Good day, and thank you for standing by. Welcome to Community Health Systems First Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Ross Comeaux, Vice President of Investors Relations..

Thank you, Jay. Good morning, and welcome to Community Health Systems' First Quarter 2022 Conference Call. Joining me today are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer.

Before I turn the call over to Tim, 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 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.

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 loss or gain from early extinguishment of debt and impairment expense as well as gains or losses on the sale of businesses. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer..

Thank you, Ross. Good morning, everyone, and welcome to our first quarter conference call. The COVID-19 pandemic and specifically a surge in cases due to the Omicron variant impacted our results in the first quarter. We provided care for approximately 13,000 inpatient COVID admissions, 12% of our total admissions in the quarter.

The surge was most acute in January when our hospitals cared for approximately 9,000 inpatient COVID cases or about one-quarter of total admissions for that month.

While the acuity level of the Omicron variant was below the Delta wave, a highly contagious nature of Omicron affected our workforce with more staff members and health care providers requiring time off due to exposure or illness. The need for contract labor increased for our hospitals.

At the same time, other health care systems also needed labor support, driving up the cost of temporary staffing. And even though we intently managed capacity, longer length of stay was unavoidable for some patients and in some markets.

It took longer to discharge patients to various post-acute services such as skilled nursing facilities and home health because those organizations were dealing with their own labor challenges. All of this negatively impacted elective volumes, net revenue and EBITDA during the first two months of the year.

March was a much stronger month for the company as COVID admissions declined and non-COVID demand accelerated for both inpatient and outpatient care and across most service lines. As a result, we finished the quarter with much stronger net revenue and meaningful improvements in adjusted EBITDA.

COVID cases currently remain low, and we have carried forward March's improved volume trend into the second quarter. With the exception of contract labor, expenses were well managed. Contract labor expense increased sequentially versus the prior quarter and the contract labor was higher than we anticipated.

And unlike prior COVID waves, where we saw contract labor expense moderate relatively quickly, the expense remained elevated throughout the first quarter. Contract labor was necessary as we upheld our commitment to provide essential health care services in the communities we serve and to remain available for the patients who rely on us.

Even with the difficult labor environment, we also believe that, it was critically important to maintain momentum from recent capacity expansions and high acuity service line investments, because they remain key to CHS's long-term strategic growth and success.

Currently, our contract labor usage and rates are moving lower and contract labor expense has continued to decline. We are very focused on executing upon opportunities to further reduce contract labor expense moving forward.

Specifically, we have recently completed the full rollout of our centralized nurse recruitment function with a specialized team of more than 60 clinical recruiters driving this work. This company-led service utilizes digital marketing tactics and coordinated processes to expedite the recruitment process.

We are also focused on repatriating nurses who had left for travel or other opportunities. As a result of these tactics, our nurse hiring rate is up 10% compared to the prior year.

To further increase the number of qualified hiring candidates, all of our hospitals have relationships with nursing colleges in their markets, and we are focused on deepening those partnerships.

We are also sponsoring a new generation of nurses through our partnership with Jersey College, which enables nursing students to integrate into our health care facilities during their respective training programs.

We have commenced a number of cohorts already across four distinct campuses, and we're seeing very strong applicant pools for each new class of students. After a full rollout of 10 campuses is complete in 2023 we expect to graduate approximately 1,000 nurses annually through the Jersey College partnerships.

This week we are excited to announce a significant investment into new and enhanced benefits for existing employees which are designed to help team members eliminate student loan debt faster, pursue additional professional education and advance their careers within our organization.

We expect this investment will further improve employee retention and satisfaction and support their career advancement for years to come. We also believe this enhanced benefit program will support recruitment efforts as well. Shifting now to our markets. We remain optimistic about the growth potential of our portfolio.

We operate in 48 distinct markets, with more than 1,000 sites of care and we are intently focused on building comprehensive health care delivery systems, offering the right blend of both inpatient and outpatient services. During the first quarter, we added two new ASCs, one freestanding emergency department and new behavioral health beds to the mix.

Our health care systems are in areas with attractive population and economic growth. Looking at recent 2021 US census data, approximately 30% of our hospitals are in or adjacent to the 60 fastest-growing counties with more than 100,000 residents.

These areas include our hospitals across Florida, including the western portion of the state in the Panhandle and parts of Alabama, including Huntsville and Foley, across Northwest Arkansas and parts of Texas such as Cedar Park in the Aftermarket and like Grand Mary and in other markets as well.

We continue to invest in growth projects, which include building higher acuity service lines and a new bed and procedural suite and expanding our ambulatory surgery, freestanding ED and urgent care and walk-in care footprint. Our development pipeline is robust and our capital investment plan remains in flight.

