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Edited Transcript of QHC earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 Quorum Health Corp Earnings Call

BRENTWOOD Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Quorum Health Corp earnings conference call or presentation Friday, November 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred Lumsdaine

Quorum Health Corporation - Executive VP & CFO

* Martin D. Smith

Quorum Health Corporation - Executive VP & COO

* Robert H. Fish

Quorum Health Corporation - President, CEO & Director

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Conference Call Participants

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* Anton Hie

RBC Capital Markets, Research Division - Assistant VP

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Presentation

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Operator [1]

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Good morning, and welcome to Quorum Health Corporation's Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, today's call is being recorded. Before we begin the call, I'd like to read the following disclosure statement.

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 the company's Form 10-K filing 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 statement in today's discussion. The company does not intend to update any of these forward-looking statements. Quorum Health issued a press release last night with their financial statements and definitions and calculations of adjusted EBITDA and same-facility adjusted EBITDA including reconciliations to U.S. GAAP measurements. A slide presentation is available on the company's website to supplement today's call.

Results discussed today consolidate the results of Quorum's 24 owned or leased hospitals and results of Quorum Health Resources. Same-facility information excludes the results of the 14 facilities that have been divested or closed since the spin-off through September 30, 2019. In addition, the company filed their quarterly report on Form 10-Q last night. All discussions today are supplemented by the press release, the earnings presentation on the company's website and the Form 10-Q. All non-GAAP calculations discussed will exclude certain legal, professional and settlement costs, charges relating to the impairment of long-lived assets and goodwill, the net gain or loss on sale of hospitals, the net loss on the closure of hospitals, cost associated with the transition of the Transition Service Agreements or TSAs, change in actuarial estimates and severance cost of headcount reductions and executive changes.

Please refer to the earnings presentation located on the Investor Relations section of the company's website at www.quorumhealth.com. For further description and calculation of adjusted EBITDA and same-facility adjusted EBITDA and a reconciliation of these non-GAAP measures to income or loss, their most directly comparable GAAP measure.

With that, I'd like to turn the call over to Mr. Bob Fish, Quorum's President and Chief Executive Officer. Mr. Fish, you may proceed.

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Robert H. Fish, Quorum Health Corporation - President, CEO & Director [2]

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Thanks, operator. Good morning, and thanks for joining us on today's call. With me this morning are Alfred Lumsdaine, our Chief Financial Officer; and Marty Smith, our Chief Operating Officer.

On the call today, I'll discuss results from our third quarter and provide information on our revenue cycle and divestitures before turning the call over to Marty to cover third quarter operating results and Alfred for financial results and a discussion of updated guidance.

Despite the soft results, which I'll discuss further in a moment, I'm pleased with many aspects of the progress we've made operationally during the third quarter. Same-facility net operating revenue in the third quarter was $378.6 million, a decrease of 2.7% compared to the third quarter of 2018. Same facility adjusted EBITDA was $30.6 million. These results were negatively affected by the timing of 2 items. First, compared to the prior year quarter, we were unable to recognize $2 million in revenue from the California Hospital Quality Assurance fee program at our hospital in Barstow. We received the needed information in October of this year, and we'll recognize these revenues in the fourth quarter of 2019.

Second, compared to the prior year quarter, our EBITDA results were negatively impacted by $4.2 million as a result of a change in the timing for recognizing proceeds from the sale of property tax credits in the state of Illinois. Normalized for these timing items, our same-facility net operating revenue declined by approximately 1.1% year-over-year, which I'll describe in greater detail in a moment. In terms of underlying volume, our results for the quarter reflect a year-over-year increase in adjusted admissions for the first time in 6 quarters as well as continued strengthening in patient acuity. In particular, we experienced growth in our outpatient surgeries, which were up 2.5%. Despite these positive trends, we experienced an estimated $8 million impact during the quarter, from a deterioration in our revenue cycle performance ahead of the transition of revenue cycle responsibilities to R1 RCM, which began October 1. As of that date, we completed the transition of our back-end revenue cycle functions and are on track to complete the full end-to-end transition by January of 2020. This deterioration in our revenue cycle activities began prior to the third quarter of this year, but accelerated as we got closer to the October 1 go-live date.

