Quorum Health Corporation (QHC) CEO Bob Fish on Q1 2019 Results - Earnings Call Transcript

May 11, 2019 2:21 PM ETQuorum Health Corporation (QHC)
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Quorum Health Corporation (NYSE:QHC) Q1 2019 Results Conference Call May 10, 2019 11:00 AM ET

Company Participants

Bob Fish - President and CEO

Alfred Lumsdaine - CFO

Marty Smith - COO

Conference Call Participants

Zack Sopcak - Morgan Stanley

Frank Morgan - RBC Capital Markets

Jason Adler - UBS

Rishi Parekh - Barclays

Operator

Good morning, and welcome to Quorum Health Corporation's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. 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 statements in today's discussion. The company does not intend to update any of these forward-looking statements.

Quorum Health issued a press release this morning with their financial statements and definitions and calculations of adjusted EBITDA and the same-facility adjusted EBITDA, including reconciliations to U.S. GAAP measures. A slide presentation is available on the company's website to supplement today's call. Results discussed today consolidate the results of Quorum's 27-owned or leased hospitals and the results of quorum health resources. Same-facility information excludes the results of the 11 facilities that have been divested or closed since the spin-off through March 31, 2019.

In addition, the company filed their quarterly report on Form 10-Q this morning. 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 related to the impairment of long-lived assets and goodwill, the net gain or loss on sale of hospitals and the net loss on the closure of hospitals costs associated with the transition of the Transition Service Agreements or TSAs, severance costs for 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 a further description and calculation of adjusted EBITDA and same-facility adjusted EBITDA and a reconciliation of these non-GAAP measures to net income, their most directly comparable GAAP measures.

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

Bob Fish

Thank you, Heidi, and good morning, everyone. Thanks for joining us to discuss Quorum Health's first quarter 2019 financial and operating results.

Joining me on the call this morning are Alfred Lumsdaine, our Chief Financial Officer; and Marty Smith, Chief Operating Officer. I'll begin the call today with a few comments on the first quarter followed by an update on our strategic initiatives before turning the call over to Marty for an overview of this quarters operations.

For the first quarter of 2019, we reported same-facility net operating revenue of $445 million, a decline of 3.6% year-over-year and 3.4% sequentially. Same-facility adjusted EBITDA for the first quarter was $23.5 million.

Our results for the quarter were impacted by several temporary volume issues, seasonally soft outpatient demand, a lighter flu season and weaker surgery volume. Approximately 70% of the decline in our surgery volume was concentrated in poor markets, which Marty will discuss in greater detail. In terms of our strategic initiatives, we continue to make progress on many fronts this quarter.

First, continued progress on cost management. These efforts were evident in our first quarter results are shown in the year-over-year cost improvement resulting from last year's margin improvement initiatives. We'll continue the momentum of these initiatives and have identified an additional $20 million of the annual cost reductions, which will implement in the second quarter.

Second, on our last quarterly call, I discussed our efforts to grow Quorum Health Resources. I'm happy to report that this quarter we furthered our commitment to growing this business by adding doing Dwayne Gunter to lead the division. We're confident that Dwayne's 10-plus years of executive leadership experience growing hospital-consulting businesses will be particularly valuable. Dwayne brings an entrepreneurial approach to running QHR and is already driving top line growth and increased profitability. I look forward to sharing more of our successes at QHR as the year progresses.

Third, on divestitures. I am pleased we completed the divestiture of Scenic Mountain in Texas, last month.

We used $12 million of the cash proceeds from the transaction to pay down our term loan facility. Also, during the first quarter, we significantly expanded our resources dedicated to divestitures, engaging 2 M&A advisers who are aggressively marketing 10 hospitals. As a result, we've seen a significant increase in the amount of activity from both strategic and financial buyers for both individual and groups of assets. We're currently evaluating proposals on 8 facilities.

Given this level interest, we're confident in our divestiture proceeds goal of $125 million to $175 million during 2019. Fourth, regarding the planned exit of our remaining TSAs as you saw in our press release yesterday, we've entered into an agreement with R1 RCM for end-to-end revenue cycle management services. R1's scale and technology will enable us to further reduce costs, improve net patient revenues and achieve smooth transition. Alfred will provide more detail regarding the financial benefits of this new partnership, but ultimately, the importance of this strategic milestone can't be overstated.

Finally, we continue to work on several refinancing options. And remain confident, we'll be able to refinance our debt in a manner that will create significant value for our organization and for shareholders. For the full year 2019, given the execution on strategic initiatives combined with our partnership with R1 and continued cost management discipline, we remain confident in our ability to meet or exceed our 2019 guidance.

With that, I'll turn the call over to Marty for a discussion of our operations during the quarter.

