Good day, and thank you for standing by. Welcome to the Community Health Systems Second Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Ross Comeaux, Vice President of Investor Relations.

Thank you, Jay. Good morning, and welcome to Community Health Systems Second Quarter 2021 Conference Call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer. Before I turn the call over to Tim, I'd like to remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations we will discuss also exclude loss from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expenses from government and other legal settlements and related costs, expenses from settlement and legal expenses related to cases covered by the CVR, expenses related to employee termination benefits and other restructuring charges, change in tax valuation allowance. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Ross. Good morning, everyone, and welcome to our second quarter 2021 conference call. We are pleased with our second quarter results, especially as we continue to see volume recovering, net revenue growth, and margin improvement. During the first half of 2021, we further advanced growth-oriented strategic initiatives that continue to strengthen the company. Before we walk through the details, we would like to thank all of our providers, nurses, and caregivers and our employee and leadership teams, who continue to provide safe, high-quality care in the communities we are so fortunate to serve. This has been great to see firsthand. With more people vaccinated and because COVID case counts have declined in the second quarter, many of our executive leaders were able to spend time visiting our markets over the past several weeks. We have had the opportunity to tour capital projects that have come online, witness operational improvements, and hear heartwarming stories of patient care and positive outcomes. There is a tremendous sense of pride across our organization, especially as we reflect on the essential services and value provided to our communities while we've worked together to fight the COVID pandemic. We are currently seeing an uptick of COVID cases in some markets, but we remain confident in our dual-track operating model and the ability of our teams to safely and effectively manage COVID surges while also meeting the increasing demand for our services and the health care needs of non-COVID patients. Now switching back to the second quarter. Positive COVID-19 case counts were lower than the first quarter, following the peak numbers we experienced in January. In the first quarter, we provided care for approximately 9,500 inpatient COVID admissions. In the second quarter, our inpatient COVID admissions were approximately 3,000, which represented about 3% of our total admissions. As COVID cases declined during the second quarter, we experienced a solid rebound in non-COVID volumes driven by our efforts to attract new patients and to reengage and retain patients who have previously used our health care systems. For the second quarter, on a same-store basis, net revenue increased 30.2% year-over-year driven by the easier comp, resulting from government restrictions on elective procedures that impacted net revenue last year. For the full quarter, year-over-year, same-store admissions increased 17%, while adjusted admissions were up 28.5%. Surgeries increased 43.7%, and ER visits were up 39.2%. In terms of our patient volumes, all volume growth rates meaningfully improved sequentially compared to prepandemic levels. Looking at our second quarter results compared to the same period in 2019, we are pleased with the improvements we've delivered over that benchmark period. Compared to 2019, same-store surgeries were slightly higher, increasing approximately 1%. Admissions and