Community Health Systems, Inc. (CYH) CEO Wayne Smith on Q1 2019 Results - Earnings Call Transcript

About: Community Health Systems, Inc. (CYH)
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Earning Call Audio

Community Health Systems, Inc. (NYSE:CYH) Q1 2019 Earnings Conference Call May 1, 2019 11:00 AM ET

Company Participants

Ross Comeaux - Vice President of Investor Relations

Wayne Smith - Chairman & Chief Executive Officer

Tim Hingtgen - President & Chief Operating Officer

Tom Aaron - Executive Vice President & Chief Financial Officer

Lynn Simon - President of Clinical Operations & Chief Medical Officer

Conference Call Participants

Frank Morgan - RBC Capital Markets

A.J. Rice - Credit Suisse

Josh Raskin - Nephron

Ralph Giacobbe - Citi

Ana Gupte - SVB Leerink

Kevin Fischbeck - Bank of America

Jesse Klink - Piper Jaffray

Stephen Tanal - Goldman Sachs

Peter Costa - Wells Fargo Securities


Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems 2019 Q1 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Mr. Ross Comeaux, Vice President of Investor Relations. You may begin your conference.

Ross Comeaux

Thank you, Mike. Good morning and welcome to Community Health Systems first quarter 2019 conference call. 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 historically 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 gain or loss from early extinguishment of debt, impairment expense, as well as gains or losses on the sale of businesses, expenses incurred related to divestitures, expenses related to employee termination benefits and other restructuring charges, expenses related to government and other legal settlements and related costs, and expense from settlement and fair value adjustments to the CVR agreement liability related to HMA legal proceedings, and related legal expenses.

With that said, I'd like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Wayne Smith

Ross, thank you. Very well done. Good morning and welcome to the first quarter 2019 conference call. With us on the call today is Tim Hingtgen, our President and Chief Operating Officer; Tom Aaron, our Executive Vice President and Chief Financial Officer; and Dr. Lynn Simon, our President of Clinical Operations and Chief Medical Officer.

Today's call, I'll provide a brief summary of the company as well as our performance during the first quarter. Then, I'll turn the call over to Tim, who will provide an update on operations, and then Dr. Simon who will provide an update on physician practices and then Tom who will provide more details on the first quarter's financial results.

Overall, we made good progress during the first quarter and we expect to continue to drive additional growth during the remainder of 2019. In addition to divestitures during the 2018, we invested in a number of revenue growth initiatives across our core hospital portfolio including our transfer and access programs, accountable care organizations, inpatient investments, access points, patient connectivity and other strategic operating initiatives to drive improved volume.

We are seeing very favorable results across all of these initiatives. Due to the success of these initiatives, our same-store volumes improved in 2018 compared to our trends in 2017. It's worth noting that we saw a continuation of this trend in the first quarter of 2019, during which we delivered sequentially better admissions adjusted admissions and surgeries.

For the quarter, on a year-to-year basis – of year-over-year basis our same-store admissions were nearly flat our adjusted admissions were up 80 basis points and our surgeries were up 3.6%. Finally, our same-store net revenue was up 3.1%. So we're pleased with our same-store volumes and we expect to continue to deliver improve volume and net revenue performance going forward.

During the quarter, we had a number of non-recurring items that lowered our EBITDA. As we mentioned on our fourth quarter earnings call, we expected to continue to roll out strategic investments during the first quarter to drive future growth during the balance of 2019 and throughout 2020. Along these lines, during the first quarter in 2019, we invested across a number of strategic areas including revenue growth opportunities as well as expense management initiatives. Tim, will provide more detail on some of these items in a minute.

Now, I'd like to talk about our divestitures. During the first quarter of 2019, we completed a number of additional divestitures and we'll close incremental divestitures during the balance of 2019. As I mentioned, before this has allowed the company to shift more of our resources to more sustainable markets ones with better population growth, better economic growth, and lower unemployment which provides us an opportunity for sustainable growth.

As we complete additional divestitures, we expect our same-store metrics to further improve. This will lead to not only additional debt reduction, but also better cash flow performance and lower leverage ratios.

