Hello, and welcome to the HCA Healthcare Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Mark Kimbrough. Please go ahead, sir.

All right. Thank you, Katherine. Good morning and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks, and then we will take questions. Before I turn the call over to Sam and Bill, let me remind everyone that should today's call contain any forward-looking statements, they are based upon management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare is included in today's release. This morning's call is being recorded and a replay of the call will be available later today. With that, I'll now turn the call over to Sam.

Good morning and thank you for joining us. With the effects of the pandemic moderating in the second quarter, we experienced a strong rebound in demand for our services. COVID admissions in the quarter were down to 3% of total as compared to 10% in the first quarter. Volumes across all categories grew significantly compared to last year. Notably, we grew inpatient admissions and outpatient surgeries over 2019. The growth was supported by an improved payer mix, which resulted from an increase in commercial volume. On a year-over-year basis, revenues grew 30% to $14.4 billion. Inpatient revenues increased 20%, driven by 17.5% admission growth. Outpatient revenues grew an impressive 59%, reflecting the resurgence in outpatient demand across most categories. To highlight a few areas: outpatient surgeries were up 53%, emergency room visits grew 40%, cardiology procedures increased 41%, and urgent care visits were up 82%. Compared to 2019, overall inpatient admissions grew almost 3% with commercial admissions growing 8%. Outpatient surgeries grew approximately 3.5%. Emergency room visits were only down 5.5% with the month of June basically flat. Acuity, however, in our emergency rooms was up with moderate growth in the most acute categories. We were able to leverage the increased revenue into higher margins. Adjusted EBITDA margin improved compared to last year, excluding the government stimulus income, and sequentially in comparison to the first quarter. Diluted earnings per share, excluding losses and gains on sales of facilities and losses on retirement of debt, increased 35% to $4.37. As noted in our release, EPS in the second quarter of 2020 included a $1.73 per diluted share benefit from government stimulus income. This benefit was reversed in the third quarter of 2020, as a result of the decision we made to return our entire share of provider relief funds from the CARES Act. Once again, our teams delivered on our operating agenda. I want to thank them for their dedication and hard work. As we look to the rest of the year, we have raised our annual guidance to reflect the performance of the company over the first half of the year, and the belief that the current levels of demand should persist throughout the remainder of the year. We continue to invest aggressively in our strategic plan, which revolves around building greater clinical capabilities to serve our communities while also developing more comprehensive enterprise resources to support caregivers and differentiate our local networks. We believe this operating model will continue to create value for our patients, deliver market share growth, and produce solid returns for our shareholders. Thank you. And now I'll turn the call over to Bill for more details.

Great. Thank you, Sam, and good morning, everyone. I will discuss our cash flow and capital allocation activity during the quarter, then review our updated 2021 guidance. As a result of the strong operating performance in the quarter, our cash flow from operations was $2.25 billion as compared to $8.7 billion in the second quarter of 2020. In the prior year period, cash flow from operations was positively impacted by approximately $5.8 billion due to CARES Act receipts. This year, we had approximately $850 million more in income tax payments in the quarter than the prior year, due to the deferral of our second quarter 2020 estimated tax payments. Capital spending for the quarter was $842 million, and we have approximately $3.8 billion of approved capital in the pipeline that is scheduled to come online between now and the end of 2023. We completed just under $2.3 billion of share repurchases during the quarter. We have approximately $5 billion remaining on our authorization. Consistent with our year-end discussion, we are planning on completing the majority of this in 2021, subject to market conditions. Our debt to adjusted EBITDA leverage was 2.65x, and we had approximately $5.6 billion of available liquidity at the end of the quarter. During the quarter, we closed on the acquisition of Meadows Regional Hospital in Vidalia, Georgia. We also closed on the Brookdale home health and hospice transaction as of July 1, 2021. We have a number of other development transactions in our pipeline to expand our regional delivery networks, including over 15 surgery center additions through both de novo development and acquisitions, as well as a number of urgent care and physician practice acquisitions. We also anticipate the closing of our previously announced facility divestitures in Georgia later this quarter, and we plan to use the proceeds from this transaction for other capital allocation purposes. As noted in our release this morning, we are updating our full year 2021 guidance as follows: We now expect revenues to range between $57 billion and $58 billion. We expect full year adjusted EBITDA to range between $12.1 billion and $12.5 billion. We expect full year diluted earnings per share to range between $16.30 and $17.10 per share. Our capital spending target remains at approximately $3.7 billion. As Sam mentioned, our revised guidance considers the strong results in the first half of the year and our belief in the company's ability to continue this performance for the remainder of the year. With that, I'll turn the call over to Mark and open it up for Q&A.