Physician recruitment remains a cornerstone of our growth strategy. We are adding primary care and specialist providers, aligned to the unique needs and growth opportunities of each health care system.

During the first quarter, on a same-store basis, we increased the number of newly signed physicians 11% over prior year and by more than 30% versus our 2019 pre-pandemic baseline. As we move forward, we expect health care demand in our markets to grow.

And we are well positioned to serve more patients and capture more market share across the portfolio. While the first quarter did not meet our expectations due to a number of the challenges I mentioned earlier, we remain focused on achieving our medium-term and long-term goals.

In March and April, we have seen a number of key metrics incrementally improve, including net revenue and volume, along with reductions in various expense categories, including contract labor and premium pay.

We expect these improved operational trends to continue, as we capture health care demand, leverage recent investments and appropriately manage our costs.

Finally, before turning the call over to Kevin, I want to thank the employees, physicians and our hospital leadership teams for rising to the challenge during the Omicron surge and for always making quality patient care their top priority. Kevin, I'll now turn the call over to you to cover a number of financial topics including our updated guidance..

Thank you, Tim, and good morning, everyone. As Tim highlighted, our first quarter results were negatively impacted by COVID. As the surge receded and COVID cases declined, operational and financial results improved and we finished the quarter with positive momentum.

Our investment in labor, although, coming in at a higher cost, allowed us to make further progress around our strategic initiatives and strategic margin improvement program, which we believe will continue to benefit the company into the future.

Switching back to the first quarter, net operating revenues came in at $3.111 billion on a consolidated basis. On a same-store basis, net revenue was up 3.8% compared to the first quarter of 2021. This was the net result of a 3.2% increase in adjusted admissions and a 0.5% increase in net revenue per adjusted admission.

Adjusted EBITDA was $409 million. During the first quarter, we recorded approximately $47 million of pandemic relief funds, with approximately $82 million recognized in the prior year period. Excluding pandemic relief funds, adjusted EBITDA was $362 million, with an adjusted EBITDA margin of 11.6%. Switching now to expenses.

I'm going to highlight two expense buckets, the first of which is non-labor expenses and the second is labor expenses. In terms of non-labor related expenses, this category includes supply costs as well as vendor-related expenses, such as insurance utilities and a host of other purchase services and fixed costs.

On a year-over-year basis these non-labor expenses were well-managed, as the cost declined approximately 120 basis points year-over-year as a percent of net revenue.

As a result of our margin improvement program and good expense discipline, we have very effectively managed non-labor expenses throughout the pandemic period, holding absolute dollar spend flat, offsetting growth, both from inflation and expansion.

On the flip side, however, labor costs increased both sequentially and year-over-year, primarily due to higher contract labor usage and rates. During prior COVID waves, we had seen contract labor usage and rates decline relatively quickly following a COVID surge.

However, following the Delta wave in the fourth quarter and the Omicron peak in January, contract labor usage and rates remained elevated throughout the remainder of the first quarter. In terms of contract labor, during the first quarter of 2022, our contract labor expense was approximately $190 million.

This was up year-over-year from when it was approximately $70 million in the first quarter of 2021 and also higher sequentially from when it was approximately $140 million in the fourth quarter of 2021.

It's worth noting that our contract labor costs had declined sequentially during the second and third quarters of 2021, but have now increased during the past two quarters.

Although we anticipate contract labor to remain elevated and to cause some near-term headwinds on our progress, our contract labor usage and rates are declining in April and we expect this to continue to decline throughout the remainder of the year due to lower COVID case counts coupled with a number of the internal initiatives that Tim walked through earlier.

Turning to cash flow. Cash flows provided by operations were $101 million in the first quarter of 2022, unchanged from the prior period. Excluding repaid Medicare accelerated payments made in the first quarter of 2021, cash flows provided by operations were $119 million for the first quarter of 2021.

The comparison versus the prior year includes the impact of Medicare accelerated payments just mentioned as well as working capital changes. As a reminder, all outstanding Medicare accelerated payments were repaid at the end of 2021 and we are now receiving 100% of Medicare fee-for-service reimbursement. Moving to CapEx.

For the first quarter of 2022, our CapEx was $97 million compared to $105 million in 2021. In terms of liquidity, we have no outstanding borrowings under the ABL with $897 million of borrowing base capacity. Also at the end of the first quarter, we had $460 million of cash on the balance sheet.

During the past two years we've made significant improvements to our balance sheet as we have reduced our annual cash interest by approximately $230 million and lowered our leverage by two turns and we now have no debt maturity due until 2026.