adjusted admissions were down approximately 4% and 2%, respectively. ER visits have strengthened throughout the quarter, but continued to lag other volume metrics compared to prepandemic run rates, now down 6%. On a consolidated basis, second quarter adjusted EBITDA came in at $453 million with an adjusted EBITDA margin of 15.1%. Compared to the second quarter of 2019, consolidated adjusted EBITDA increased to $453 million from $402 million, an increase of 12.7%, even though the company operated 23 fewer hospitals this quarter. It's worth noting that we expanded our EBITDA margins by 290 basis points during that time frame. The transformation we began a few years ago is continuing to drive the expected growth and development opportunities across the portfolio and with very good momentum. We've strengthened our organization in a wide variety of ways, positioning the company for incremental same-store growth going forward. To highlight some of these initiatives, we introduced the company's strategic imperatives and have made notable improvements across each area of focus. Those being safety and quality, operational excellence, connected care, and competitive position. Net revenue initiatives such as the transfer center, investments into higher acuity and patient services, ongoing outpatient access point development, and our ACOs are generating growth. The strategic margin improvement program is adding value across the enterprise. Our current portfolio of hospitals positions us in stronger markets, primarily across the southeast, south, and southwest areas of the country, where there is population growth and economic expansion. Over the past few years, we have continued to deploy capital in our core markets to drive long-term inpatient and outpatient growth with recent investments, including bed and service line expansions in Birmingham, Naples, Huntsville, and Knoxville; the opening of our 15th freestanding ED in Gulf Shores, Alabama, which is part of the fast-growing Baldwin County market; the recent opening of 2 new hospitals in Arizona and Indiana; and we have 2 more hospitals nearing completion, one in Downtown Fort Wayne, scheduled to open in the fourth quarter of this year, and another de novo hospital in Tucson, Arizona, that we plan to open in the first quarter of 2022. We are also excited about recently announced partnerships and joint ventures that will expand access to post-acute and behavioral health services. During the quarter, we opened Knoxville Rehabilitation Hospital in our Tennova East market in partnership with Kindred. We also announced a de novo JV project with Select Medical in Tucson, acquiring a 47-bed long-term acute care hospital. We will break ground next week on a behavioral health facility in Fort Wayne as part of a joint venture with Acadia Healthcare. We continue to invest in joint venture ambulatory surgery center partnerships in key markets, with the de novo center opening in our Tennova East Tennessee market in just a few weeks. We will continue to invest in our considerable pipeline of inpatient and outpatient opportunities over the next several quarters, which will further strengthen our core markets for the long term. Since the start of the year, we have demonstrated progress in terms of net revenue growth, expense management, EBITDA growth, EBITDA margin expansion, as well as our capital structure. We're certainly pleased with this progress and the momentum it provides as we execute our strategies and capitalize on all of the opportunities we see over the next several years. In the medium term, we continue to target 15%-plus adjusted EBITDA margin, positive annual free cash flow generation, and reducing our leverage below 6x, which we believe will add value for all of the company's stakeholders.