All right. Sam, Bill, thank you so much. Katherine, I think we're ready for questions now if you could give instructions to the callers on the queue. Please limit yourself to one question so that we can try to get as many as possible. Thank you.

Your first question comes from Brian Tanquilut with Jefferies.

Hi. Good morning, guys. Congratulations on a solid quarter. I guess, Bill, I'll follow up on the last part of your comment on the guidance. So you're expecting continuation of the trends that we saw in Q2. So, how are you thinking about the delta variants coming up? And just in terms of the backlog that you're seeing in terms of procedures that was delayed on the elective side from last year?

Yes. Brian, it’s Bill. I’ll take that. Obviously, our guidance factors in a lot of variables. We believe, overall, our volume, as indicated in the second quarter, will return to 2019 levels and perhaps moderately above that. We think we can maintain the acuity levels, even though some lower acuity may come back into the system in the balance of the year. Overall, the payer mix I think will remain strong. Relative to COVID, as we mentioned in our year-end results, we anticipated serving COVID throughout all of the year, and indeed we're seeing that. As Sam mentioned in his comments, roughly 3% of our admissions were COVID in the second quarter compared to 10% in the first quarter. I think we've proven the ability to manage through different cycles as they present themselves. So we factored a number of variables into our guidance and believe, again, in the performance of the company to be able to deliver that.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

Good morning, guys. Thanks for taking my question. Great job here in the quarter in 2021. Guidance now brackets consensus for 2023. I understand it's way too early to think about 2022, but the new guidance begs that question a little bit. If we think about the midpoint of 2021 guidance of $12.3 billion and we back out $600 million of government spending from sequestration, we would get to about $11.7 billion. Is that the right launch pad for 2022? If we assume a 4% EBITDA growth to get us to $12.2 billion for 2022, is that the right way to think about next year?

Well, Pito, let me start and add Sam. I think it's a little early to put math to 2022 numbers. We obviously have some puts and takes going out through 2021. You correctly anticipate the government stimulus to approximate $600 million for full year, but it’s really too early to start putting numbers to 2021. We do feel confident in the general direction that the company is seeing. So, again, we'll reserve comments on specific guidance for 2022 at this standpoint.

And Pito, this is Sam. I want to add to Bill's comments there. I think when you think about the near term, and we're not defining that as 2022. We're defining it as over a reasonable period of time post this year. We do believe that demand growth for healthcare services over the near term is going to remain solid. We think with a differentiated portfolio of markets that we have inside of HCA Healthcare, that helps support that particular belief. The second belief we have is that our provider system model has unique strength and will allow us to compete effectively for market share. We also had a number of initiatives that we believe are appropriate in creating better services and more value for our stakeholders. We think these will create opportunities for us as well. And then, as Bill alluded to in his comments, our capital investment strategy and our balance sheet flexibility really provides us support also for near-term objectives. We will get through the next quarter. Hopefully, by that time, we will have some perspective, as we have in the past on how we see the upcoming year. But this is more of our near-term beliefs, and we think these are reasonable for the operations of our company.

All right. Thank you, Pito. Katherine?

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

Great. Thanks. So if I could drill down on margins. How should we think about the normalized margin for you guys? We're hearing more and more about labor pressure. How are you thinking about specifically how labor might impact margins in the coming years?

Well, this is Sam. Let me speak to our labor agenda in general. First of all, our employees over the past 18 months have been just incredible. They stepped up. They’ve shown up. They've delivered on our mission. They've delivered for their communities and they’ve delivered for their patients. Obviously, as other industries are experiencing, we are in a difficult labor market. I will tell you that we have numerous initiatives underway to improve our overall position. We have invested significant amounts of resources into our recruitment functions. We have advanced our expansion of our Galen School of Nursing. We have implemented compensation adjustments, some of which were in our numbers this quarter and some of which will show themselves in the future. What we are encouraged by is each month this year, we've seen sequential improvement in overall labor metrics with respect to turnover and recruitment. So we're encouraged by our efforts up to this point. I will also tell you that our labor costs from the second quarter to the first quarter, rather, to the second quarter are essentially stable, which gives us some confidence that our efforts are working. Obviously, there's still uncertainty with respect to inflation. We will be focused on doing the right thing for our employees as we move forward in managing through this period. We think, again, we have a number of initiatives that can help address some of these pressures that might evolve.

All right. Thanks, Kevin.

Your next question comes from the line of Justin Lake with Wolfe Research.

Good morning. I wanted to follow up on Kevin's question, just talking specifically on margins. They're up 200 basis points versus 2019 and what you guided to originally pre-COVID in 2020. I'm wondering if you could break that down maybe between better acuity you've seen, better payer mix, the cost-cutting you've done, and maybe some of the government program dollars, and just talk about the sustainability there. If I missed this, Bill, could you also run up the acuity numbers, that would be great as well. Thanks.