Since our last earnings call we have closed the divestitures of four hospitals in South Carolina including hospitals in Chester, Lancaster, Florence and Mullins. And in late March we announced a definitive agreement to sell our Lebanon Tennessee Hospital to Vanderbilt University Medical Center. We expect this divestiture to occur during the third quarter of 2019.

Our current divestiture plan which includes both 2018 and 2019 divestitures calls for divestitures of at least $2 billion of annual net revenue with a mid-single-digit EBITDA margin.

Total estimated gross proceeds excluding working capital is expected to be approximately $1.3 billion. Since the beginning of 2018 we have closed divestitures accounting for approximately $1.5 billion of net revenue generating approximately $550 million of gross proceeds. These divestitures are consisted of low single-digit EBITDA margin hospitals.

As it relates to our divestitures we remain in active discussions with a number of potential buyers and will continue to receive inbound interest. We expect to complete our divestiture plan during 2019.

Tom will provide more details on our full year 2019 guidance later in the call. But our net revenue and EBITDA guidance remain unchanged which includes net operating revenues adjusted for expected divestiture timing of $12.8 billion to $13.1 billion adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion.

Now I'd like to turn the call over to Tim for additional comments.

Tim Hingtgen

Thank you, Wayne. As Wayne mentioned we are pleased with the continued improvements we are seeing across our same-store volume metrics. Our admissions surgeries and adjusted admissions have all improved sequentially in line with the improving trends we drove in 2018 and reflect some of the strongest volume indicators since 2015.

We've been executing upon a number of strategic initiatives to drive incremental growth across our markets and these investments continue during the first quarter. And the good news is, we're seeing volume acceleration as a result of these strategic investments.

Today I will spend some time talking about our volume and net revenue performance and then I will review some of our expense initiatives which we expect will drive improved EBITDA margin performance during the remainder of 2019 and throughout 2020.

First on the volume side, our same-store admissions continue to post sequential improvement down 10 basis points in the first quarter, despite the impact of selected service line closures and a lighter year-over-year flu season. Our core hospitals continue to demonstrate improved admissions performance.

In terms of individual service lines, we experienced favorable growth across cardiovascular, neurology, orthopedics and spine and other targeted specialties. Due to the investments we are making across our company, we do expect our admission volumes to continue to improve.

Surgeries increased 3.6% driven by strength across orthopedics, GI and other categories. While posting sequential improvement ER visits were down 1.9% in the first quarter. We remain focused on adapting our access point model to adjust for the migration of lower acuity ER patients to alternative outpatient settings of care.

We have continued our expansion of our own strategically placed on-demand care offerings like urgent care and walk-in care centers. During the first quarter, we opened an additional four on-demand access points bringing our total count to 101 locations including the opening of our 12th freestanding ED in Central Florida.

As a result of this ongoing access point expansion and our focused marketing of the convenient on-demand care and other primary care locations, we experienced a net increase in patient visits despite the lighter flu season this year.

Looking forward we have a set of strong pipeline of additional opportunities across freestanding EDs urgent and walk-in care clinics and primary care offices. It is important to note that while we are seeing fewer lower acuity ED business overall, we continue to see growth of inpatient visits or the absolute number of patients admitted to our affiliated hospitals through our emergency rooms. This is the result of our focused on targeted service line development supported by our transfer centers and enhanced clinical outreach programs.

Our adjusted admissions were up 80 basis points and our net revenue per adjusted admission was up 2.3%. So overall, we're pleased with our volume performance and remain focused on driving this momentum going forward.

As we mentioned last quarter, we expected to incur some additional expense related to our focused growth initiatives including the development of our physician practice networks, enhancements to our supply chain organization and in other key areas. In addition to these investments we also incurred higher-than-expected losses particularly related to two recent hospital closures.

During the first quarter of 2019, the cost related to these closures increased our operating expense by approximately $10 million. We expect these expenses will be substantially lower during the second quarter and in the back half of 2019 as we complete the strategic repositioning and network redevelopment plan. In a minute, I will ask Dr. Simon to comment on our physician practice investments. But before I do that I would like to talk about the meaningful opportunity we continue to see on the supply chain front.