Marty Smith

Good morning, and thank you, Bob. Our total same-facility admissions were down 7.4% in the first quarter of 2019 versus the first quarter of 2018. Same-facility adjusted admissions declined by 4.9% compared to the first quarter of 2018. And there were a number of factors at play, which I'll review. Our same-facility admissions were negatively impacted by our margin improvement initiatives, which we began implementing in the second quarter of last year.

Additionally, 162 basis points of the same-facility adjusted admissions declined was attributable to a significantly lighter flu season relative to last year. I would point out that our same-facility admissions and adjusted admissions, while down compared to the first quarter of 2018, were consistent with the volume run rate we achieved in the second half of 2018. Same-facility surgeries were down 8.6% in the first quarter primarily due to declines in GI, ophthalmology and pain management.

Again, the declines were primarily attributable to margin improvement decisions we made last year and some short-term provider turnover we saw in a few select markets. Many of these short-term issues were concentrated in Illinois, where we are re-syndicating 2 underperforming outpatient surgery centers. In addition, we're seeing issues in Oregon, where internal changes as an independent physician group resulted in 2 high-volume GI surgeons leaving the market.

We also lost a week of surgical volume in Oregon during a record-breaking snowstorm in late February. We are actively working to employ 2 GI surgeon in Oregon to compensate for the physician group turnover, and we are confident that we will see normalized volumes over the next few quarters. Moving on. ER visits were down 5% primarily due, again, to the lighter flu season, as I mentioned. On the acuity front, our all-payer case-mix index increased 6.7% year-over-year. Again, this was despite a decline in surgical, acuity and volumes as we discussed.

Turning to our payer mix. Our managed care and commercial mix increased to 143 basis points to 41.3% of total net patient revenues. In addition, our Medicare payer mix increased 6 basis points to 30.6%, and Medicaid payer mix increased 64 basis points to 19% of our total net revenues.

As Bob mentioned, we are implementing approximately $20 million in additional cost savings. These savings are primarily from reductions in our medical specialist fees and overhead. Our medical specialist fee efforts are focused on reducing our hospital-based provider contracts, and we are actively renegotiating agreements, consolidating vendors in certain markets and outsourcing, or excuse me, in-sourcing these services where it makes sense. We expect to recognize approximately half of the $20 million cost savings impact in 2019.

And with that, I'll turn the call over to Alfred.

Alfred Lumsdaine

Thanks, Marty. Good morning, everyone. First, I'd like to cover our first quarter results, then I'll provide some additional detail around the R1 agreement. And finally, discuss our 2019 outlook.

As Bob noted, same-facility net operating revenue of $445 million was down 4% year-over-year from the $462 million in Q1 of 2018. This year-over-year decline was primarily the result of the softer volumes that Bob and Marty, both, noted. Compared to the first quarter of last year, our net operating revenue was also negatively impacted by $4.5 million from lower self-pay collections related to the transition of our secondary accounts receivable TSA from CHS to new third-party vendors.

While this ramp in collections has been lower than expected, collections have continued to increase. And in April 2019, we're back on par with pre-transition collection levels.

Turning to expenses. Same-facility salaries, wages and benefits at our hospitals were down 3% year-over-year primarily due to headcount reductions at our hospital as well as lower health benefit expenses from employee-benefit plan redesign. Same-facility supply expense decreased 6% as a result of lower year-over-year volumes as well as our cost management efforts.

Same-facility other operating expenses decreased 2% compared to a year ago primarily from our cost management initiatives as well as cost savings from transitioning the ESS and PPSI TSAs that we've spoken about.

Moving on. Our same-facility adjusted EBITDA was $23.5 million compared to $27.1 million in Q1 of 2018. From a profitability standpoint, our cost management initiatives continue to produce results. We believe, this will certainly be our lowest EBITDA margin quarter of 2019 and anticipate that EBITDA and EBITDA margins will steadily increase due the course of the year, particularly as we implement further cost savings initiatives and transition our revenue cycle management to the R1 platform.

In terms of cash flow in the quarter, cash flow from operations was $8.1 million and compared favorably to a negative $2.6 million in Q1 of 2018, or an $11 million improvement year-over-year. This increase in cash flow from operations is primarily driven from closure cost in Q1 2018 that related to our former hospital in Massillon, Ohio.

Capital expenditures in the first quarter were $9 million, which represents a $6 million decline relative to Q1 of 2018. This reduction in CapEx was primarily related to the substantial completion of the Springfield-Oregon expansion at the end of 2018.