We continue to remain confident in the improvement that R1's revenue cycle capabilities will bring to our business and expect that the negative impact we see in the third quarter results will normalize over the next few quarters. This recovery is in addition to the expected annual EBITDA improvement of $45 million by 2021, which we've discussed previously.

Moving on, I'd like to discuss the progress we've made on divestitures. In those terms, we've announced at the end of the quarter, the sale of Watsonville Community Hospital on September 30 for $39 million in net cash proceeds plus $5 million in a note receivable. We used the cash proceeds from this transaction to pay down our term loan facility. During the quarter, we also made the difficult decision to close MetroSouth Medical Center in Blue Island, Illinois. Closing a hospital is a decision of last resort. And we're convinced, however, that it was the best solution for the company as a whole, and we continue to work with a number of parties to determine the optimal use of the physical plant to benefit the Blue Island community. While we don't currently anticipate completing additional divestitures this year. We're actively working on up to 4 more potential divestitures that could transact by the end of the first quarter of next year.

With that, I'll turn the call over to Marty for a review of our operations. Marty?

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Martin D. Smith, Quorum Health Corporation - Executive VP & COO [3]

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Thanks, Bob, and good morning, everyone. At a high level, volume and expense operating results came in as expected. As Bob mentioned, adjusted admissions increased 0.2% year-over-year, and net patient revenue per adjusted admission declined 2.7% year-over-year.

While net revenue per adjusted admission declined compared to the third quarter of 2018, when normalized for the estimated impact of the revenue cycle deterioration ahead of the transition and the timing of recognizing revenue for both the sale of property tax credits in Illinois and the California HQAF program, net revenue per adjusted admission would have increased approximately 0.7% year-over-year, primarily due to both inpatient and outpatient increases in acuity.

While our same-facility admissions during the third quarter declined 5.9% year-over-year, the majority of this decline is attributable to our decision to close some select OB service lines, some continued shift in services from inpatient to outpatient and an overall continued decline in Medicaid volume. As a percentage of our overall volume, Medicaid was down approximately 210 basis points to prior year. Same-facility surgery volumes decreased 1% due to declines in GI, primarily in 1 market; surgery volumes associated with the closed OB/GYN services; and select termination of some employed surgeons. We have been able to mitigate the impact of this through the continued growth of other service lines and new surgeon recruitment.

Turning to our same-facility ED visits, we saw a 0.4% decrease year-over-year in visits but a 260 basis point improvement in the percentage of admissions from the ER. Overall, our emergency room volumes on a quarter-over-quarter basis this year have been very stable. Our volume and acuity trends are reflective of the strategic decisions to term select Medicaid MCOs to rationalize negative-margin service lines and underperforming physicians, which began in the second quarter of 2018. We have successfully reduced negative-margin volumes and improved the overall acuity of our service lines. As we move forward, we expect to see targeted year-over-year volume growth as we continue to strategically focus on growth drivers as well as the underlying profitability of our service lines. 2019 has been a stronger year for provider recruitment with 71 providers signed year-to-date, which is 20 ahead of prior year through 3 quarters.

Finally, I'd like to provide some color on our expense initiatives and trends during the quarter. As we have noted on previous calls, we have implemented various initiatives to reduce our cost by over $20 million annually. These initiatives include reducing corporate overhead expense, lowering our cost associated with the medical specialist, terminating certain underperforming physicians and lowering our supply cost. As the end of -- as of the end of October, we have renegotiated 13 medical specialist contracts since the beginning of 2019, including emergency physicians, hospitalist and anesthesia provider contracts. 10 of those contracts are now active and 3 more will take effect in Q4. We expect the impact of these savings initiatives to be realized beginning in Q4 and expect an incremental $5 million in cost savings relative to the third quarter. With that, I'll turn the call now over to Alfred for a closer look at our third quarter financial results. Alfred?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [4]

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Thanks, Marty. Good morning, everyone. I'll start with an overview of the third quarter financial results and then discuss the revised expectations for the year. Same-facility net operating revenue of $379 million was down approximately 3% year-over-year from $389 million in Q3 of 2018. A large piece of this year-over-year decline was driven by the 2 timing items Bob mentioned. First, our inability to recognize revenue associated with the California HQAF 6 program. And second, a change in the timing of recognition for the sale of property tax credits in Illinois. Combined, these 2 timing items resulted in more than $6 million of the decrease in same-facility net operating revenue year-over-year.