Thank you, Tim, and good morning, everyone. As Tim highlighted, it was another strong quarter for the company, during which we delivered solid financial performance and made progress across multiple fronts. During the second quarter, we delivered a strong volume recovery, good expense management, positive free cash flow, further capital structure improvement, and additional progress across our strategic initiatives. We also adjusted our full-year guidance to reflect the company's strong start to the year and our outlook for the back half of the year. Looking at the second quarter performance, net operating revenues came in at $3.007 billion on a consolidated basis. On a same-store basis, net revenue was up 30.2% from the prior year due largely to the prior-year impact of COVID-19. This was the net result of a 28.5% increase in adjusted admissions and a 1.3% increase in net revenue per adjusted admission, which faced a difficult comp from the prior year. Excluding nonpatient revenue, which was lower year-over-year, net patient revenue per adjusted admission was up 3.3% compared to the prior year. During the second quarter, we drove a strong sequential recovery in non-COVID-related patient demand. We delivered improved volume performance on a sequential and year-over-year basis. Adjusted EBITDA was $453 million. Comparing to the prepandemic baseline period of the second quarter of 2019, this represents a 12.7% growth in adjusted EBITDA despite having 23 fewer hospitals. Excluding Provider Relief Funds, this also represents a sequential 9.4% improvement over the first quarter of this year. During the second quarter, we recorded approximately $1 million of pandemic relief funds. If you recall, in the second quarter of 2020, we recognized $448 million of pandemic relief funds, which represented substantially all of our prior year adjusted EBITDA. The pandemic relief funds have helped to offset a portion of lost net revenue and incremental expenses related to the COVID-19 pandemic. In the past 6 quarters, we've experienced a number of waves of COVID, which have impacted our volumes and operating expenses. Our hospital leadership teams continue to adjust extremely well to this evolving operating environment. We expect to continue to utilize our dual-track strategy in the back half of the year as we care for both non-COVID-related healthcare demand as well as additional COVID-19 patients. It's also worth noting that our strategic margin improvement program has remained on plan. The program has helped to drive savings in the past few quarters. We expect the plan will reduce operating costs in the back half of this year and over the next several years. Switching to cash flow. Cash flows provided by operations were $280 million for the first 6 months of 2021. This compares to cash flows from operations of $1.7 billion during the first 6 months of 2020. Excluding the received and repaid Medicare accelerated payments, cash flows provided by operations were $414 million for the first 6 months of 2021 compared to $552 million in the prior period. Looking at the year-over-year decrease, excluding the Medicare advance payments, the change was primarily due to changes in net working capital, which included the pandemic relief fund grants. Declining net revenue in the first half of 2020 benefited working capital last year as accounts receivable declined, while strong net revenue growth during the first half of this year has resulted in a net increase in accounts receivable and, therefore, a slight net working capital drag to start the year. Moving to CapEx. In the first 6 months of 2021, our CapEx was $212 million compared to $192 million in the prior period. Our CapEx was up 10% in the first half of 2021, despite operating 13 fewer hospitals than a year ago. Going forward, over the next several years, we believe our current portfolio of markets is well positioned to benefit from continued economic and demographic growth. In addition to recent capital investments, we plan to continue investing in a strong pipeline of development opportunities in our existing markets to further strengthen our portfolio. In terms of liquidity, at the end of the second quarter, the company had $1.25 billion of cash on the balance sheet, which was essentially unchanged sequentially compared to the first quarter. During the second quarter, $116 million of previously received Medicare accelerated payments were returned to CMS as part of the planned recoupment that started in April. As of June 30, 2021, the company has $947 million of Medicare accelerated payments remaining to be repaid. These are recorded as a liability on the balance sheet. As it relates to liquidity, we continue to have no outstanding borrowings and approximately $762 million of borrowing base capacity under the ABL with the ability for that to increase up to $1 billion. Turning now to the capital structure. We've continued to make meaningful progress. On Slide 12 of our supplemental slide presentation, we've included our debt maturity profile at the end of 2019 compared to the end of the second quarter of 2021. During the past few quarters, we've significantly extended debt maturities, paid down debt, and lowered annual cash interest. Most recently, in the second quarter, we extended $1.4 billion second-lien notes from 2024 to 2030, while lowering our interest rate by 200 basis points. This transaction further lowered annual cash interest, and now our next debt maturity is not due until 2025. Through 2020 and the first half of 2021, we lowered our debt by over $1.3 billion, reduced our leverage ratio by over 2 turns down to 6x compared to over 8x at this point last year, and lowered annual cash interest by approximately $210 million. Now I would like to walk through a few updates to our full year 2021 guidance. Net operating revenues are now anticipated to be $11.9 billion to $12.3 billion as we narrowed our full year range but maintained the midpoint. Adjusted EBITDA is anticipated to be $1.7 billion to $1.8 billion as we raised the low end of guidance for the second consecutive quarter. As a reminder, our 2021 adjusted EBITDA guidance does not include any previously recorded pandemic relief funds or any pandemic relief funds that may be recognized in the future. Cash flow from operations is anticipated to be $700 million to $850 million, which is an increase of $100 million from our original guidance. Net income per share is anticipated to be $0.60 to $0.80 based on weighted average diluted shares outstanding of 129 million to 130 million. Overall, we delivered another strong quarter as our second quarter performance came in above our internal expectations. As we think about the balance of the year, we expect our EBITDA performance to have similar seasonality to prior years with some seasonal softening in the third quarter, followed by a good finish to the year in the fourth quarter.

