Community Health Systems, Inc.

Good day and welcome to the Community Health System's third quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Anton High, Vice President of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, everyone, and welcome to Community Health Systems' third quarter 2025 conference call. Joining me today on the call are Kevin Hammons, President and Interim Chief Executive Officer and Jason Johnson, Senior Vice President, Chief Accounting Officer, and Interim Chief Financial Officer. Before we begin, I'll remind everyone 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, as described in headings such as risk factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we will discuss today exclude gains or losses from early extinguishment of debt and impairments, gains, or losses on the sale of businesses. With that said, I'll turn the call over to Kevin Hammons, President and Interim Chief Executive Officer. Kevin?

Thank you, Anton. Good morning, everyone, and thank you for joining our third quarter 2025 conference call. Before we jump into discussing the quarter, I want to take a moment to thank the team here at CHS for the support they've shown me and others through the recent transition in senior leadership. It is gratifying to see our team's confidence in the work we are doing here at CHS and their commitment to our future success. Over the past 90 days or so since stepping into my new role as interim CEO, I've had the opportunity to visit several of our markets and speak with many of our hospital leadership teams, including operational, financial, clinical, and service line leaders. It is always inspiring to see the folks who are providing high-quality care for our patients. and helps put into perspective how important our hospitals are to the people and communities they serve. At CHS, we will remain focused on supporting our caregivers, physician partners, and support teams to help ensure an exceptional healthcare experience for our patients. Next month, approximately 150 CEOs and CFOs from across the CHS network will gather for a leadership conference where we will discuss our vision for the future of the company and our ongoing commitment to investments in quality, improving both physician and patient experience, improving employee satisfaction, and achieving sustainable, positive free cash flow. As I've shared with many on our team already, I'm very optimistic about the future of CHS and our opportunities to continuously improve the healthcare experience. to continue to improve our operational and financial performance and to create value for our investors through disciplined and proactive management of our business. Now, turning to the third quarter operating results, our operating performance was in line with our updated expectations, and our reported results were further enhanced by the recognition of a $28 million gain from the settlement of some prior litigation, which reimbursed us for previously incurred expenses. Stored net revenue for the third quarter improved 6% year over year. We were encouraged to see some improvement in payer mix on both the sequential and year over year basis, as well as realizing the incremental state-directed payments from New Mexico and Tennessee when compared to the prior year. As we have done all year, we continue to grow our inpatient volume. However, similar to last quarter, the overall business mix remains surgical cases, and inpatient admissions were flat ahead of outpatient elective procedures. However, solid expense management across most categories helped drive slight margin expansion year over year, even when excluding the benefit from the legal film. We continue to make targeted investments and advance our competitive position in many key markets during the quarter, including capacity and service line expansion, such as the acquisition of a vascular surgery practice and the relocation of a large OBGYN practice onto our campus, both in Birmingham, Alabama, the addition of a new urology service line in Las Cruces, New Mexico, the addition of a new neurosurgery and spine program in Laredo, Texas, and new robotic surgery programs in two of our New Mexico markets. We are successfully recruiting physicians and advanced practice providers to our markets, At September 30th, 2025, we had approximately 160 more employed physicians and APPs in our clinics than in the prior year. With the recent recruits and planned commencements in the fourth quarter and early next year, we should be favorably positioned as we enter 2026. In addition, we continue to improve our capital structure, further reducing our leverage to 6.7 times, down from 7.3%. four times at year-end 24. Also, as a reminder, during the quarter, we refinanced $1.74 billion of our senior secured notes due 2027 through the offering of $1.79 billion of 2034 notes, thereby pushing out our nearest significant maturity to 2029. At this point, I want to introduce Jason Johnson, our Interim Chief Financial Officer, And we'll turn the call over to Jason to review the financial results in greater detail and discuss our updated guidance. Jason.