I'd like conclude the review of the first quarter financials by noting a few items on the balance sheet. Our net debt at March 31 was $1.2 billion, this includes $789 million outstanding on the term loan and $15 million outstanding on the ABL revolver. Cash and cash equivalents totaled $2 million. Our EBITDA cushion for compliance purposes at March 31, 2019, with 11% of EBITDA. Our compliance ratio at the end of the quarter as calculated under our credit agreement was 4.45x.

I'll move on and add some commentary about recently announced agreement with R1 RCM. The 7-year agreement with R1 is, as Bob noted, a major milestone for us. The contract we signed this week followed an exhaustive evaluation process. We strongly believe that R1's platform is the best option for our portfolio of hospitals moving forward. We're confident that our agreement with R1 will notably enhance, both the efficiency and the effectiveness of our operations. Based on the expected implementation schedule, we project that in 2019, we'll reduce our cost by approximately $5 million as well as improve net patient revenues by a similar amount.

It's important to note that the cost savings, as well as the expected revenue enhancement, will grow over the first 3 years of the contract. By fiscal 2021, we project the EBITDA impact from R1 services will be $50 million. Last, I'd like to briefly discuss our 2019 guidance. We continue to expect 2019 same-facility net operating revenue will be in a range of $1.825 billion to $1.875 billion. We also expect same-facility adjusted EBITDA will be in a range of $160 million to $180 million.

As previously discussed, our guidance includes the continued accrual of the California HQAF Program revenues beyond the expiration of the current program on June 30 of this year. In addition, our guidance takes into consideration the benefits from the new R1 agreement as well as the ongoing cost reduction initiatives that Marty referred to.

With that, I'll turn the call back to Bob for some closing remarks.

Bob Fish

Thanks, Alfred. Just to conclude, I want to take a moment to thank all my colleagues for their hard work and dedication this quarter, particularly those involved in the revenue cycle management vendor evaluation and ultimate partnership with R1. It's rare in business to initiate a project that has such a dramatic impact. And although we are just now at the starting line, this agreement is transformational for the company and will pay great dividends for years to call.

Operator, at this time, let's open the call to question.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Zack Sopcak with Morgan Stanley.

Zack Sopcak

I wanted to just ask first on adjusted admissions. As we look forward to 2Q, was there any flu-positive impact in 2Q '18 that we should be thinking about when we're modeling 2Q ‘19.

Marty Smith

No. There's not anything significant really in Q2 related to flu, most of that kind of filtered out all through the last half of Q4 and then Q1.

Zack Sopcak

Got it. And then on the R1 contribution, first of, congratulations for signing that. On the R1 contribution for 2019, was that considered in the original guidance, or is the $10 million tailwinds new as of this quarter?

Alfred Lumsdaine

It was not considered in our initial guidance, obviously as we were working through the process, we didn't have visibility when we provided guidance to the benefit. Of course, as Bob mentioned, we reaffirming guidance. We clearly saw some softness in volumes, as Marty discussed in Q1. And at the same time, clearly, it's an incremental benefit to 2019.

Zack Sopcak

Got it. And then on your Slide 10, that has bullet points on the agreements. So the last bullet point on the $50 million by 2021. So 2020, would you think of it as a ramp from somewhere between $10 million to $50 million, and then, exiting 2020, you'd have a $50 million run rate going into 2021?

Alfred Lumsdaine

That's fair. And I think the ramp is relatively fast. So as you can see from those data points, so I think you're thinking about it right.

Operator

[Operator Instructions] And your next question comes from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan

I was hoping to get a little more detail or actually a reminder on what remaining TSAs you have with CYH? And then what would be kind of the potential cost savings as a result of those transitioning?

And then secondly, just more, a little more detail on the markets that you called out from some physician exits. Just a little more color about what's happening there and the timing of when you see that recovery?

Alfred Lumsdaine

Great. Thanks, Frank. I'll speak to the first part of your question and Marty can speak to the second. In terms of the TSAs that we have remaining with CHS, there's the 2 primary, are, the billing and collections or what we call the SSC TSA as well as the IT TSA.

It's important to note with our agreement with R1, it's a much broader agreement than simply the activities that we have under TSA with CHS. So that's an important point, and in fact, I would suggest the activities we are under TSA with CHS are actually a minority of this band under the R1 agreement.

So again, if we think about the 2 primary TSAs, we have remaining with CHS, it's those 2 things, what we'll call the billing and collection functions as well as all of the IT functions.

Marty Smith

Yes. Frank, as you mentioned, there is some little more color on the, particularly on the markets, we spoke of. Broadly, though, I would say that because we turn providers and discontinued some service lines in the, primarily in the first quarter and early second quarter of last year, I mean those volumes are still in our run rate, and these were negative margin service lines.