Thank you, Kevin, and thank you, Tim. At this point, Jay, we are ready to open the call for questions. You can reach us anytime at (615) 465-7000.

Our first question comes from Brian Tanquilut of Jefferies.

Congrats on the quarter. I guess my question for you, for both, I guess, for Kevin primarily. As I think about the guidance, I appreciate your comment on seasonality, but you put up a 15% margin number in the quarter, and it sounds like you're seeing the recovery; you feel confident in your ability to drive growth, and you beat the number in Q2 pretty well. How are you thinking about that? I mean is that just conservatism? I guess as I look at both the back half guidance and your medium-term guidance as well, maybe if you can touch on just some of the cost factors that we should be thinking about.

Sure, Brian, and thank you very much. So let me touch on a couple of things there. So first, as we, I guess, think about in the beginning of the year, we kind of expected and did our guidance expecting a recovery from COVID that kind of extended throughout the year. As we sit here today, we have a little more insight. Of course, that recovery occurred a little bit quicker in the second quarter than we anticipated. We have a little more insight into the third quarter. We see some things returning to a little more normal seasonality as people are getting back active again, school starting up, and so forth. In terms of net revenue, we think our net revenue per adjusted admission will look somewhat similar in the back half of the year to where we exited the second quarter. In terms of cost improvements and our margin improvement program, that, as I mentioned, is on plan, and we believe that there's still some opportunities with margin improvement and cost savings initiatives that we're working on to deliver further cost improvements in the back half of the year as well as into next year and beyond. So as we're looking at that, all things equal, we're pretty comfortable with where we're at in that guidance range. The big unknown certainly included in that guidance are a number of scenarios around what may happen with COVID case counts.

Yes, Brian, this is Tim. I'll add on just real quick. I think Kevin summed it up very nicely. I'll add on some of our investments back into the business kind of going back to that seasonality we've talked about historically, but we have about 30% more employee doctors coming into the portfolio in the third quarter. So there'll certainly be some investment into that as we ramp those practices up, but that's all for the long-term growth and development of the entire portfolio along our service line strategies and our primary care development strategy. So again, that's factored into our guidance as well, but we believe it's a good thing for the long-term prospects of the business.

Our next question comes from the line of Frank Morgan of RBC Capital Markets.

I guess I'll stay on that same subject. So before I go back to the cost side, when you appreciate the color around the utilization across your service segments versus the prepandemic levels across the or for the quarter in its entirety. But could you give us any color on really how you exited the quarter relative to some of those 2019 prepandemic levels of utilization, whether it's admissions or ER, surgeries, those kind of things? And I guess just for a clarification, I guess, what I'm hearing you say is that the reason the seasonality here is probably going to be more driven by the cost side than the volume side. Is that correct?

Sure. Let me kick that off, and then Tim may weigh in here as well. And thanks, Frank, for the question. I guess starting off here, I would say that the second quarter, we started off with a little higher COVID case counts. Those came down throughout the quarter, and the non-COVID cases increased throughout the second quarter. So as we exited the quarter, we were probably fairly even or a little bit above that 2019 base period exiting the quarter.

I agree, Kevin. Thanks for that. In terms of the volume progression, we certainly did see throughout the course of the previous waves of the pandemic when inpatient COVID cases subsided, we were able to bring back the elective or non-COVID care back. We saw that trend continue into the second quarter, frankly, with a really strong bounce in the months of May and throughout June and heading into July. We are pretty optimistic in terms of our ability to manage surges at COVID, maintain our access for our non-COVID patients through that dual-track strategy we referenced, working to demonstrate that our priority is obviously to be there when our communities need us. We've become more proficient at managing elective care to the point that we would hope that governments wouldn't feel the need to restrict our ability to do so. We'll kind of be the arbitrator if we can of where we put our resources to make sure we take care of both COVID and non-COVID care.

And then maybe to finally circle back on the last part of your question in terms of the third quarter, I think seasonality, what we typically see is a little bit lower volume in the third quarter and then picking up in the fourth quarter and through the end of the year. That's kind of what we're expecting to see in terms of the return to maybe a more normal seasonality or seasonal softening in the third quarter. But we believe we'll still have good, strong expense management throughout the remainder of the year.

Our next question comes from the line of Josh Raskin of Nephron Research.

Just quick clarification on those Medicare repayments. I heard the $947 million remaining. Is that $125 million or so a quarter going forward until it's repaid? Or I guess what's the number quarterly?

Yes, that's about right. I think we were estimating $400 million to $450 million this year with the remainder paid back in 2022.

Our next question comes from the line of A.J. Rice of Crédit Suisse.

Might just take a minute to ask you about the labor dynamics. We're hearing a lot about that across the provider world. What are you seeing in terms of turnover rates, use of contract labor? And how about just thinking about wage increases over the next year or so for your permanent employees, do you have an early read? Is that going to step up? Or is that sort of consistent with where it's been?