Thank you, Kevin, and good morning, everyone. For the third quarter, CHS delivered results generally consistent with expectations. The overall volume growth was in line with our updated guidance and with continued solid execution on controllable aspects of our business. The company achieved expansion and adjusted EBITDA margins and remains on track for the full year. Adjusted EBITDA for the third quarter was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year over year. Results included $28 million from the receipt of a settlement of a legal matter recognized as non-patient revenue. When excluding this amount, adjusted EBITDA was $348 million, and margin was approximately 11.4%. of 20 basis points from the prior year period. Please note that the non-patient revenue related to legal settlement is excluded from the same store metrics provided in our earnings release and supplemental materials. Same store net revenue for the third quarter increased 6.0% year-over-year, again driven primarily by rate growth, as net revenue per adjusted emission was up 5.6% year-over-year. Same-store inpatient admissions increased 1.3% year over year, and adjusted admissions were up 0.3%. Same-store surgeries declined 2.2%, and ED visits were down 1.3%. We were encouraged by the sequential volume performance coming out of the second quarter, which was better than our typical seasonal experience in the third quarter. However, as Kevin previously noted, we again experienced a divergence in inpatient surgeries which were flat year over year, and outpatient surgeries, which were down, reflecting continued pressure on consumer demand for elective procedure in our markets. Despite this environment, the company continued to perform well on cost controls, including labor costs. The year over year increase in average hourly rate was in line with our expectations, and contract labor expense was down slightly on a year over year basis. We also performed well again on supplies expense, which were down year over year and as percentage of net revenue fell 20 basis points to 15.0% when excluding the $28 million legal settlement. While we acknowledge ongoing inflationary pressures and potential incremental upward pressure from tariffs on imported products and raw materials in future periods, We believe that opportunities remain as we stabilize and mature workflows under our ERP. Medical specialist fees were $165 million in the third quarter, up approximately 4% year over year on a same store basis, and representing 5.4% of net revenue when excluding the legal settlement, which is generally consistent with recent quarters. We expect continued upward pressure on medical specialist fees in the fourth quarter, and into next year, especially in radiology, while increased use of emerging or developing technology, including AI tools, should eventually help on this front. Cash flows from operations were $70 million for the third quarter and $277 million for the year to date. Cash flows from operations for the year to date, as reported, includes $126 million in outflows for taxes on gains on sales of hospitals. which are paid out of divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $403 million for the year to date, and adjusted free cash flows were slightly negative for the year to date. Based on our historical performance, in which the fourth quarter operating cash flows are typically the strongest of the year, we remain confident in our ability to achieve positive free cash flow for the full year of 2025 after adjusting for cash taxes paid on divestiture gain. In August, we refinanced substantially all of our 2027 maturities using proceeds from an offering of $1.79 billion and 9.75% in your secured notes due 2034 to redeem the tender offer $1.743 billion or 99% of our outstanding 2027 senior secured notes. As Kevin previously noted, leverage of quarter end was 6.7 times, down from 7.4 times at year end 2024. And our next significant maturity is in 2029, providing ample runway to continue executing our strategic initiatives. As expected, in October, we received $91 million in contingent cash consideration related to last year's divestiture of Canova, Cleveland. We also continue to expect the divestiture of our outreach lab assets to close later this quarter with proceeds of approximately $195 million, which will provide additional liquidity to fund growth investments or further reduce our leverage. Now moving on to our updated 2025 financial guidance. Based on our operating results through the first nine months, along with the benefit from the legal settlement that was not contemplated in the previous guidance, we are tightening our adjusted EBITDA range for the full year 2025 to $1.50 to $1.55 billion. Consistent with our prior approach, this guidance does not contemplate any further divestitures beyond those announced, nor does it assume contribution from any new or pending supplemental payment programs. This concludes our prepared remarks, so at this time we will turn the call back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Brian Tenkewit with Jeffrey. Please go ahead.

Hey, good morning, guys, and congrats on the quarter. Maybe, Kevin, as I think about volume performance, obviously nice to see the positive trend in inpatient, but on the outpatient side, you still saw some weakness in surgeries and ER. Just any thoughts you can share with us in terms of what you're seeing in terms of the recovery of volumes there, or how are you guys thinking internally in terms of what that trajectory looks like, and maybe also the components of what outpatient is and what you're seeing in those buckets?

