Q3 2020 Community Health Systems Inc Earnings Call

October 28, 2020

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Ladies and gentlemen, thank you for standing by and welcome to community Health Systems' third quarter 2020 earnings Conference call.

At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today, Mr. Bras Coleman Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you Mike Good morning, and welcome to community Health Systems' third third quarter Conference call.

Before we begin the call I'd like to read the following disclosure statement.

This conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts. Please.

These forward looking statements are subject to a number of known and unknown risks, which are described in headings such as risk factors in our annual report on form 10-K, and other reports filed with or furnished to the securities and Exchange Commission.

As a consequence actual results may differ significantly from those expressed in any forward looking statements in today's discussion we do not intend to update any of these forward looking statements.

Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS for those of you listening to the live broadcast of this conference call. A supplemental slide presentation has been posted to our website, we will refer to those slides during this earnings call.

All calculations, we will discuss also exclude gain or loss from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses expenses from government and other legal settlements and related cost expenses from settlement of legal expenses related to cases covered by the CVR expenses related to employee termination Ben.

Bits and other restructuring charges change in valuation allowances recorded for premise very notes change in estimate for professional liability claims accrual tax effect related to HMH legal settlement chains and tax valuation allowance.

With that said I'd like to turn the call over to Wayne Smith, Chairman and Chief Chief Executive Officer, Mr. Smith, Thank you Ross and good morning, and welcome to our third quarter Conference call I'm joined today.

On the call with Tim Anderson, our President and Chief operating Officer, Dr. Lynn Simon present, clinical operations, and Chief Medical Officer, and Kevin Hammonds, Executive Vice President and Chief Financial Officer.

We're pleased with the strong results reported in the third quarter, especially as we manage through code at night and they can also advancing strategies designed to build on the company's recent progress ensure long term success I want to credit our hospital leaders corporate management, others, 14 engine, especially the frontline caregivers, who continue to meet the challenge.

The global pandemic.

Professionalism and the level of human compassion that truly impresses me every single day.

Before we get into the quarter's results and I hope you'll indulge me just admitted to comment on other press release that we issued yesterday.

I see my decision to transition from CEO of the company into the new role.

Of executive Chairman of the board of directors.

Beginning in 2021.

It will become our new Chief Executive Officer, and I completely confident that these strategic energetic and an outstanding CEO.

You've gotten to know them over the past few years in his role as president and COO.

Just that you are seeing his strong leadership capabilities his deep knowledge and experience in our industry and has intense personal commitment to this kind of.

Certainly seen the results of its labor and good work is done to advance strategic and operational initiatives that are driving growth in our markets.

I could not be more pleased that Tim will be our next CEO, Let me say again that I and our board are completely confident EMS ability to picture quality health care to increase the services, we provide in our communities and to produce value for our shareholders. Please join me in congratulating team on this new job and responsibilities.

It's been my pleasure.

And privilege and.

And I'm very grateful to have served as a CEO of community health system for more than two decades CHS is a great company with great people and great opportunities ahead.

Deeply grateful for the support of our board our investors and all the people here in part of our organization and more than that a part of our effort to always provide safe quality care for our patients over.

Over 20 plus years, a lot has changed in this industry certainly our company has changed a lot as well, but our purpose and our commitment our resilience in our ability to keep things moving forward remain constant I'm extremely optimistic about the future of community health systems I believe we have the right strategies and the right people.

And we are executing and we're moving forward.

As we continue to drive positive results as executive Chairman of the board I'll remain involved in setting the strategic course of the company and I'll continue to feel certain executive level management responsibilities.

Now, let me turn to COVID-19, and then I'll briefly discuss the quarter results from give Tim and Kevin Lee and an opportunity to share more detail Gobi 19 currently remains manageable in our markets. Our teams are doing an extraordinary job of caring for patients and with providers as well as those who have other health care needs.

You can see the Cove in 19 cases or timing in many areas across the country and we are seeing a rising number of inpatient cases in some of our markets. I think we have learned a lot over the past several months about how to keep essential services opening safely operating and we will continue to do all we can to protect front line care givers and patient.

We're also working to ensure all services remain available for the patients that need them.

Course, we monitor code activity constantly and I think we have proven we are agile and adapt.

Navigating change should that become necessary in our response.