For our supply chain, we are focused on a defined strategy to better leverage our purchasing power, across both our supply and purchase service spend. During 2018 and into the first quarter, we have reorganized our supply chain organizational structure and we have added very experienced executives to lead this focus and drive expense savings.

To-date, we have implemented company-wide initiatives and the commodity product savings in more than 50 supply categories with the products that offer the best quality, safety and overall value are identified as part of our expanding supply formulary. We are also deploying physician-led advisory committees to assist with the selection of clinical physician preference items. We implemented the first such category which will lead to significant savings of around 30% on that particular implant the savings of which started late in the first quarter. And we plan to initiate the same strategy with other specialty categories throughout 2019.

In summary, we expect to see supply expense improvement in 2019 and beyond. And we will be utilizing much of the same playbook and the same procurement team for certain areas of other external vendor costs. We expect these initiatives to drive further expense leverage and margin improvement over the next couple of years. On these expense lines, we are targeting at least 100 basis points of improvement as a percent of net revenue as we exit 2020.

And now I'll turn the call over to Dr. Simon.

Lynn Simon

Thanks, Tim. As we noted in 2018, physician recruitment is tightly aligned with our multiyear strategic planning process, which includes improved retention over the past last two years as well as the addition of providers to ensure a strong primary care base and specialists to support service line growth in our markets.

In our affiliated employed clinics, we have grown our provider base by 6% in total. Successful recruitment efforts through 2018 and into 2019 have increased our startup positions those practicing in our affiliated clinics for less than 12 months by more than 30% over the prior year quarter. While we expect this hiring and onboarding of new providers to further enhance our net revenue growth during subsequent quarters, our clinic SWB was up approximately $20 million year-over-year and EBITDA was reduced by $10 million.

Our recruitment efforts and other physician strategies such as centralized scheduling, online scheduling and patient engagement technology are continuing to show good results. During the first quarter of 2019, we had a 6.8% increase in walk-in clinic visits and a 19.3% increase in traditional primary care visits. And as Tim mentioned, we are seeing growth in cardiology, orthopedics, neurology as well as surgeries and GI procedures. We expect to continue to deliver strong volumes from these strategic investments into high-quality physicians and providers further strengthening our competitive position in CHS-affiliated markets.

And now, Tom will walk through some additional financial results.

Tom Aaron

Thank you, Lynn and good morning. We've been focused on improving our same-store metrics. Wayne, Tim and Lynn highlighted some of our strategies to drive that improvement and I'll reiterate that we're pleased to see these efforts deliver results. Our first quarter results benefited from adjusted admission and surgery volume growth and improved acuity, investor progress and stronger portfolio of hospitals.

Now, we'll discuss first quarter on a same-store in a quarter-over-quarter basis. As a reminder, calculations discussed on this call exclude items Ross mentioned earlier. During the first quarter of 2019, net revenues increased 3.1%. This is comprised of a 0.8% increase in adjusted admissions, and a 2.3% increase in revenue per adjusted admissions.

Similar to Q4 2018, our first quarter net revenue was impacted by significant stock and bond market fluctuations during those quarters, decreases in Q4 2018 and increases in Q1 2019. The market change increased the value of investments held in deferred comp plans resulting in higher other revenue and corresponding increase in benefits expense which combined has not impacted EBITDA materially.

Excluding market fluctuations impact, changes and other non-patient revenue, our first quarter net revenue per adjusted admission would have been up 2.0% and our total net revenue up 2.8%. During the first quarter, our net operations revenue were up approximately 50 basis points and were over 51% of our net operating revenue.

Consolidated revenue pair mix for the first quarter of 2019 compared to the first quarter of 2018 shows managed care and other which includes, Medicare Advantage and other revenue increased 260 basis points, Medicare fee-for-service decreased 170 basis points, Medicaid increased 30 basis points, self-pay decreased 120 basis points.

Looking at our adjusted admissions by payor, our managed care Medicare Advantage and self-pay volumes each were up. Our Medicare fee-for-service and Medicaid volumes each decreased.

During the first quarter of 2019, the sum of consolidated charity care self-pay discounts and uncollected revenue increased from 29.8% to 31.4% of adjusted net revenue year-over-year, a 160 basis point increase.