Thanks, Brian. Absolutely. So as we called out in the second quarter, and as I believe we still saw in the third quarter, some of the economic headwinds, more the macroeconomic climate and consumer confidence seemed to be the big headwind. And I think that continued on into... the third quarter, particularly some of our markets are experiencing some heavier or more softness economically than other markets. And so we still believe that that has been the primary driver of some of the softness. Now, as consumer confidence seems to be stabilizing, it's bounced off its lows. in the second quarter a little bit and seems to be improving. We are seeing some recovery and I think that we experienced that where we saw some improvement in payer mix into the third quarter and we're certainly experiencing that in some of our markets. So that gives us a little more confidence as that payer mix improves and people are feeling better and they're starting to come back in for more procedures. Although we were still down on an outpatient selective surgery volume year over year, it was improved over the second quarter. So we did see some improvement there. I'd also point out maybe the immigration climate probably is affecting some of our markets still. If you think about markets in Arizona, across Texas primarily, there's still probably a little bit of an overhang there where patient behavior, people are staying away from hospitals, at least on an elective basis, more than we've seen in the past. Now, we're also experiencing or noticing that in our ER visits, and many of those are uncompensated, so where you're seeing some lower volume and maybe why that hasn't completely been noticed in our EPIDOC, generation is because some of that volume that we're seeing, there's loss of volume, particularly in the ER and uncompensated care, and so that has not had a negative EBITDA impact on us.

That's very helpful, Kevin. And then maybe just a follow-up question for me. How should we be thinking about your divestiture kind of plans or outlook for 2026?

Yeah, we're still pursuing. Some of the vestitures were in some early conversations that, you know, too early at this point. We don't know how far those will go, but certainly we're continuing to get some inbound interest. We are in some more advanced discussions on a couple deals, which we think could be announced even later this year. this year, but no agreements have been signed at this point, so nothing to report today, but that we are advancing some discussions on their field.

Okay, perfect. Thank you. The next question comes from A.J.

Rice with UBS. Please go ahead.

Hi, everybody. First of all, I guess you're moving toward this year. It sounds like you think you'll be pre-cash flow positive on a full year 2025 basis, assuming the fourth quarter comes in with a couple hundred million positive for you. Does that, as you begin to move to a position where that's ongoing going to be the case, does that change your thinking on capital deployment, amount of CapEx you're going to spend, other initiatives, maybe tuck in deals with outpatient or other things. Any thoughts on that?

Thanks, JJ. Absolutely. I think that it frees us up a little bit and does allow us to think and be a little more strategic in terms of how we think about either deploying capital and gives us some optionality of whether we use incremental free cash flows to further deliver the company to, you know, which in effect would, you know, have a virtual staple benefit because it reduces future cash flows. We could use it where there are opportunities for some tuck-in deals to spend capital more strategically in areas of things that we think could, you know, generate further So it does free stuff and should then, again, create a little more of a virtuous cycle for us.

Okay. And then, I mean, it's early, I know, but when you look at 26 and you're starting your budgeting process, et cetera, are there headwinds or tailwinds that you would call out that we should keep in mind as we try to model 26?

Yeah, I think I could point out a few things. Certainly taking into consideration the divestitures that we've completed this year, Lake Norman and Shore Point early in the year, Cedar Park divestiture kind of mid-year. We did recognize some prior year SDP for Tennessee. That's about $15 to $20 million that we'll have directionally some of the things. Medicare rate increase will be strong for 2026. We potentially, there's a couple other SDP programs out there in Georgia, Florida, Indiana. The Rural Health Fund, which we don't know, can't quantify at this point, but that should be incrementally positive for us. And then, you know, we're making, continue to make some growth investments. And as you just mentioned, with positive free cash flow this year, continuing on into next year may allow us to further invest in some incremental growth capital.

I might add, Kevin, this is Jason, that you might want to include that $28 million legal settlement this quarter. Split that from the jump off from the 2025s.

Right. Okay. Thanks a lot.

The next question comes from Ben Hendrix with RBC Capital Markets.

Please go ahead.

Great. Thanks. Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations and your roles. You know, Kevin, you mentioned you've visited some facilities. Any surprises or anything? out of expectation in your review of the platform, and then any initiatives you guys are looking at. You talked a little bit already about capital deployment, but anything in operations or balance sheet management that could deviate from your prior practice? Thanks.