In addition, as Bob mentioned, our third quarter revenues were impacted by an estimated $6 million that we associate with deterioration in the collectability of self-pay accounts receivable, which we attribute to disruption ahead of the transition of revenue cycle functions to R1 RCM beginning October 1 of this year. I'll note that although this financial impact accelerated as we approach the October 1 transition date, we can see a smaller impact that was present in our results during the first 2 quarters of the year. And the total is more than $15 million for all of 2019 through the end of the third quarter compared to the same period in 2018.

Moving on to expenses. Same-facility salaries, wages and benefits were generally flat year-over-year. That's a result of normal wage growth that was mostly offset by employee health benefit cost reductions attributable to planned design changes. Same-facility supply expenses increased 6.5% year-over-year. That's primarily a result of the acuity increases that Marty mentioned, particularly as it relates to outpatient services. Same-facility other operating expenses increased just over 1% year-over-year, primarily from some small increases in contract labor and purchase services.

In summary, same-facility adjusted EBITDA was $31 million compared to $42 million in Q3 of 2018 or a decrease of $11 million. And as I've noted, this decline is more than accounted for in the estimated $8 million deterioration in our revenue cycle, our inability to recognize the benefit from the California HQAF 6 program revenues and then the more than $4 million impact from the timing of recognizing the property tax credit sale in Illinois.

So in terms of cash flow for the quarter, our cash flow from operations was $25 million compared to $28 million in the third quarter of last year. Cash flow from operations during the quarter included $7 million of cash costs that are associated with the closure of MetroSouth. Capital expenditures in the third quarter were approximately $10 million, which is comparable to Q3 of last year.

Our free cash flow for the quarter similarly reflects the impact that we attribute to the deterioration from revenue cycle management activities. Although we've seen our cash collections improve significantly during the month of October from September levels, we would now expect free cash flow for the full year to come in slightly negative.

Moving on to the balance sheet. Our net debt at September 30 was approximately $1.2 billion. This includes $778 million outstanding on the term loan and $25 million outstanding on the revolver. Cash and cash equivalents totaled $44 million, and that reflects the cash proceeds from the sale of Watsonville at the end of September.

Our senior secured net leverage ratio calculated under our credit agreement was 4.49x at September 30, 2019. We anticipate being fully in compliance with our credit agreement covenants through the end of this year. As we look to 2020 and the step-down in the secured leverage covenant that occurs at the end of the first quarter, as we noted in our release, we plan to engage with our secured debt holders to try and ensure we remain in compliance and have sufficient flexibility within our credit agreement during this important inflection period for the business.

Moving to our financial guidance. We are revising our full year same facility adjusted EBITDA guidance from a range of $160 million to $180 million to a range of $140 million to $155 million. In addition, we are revising our same-facility net operating revenue guidance from a range of $1.55 billion to $1.6 billion to a range of $1.525 billion to $1.575 billion. Our guidance reflects the previously communicated expected $5 million revenue benefit in the fourth quarter from the R1 transition as well as approximately $5 million in expected cost reductions in the fourth quarter from a number of ongoing expense initiatives at our hospitals and corporate that Marty mentioned.

The size of the same-facility adjusted EBITDA guidance range represents uncertainty as to the precise timing of the expected improvement in revenue cycle performance from the deterioration we experienced thus far in 2019. However, our discussions with R1 give us confidence that the deterioration is temporal and can be fully recovered from in the coming quarters.