Now I'd like to provide.

Some brief highlights on the third quarter it was a strong quarter.

Our investments in volume driving initiatives strategic margin improvement program and the targeted capital investments produced very good results, our ability to quickly and effectively.

It was in services after some services closures in the early phases.

Within bidding it turned out to be very productive.

Our efforts to secure a stronger go forward portfolio of hospitals has produced.

The improved results all of these things should continue to drive positive results over time.

It's worth noting that we delivered improved metrics across a number of categories. During the third quarter compared to the second quarter. As a reminder, the shelter in place recommendations to the government restrictions are elective surgeries negatively impacted our volumes net revenues from performance during the second quarter.

In the third quarter our mill.

Mission surgeries and E. R visits improved sequentially, our same store volumes and net revenue growth remains below pre pandemic run rates and in a number of markets. We did see cobot, knocking hot spots during the quarter, which negatively impacted non cobot healthcare demand, including elective procedures in some areas. Despite these issues has occurred.

Third quarter net revenue was.

It was approximately 3.1 billion, which was up 2.9 on the same store year over year basis. Adjusted EBITDA was 431, which increased 11% versus last year and I want to point out that no provider really fronts from the carriers that were recognized.

In the quarter.

Adjusted EBITDA margin was 13.8% up a 180 basis points versus last year.

In terms of expense as a percentage of net revenue were made progress across STB and other operating expense lines, while supply cost and finally.

Our strategy for the past several years has been to intentionally and strategically reshape our portfolio into a stronger for hospitals and healthcare systems.

This enabled us to make targeted investments in markets, where we see the most potential to drive long term growth.

We are now finishing network with the divestitures completed in third quarter and an expectation that we will complete the rest of our pending divestitures for the end of year. We will end our formal portfolio optimization strategy. We are pleased with our remaining markets and confident that we can effectively produce value with this portfolio.

Our singular focus is on market development and long term growth in the markets, where we operate.

Accelerated investments in high return Capex opportunities on both inpatient and outpatient side of the business. Many are complete and many more are in the pipeline to strength in services and increase access points across these markets.

I'm proud of all our company's accomplishments during the first three quarters of the year I'm very proud of the people who work across this organization and I want to again recognize with physicians and nurses and other employees that could continue to improve their work.

To continue to prove their work is essential and heroic again I want you know I am very optimistic about our future.

And how grateful I am for Mark spent my experience as the CEO.

Community Health systems, and how appreciative I am for all of your support through the years I look forward to serving as executive Chairman of the board of directors and now I'd like to turn the call over to Dr. Lynn Simon.

Thank you Wayne I'd.

I would like to thank all of our hospital leadership teams that caregiver support staff and physicians for their commitment to their patients and communities and for their resilience throughout this extraordinary here.

The teamwork and collaboration and their dedication we have cared for thousands of kind of a 19 patients churn safety from Cowen.

Endako that patients as well as our employees and clinicians.

To date through the end of the third quarter currently providing care for approximately 25000 confirmed that Nike patients across our hospitals emergency department and outpatient care settings.

I mentioned on last quarters earnings call, we experienced an increase in 19 patients are particularly across the Sun belt States.

During the quarter in our hospitals and outpatient care settings. The care for approximately 8000 confirm that 19 patients in July.

Currently 6000 in August and approximately 4000 at September.

In total we saw more pain.

Patients in the third quarter than we did in the first half of the year. The increase covet patient counts have created challenges for the hospital industry all across the country due.

Due to our early stage planning, including our dual track framework, combining clinical and operational expertise along with the strong support of our supply chain facilities and logistics infection prevention HR and employee.

Occasions, and other corporate support functions, we've been able to effectively manage certain open 19 lots across our markets.

Looking forward, we could see that continue to increase in many parts of the country and the ultimate duration of the pandemic remains an unknown.

We continue to monitor cases through our internally developed that 19 tracking dashboard for real time visibility of COVID-19 cases and all our hospitals.

Focused on continuous capacity and contingency planning.

In case of the so called Twitter, Demick, relenza and commit or just additional ways of COVID-19 by leveraging the expertise and resourcefulness of our hospital teams and the support of our corporate assets.