Thanks, Ben. Appreciate the question. You know, I think the short answer is to say I'm really excited about the direction of the company, and I'm confident that we have the right strategies and people in place to execute on our opportunities. We've had, I believe, a very smooth transition of leadership, and I believe we're already picking up momentum in a number of key areas. As I mentioned in my prepared remarks, we have taken the time to visit several local health systems. We've met with health professionals. system leaders and I think substantially all of our major markets already. They're very enthusiastic about the progress we're making and I just am becoming increasingly confident that our investments are strategic priorities and the resources that we're appropriately laser focused on those most important aspects of our business. I think we'll see some of that come to fruition here in the near term with a few areas. I'm highly focused on quality of care, so our quality ratings, our patient and physician experience, employee satisfaction, and I won't take my CFO hat on it. I'll continue to be laser focused on free cash flow and making sure we've made such great progress over the last, you know, probably nine quarters in a row on free cash flow are, you know, trending positively now that we're getting to kind of cross over from being negative to positive free cash flow. I think that's going to give us a lot more opportunity. So as I think, though, about those kind of five priority areas for myself and the progress that we're already making on quality and getting focused on the others, I think that will help really accelerate what we can do in the future.

Brian, this is Jason. Kevin alluded to his CFO hat. I'm in the position of following the guy who's still here. Kevin put into place the focus on adjusted free cash flow and that virtuous cycle. We're continuing to make sure that we're laser focused on that. So no change there. You know, I do think about that we got the ERP fully implemented earlier this year, so continuing to optimize that is a big focus. Evaluation of the most efficient use of proceeds from any investors, whether that's investment in capital or deleveraging through debt repurchases. So from my standpoint, it's just, you know, I've been here with Kevin for a number of years, so I understand what his vision is financially and am alive with it and we're continuing on.

Great, appreciate that. Just a quick follow-up to a prior comment. With the sequential surgical trend you saw from 2Q into 3Q, anything changing in the way we should think about typical 4Q elective seasonality? Thanks.

You know, I do feel that with the improvement in payer mix in Q3, it gives me a little more confidence that Q4 could look more like a normal seasonal recovery. There was some concern that if commercial patients did not come back in Q3 and you get to late in the year and people have not met their copay and deductible yet, they may put it off until early 2026. It's looking less likely. that that will occur. But with the continued headlines around health care and some uncertainty, we did not want to get ahead of ourselves in terms of guidance or suggesting that it could be better. But I think we're in a pretty good position coming into Q4. There's also potentially an opportunity that if people are concerned who have exchange insurance about losing it, there may be some more of that that comes back in in Q4. It's a relatively small component of our net revenues, less than 5% of our net revenues. I don't think it's a real material needle mover for us, but it potentially could be a slight positive.

Thank you very much. The next question comes from Andrew Mock with Barclays.

Please go ahead.

Hi, good morning. I think I want to just follow up on some of those encouraging volume trends. Were those trends you saw exiting 3Q or at the start of 4Q? And from a category standpoint, what are you seeing? And is the payer mix improvement generally driven more by the employer-based coverage or the ACA? Thanks.

So we saw the payer mix improvements really beginning early Q3 in July. We saw that improvement throughout Q3. So I think our expectation would be that that will likely continue into Q4. Now, from a top perspective, Q4 of 2024 was strong, and particularly kind of the post-election period, we saw consumer confidence kind of spike in Q4 of last year. So we will have that to climb over, but all in all, directly and sequentially, I would say that we should continue, or we expect that we could continue to see some improvement Q3 to Q4. In terms of where we're seeing improvement in terms of the breakdown, it was primarily in commercially insured business, although we did see improvement in exchange as well. But again, the exchange business is a relatively small component of our overall network.

Great. And on the government side of things, Indiana is one of your largest states, which I think has one of the largest declines in state Medicaid enrollment to date. Are you seeing the impact of tighter Medicaid eligibility in states like Indiana impact your Medicaid volume results?

Thanks. We've not.

We've not experienced any significant impact specifically to Indiana from that.

Great. Thank you. The next question comes from Jason Kessoria with Guggenheim.

Please go ahead.

Can you guys hear me?

Yeah, we got you, Jason.

Okay, got it. Thank you. I just wanted to touch quickly. I think you noted kind of thinking about 2026 and the favorable Medicare IPPS coming in. Obviously, we're waiting on the final outpatient rule, but as you think about if the outpatient were to come in as proposed, how do you think about the net of those two pieces as it relates to 2026? Would they largely offset each other or are there nuances from a Medicare rate perspective if the OPPS comes in as proposed? Thanks.

I would say with the proposed outpatient, but we know an inpatient proposed outpatient, I still think it's a little net positive to 2026 over 2024? Okay, great.

Start 2025.

