership with the providers who have been a part of this transition.

Finally, we are excited to publicly announce Project Empower, a strategic initiative to modernize and further centralize and standardize certain business functions. As part of the program, we will launch our Enterprise Resource Planning or ERP platform later this year. Kevin will go into more detail about how this initiative will optimize a number of business activities and eventually yield meaningful savings to our organization over time. Returning to our second quarter results, I want to highlight a few of our key performance metrics. Same-store admissions increased by 4.8% and adjusted admissions increased 4.9% year-over-year. Same-store surgeries increased 6.2% with strength across a number of specialties, including cardiovascular, colorectal, urology and gynecology.

In addition to these year-over-year gains we also experienced solid sequential surgery volume improvement in the second quarter. I mentioned physician recruitment earlier, so I want to highlight that at the midpoint of the year, provider recruitment is up 13.1% compared to last year, which is our — which was our best recruitment year of the past 5 years. We are also making great progress recruiting nurses. Nurse hiring for the first half of the year is up 5.3% compared to last year in large measure due to the success of our centralized nurse recruitment model. Through tuition reimbursement, nursing school programs and other opportunities for existing employees to become nurses, nearly 400 of our team members have achieved our end status this year and moved into nursing role and nearly 400 more nurses have joined our hospital team via international recruitment programs.

We also realized a significant reduction in contract labor during the quarter, which Kevin will describe in greater detail. As we move forward through the second half of the year, we will pursue continuous growth and every opportunity to manage costs. We remain optimistic about all of the potential still ahead. Now Kevin, I’ll turn the call over to you.

Kevin Hammons : Thank you, Tim, and good morning, everyone. As Tim mentioned, we were very pleased with our financial and operating performance in the second quarter. As expected, results reflected notable sequential improvement as demand remains strong, driving continued solid volume trends and better payer mix and reductions in contract labor helped drive margin expansion. The continued return in core demand for health care services is encouraging, and CHS continues to invest in service lines, access points and talent so that our operators can provide safe and cost-effective care for our communities. Moving on to quarterly financial results. Net operating revenues were $3.1 billion, representing 6.2% year-over-year growth on a consolidated basis.

On a same-store basis, net revenue increased 9.2% from the second quarter of 2022. This reflected a 4.9% year-over-year increase in adjusted admissions and a 4.1% increase in net revenue per adjusted admission. Additionally, surgeries were up 6.2% on a year-over-year basis. On a sequential basis, same-store net revenue increased 1.1%, driven by 2% growth in adjusted admissions and a 1.7% increase in surgeries, partially offset by 0.8% decline in net revenue per adjusted admission. As noted, we experienced slight improvement in payer mix relative to the first quarter and continue to expect further improvement through year-end. Adjusted EBITDA was $373 million, representing adjusted EBITDA margin of 12%. Consistent with expectations, pandemic relief funds did not contribute materially to the adjusted EBITDA in the second quarter compared with the $8 million recognized in the prior year period.

We were very pleased to deliver strong labor cost management during the quarter with combined salaries, wages and benefits and contract labor expense declining approximately $40 million sequentially. We achieved these results despite the continued strong nurse and provider recruitment activity and increased staffing necessary to meet the strong demand in the quarter, primarily through productivity management, and improved retention and lowering the need for over time and premium pay. Notably, our average hourly wage rate increased only 2.8% compared to the prior year and was down 0.6% sequentially. Contract labor expense showed further progress, down 15% sequentially to $74 million in the second quarter of 2023 and well below the peak of $190 million in the first quarter of 2022.

Supply costs were down $3 million sequentially despite the solid growth in surgical volumes reflecting our ongoing supply chain management efforts. Medical specialist fees were also down slightly from the first quarter, but were still up substantially on a year-over-year basis. We expect further reductions in the coming quarters, particularly through the actions we’ve taken through the agreement with APP. Moving on to the cash flow statement. Cash flows from operations were $86 million compared with $53 million in the second quarter of 2022. Capital expenditures for the quarter were $105 million and for the first half of 2023 were $227 million on track with our guidance of $450 million to $500 million. We continue to expect significant improvement in free cash flow performance with certain state supplemental payments expected to come in along with other working capital improvements.

Recall that the fourth quarter has historically been our strongest cash flow period, and we expect this year to be no different. The company’s net debt to trailing EBITDA was 7.7x at quarter end, with $118 million of cash and equivalents on hand and $764 million of borrowing capacity available under our ABL, we remain well positioned from a liquidity standpoint to meet our needs going forward. Proceeds from the sale of our facility in El Dorado, Arkansas, that was completed in July and the planned divestiture of the Bravera Health assets in Western Florida will be used primarily to pay down debt, freeing up additional capital for higher return uses in core strategic markets. From time to time, we continue to receive inbound interest in our assets, and we’ll consider a transaction when it makes financial and strategic sense.