For the same-store expense items, our salaries and benefits as a percent of net operating revenues for our same stores increased approximately 110 basis points. This increase was driven primarily by employee benefits and physician investment.

Supplies expense as a percent of net operating revenues for our same stores increased 10 basis points as higher implant costs from increased surgery growth exceeded our lower commodity spend.

Our other operating expenses as a percentage of net operating revenues for same-stores increased 10 basis points due to higher vendor related expenses. As Tim mentioned, we're focused on driving the supply and other operating expense savings by implementing strategies and leveraging technology.

We're underway with national contracting for our second physician preference category with others to follow later in the year. We expect to see improvements in the back half of 2019 and more meaningful savings in 2020 and beyond.

Switching to cash flow. Our cash flows provided by operations were $133 million for the first quarter of 2019, which compares to cash flow from operations of $106 million during the first quarter of 2018. Free cash flow has improved by approximately $80 million.

In terms of quarter-over-quarter – year-over-year increase there are a few items worth noting versus the prior quarter. Improved collections from accounts receivable, contribute approximately $56 million more this year including divested hospitals and state supplemental programs. Decrease in the cash flows included increased malpractice, claims payments of approximately $29 million. Other year-over-year increases and decreases included working capital changes offset each other during the quarter.

Turning to CapEx. Our CapEx for the first quarter of 2019 was $121 million or 3.6% of net revenue. During the first quarter of 2018, our CapEx was $170 million or 4.6% of net revenue. We're continuing to invest our capital towards high growth opportunities in our markets such as additional access points as well as service line build outs for cardiology orthopedics and other high acuity areas.

Moving to the balance sheet. At the end of the first quarter, we had approximately $13.39 billion of long-term debt, current maturities of long-term debt of $205 million. And at the end of the first quarter, we had approximately $277 million of cash on the balance sheet. We continued to be proactive as we manage our capital structure. And as a reminder in March we paid off the balance of our Term Loan H facility through a $1.6 billion senior secured note offering through 2026.

Our first lien net leverage ratio financial covenant under the credit facility is currently 5.25 to 1. As of March 31 2019 our first lien net debt leverage ratio is approximately 4.98 to 1.

As Wayne mentioned earlier, we expect our ongoing divestiture plan to reduce our total debt and we expect our first lien net debt leverage ratio to decrease moving forward as we pay down additional debt and improve operations.

Wayne, Tim and Lynn covered a number of our strategic initiatives. Our primary goal over the next couple of quarters is to execute on these initiatives, which will drive improved same-store EBITDA growth, allowing the company to deleverage and drive better cash flow.

As a reminder, 2019 guidance contemplates future divestitures and does not reflect anticipate refinancing activities. We've updated our 2019 full year guidance to reflect the impact of the Q1 Term Loan H refinancing.

Our updated guidance includes the following; for 2019 net operating revenues are anticipated to be $12.8 billion to $13.1 billion after adjusting for expected divestitures. Same-store adjusted admission growth is anticipated to be flat to up to 1%.

Adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion. Net income per share is anticipated to be negative $1.85 to negative $1.50 based on weighted average, diluted shares outstanding of 114 million to 114.5 million. Cash flow from operations is forecasted at $600 million to $700 million. And CapEx is expected to be $475 million to $575 million.

Wayne, I’ll return the call back to you.

Wayne Smith

Thanks, Tom. At this point Mike we're ready to open it up for questions. We will limit everyone to one question, so several of you can have a chance to get on the phone. But as always we're available to talk to you and you can reach us at area code 615-465-7000.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Frank Morgan from RBC Capital Markets.

Frank Morgan

Good morning. I was hoping you could talk a little bit more -- I mean, you reaffirmed your guidance, but maybe a little bit about the cadence over the balance of the year. Obviously, a lot of things going on with these closures that are burning off and the physician on-boarding. But just curious about walking through the cadence on the year. And I guess specifically in the fourth quarter just any thoughts around the proposed 2020 updates for rates and kind of what you have built in there for that. Thanks.

Wayne Smith

Hey, Frank. It's Wayne. Just in terms of this proposed CMS, it's all proposed, but theoretically, it will be approved in August. We think it's fairly meaningful to us if all of it goes through. And there's a number of categories which you can see. I think it's on slide 14. But this happens every year, but historically has not been as good as it is this year.