Yes. So, Justin, obviously, a lot of factors go into the margins. You see in our guidance that we're raising our margin expectations compared to our original discussion going into the year. I think that's reflective of all the variables. Clearly, margin is being driven by the volume returning to 2019 levels, the favorable acuity, as well as the favorable payer mix. We continue to have a number of cost initiatives that we're managing through. As we think about where we stand today and the balance of the year, the margins reflect more like our average that we've experienced over the past four quarters. The acuity we still saw some growth in 2020. It was about 2% growth over 2020 and about 5% growth over 2019 levels. That's continuing to show strength. We feel reasonably confident on the margin projections we have. Our guidance reflects a significant increase in the margin expectations compared to where our original expectations were as we turned the calendar.

All right, Justin, thank you so much. Katherine?

Your next question comes from the line of A.J. Rice with Credit Suisse.

Hi, everyone. We had an impressive quarter overall. I’d like to delve deeper into the volume you're experiencing. I understand that third-party market share data takes time to arrive, but I assume you conduct some local assessments. How much of the volume recovery is exceeding my expectations, especially being ahead of 2019 levels? It’s quite remarkable. To what extent do you think this is due to your gaining market share, considering your response to COVID and your capital investments? How much of this is attributed to the overall market? You seem optimistic about the second half of the year. Do you have any insights from your scheduling of procedures or feedback from physicians, especially since you employ many? Could you share why you believe this volume will be sustainable rather than just a temporary spike that might decrease?

All right, A.J. Thank you. Sam, Bill?

Yes. This is Sam, A.J. Thank you for that question. We have had fits and starts over the last three or four quarters with a couple of months here, a couple of months there; then we went into COVID surges that created difficulties in our ability to judge precisely where we were in the market. So we've had essentially four solid months; March, April, May, and June, where we've been able to judge the market with some level of confidence. What we see is, as I mentioned, the ability to move markets here. I don't know that we moved in this last quarter necessarily, because we don't have the data. But if you look at our progression over time, you've seen a pattern of market share growth. I think that speaks to the model, resource allocation that we put forth, and execution by our teams in the field. At the beginning of 2011, we had 23% market share. At the end of that decade, we had over 27%. We have continued to see annual growth in our most recent data points. We believe that system capability still exists and is possibly showing itself in the second quarter. We need more time to fully judge that. These four months have given us reasonable perspective on what's happening in the markets; job growth, more people insured with the Affordable Care Act, investments that we're making, execution on our physician and program development strategy, and continuing to manage the network most effectively gives us reasonable visibility into the last half of the year. That's why we're judging that the demand is going to endure over the remaining two quarters. So we don't have anything other than our analysis of these four months to suggest it. But we believe with our study of their individual markets that’s the reason for the guidance.

A.J., thank you for the question. Katherine?

Your next question comes from the line of Scott Fidel with Stephens.

Hi, Scott. Thanks. Good morning. I wanted to just ask a follow-up question around the planned capital investments that you highlighted that were north of $3 billion through 2023. Specifically, I'm interested in the mix of those investments as they relate to inpatient versus, let’s call it, outpatient and tertiary and other investments? I'm just interested in, as you look sort of historically at the mix of investments, how those may be evolving as we've seen some shifts in site of care clearly playing out post pandemic? Thanks.

All right. Sam?

Yes. This is Sam. Just so you have a sense of our networks today, we have roughly 185 hospitals. We have over 2,000, almost 2,200 outpatient facilities. So think about our network as almost 11 to 1, outpatient to hospital. The capital intensity in the 185 hospitals is clearly more than that of the outpatient facility. As Bill mentioned in his comments, we have a significant amount of capital going to ambulatory surgery centers, but each ambulatory surgery center per unit requires only $10 million or $12 million to complete, while an urgent care center is a couple million and a freestanding emergency room is a $10 million investment. These are smaller dollar unit investments, but they enhance our network capability and support our hospitals. As it relates to our capital investment, our hospitals will always consume more of the capital due to the intensity required for heavy clinical equipment. We have capacity in our spending, allowing us to invest aggressively in our outpatient network to support our facilities. We're adding this to our facilities in many markets because we're still running at very high occupancies. Our occupancy in the second quarter was 73%. We have 41,000 beds in HCA operational, and we're running north of 30,000 patients a day inside of those facilities. We see opportunities in investing in technology, which we believe will enable better care and achieve efficiencies. We are very excited about our technology platforms and will share more about that in the future.

Scott, thank you for your question. Katherine, next question please.

Yes, sir. Your next question comes from the line of Ralph Giacobbe with Citi.