We will continue to support our hospitals at a number of ways on the supplies. Our centralized distribution system is engaged in sourcing and logistics as it relates to battle layers TPH pharmaceuticals, and other critical supplies that are needed to treat come in 19 patients.

From a capacity management standpoint, we are monitoring.

Overall hospital utilization and proactively planning to expand capacity and churn necessary staffing where and when needed.

We are leveraging our transfer center for patient logistics support and utilizing tele health to allow for continuous outreach to patients both those needing preventative care and as vulnerable patients with pre existing co morbidities you might be considering delaying care. It appears that contracting COVID-19.

As always we lead with safety and following CTC effective prevention guideline and with proactive COVID-19 testing, especially for high risk patient populations and pre procedural testing and ensuring facility spaces provide safe workplace and the social distancing requirements.

Going forward, we remain confident in our ability to manage through this pandemic safely efficiently and effectively Tim. Thanks, Len first I want to say, how incredibly honored I am about the opportunity to become the next chief Executive Officer of CHF at the beginning of next year I'm excited about where our organization is headed.

And the progress, we are making and like Wayne I'm optimistic about our future.

Our portfolio is strong our team is strong and I'm extremely proud of how we've demonstrated that working closely together over the past few months by navigating the COVID-19 pandemic, while also returning other services and advancing strategic priority.

As a company we have a strong culture of caring and accountability Wayne of course has been an extraordinary chief executive and leader for CHS for all of US and I look forward to working closely with him in his new role as executive Chairman of the board of directors I'm very grateful for the confidence and trust that has been in place to make five Wayne and our board.

Shifting to third quarter results on top of the ongoing management of the pandemic. Our hospital teams also successfully managed through two significant hurricanes during the quarter.

In August and Laura cause minor disruption to facilities in Texas, and Arkansas Walden September Hurricane Valley cause more significant disruption and our Baldwin County, Alabama market and less significant impacts and other Florida and Mississippi market had.

Ahead of these hurricanes, we instituted our hurricane preparation plant and our hospital leaders in medical staff get fantastic work maintaining operations throughout and after these weather events.

In terms of COVID-19, Dr. Simon along with the clinical teams and a full breadth of corporate support has done an excellent job managing our COVID-19 response, and our hospital and regional leadership team has successfully managed our return to caring for more non coated demand, including elective procedures.

Going forward, we are refining our dual track strategy, which we believe will allow the company to successfully care for incremental opened 19 and not have a 19 patients.

And we continue to monitor each market and we're prepared to dial up or dial down elective procedures. If it is warranted.

Now I would like to provide some comments on our third quarter performance.

Overall, we delivered good sequential improvement from the second quarter to the third quarter and while third quarter volumes did not return to pre called at a run rate. We delivered strong sequential improvements from the lows of April and the second quarter looking.

Looking at our same store net revenue and volume on a year over year basis, and a third quarter. Our net revenue increased 2.9% as higher acuity improved contact contract rate and favorable payer mix offset negative volumes.

Admissions were down 6.2% and adjusted admissions were down 11.5%.

Surgeons worked surgeries were down 5.8% with cardiology orthopedics and other service lines contributing to the sequential recovery.

The art visits were down 18.4% similar to the second quarter. Our EBITDA declines are primarily due to lower acuity patients not presenting any E. R. R. SMS traffic, representing typically higher acuity patient volume has returned to closer to historical run rates.

On the expense side, we managed variable cost down during the second quarter as volumes were negatively impacted by restriction thought elective procedures and shelter and place orders as volumes. The net revenue return in the third quarter. Our hospital leadership teams managed variable costs very well this combined with savings from our strategic Mark.

That improvement program drove improved EBITDA and EBITDA margin performance during the third quarter.

Overall, we were pleased with our third quarter performance and I'm excited about the strategic progress we have made during the year, although management of coping Nineteena certainly garnered much of our attention and focus we have also continued to effectively execute our strategic plan.

As Wayne noted our announced divestiture plan is nearing completion and we are optimistic about our current portfolio. This portfolio includes hospitals and access points in stronger markets and while we have been divesting. Some hospitals, we have been making targeted strategic advancements in our core markets along the way.

In terms of net revenue initiatives, we are seeing the benefits from investments into physician practices patient connectivity the transfer center Agios and other initiatives. These.