Sure. Thanks, A.J. This is Kevin. Let me start this one off. We are seeing a little bit of higher inflation costs with respect to our labor. This does vary market by market, and it's been a little bit above maybe what we've experienced in previous years. But at the same time, we are seeing some easing on both the rate and utilization of contract labor. That came down pretty significantly from the first quarter to the second quarter sequentially. We're also seeing some improvement in our employed labor retention. So we saw improvement in retention sequentially as well. So net-net, I think we believe we'll be able to kind of manage through this current environment without any material impact on margin through the back half of the year.

A.J., this is Tim. I'll just add on to what Kevin mentioned. In terms of our management of labor, throughout the quarter, as Kevin said, sequentially improved from the first quarter tied to some of that decrease in COVID case counts, reduction of contract labor expenses, and improved retention and hiring of our core staff. We plan to continue, obviously, with that going forward into the future with some very specific initiatives here at CHS. First of all, we've had some centralized RN recruitment success in a few of our markets that we piloted in 2019 and 2020. We're now scaling that across the organization. By the end of this month, we'll have about half of our hospitals up on a centralized nursing recruiting support function, and by the end of the year, about 90% of our hospitals. What that entails is really leveraging the digital marketing and sourcing of nurses from a corporate standpoint, similar to what we do for physician recruitment, handing over qualified candidates to the local HR teams, completing the hiring process, and then on the back end, working with some very specific preceptorship and orientation programs. The other thing that we're doing to support the supply side of nursing, in particular, is that we now have 2 fully functioning nursing programs in our market that are fully staffed and have a full enrollment of new nursing students. We have 2 more programs launching by the end of the first quarter of 2022. By the end of 2023, about half of our hospitals will be supported by our own affiliated nursing program. The benefit is not just on the supply side, but as these candidates, these students go through the nursing program, they are getting experience in our hospitals in supportive care functions, which we believe gives them an early entry into our health care system so that when they're finished with their program, pass their test, they're already ingrained into our health care delivery systems and will come on full time as nurses.

Next question comes from the line of Ralph Giacobbe of Citi.

Just I guess wondering with COVID cases up recently with the Delta variant, I was hoping you can give us a sense of what you're seeing in your markets in terms of the magnitude of that lift of COVID specifically and whether you're seeing any corresponding slowdown in non-COVID volume in surgery. Just to clarify, is the volume seasonality in the third quarter your expectation? Or are you already sort of seeing some of that of late, whether it's sort of in core or related to COVID?

Ralph, I'll start this off and then hand it over to Dr. Simon for some more color around our current COVID experience. In terms of the current surge's impact on elective business, we've been monitoring that very closely. We have not seen a material impact. It relates to our experience with managing previous waves of COVID with our dual-track strategy. Our staff is well equipped to manage COVID care safely and distinctly from elective care. Our physicians and caregivers are committed to this, and we believe they've made our communities and patients safe. We have not seen wide drops in elective care. Regarding the actual pandemic, I'll turn it over to Dr. Simon.

Thanks, Tim. The current surge that we're seeing shows an increase in cases but is still running at a lower rate than we were seeing last July. I think people have much more confidence now in managing the protocols and how these patients are treated. We continue to have our corporate command center running and continually reach out to our teams to ensure that they have the support that they need as we see these COVID cases increase.

Our next question comes from the line of Steven Valiquette from Barclays.

Great. So a lot of key topics have been touched on already in relation to the acuity mix margin trends for the remainder of '21. And it's a little early to talk about '22, but I guess I'm just curious given all the puts and takes in your upcoming pivot from this year to next year, if we ignore the $83 million of government stimulus relief that you received this year, is there any preliminary view on whether you would expect EBITDA to grow next year from the '21 base, just given your growth initiatives? Just curious, any directional thoughts around that at this early stage?

Sure. It's probably a little early, and we haven't given out any guidance on 2022 yet. But I would say a couple of things relative to that point. One, we're done with our divestiture program, and we've turned 100% of our attention towards growth. We're making a number of investments in inpatient and outpatient areas and service line enhancements to grow our net revenues. If you look at our medium-term goals, our goal is to grow net revenue, increase our margin above 15%, and reduce our leverage below 6x—medium term being over the next 2 to 4 years. If you think about the trajectory to get there, hopefully, you can use that to give some idea about the direction of 2022.