At the end of the first quarter, the company's net debt to EBITDA was 6.2 times and we remain focused on further lowering our leverage and increasing our free cash flow during the next several years. Now, I'll walk you through our updated full year 2022 guidance. Net operating revenues are anticipated to be $12.6 billion to $13.1 billion.

Adjusted EBITDA is expected to be $1.775 billion to $1.925 billion, which is $50 million lower than our prior range. Net income per share is anticipated to be $0.75 to $1.30 based on weighted average diluted shares outstanding of 133 million to 134 million shares. Cash flows from operations is now anticipated to be $900 million to $1.50 billion.

CapEx is expected to be $500 million to $600 million and cash interest is expected to be $820 million to $840 million. In summary, despite progress in a number of areas, our first quarter financial performance did not meet our expectations.

However, we exited the first quarter with strong momentum and we expect to deliver improved financial and operational performance moving forward.

s we think about the remainder of the year we expect adjusted EBITDA to improve sequentially during the balance of the year with the fourth quarter of 2022 being our highest adjusted EBITDA quarter of the year. Ross, at this point, I'll return the call back to you. .

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

Thank you. [Operator Instructions] Our first question comes from the line of A.J. Rice of Credit Suisse. Your line is open.

Good morning everybody. It's Nick on for A.J. today. Thanks for taking the question. It looks like surgery growth was pretty strong in the quarter even with Omicron impacting the early part of it.

Can you talk about the dynamics you saw there in terms of inpatient and outpatient surgical growth? And how much of that outpatient growth were procedures that have moved from more of an inpatient to an outpatient setting? Thanks..

Right. Nick, this is Tim. I'll go ahead and start this off. Yes, we were very pleased with our ability to grow surgeries both sequentially and on our baseline 2019 comp now at 100% in 2019. So, the investments in service lines and acuity the capacity expansions the targeted physician recruitment is definitely generating the results that we had expected.

In terms of the service line that really showed the most promise throughout the first quarter, it continues to be the orthopedic service line including spine procedures. We had some growth in neurosurgery. We also had good growth in just basic general surgery cases coming back into the system.

In terms of the general dynamics related to the migration from inpatient, outpatient, consistent with our peers in the industry, we are seeing more and more cases move to the ambulatory care setting, which is creating some pressures on our admissions numbers.

But in general, the overall orthopedic service lines are growing at a really nice rate for us as we invested in and projected. Other service lines in terms of migration to lower acuity settings would be some of the lower acuity spine procedures, shoulder procedures, et cetera. So again all that is in flight.

Now to make sure that we're positioned well for that migration as we've been reporting to you we are investing in a broad number of ambulatory surgery partnerships. The majority of them de novo or majority in consolidating but even a small number of minority interest in some markets where we can find that fit and make that work for us.

We remain very focused on building out the continuum of care on both the ambulatory and the inpatient side of the business..

Thank you. Next question comes from the line of Ben Hendrix of RBC Capital. Your line is open..

Hey, guys. Thank you very much. One quick question on kind of the margin progression through the quarter kind of based on your Slide 8. It seems like that would imply kind of 7.5% margin context through January and February and then kind of a strong 18.5% or so in March.

There may be some timing skew in there but just kind of wanted to get an idea of where you're thinking kind of that the baseline margin is heading into the second quarter, given that kind of that 18.6% in March versus your intermediate and longer-term targets? Just kind of trying to size up where you are with regard to those targets. Thanks..

Sure. Thanks, Ben. This is Kevin and I will take that one. The purpose of this slide a couple of things that we wanted to point out. One to be clear that COVID is not a margin driver for the business. And as you can see during the peak months of COVID we were not creating a lot of EBITDA.

The other thing we wanted to point out is we did get traction and we are gaining momentum as we exit the quarter. Now in a normal March, March is typically the highest EBITDA quarter in margin of the first – or month of the first quarter being that there are more patient days and more business days during the month of March.

And if you think about fixed cost being somewhat spread evenly month-to-month, you do have more revenue in the month of March. That being said, we expect to get our margin back in line with what we had kind of projected and what our guidance is and in line with where we had exited the year in 2021..

Thank you. Next question comes from the line of Brian Tanquilut of Jefferies. Your line is open..

Hey, good morning, guys. It's Jack Slevin on for Brian. Appreciate all the color and quantification on contract labor and sort of how you're thinking about progression throughout the year. I guess when we look at the move in the 2022 guidance, right revenue – maintaining the revenue guide and pulling down EBITDA a little bit.