Hi. Thanks. Good morning. So you guys mentioned commercial up I think 8% over 2019. Can you maybe just give us a sense of volume trends for Medicare and Medicaid? Is there any way to gauge population growth, particularly in your Texas and Florida markets, and maybe how much that's aided the payer mix at this point? Thanks.

All right. Thank you, Ralph.

Yes. Ralph, this is Bill. I think we saw recovery volume in every payer class, and that includes Medicare. Our Medicare volume was just under 4% below 2019 levels, and that compares to where we have been running 8% to 10% below. So we’ve seen recovering volume in the Medicare class as well. Obviously, it's more favorable in the commercial and managed care, resulting in a strong overall payer mix area. In terms of overall demand, I don't have information on that. We are generally a couple of quarters behind to see that. Our belief is that demand is recovering as the economy and markets are opening back up, so we'll have to wait to see what that actually yields in terms of the percentage of demand. It's our belief we're starting to see demand recover throughout most of our markets.

All right, Ralph, thanks so much.

Your next question comes from the line of Joshua Raskin with Nephron Research.

Hi, Josh. Good morning. Just the ED visits. I know are running 5.5% below 2019 in the quarter. I think you said June was almost flat. Are those stabilizing in your view? Is that the new normal level? Do you think EDs have actually fully recovered back to pre-pandemic levels? Are you seeing any changes in the percentage of those ED visits that are getting admitted, and are there any differences by payer segment?

Well, one month, June, doesn't necessarily suggest a pattern. Although we think the second quarter is more likely reflective of activity in the ER than previous quarters when we were down 15% to 20%. We knew there would be some recovery in the emergency rooms. We haven't seen the effects of schools going back yet either, particularly in our pediatric activity where we've seen significant shortfalls by comparison to 2019 still even in the second quarter. So that would provide some potential support as kids get back to school and engage in their normal activities. As it relates to the acuity of our emergency room population throughout 2020 and into the first half of 2021, we've continued to see more acute patient populations in our emergency rooms. This has yielded admission growth. In the second quarter of '21, our admissions grew compared to '19 due to that acuity, and we anticipate that will endure throughout the remainder of the year.

All right, Josh, thank you so much for your question.

Your next question comes from the line of Jamie Perse with Goldman Sachs.

Hi. Good morning, guys. I wanted to go back to the EBITDA margin piece and your guidance for the rest of the year. It looks like the second half guidance implies a lower margin rate than the first half of the year. I wanted to get any specific incremental pressures you see for the balance of the year. On a related note to premium labor utilization and premium labor rates, are those coming down relative to recent trends?

Yes, let me start with margins. As I tried to talk about before as we kind of project the balance of the year, there's a lot of variables that go into that. You'll see that our margin that we're projecting is a significant increase from our original projection. It reflects more like our average margin for the past four quarters. We'll have to see how the various variables play out. We don't have anything specific we're calling out on that. We know we're running a little high in the first half. I think some of our first quarter COVID volume may have contributed to that. Our margins for the full year are reflective of our average margins.

We did have more premium labor utilization in the second quarter than we did in the first quarter, and that put a little pressure on our labor costs. We were able to absorb that with the volume and the outpatient activity that we mentioned. We anticipate, again, that our labor agenda for recruitment, retention, compensation adjustments, and so forth will start to moderate that pressure over the remainder of the year. But we continue to be mindful of that particular item. We're having to staff the volume we've seen, and in many instances we're relying on premium labor at this point.

All right. Jamie, thank you so much.

And your last question comes from the line of Lance Wilkes with Bernstein.

Hi. How are you doing? Great quarter. Just if I could ask about impacts of value-based care on the business, particularly impacts on volumes. Just interested if that's causing any pressure in any particular markets where you're seeing the rise of some of those risks in primary care, or if it's in fact helping you if you're taking more of that share? A quick cleanup question on Medicaid volume relative to 2019, if you're seeing that up or down?

Thank you. We’ve spoken to value-based programs over the years and nothing has really changed in our estimation over the past year, year and a half with respect to those. In many markets, we have to respond to the dynamics in those markets. South Florida is probably the most advanced managed care market in the country. We have 24%, 25% market share in that particular region, with many investments underway to improve our position overall. Our ability to navigate some of the deepest and most complex managed care markets has been proven over time. We nuance our strategy from one market to another to respond to what our payers feel they need to support their customers. We have great relationships and partnerships in many instances with the various payers. We feel well-positioned with the payers’ objectives in allowing them to push forward on whatever agenda they think is appropriate.

Hi, Lance. This is Bill. On your Medicaid question, we're up about 4% over 2019 on a year-to-date basis. We were relatively flat in the first quarter and we're up just under 9% in the second quarter.

Okay. We want to thank everyone for joining us this morning. Obviously, we're excited about the quarter. I’m around if you have any additional questions for the rest of the week, and please feel free to give me a call. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.