Tom Aaron

Frank, on the rest of the initiatives, I think you got that right. We mentioned -- Lynn mentioned the Knoxville market closing that down. We are selling that campus to the City of Knoxville that will close later in the year. There's property taxes associated with that utilities, insurance, we're relocating IT. So that was the highest quarter will be Q1 that will wind down as we approach the sale.

On the other initiatives, I think the investments we've talked about that we're continuing those investments with volume access points and so forth. We're really happy with the adjusted admission growth in Q1. And so, I think we've got a good start and seeing that progress as we ramp up those initiatives. Really no major new initiatives to launch. We're in, as you know, year two of the ACO which was very successful and so we're happy with what's happening on the volume side, especially against what we thought was pretty tough comp throughout this quarter.

On the other initiatives, the biggest one that we're talking about is on the supply chain. The physician preference initiatives, we had a very successful launch in Q1 on that one. A second one that is well underway. It's going to be a bigger effect than the first one. We've got another one teed up just after that. Our physicians are already huddling on that one. So, those are very executable the natural contracting strategy. So we're highly confident that we're going to get the impact of those. And then the other commodity items Tim mentioned, again most of the improvement we should see later in the year and into 2020.

And then lastly, I'll just mention on the salary side that we look at all the progress we made the last six quarters with the labor analytics. We pretty much held to serve on that in most of our hospitals. The two items in this quarter were benefits that came out of the box hiring benefits -- mostly health benefits. And what Lynn mentioned with respect to -- we did have a ramp up in our physician start-ups. We expect that to wind down over the years. So we feel like those are very manageable.

And then on top of that to Wayne's point and what you asked about the Medicare inpatient rules, we wanted to share those. Those are bigger than what we've had in the past and we -- and so they are preliminary. But if those follow-through both on the Medicare Fee-for-Service and the Medicare Advantage, that could be a good opportunity for us during the fourth quarter.


Your next question comes from A.J. Rice from Credit Suisse.

A.J. Rice

Hi, everybody. Obviously, you're showing some improving trends on the volume side and you're mentioning about success in recruiting doctors. I guess, I was going to ask about your capital plans. As I look at the percent of revenues that you're allocating to capital, it's trended down a little -- the capital spending specifically has trended down a little bit. Are you feeling constrained at all with the balance sheet on your capital needs? Or do you have enough to -- I would think you'd actually start to potentially see some pickup with the added physicians and looking at new opportunities for volume growth.

And specifically I guess in the quarter was down a little bit. Is that just an anomaly of the seasonality and you'll see a pickup over the course of the year?

Wayne Smith

A.J., so on the quarter with the comparable to last year, we did have some late purchases in 2017. We paid for those in 2018 and we might have called that out last year for first quarter, it's not like a bigger comp that we're comparing to. We are on the same path as funding all the strategic projects that can add to the initiatives whatever strategies are in those markets. And so, we're continuing on that path.

As we called out earlier, we've been in a period of not having replacement hospital spend and also having the benefit of knowing hospital being divested where we're not making strategic spend. That's going to start to change. We've got a replacement hospital under way. The spend in Q1 was less than $5 million, but it's going to ramp up for replacement hospital in La Porte, Indiana. Then we've got -- we're getting towards the end of the divestitures with 2019. And I think that will start -- the remaining portfolio we'll be making strategic spend in a lot of those. So I do expect that ratio to increase over time with the replacement hospital as we end the divestiture program.


Your next question comes from Josh Raskin from Nephron Research.

Josh Raskin

Thanks. Good morning. Could you just remind us on the cash flow implications for sold facilities. I just don't remember if there's typically any working capital that gets worked out or any commitments that remain after the sale. Do you have any of those on the ones you guys are working on now?

Wayne Smith

We have -- so the one kind of observation from that Josh is after we close, we generally have been keeping our working capital. And so we will pay out the first 30 days essentially all of our accounts payable accrued liabilities. Then on the receivables that starts to come in for the most part, maybe that 30 to 90 days the collection on that. So when we close, let's say a month before quarter -- sometimes that gets at a little bit backwards from a cash flow standpoint. But we are -- down the road it levels out. In this quarter, in fact we did have a good collection on the receivables.