Our next question comes from the line of Kevin Fischbeck of Bank of America.

Great. I wanted to ask about the volume expectation in the back half of the year. I think if I heard you right, you said that you expected the rate to largely be similar to the first half of the year. I guess we might expect that as volume continues to normalize, it would be lower acuity volume, and it seems like government volume has been more depressed. So that would be the volume that comes back. I guess, I just want to touch on that dynamic. Secondly, how are you thinking about, if you agree with that comment, the ability to maintain the growth margins if you're bringing in low acuity government volume, which historically is a lower margin volume source?

Sure. There's a lot to unpack there. There's certainly a lot of noise in the prior periods as we came out and saw declines in COVID cases. If you look at our net revenue per adjusted admission compared to 2019, we're up about 10% over the 2-year period. If you think about normal rate lift and a bit of acuity lift off that, we're comfortable that we can maintain that level of net revenue per adjusted admission going into the back half. Certainly, there's probably some lower acuity service that isn't back yet. However, there's still some higher acuity services. We've been, over the past couple of years, making investments in higher acuity service lines and making other improvements and adding services that we think will offset some of that downward pressure as we continue to grow.

Yes, Kevin, this is Tim. I'll just add on to what Kevin said. In terms of our prospects for growing net revenue, we really have a very balanced approach to how we want to build out the business and expand our markets. That balanced approach includes investments in the ambulatory care settings and our access point strategies. Our freestanding EDs continue to expand. We have another one that will be opening up yet this year. We have our pipeline that has additional ones in place. While some of those visits may be lower acuity, it is an expansion of some of our higher acuity service lines on the orthopedic and cardiac service lines. So it's all meant to further bolster that inpatient side of the business. In some of the core markets where we're adding beds, we still see tremendous opportunity to expand and augment service lines, taking more of the inpatient market share. Again, we see that balanced approach serving us quite well, making sure we're positioned well to where care is migrating on the ambulatory side but still being able to drive the higher acuity inpatient services.

And last question comes from the line of Josh Raskin of Nephron Research.

Yes. I appreciate the follow-up. The real question I had was just the changes that you're seeing. I know we just talked about sort of COVID and Delta, but I'm curious about the treatment and cost per patient and the sort of impact on operations. Are you seeing differences in the treatment of the Delta variant patients relative to others? Are there differences in length of stay, and the difference in cost to treat? I'm assuming you don't have PPE issues and other impacts on the rest of the facility, but I'd be curious about the inpatient cost per patient.

Sure, Josh. This is Tim. I'll kick it off with more of the operational side and have Kevin weigh in on the cost side. In terms of the operations side, your theory is correct. We're not having the same pressures on PPE. As we pointed out, in the second quarter, we saw a drop in contract labor. We are bringing in more contract labor, so you may see some increase in that spend we manage our caregivers and resources to maintain elective non-COVID business. In terms of expenses—drugs or labs—those are relatively stable to what we saw in the previous waves.

Yes. I would say it's a little early, but what we're experiencing is not any significant difference in the cost of treatment for the current wave of COVID patients compared to previous waves.

Yes, and this is Lynn. I'll just add. With this wave, we're seeing a little younger patient and probably fewer ventilated patients. That's a trend at least now that obviously is subject to change, but that's what we've been seeing recently.

We will now turn the call over to Mr. Hingtgen for closing comments.

Thank you, Jay, and thanks to all of you for spending time with us today. In closing, I want to once again thank our physicians, caregivers, employees, and hospital leadership teams, who consistently demonstrate their true purpose and commitment and service to their communities each and every day. I also want to thank our regional presidents and the company's entire leadership team for their continued strong support of our markets. We are pleased with our strong first half of the year. We look forward to updating you on our progress throughout the rest of 2021. Once again, if you have any questions, you can always reach us at (615) 465-7000. Have a great day.

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