But as you speak to, as we speak specifically to Oregon, I think Oregon, we have a joint venture partner that is a large multi-specialty group. That have about 8% ownership in our structure. It's a primary care and specialist group mix. There was a significant disruption in that group between their GI physicians and the rest of the physicians over a comp structure. Some, several physicians, or in this case, 2 physicians, in particular, GI physicians left market. So, we've had to work to kind of recover that volume. And we're very confident, and I just saw a record actually, on May, already, we're starting to see some normalizing, both in April and in May of the volumes in Oregon, specifically related to GI. The other Illinois markets that we spoke of, we've got 2 underperforming surgery centers. We made a decision to basically unwind the existing structure of ownership, and basically, start all over again try to get us to a better group of physician, ownership and partners kind of going forward.

Operator

[Operator Instructions] And your next question comes from the line of Jason Adler with UBS.

Jason Adler

Is there anything that you can tell us about the 8 hospitals that have attracted interests since you hired the advisers in terms of revenue or EBITDA or margin? And are they different than the hospitals that were attracting interest before?

Bob Fish

Well, last part of question, first. No, they're not different facilities than we have been discussing in the past. These are facilities that vary in terms of their contribution margin. So I can't probably call that out to you. I think as we look in our model, looking forward, we, obviously, the most important thing for us is to pay down debt, decrease our leverage, get in a position to refinance. So no, we don't think that the facilities that are involved, we haven't been, material impact in terms of our EBITDA performance.

Jason Adler

Are they, in aggregate, EBITDA-negative?

Alfred Lumsdaine

No. I would suggest, in aggregate, they're EBITDA-positive. We still have a handful that due us money, but in aggregate, they're going to be slightly EBITDA-positive.

Jason Adler

Okay. And then is there any way that you could quantify ideally in terms of dollars, sort of, what the weather impact in Oregon was during the quarter?

Marty Smith

It's going to flow through a little bit into March. I think we lost roughly about 100 surgeries during that week and how much of those we recovered in March is still working through. But you also have a loss of admissions in a similar sort of vein for that quarter as well, in that month.

Jason Adler

Do you have a sense of how many, I mean, in terms of surgeries, is there are a reasonable belief that you would get a lot of those back in later quarters if those were elective versus the admissions, which I presume you can't get back?

Marty Smith

Yes. We would expect to recover certainly the elective volume. The outpatient schedule volume, we would expect to recover that.

Operator

And we have another question in the queue from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan

Yes. I actually want to go back. I know you had a press release earlier about a potential delisting. I'm just curious I want to get your comments on that? And kind of what you're strategies and thoughts are around that?

Alfred Lumsdaine

Sure. Thanks, Frank. Obviously, as we released, I believe, last week, a week ago, today, we received notice from the NYSE. We were in violation of delisting standard. That has to do with having both greater than $50 million market cap for trailing to average 30 days and then shareholder equity greater than $50 million.

So, of course, we intend to cure it. We, there is a process by which we notified the exchange of our intent. And then we filed a plan, and I believe it's within 45 days of receiving that notice for our plan to come back into compliance, which we will be back in compliance for either achieving the equity, $50 million, or the market cap, $50million.

Of course, we believe, strongly as we've articulated on this call in the trajectory of the company from a business perspective. The impact already that we're seeing in terms of the expectations around our relationship with R1 and just have transformative, how that can be and that if the exchange excepts our plan, I believe we'll have through the end of essentially 2020 to come back into compliance.

Operator

Your next question comes from the line of Rishi Parekh with Barclays.

Rishi Parekh

I apologize, I jumped on a little late. I just want to make sure, the language in queue about the going concern in your leverage ratios. Is that entirely tied to your maximum secured net leverage ratio? Meaning that, if you were just to adjust, would you feel that you are a lot more comfortable with your operations? And obviously, the R1 contract going forward, where the going-concern language is not going to be an issue?

Alfred Lumsdaine

That's correct. I think, Rishi, your thinking about it absolutely right. Obviously, after Q1 of next year, we have stepped down as currently constructed in our leverage ratio from 5x to 4.5x. So it's entirely connected to that ratio and the step-down that we have next year. We, obviously, we have decision to make as to whether we could have considered pushing out the step-down. But as we've articulated inside of 10-Q, our business plans, we expect we'll continue.

Rishi Parekh

Sorry. I missed the last part. Did you say that you've already started negotiations on adjusting the step-down?

Alfred Lumsdaine

Not. We have not. As constructed in the 10-K, as we've disclosed in the 10-Q, we believe our business plans will allow us to remain in compliance.

Operator

And now I'd like to turn the call back over to Mr. Fish.

Bob Fish

I got to just close by thanking everyone for taking the time to be on the call. We look forward to talking with you again. Thanks very much.

Operator

And this concludes today's conference call. You may now disconnect.

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