Generally, on our divested facilities, we don't have obligations. So we've closed three and the one we called out is a very large campus. It's an old campus. There's a lot that we need to do to have it ready for a sale and also to move some of our assets out. So I think that one's unique to closures and I wouldn't expect on divestitures that we would have ongoing obligations. We do have TSA obligations for IT and revenue cycle services with the buyers until they're able to put them up on theirs. But other than those nothing material.


Your next question comes from Ralph Giacobbe from Citigroup.

Ralph Giacobbe

Thanks, good morning. The volume number and surgery specifically stood out both in terms of the increase relative to recent trend that you've seen versus what others have reported so far in the quarter. Can you maybe just talk a little bit more about the drivers the service lines kind of seeing that bump? And maybe more importantly, the durability and sustainability you think of that number and that increase? Thanks.

Tim Hingtgen

Good morning, Ralph. This is Tim Hingtgen. I will take that question. In terms of the surgery growth, I believe it's largely due to the thoughtful planning of those strategic plans that Lynn mentioned, the multiyear strategic planning processes certainly teed up our physician recruitment pipeline, the number of same stores -- non-same-store start ups that we put into play throughout the 2018 calendar year, the increased number in 2019 today all those are driving some good surgical volumes.

As we recruit the primary care clinicians into our practices roll those access points drive the transfer center volumes we are seeing good progress on both inpatient and outpatient surgeries. So we are seeing some good acuity lift in terms of where we're placing those investments. And then later on top of that some of our targeted capital spend throughout 2018 and in-flight right now was to expand some surgical capacity in markets that certainly had the pent up demand.

So we're glad to see that once we put that capital into play, we had the volume grow. And then lastly I'll put on there, we had some good growth in our ambulatory surgery group on this quarter as well. Some good strategic acquisitions and partnerships that happened in 2018 are driving some increased business on that outpatient basis as well. So I do believe it's sustainable and we're planning on leveraging that investment into the physician provider and practice network going forward.


Your next question comes from Ana Gupte from SVB Leerink.

Ana Gupte

Hey, thanks, good morning. So the first one was just to clarify, did you have the IPPS rate update right now in the guidance or not? I'm not entirely clear.

Wayne Smith

Do you any other question on it or is that...

Ana Gupte

I was just wondering if you had the inpatient the Medicare rate already in guidance. I couldn't tell for sure…

Wayne Smith

Yes. Ana, so when we put out our original guidance as we reassessed it this quarter, original guidance we did not have the benefit of this when that went out. And this is fairly recent less than two weeks old. And so as we evaluate it after our Q1 this was taken into consideration as well. However, as we mentioned, we feel like we've got -- even without the benefit of this we've got very manageable pathway to be in our guidance.


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

Kevin Fischbeck

Great. Thanks. Just wanted to follow-up on the margin compression in the quarter, because the change in trends versus what you guys have seen over the last few quarters. And I appreciate all the color you've given on the kind of the things you have going forward.

But given the fact that you've been divesting low margin assets, I was still surprised by that. I guess, if I take the $10 million of asset wind down costs and another $10 million of physician cost its about 60 basis points of the -- maybe that's half of the margin compressions or anything else that you would highlight going on in the quarter that might be more one time? Or I guess, I was just surprised that given the volume strength and the same-store revenue improvement there wasn't better leverage on the cost.

Wayne Smith

Yes, I think that the benefits was surprise to us. Again, we feel like the first quarter benefits -- our history over time we have not made major planned changes that would even out. So we don't feel like that's going to be a recurring theme. We've been talking about this all along. We have been anticipating that we're going to be getting a lot of the lift on the supply chain coming in for more in the second quarter, but definitely third and the fourth quarter.

We have made investments. We've made significant investments in that supply chain team to build out our capabilities and change our strategies there. But I'd say there's probably nothing that gives us that much concern going forward. You do typically have higher benefits with some of the payroll taxes upfront that levels out a little bit later in the year. So we feel like we're very comfortable with where we're positioned.


Your next question comes from Sarah James from Piper Jaffray.