These investments have helped the company recapture medical procedures as markets reopen during the second and third quarter and as we look forward, we plan to leverage these initiatives to earn incremental market share across our core market.

Our planning and execution related to our strategic margin improvement program remains on track. This plan was formalized about a year ago and we continue to implement these plans and that new incremental opportunities. We expect this program to deliver margin expansion opportunity for years to come.

On the Capex side I'm very pleased with our recent investments looking back since 2018, two today, we have added over 200 bed, including replacement hob, excluding a replacement hospital projects across a number of markets in.

In addition, we have a number of new projects that were just completed or will be completed in the near term to highlight just a few projects and look forward, Indiana. We completed the 84 bed replacement facility, which opened last Saturday and Tucson, Arizona, We plan to open our 18th that micro hospitals during the fourth quarter and a larger full service.

Acute care hospital with a target of 2022 opening date is under construction in another quadrant of Tucson, and Fort Wayne, Indiana, We expect to complete the St. Josephs replacement hospital to be renamed Lutheran Downtown Hospital by this time next year and we have an extensive pipeline of service line investments as well as access.

Points to complement existing market.

As a result, we are very pleased with the strategic progress. We have made this year and protect particularly during the year was still many unexpected and uncontrollable challenges.

This progress has been made possible because of strong dedication incredible effort across the entire company.

And as I look forward I am extremely excited about the future of CHF today, we have a great collection of assets our management team regional Presidents and hospital leadership teams are all highly energized and focused on strong execution as we finished 2020.

Looking beyond this year, we remain highly focused on delivering long term growth for all stakeholders.

Kevin I will turn the call over to Peter Thanks.

Thank you, Tim and good morning, everyone.

Similar to last quarter I will not cover all of our typical financial metrics today, but instead I would refer you to the 8-K in our slide deck for additional details.

As a reminder, we previously were through our 2020 financial guidance and we are not providing 2020 guidance today due to a number of factors, which we have recently discussed.

During the third quarter on a consolidated basis net operating revenues came in at $3 billion $126 million down 3.7% from the prior year, while adjusted EBITDA was $431 million up 11% keep in mind, we did not recognize any cares act funding into Inc.

During the quarter.

On a same store basis net revenues increased 2.9%.

This was comprised of 11.5% decrease in adjusted admissions and a 16.2% increase in net revenue per adjusted admission.

During the quarter, our hospital leadership teams executed well managing variable cost as net revenue improved sequentially and as Tim mentioned, our strategic margin improvement program continues to deliver expense reductions and improve our margin profile.

On a same store basis, our salaries wages and benefits expense decreased 8.8% down 160 basis points as a percent of net revenue supplies expense increased 5.1% up 40 basis points as a percent of net revenue and other operating expense increased 1.9% down 30.

Basis points as a percent of net revenue.

Switching to cash flow cash flows provided by operations were $393 million for the third quarter of 2020. This compares to cash flow from operations of a negative $74 million during the third quarter of 2019.

Looking at the quarter over quarter increase cash interest payments were approximately $213 million lower due in part to timing of payments. The company received approximately $155 million and provide a relief grants under the care that and.

And higher EBITDA continued and continued management of our working capital also contributed to the increase.

For the first nine months of 2020, our cash flows provided by operations were $2.1 billion. This compares to cash flows from operations of only $191 million during the first nine months of 2019.

Looking at the year over year increase the company received $1.1 billion of net Medicare accelerated payments. The company also received approximately $719 million and provide a relief France under the Caretech.

Other increases and decreases including increased cash from air collections and lower malpractice claim payments were offsets.

Turning to Capex, our capex for the first nine months of 2020, so $317 million or 3.7% of net revenue compared to $322 million or 3.2% of net revenue in the prior year, we have continued to invest capital into our core portfolio to strengthen our.

Markets.

As it relates to liquidity at the end of the third quarter. The company had $1.8 billion of cash on the balance sheet.

As of September Thirtyth September Thirtyth, the company had no outstanding borrowings and approximately $654 million of borrowing base capacity under the IPO with the ability to increase that up to $1 billion.

Switching to the cares Act and Demick relief funds, we did not recognize into income any relief funds from the carry back during the quarter.

So far in 2020, we have received approximately $719 million through the public health and social services Emergency fund in both general and targeted distributions, including approximately $155 million received during the quarter.