That concludes our prepared remarks. With that, operator, I'll open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Frank Morgan from RBC Capital Markets.

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Anton Hie, RBC Capital Markets, Research Division - Assistant VP [2]

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It's Anton on for Frank. Just -- I think you -- if I'm not mistaken, you mentioned the Medicaid volumes down a bit. Can we talk about kind of what may have driven that? Was that service line closures? Or what's really behind that?

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Martin D. Smith, Quorum Health Corporation - Executive VP & COO [3]

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Yes, it's really a combination of 2 things, both of the items. And they're kind of working in tandem. We did term, primarily in Illinois, and some Medicaid MCOs, and we continue to kind of rationalize that portfolio just because it's either ability to pay, timeliness of payment, increase in denials, all the things associated with some of those struggles. And a lot of the Medicaid volume was embedded into some of the service lines or physician terminations that we had, in particular, OB service lines. And then there were a few select markets where we had some negative-margin volume just coming out of surgical programs and certain markets where we turn providers at some point in the second half of 2018, and that's still kind of flowing through 2019.

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Anton Hie, RBC Capital Markets, Research Division - Assistant VP [4]

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Okay. And I guess -- so that -- does that come back to some of the managed care? If I remember right, you guys have put in some additional resources to get managed care negotiated rates better, does that kind of come back to that.

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Martin D. Smith, Quorum Health Corporation - Executive VP & COO [5]

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Some of that, I mean, we put in some new managed care resources in the first of this year. And so there's still a lot of work going on in that area, and there's still a lot of analysis on the Medicaid MCOs in certain states. But some of that activity was done even prior to [Rick] coming on board with us.

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Anton Hie, RBC Capital Markets, Research Division - Assistant VP [6]

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Okay. And then how about just overall commercial rate renegotiations.

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Martin D. Smith, Quorum Health Corporation - Executive VP & COO [7]

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Overall, that continues to be very positive for us. I think we've done a nice job, one, securing -- continuing to secure some rates that are favorable and using our strength in certain areas to continue to bring good plan design going forward. What we really uncovered is a lot of our plans hadn't been touched in a number of years. And so there were some opportunities there, and [Rick] and his team have done an outstanding job for us.

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Anton Hie, RBC Capital Markets, Research Division - Assistant VP [8]

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Okay. And then back on the RCM, it was a collections issue. I mean, you say it seems better kind of -- now that you've moved over onto the R1 platform. Is that -- are you kind of back to where you were before this sort of deterioration? Or do you think it's improved from even there prior to the deterioration?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [9]

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Yes. So I'll speak to it in 2 pieces, [Anton.] There's the -- we've long talked about the expected improvement and Bob noted in his comments about the $45 million at full maturity that we expect to see from a flow-through. And of course, as I mentioned on the call today, we've seen deterioration in rev cycle [fidelity,] particularly profound in the third quarter, the closer we got to the transition date. Our conversations with R1 give us confidence, we can fully recover from that deterioration but your question is how quickly. I think it would be -- it's going to be -- it would be early for me to speculate. We see good process data, as I mentioned, we've seen collections significantly improve from September, although September was a very low month, of course.

So yes, we think it's going to take a few quarters in our conversations with R1. So -- and again, it goes to the width of the range of same-facility adjusted EBITDA for the year because it's difficult to predict just how quickly, and we'll likely never be able to tease out what was the expected improvement versus what was, kind of, I'll call, the recovery piece. It will all look the same as it happens. But from where we are, of course, we would expect to achieve more than the $45 million that we quoted, because of the -- in previous calls because of the deterioration that we've seen. I hope that makes sense, but the short answer is we think it's going to take a few quarters.

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Operator [10]

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There are no further questions at this time. I will now turn the call back to Mr. Bob Fish. Please go ahead.

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Robert H. Fish, Quorum Health Corporation - President, CEO & Director [11]

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Thanks, operator. Again, thanks for joining the call, everyone, and we appreciate your interest in Quorum Health. Everyone, have a great day.

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Operator [12]

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This concludes today's conference call. Thank you all for joining. You may now disconnect.