As we think about those medium-term targets, how are you feeling about the out years beyond 2022? Does it seem like there's any structural change on contract labor that could extend further, or are we still feeling good about the medium-term targets?.

We still feel very good about the medium-term targets and believe that we're going to achieve those. We – as I mentioned earlier, we did have some very good momentum and achieved a lot of our initiatives during the first quarter all that being offset by the higher labor costs.

But we did make good progress not only on some top line initiatives, we're gaining momentum on some of our capital investments that we've made. We've improved our reputation, our patient experience all the things that we made an investment with this labor cost to do that we achieved. We also had very good non-labor expense management.

All those things as we get past this current labor headwind, we believe will set us up well to achieve those near-term within two years and medium-term targets that we have out there..

Thank you. Next question comes from the line of Kevin Fischbeck of Bank of America. Your line is open..

Hey, great. Thanks. Maybe just to kind of follow up on that question. I think that the big question in hospitals generally but obviously, you guys are giving longer-term guidance is about the margin sustainability.

So I would love to any more color you could provide there? I guess in particular, given the pressure on labor so far this year and that it's unexpectedly coming in higher.

Why shouldn't we be expecting longer-term labor pressure and margin compression versus kind of still being on that same track that you expect it to be at a quarter or two ago when labor wasn't quite the same as it is this year?.

Yes. Kevin, a couple of things. I'll start off and Tim feel free to jump in.

As we continue to kind of focus as we said our balanced approach of organic growth in our markets, capital investments in our markets and margin improvement program, we believe in the longer term, we'll be able to step over some of these labor issues and the increased rates that we're seeing both in employed labor and contract labor.

We certainly expect contract labor situation to moderate. And we're already seeing some relief I think I would say on the employed labor or at least getting to the point where sequentially, we did not see labor inflation. Rates remained relatively flat sequentially.

So although we saw last year some higher labor inflation on employees, we're not seeing that continue into the earlier parts of this year. We think there's a lot of room and runway on our margin improvement program to continue to gain efficiencies, continue to make progress on some of our supply chain initiatives that will help drive down costs.

And as I pointed out with our non-labor related expenses, we actually reduced that by 120 basis points year-over-year during the quarter. So we did get good traction and we think all of that leads to our confidence in our ability to hit our longer term goals..

Yes. Kevin I'll jump in. This is Tim. I agree with everything Kevin said and a few other notes I'd add. Understanding that the labor pressures may take a little bit longer to moderate than we had expected there are other things in our control just in the operations.

And one of them being the length of stay management, our focus on capacity optimization being able to drive down the length of stay appropriately back to its historical levels, assuming there'll be some easing in the post-acute care sector as well as they resolve their staffing challenges. That frees up our beds for inbound traffic.

We did have increased declines or patients we weren't able to accept through our transfer center in the first quarter because we were running at higher capacity even with the contract labor. So we do need to stay focused on reducing that length of stay something we call capacity optimization.

In terms of our mid- and long-term prospects for the labor pool, the nursing labor pool, I mentioned the centralized nursing recruitment team that now supports 100% of our hospitals. We have much better insights and resources available to recruit nurses into our health care delivery systems. And as I said, we're seeing some good progress with hires.

On a net hire basis we're also seeing improvements and the net hires are based upon a calculation of hires less terminations or resignations. So we've seen that moderate as well.

So there's some improvement sequentially and over prior year in terms of the net hires that we're seeing to help us move through some of the vacancy rates that we're experiencing right now.

The other thing I'll mention is the investment we announced this week into our employees for the furtherment of their education and to help them pay down their student debt.

We think that does create a sizable investment into our workforce that should improve retention and also will help us to hopefully recruit more employees and repatriate those that may have left us for a travel assignment. So we're very focused on direct outreach to those individuals who may have left our health care systems.

And then the last thing I'll say is we are seeing some improvements in the international nursing pipeline, seeing increased orders being filled and being able to onboard new international nurses, which is another component that's helping us rebuild a really solid and stable internal workforce..

Thank you. Next question comes from the line of Josh Raskin of Nephron Research. Your line is open..

Hi, thanks. Just to clarify on the labor expense and I apologize for staying here. But your overall margins in the quarter excluding grant income were down 210 basis points and you said non-labor costs improved by 120.

So is it just simply labor as a percentage of revenue in all the buckets was up 350 basis points year-over-year? And then how much of that is base labor versus contract labor?.

Yeah, that math is right, I believe Josh. I don't have -- I won't do math here on the phone for you. But I think as we've said and I think we've given the components where you can do that our contract labor expense was $190 million in the quarter compared to $70 million in the prior year. And that's included in other operating expenses.