We recognized approximately $448 million in the second quarter into income as a reduction in operating costs and expenses with no funds recognizing the third quarter. The remaining $271 million is currently on our balance sheet as a deferred liability.

In terms of the relief funds the government issued multiple changes to the qualification criteria since June thirtyth.

We are evaluating the most recent HHS disclosures.

That were issued on October 22nd and expect to recognize a portion of these deferred grants in future periods.

As we've previously discussed we received approximately $1.2 billion in Medicare accelerated payments to support near term liquidity in April.

In the third quarter, we returned approximately $22 million of that that was related to divested facilities.

Currently the recruitment of Medicare accelerated payments is scheduled to begin one year. After the payment was issued which will be next April April 2021.

In terms of our divestiture program, we are nearing the completion of our formal plan.

From the six transactions completed through the end of the third quarter, including Bayfront Health Saint Petersburg in St. Petersburg, Florida, We have received proceeds of approximately $340 million this year.

Subsequent to the end of the third quarter.

We closed two additional transactions from which we generated approximately $265 million of incremental proceeds.

At this point, we are substantially complete with our divestiture program. We do have definitive agreements for the sale of four additional hospitals as it we expect to close prior to the end of the year and those will generate a relatively low amount of proceeds.

Moving to the balance sheet and capital structure at the end of the third quarter, we had approximately $12.9 billion of long term debt and no near term maturities. The company's next maturity of $197 million is not due until February of 2022.

During the third quarter the company used approximately $143 million of cash to repurchase approximately $261 million of principal amount of debt maturities in the open in open market transactions, resulting in a $115 million gain on the extinguishment of debt and reducing our annual cash.

Interest by $18 million.

When combined with the Paydown of our ABL, which we did earlier this year, we have produced on an annualized basis, our cash interest by approximately $33 million.

Through these efforts and our improved adjusted EBITDA, we have lowered our leverage ratio and reduced our cash interest in summary, we are confident that following our strong results in our recent capital structure work along with current cash on hand divestiture proceeds and our ability to borrow under our.

Well, we have ample liquidity to manage through the continued current crisis returned to normal operations and position the company for growth moving forward.

With that Wayne I will turn the call back over to you. Thank you Kevin at this point operator, we're ready to open it up for questions. We will limit everyone to one question. So several you'll have.

On this call, but there's always we're able to talk to you at any time, you can regency to recruit siteone towards 657000.

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As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.

Please standby will be compiled acuity roster.

Your first question comes from Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, and Wayne Thanks for all your your your work and your support over the years and Tim Congratulations.

I guess my question would just be on the margin than the pace of recovery that you're seeing obviously, a lot of moving parts with acuity going up and volume still pressured. So just want to hear how you're thinking about that you have the pace of recovery through Q4 and into next year and what the margin lift that you you delivered you think.

Sustainable once we see more normalized.

Acuity and revenue Great addition trends thank you.

Sure Brian This is Kevin I will take that so.

As we have managed through.

With lower volume, we have certainly done I think an exceptional job of managing our labor cost. So we've been able to flex labor.

Consistent.

And according to the lower volume the margin improvement program work that we really started late in 2019, a lot of those initiatives are focused on non patient facing.

Expenses as they deal with how we contract purchase services, how we're contracting for supplies and we believe those to be.

Very sticky so to speak so we believe those.

Expense reductions will continue going and going forward as volumes come back and so that margin lift will will be more permanent but don't forget that our portfolio portfolio rationalization program.

It's also designed to improve their margin kind of going forward and we're beginning to see that.

To come through.

Your next question comes from Josh Raskin from research. Please go ahead.

Josh Raskin your line is open.

Your next question comes from Frank Morgan RBC capital markets. Please go ahead.

Good morning, and congratulations Wayne and Tim on these new roles as you'll make this transition.

I was hoping to get a little more color around the you made some commentary I think landed about the <unk> the number of koby patients over the months of the quarter any additional color you can provide around kind of how underlying utilization was in terms of surgeries and add minutes and I'm curious how did that transition into this fourth call.

Order is that were that was the trends that you saw maybe in the say in the last month of the quarter did is that carried over into the.

Current quarter, and then have you had any need to requirements to do voluntary suspension of services. So far in the fourth quarter. Thank you.