Okay, great. Thanks. And maybe just more of a high-level question. On the ambulatory front, I know you have new access points opening up, including a few ASCs, but as you step back, can you just discuss your ambulatory strategy or remind us help frame maybe what inning you're in in terms of building out those access points and, you know, how that's helped your market share position and anything else along those fronts would be very helpful. Thanks.

Sure. So we are, you know, continue to look at access points. We've been investing in those, you know, for some time. I think each market in our markets, each market's a little bit different. We've taken... a little different strategy in those markets where we've had capacity constraints. On the inpatient side, we have invested in more inpatient dollars such as this past year we opened up new towers in Knoxville, Tennessee where we added I believe 58 beds and we added a new patient tower in Foley, Alabama. Both of those markets, we had capacity constraints. Currently, we do not have any of those kind of larger construction projects on the inpatient side in flight. And so as we kind of move through 25 and into 2026, more of our dollars will be focused on the access points, whether that's urgent care, freestanding EDs, ASCs and so forth. And so I think those are lower dollar. We can do more of them kind of for the same amount of capital. Now, we have been opening, you know, three to four pre-payment EDs per year. We have, I believe, three ASCs scheduled for opening this quarter here in 2023. in the fourth quarter of 2025. We'll probably target, you know, kind of six to eight ASCs for next year in 2026, along with some additional, you know, freestanding EDs and possibly some urgent care centers. And then we're always also, you know, acquiring clinics and hiring new doctors into our existing clinics as well.

Great. Thank you. The next question comes from Steven Baxter with Wells Fargo.

Please go ahead.

Hi, this is Mitchell on for Steve. Can you please highlight what drove the 5.6% growth in same-store revenue per admission and kind of what you see as a sustainable rate there? Thank you.

Hey, Steven. This is Jason. About a third of the net 5.6% improvement in same-store net revenue per AA as a result of the Tennessee and New Mexico state direct payment programs that were approved in the second quarter. The rest of the improvement is payer mix related. There is some offset. We did have a little bit lower acuity.

I might just add in, you know, in terms of kind of what's sustainable, you know, we think amid single-digit net revenue growth, net revenue per A growth is a sustainable number. And, you know, between, you know, your Medicare rate increases, our commercial rate increases, we expect acuity. to recover going forward. Right now, you know, there is some dilutive impact on the net revenue per AA with the softer outpatient surgeries, particularly orthopedic and cardiac surgeries, which have been areas of softness. But as those come back, we should see a lift in the net revenue per AA just at their higher acuity services.

Very helpful. Thank you. The next question comes from Josh Raskin with Nephron. Please go ahead. Josh, your line is open. You may now ask your question. We appear to have lost connection with Josh.

Hi, I'm sorry. Do you guys hear me? Do you guys hear me? Oh, sorry about that. Saved by the bell. Sorry. Can you speak to trends from payers around denials and underpayments? Maybe just an update there and more importantly around maybe the mitigation of those pressures. And I'm curious if you're using any external vendors or is it all internal services on the RCM side and maybe any changes that have been there through the year?

Sure. So, you know, we called out really third quarter of last year, in 2024, a big spike in denials. And since that time, it's stabilized. It has not really gotten any worse. But we continue to invest in our physician advisor program. We're investing in some AI tools in terms of how we do denials. with our internal revenue cycle team. We are using a combination of third-party vendors as well as internally developed products on that for purposes of our revenue cycle team. Our revenue cycle is managed internally with our own team, but they do use a combination of products. As we get better at it, I would say we've been able to hold things stable, which would indicate that the payers are probably also denying more claims, but we've been more efficient or better at overturning some of those denials in order to keep things status quo.

Perfect. Perfect. That's helpful. And maybe just a quick one. Flu season seems like off to a little bit of a slow start. I assume that's contemplated in guidance. And I'd be curious if you guys are seeing any updates into October as we kind of move into flu season.

Yeah, it is contemplated in guidance. And, you know, we haven't seen any big pickup yet in our facilities and heavy flu. So at this point, you know, I'm not sure we'll What we'll see, yes, for the remainder of the quarter, but we have kind of taken that into consideration.

Perfect. Thanks. This concludes our question and answer session.

I would like to turn the conference back over to Mr. Hammond for any closing remarks.

Thank you, everyone, for joining us on the call today. I want to close by reiterating my thanks for our team members at CHS for their commitments and confidence through the leadership transition and as we approach the future together. If you have any additional questions, you can always reach us at 615-465-7000.

Have a good day, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.