Over the past several quarters, Tim and I have discussed our 4 near-term priorities to position the company for long-term success, accelerating growth, strengthening our workforce, controlling expenses and advancing safety and quality. To that end, we are pleased to announce the launch of our enterprise-wide modernization and optimization initiative, Project Empower, which we believe will advance each of these key areas of focus as well as deliver increased shareholder value. Project Empower encompasses important investments across the operations and financial aspects of CHS, including implementation of an integrated Oracle ERP platform, standing up of a shared business organization and the redesign of key workflows. The program will provide standardization of core processes within finance, supply chain and human capital management, improved transparency across the enterprise to enable more timely decision-making reduced complexity and administrative burden and help CHS better leverage at scale as one of the largest health care systems in the country.

The company has committed significant resources to ensure the success of Project Empower, including both internal and external FTEs focused on implementation and change management experts to help team members adjust to their new workflows. Implementation will occur in several waves, beginning in the next several months and rolling out to the entire portfolio through early 2025. This cadence will allow leadership to learn from the process and ensure that subsequent waves go smoothly to minimize the risk of operational and financial disruption. Through better management of our supply chain and our workforce, reduce variability in processes and outcomes and enhanced data to support our decision-making to capitalize on opportunities we anticipate significant cost savings and other financial benefits from Project Empower.

Additionally, we believe this significantly improved visibility and insight may reveal opportunities within CHS’ markets and business lines from which our operators can capitalize upon to drive further shareholder value. We look forward to providing updates and progress reports on achievement of key milestones as we press forward with Project Empower in the coming months and quarters. With that, I’ll turn the call back over to the operator to poll for questions.

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Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut : Congrats on a strong quarter. I guess my first question for you guys on the staffing side, and it’s a 2-part right nursing. Kevin, I mean how much runway do you think is left to reduce your utilization of contract labor and maybe just overall SWB? And then maybe for Tim, how are you thinking about the physician — hospital-based physician side? I know there’s a lot of disruption there, you called out APP. Any strategies that we should be thinking about to you’re contemplating as a way to position for what seems to be a very volatile physician environment in the hospital today?

Kevin Hammons: Thanks, Brian. So let me start off with contract labor. We had indicated at the beginning of the year, we expected a 40% to 50% decrease year-over-year in contract labor. And I think we’re well on track to meet that with $74 million of contract labor this quarter down from $150 million last year to down just over 50%. I think we’ll continue to make progress through the remainder of the year and would expect to exit the year something in the low 60s, $60 million to $65 million is where I would anticipate us exiting the year. Beyond that, I still believe there’s some opportunity for us to continue to reduce contract labor probably something at this point, I guess, into the low to mid-50s. I think at that point, it starts to moderate.

We are bringing in a higher number of international nurses to fill some of those spots more international nurses than we used pre-pandemic. Of course, they come at a little lower cost. They also have longer contracts, and we hope to make them full-time employees eventually. So I think that becomes a pipeline for us. I don’t believe we ever get down to the $30 million a quarter pre-pandemic, which represented about 2.5% of net revenue. Right now, we’re approximately 5% of net revenue — or I’m sorry, of salaries and wages. So it probably goes down slightly from here.

Tim Hingtgen: Great. Thanks, Kevin. And Brian, I’ll take the medical specialist fee question. And as I said in my opening remarks, the movement with APP was rapid, but it’s obviously an expense line item that we’ve had our eye on for quite some time. We called it out in the first quarter had a significant headwind. And we expected it to moderate in the second quarter, which it did. We would expect that to continue throughout the rest of this year. I’m not being as material of a headwind, but it’s slightly elevated over prior year quarters. The strategies to mitigate that. Some of them are just operationally based in terms of highly efficient operations to reduce waste. Those would be length of stay initiatives, surgery throughput initiatives, ED initiatives, and I believe we do a really good job with that.

We hope through our Project Empower deployment, we’ll even have more insights into how we can optimize care delivery, drive high safety and quality, but also take out some of those costs which obviously, most of them have some physician staffing component embedded into them. The other thing which we’re very focused on, as we said, was in-sourcing capabilities for the company. And in the first quarter, we actually added some in-house competencies around anesthesia operations and management. It’s not our intent to in-source every single hospital-based contract across the company. But where there’s an opportunity for us to do so if we can’t find a good mix or a good partnership in a local market across many hospital-based specialties. We certainly want to have those capabilities embedded in-house.