Great. Frank This is Tim I'll start it off and then obviously when if you have anything to add so free we obviously started the third quarter with a higher surges of Covanta cases in our Sunbelt States. We commented on that during our second quarter earnings call. 'em. We also I think shared some of the impact of what's happening on our volumes from the June recovery.

On the June recovery by the way certainly benefited from a great deal of a pent up demand and we were very focused on getting that business in the door and we did see some shifting or deferral Dom in July into August, but that being pulled that surge subsided I'm as we expected we saw more elective cases come back into the hospitals and from our vantage point.

Most of the deferred care or that the delay there was that consumer driven not so much related to resources on our end. We felt we were very well staffed and equipped to work through that we only had two states that had I think what I would call a <unk> growth rate I guess required orders for curtailing elective cases, those being some counties in Texas and Mississippi.

But for the rest of our markets again, just the normal throttling up and down and being responsive to consumer concerns or or request to defer care was at the forefront I think we cleared a great deal of our backlog in the third quarter were still are very focused on building a new pipeline of business as we've talked about in the call. So far today with all of our investments I mean.

Our strategies.

In terms of you know heading into October or September was a good month that heading into October we are pleased with the further progression of our volume recovery. We are as we pointed out today seeing some resurgence of call, but haven't necessarily seen any requirement for shutdowns are curtailing elected services. So we're monitoring it day by day basis.

And where we think it's prudent to do so we will I'm Len has instituted a very rigorous pre procedure testing program. So we believe we have a good pulse everyday on the pre surgical PREPA sort of predict pre procedure patients on Ami to monitoring for upticks in Talbot filthy would see that happening, we'd obviously make operational adjustments on as warranted.

Yes.

Your next question comes from Ralph Giacobbe from Citi. Please go ahead.

Thanks, Good morning, I guess as you think about the longer term effects of the pandemic any thoughts on just population factors within your markets and may.

Stemming out migration to larger cities or any just thoughts there and then.

Youre, obviously, where we remain challenged still I know it is lower acuity that you're starting to maybe remind us again of your strategy and interior transfer center is an access point plan.

And if you're accelerating any of those initiatives to kind of capture the volume that's not presenting at the hospital. Thanks.

Ralph I'll start it off and again any wouldn't feel free to jump in here, but in terms of longer intent impacts population shifts I think we've mentioned that for the last couple of quarters and we continue to read certain articles that say there does seem to be some desires for urban dwellers to look at some supper.

Ben or non urban locations have we seen any uptick in any of our markets I think it's too soon to tell but you know what the trend that we'll certainly watch in terms of the movement of the acuity different from one sector to the other I would say we've been planning for this structural shift if you will for a lower acuity care to go to the outpatient setting for the last several years.

With active fund strategies freestanding eighties, the AMC I wouldn't even I think pretty regular updates on our progress in our investments into those access point and.

I think they serve us very well and then with coal, but I think you'll see some acceleration into urgent care settings for instance versus the lower EDI acuity business.

So we're pleased that we have been really thoughtful and strategic in how we build out those but at what point, where consumer focused strategy to get to where the customer is now they're really serving some of those structural shifts or the transfer center I'm really it is a conduit for us to connect our affiliated hospitals and our networks I'm, who are maybe lower acuity to our higher acute.

The asset as well as non CHS hospitals into the surrounding area I'm as Weve invested our capital in service line advanced Ben cardiac neurosurgery trauma that transfer center enables us to move those patients from the lower acuity setting into our sites of care that we've invested in we're really pleased with the results in the third.

Quarter. Despite no a decline in admissions, we did see an increase in transfer center activity, which which just shows how impactful it spend that help us build out the complexity and the performance of our market.

So Ralph.

We haven't seen any no change there.

The increases in terms of population shift or any of those kinds of things this quarter.

And this you still don't send store hospitals that we've had for a number of years and the market has been relatively stable.

A number of years and the opportunity we have going forward.

It is to increase our market share in these markets regions. We did this huge divesture program was to get down to a sustainable group of hospitals that we could grow and that's where we find ourselves today and were excited about the opportunities for our continued growth in those markets with or without the addition of lumpy relationship.