So we had a $120 million increase just in contract labor expense year-over-year and that was $50 million increase sequentially from the fourth quarter..

Thank you. Next question comes from the line of Jason Cassorla from Citi. Your line is open..

Great. Thanks. I wanted to ask about payer mix in the quarter.

Maybe can you help frame how payer mix develop between COVID patients and non-COVID or core patients on a year-over-year basis? And how you expect core payer mix to trend for the rest of 2022 including assumptions around the impact of the resumption of Medicaid redeterminations? And then if I could just squeeze one more in here.

You didn't change CapEx guidance but I guess in context of this labor environment, does it change how you're thinking about the pacing or timing of future capital deployment priorities just specific to service line build-out or investment equipment at this juncture? Thanks..

Yeah. On the payer mix question, so on non-COVID business we did not see any material change in payer mix. But on COVID-related business during the first quarter, we did see a much higher percentage of Medicaid and self-pay patients, representing themselves as COVID cases.

Kind of going back, there's been a lot of movement in COVID cases among payer mix in the early waves that was primarily Medicare that was affecting an older population. Then during Delta, we saw the average age of the COVID admissions come down and we saw a higher commercial business in COVID.

And then with Omicron, we saw higher Medicaid and self-pay. Kind of going forward, I think again, since we're not seeing a big change in payer mix related to non-COVID business, we would kind of anticipate that to stay relatively the same moving forward.

In terms of your question around CapEx, we did not change the CapEx guidance, but we are focused on continuing to make sure that we generate positive free cash flow. So we'll continue to manage both, our cash flow from operations as well as our CapEx and the kind of interconnection between those two.

As it relates to labor, we certainly don't want to get out ahead of ourselves in spending on initiatives if we can't staff them.

So, we're certainly cognizant of that and we'll be working closely not only with our recruiters in managing our staffing levels, but to make sure that we're opening these initiatives and some of our larger projects when we are able to staff them so that we get the highest return possible..

Thank you. Our last question comes from the line of Stephen Baxter of Wells Fargo. Your line is open..

Yeah. Hi, thanks. I was hoping you could talk a little bit about the non-labor expenses in a bit more detail, maybe what's the specificity around what some of the drivers are there? Obviously, it's been a huge driver for the company even if the size of the company has slowed down a little bit over the past few years.

I just wanted to get a sense of what the remaining key opportunities you have in front of you are? And then, it does feel like something on the non-labor expense side potentially is getting better in the balance of the year maybe than what you thought, if you're thinking that you can basically hold the rest of the year from an EBITDA perspective despite the expectation of contract labor.

Just would love to understand the dynamics better. Thank you..

Sure. As we work, and we've mentioned our margin improvement program a number of quarters now largely focused in the supply and purchase service areas.

We've continued to make some improvements in our national contracting over a number of supply areas including commodities that we're purchasing and continue to get traction as we renegotiate contracts consolidate vendors and so forth.

Similarly, on the purchase service side, we've made improvements in how we are purchasing some of these services being able to consolidate among vendors to get better pricing. We also had a reduction in some of our insurance costs.

As we think about -- and as we talked about improvements in quality over the past several years, our quality program had gone back a number of years. That is all benefiting us in terms of malpractice and professional liability and we're starting to see some of that run through.

There's a pretty long lead time on a number of these claims but certainly expecting or seeing that benefit now run through our insurance expense and seeing declines in insurance expense.

We've also -- as we have cleaned up a number of our litigation cases that you can see as you read through our public reporting, we do not have any large litigation claims out there right now. We're seeing reduction in legal expenses.

So all of that, as we add together we've also made -- had some reduction in rent and lease costs over the current period. So, all of that leading to improvement in these non-labor expenses.

Going forward, again, further focus -- as we are focused in a number of those areas as well as others we will continue to get traction, specifically around supplies a number of our contracts for multiyear contracts so we're not able to attack all of those in any single year.

So, as more of those contracts anniversary, we'll have further opportunities to negotiate pricing going forward..

Thank you. We'll now turn the call over to Mr. Hingtgen for closing comments..

Great. Thanks Jay, and thanks everyone for spending time with us today. While the first quarter presented a number of inherent challenges, we remain focused on the opportunities that lie ahead.

We are confident in our portfolio, convinced that our strategies will produce strong results and we look forward to delivering long-term and sustainable success.

Across our organization, we are fulfilling our purpose and helping people get well and live healthier, thanks to more than 66,000 people who have chosen to make that their top priority every day. We look forward to updating you on our progress as we move forward and work diligently to achieve all of our goals.

As always, if you have any additional questions you can reach us at 615-465-7000. Thank you and have a great day..

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