Jesse Klink

Hi. Thanks. This is Jesse on for Sarah. I was just hoping you could break out how having one less work day in the quarter impacted revenue EBITDA volume trends. And then conversely it looks like third quarter will have one extra day compared to last year. So just wondering how those trends might reverse to the same degree in the third quarter? Thanks.

Wayne Smith

Yes. We know that, yes, it is a measurable amount. It's not a material amount that we would call out, not only that, but just how holidays spell and everything else. I would say we're not going to probably call that out and don't feel like it had a material impact on us this quarter or the remainder of the year.


Your next question comes from Stephen Tanal from Goldman Sachs.

Stephen Tanal

Good morning guys. I guess just to sort of summarize there's a number of items called out. But in thinking about sort of the seasonality of the year, could you just sort of quantify maybe tell us where you think like core underlying EBITDA would have trended sort of ex some of the items that are maybe a little bit unusual here?

Wayne Smith

Well, we're calling out some of the I think more unusual items. The math I think is pretty easy. We called out $10 million in Knoxville on the physician practices. Again, that's something we're in a mode right now. We've got substantially more start up physicians. As we project out our model for the pipeline coming through we know we're not going to be in that position going forward. And Lynn called that out. The EBITDA on the physician practices was $10 million.

There are other puts and takes that we look at. I wouldn't call those out, but I think that would be helpful. And also I want to point out that we feel comfortable with a lot of the initiatives that we've talked about on the volume side, supply chain side, and like we said labor, our core labor statistics are still pretty strong. We feel very comfortable, especially if we continue to execute on the volume side. That really gives us the leverage to improve expenses.


Your next question comes from Peter Costa from Wells Fargo Securities.

Peter Costa

Thanks for squeezing me in here. I'd like to dig in a little more on Ralph's question on the same-store surgical volumes being up. Was there a particular category where that was? You said it was tied to sort of what you've been doing some of the spending. As you're spending -- as the CapEx comes down do you worry that that will come down as well? And what's sort of the time lag between the CapEx spend and the surgical volume growth?

Wayne Smith

Hi, Peter. I'll expand upon my previous comments. In terms of the categories of growth, as we commented on earlier, good growth on the higher acuity service lines, our surgical mix was favorable in the quarter compared to prior year quarter, but orthopedics, neurosurgery, some of the higher implant drivers. And as we've called out here today as well, still working on driving better margin on that higher acuity book of business by leveraging those supply initiatives. So that's work that will come into play throughout the rest of the year.

We also had good growth in the GI and general surgery categories. GI not always the most complex, if you will, but a very, very strong performer for us in many markets. So, with our recruitment backfilling some lost providers or expanding certain GI service line, we had good growth there.

The other area that doesn't quite get called on our surgery staff, the strong growth in our cath labs all throughout the quarter. We had a mid-single-digit increase in cath lab volumes year-over-year again as we invest in the medical specialist.

So, just in general, across a lot of broad categories tied to those strategic plans that we put into play, 18, 24 months ago and just making sure we're firm on our execution. From a capital standpoint, not worried that we won't be funding future ways of growth. As a matter of fact, we have large surgery expansion project underway in Las Cruces, New Mexico to add capacity there. Again very strong market for us performing well.

And then also some more ASCs in the pipeline. Likely you won't see the benefits of those transactions until 2020. As you know it takes a lot to work with the physician partners, put the deal together, and get the centers open, but a really robust pipeline there. But we have not slowed down our spending on capitalizing the tools and equipment for the surgeons and the staff to do their jobs to advance service line nor we stop investing in our the hospitals that have the ability to grow capacity.


That was our last question. At this time, I will turn the call back over to Mr. Smith for closing comments.

Wayne Smith

Thank you again for spending the time with us this morning. As we've outlined in the call today, we're encouraged with the progress made in 2018. And we're pleased with the first quarter.

Moving forward, we're looking forward to a strong performance in 2019. We want to specifically thank our management team, staff, hospital, chief executive officers, hospital chief financial officers, and chief nursing officers, and division operators for their continued improvement on our strategic initiatives.

This concludes our call today. We look forward to updating you on our progress throughout the year. Once again, if you have questions, you can always reach us at 615-465-7000.


This concludes today's conference call. You may now disconnect.