And I think we are well positioned on both the outpatient and inpatient side and just to point out you know I made the comment earlier, we've added over 200 bed than market, where we have opportunity to grow our presence in our market share.

He markets like Birmingham, Knoxville, Naples in Tucson, I can go down the list, but no to point to point a stronger portfolio, we've been investing in it we maybe didn't acquire any new hospitals, but we certainly I think if it built out to what would be akin to a normal acquisition or a couple of acquisitions over the last couple of years.

Your next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Great. Thank you I appreciate that you guys are able to pay down some debt in the quarter and get them.

We had $1.8 billion of cash the balance sheet plus another couple hundred million dollars them as opposed to how much cash do you think about the kind of actually being available for deployment and how should we think about the ability to actually reduce levered free cash flow going forward.

Sure This is Kevin.

So there's still a lot of uncertainties around.

Oh vision and when's. The next surge will be in certainly the accelerated Medicare.

The money that was provided by the government was.

Matt to give us assistant parent throughout the.

The pandemic period, which no one knows yet how long that's going to last and there's likely to be around until we have a vaccine that.

That being said with the new.

New rules around when that repayment starts which is not full April of next year.

And then extends out over a period of time.

There will be approximately you know roughly $450 million of the accelerated payment will.

It will be paid back in 2021, and and so that still leaves us a fair amount of cash on hand to kind of navigate through the pandemic and just through some of the unknown.

But going forward, we expect with our improved EBITDA results and management of our working capital that we will be comped positive free cash flow, which we are currently and expect to be going forward. So that gives us some additional flexibility.

Your next question comes from Andrew <unk> from Barclays. Please go ahead.

Hi, good morning, and congratulations again to both Wayne and then I wanted to follow up on cohabitation. I think you quoted 18000 cases in the quarter across the hospital system can you share how many of those cases, where inpatient admission and related way can you provide some of the characteristics of the typical cobot impatient that's treated in your hospital items.

Like length of stay insurance coverage and ventilator newpage. Thanks.

Great. Andrew This is Tim I'll kick it off and then hand, it over to Dr. Simon on some of the clinical aspects Tom in terms of the numbers. We provided about 45% of that was on the inpatient side of the of the business.

In terms of payer mix similar to what we you've heard or read recently you know most of those patients are older older age 65, and above higher penetration of Medicare Medicare advantage.

Patient, but obviously, it's something we keep track of in terms of advancing the clinical care alternative Dr. Simon thanks.

And just from a demographic standpoint flavors.

Labour, saying I don't know our eight bit early on in that.

And then we're seeing a little more medsurg, but all patients.

But still strong on the IP side as well a little bit of shifts in that the first.

First thing from a clinical standpoint, we're seeing these patients require little longer hospital stay pedaling and extended a little bit on that.

Yes, you sign in the inpatient side, but.

Overall like we're seeing elsewhere improve.

Yes mortality better therapeutic between them doesn't bear.

Steroid thing.

And you know, let's use the ventilation early on pruning and tender offer thanks.

That you hear about it I think that the conditions are getting much more comfortable in their trade that and I think we're seeing outcomes improved as well as it relates to that I'm encouraged for therapeutic and others coming down the pike.

Your next question comes from AJ Rice from Credit Suisse. Please go ahead.

Hi, everybody.

Best wishes the way the thing quite the right and congratulations to Tim on the new role.

Just go back to asking about.

Yep.

Labor generally and.

What are you seeing is we sort of been good the six seven months of this and didn't make in terms of your nurse turnover or use of temporary staff.

Wages and then I guess also on the labor front, if I could ask you where the ore body being down.

As much as they are in and across the industry. I know you use E. R. Stamping berms and typically have to subsidize them when there's a weakness in the <unk> volumes are you re negotiating those deals is there a way to do that.

Has there been a headwind this year that maybe turns around as the year volumes come back next year.

Hi, Jay I'll kick that one off in terms of contract labor trends I think we did a good job of limiting contract labor obviously in the latter part of the first quarter and into the second quarter when our inpatient volumes were suppressed.

So we we actually had a pretty significant decrease in contract labor utilization. We have seen does it then needs for contract labor to to go back up over the last several a week in particular as we've had cobot cases surge up staff turnover rate I think they're up a little bit for nursing you know for various reasons that we've all.

Read about some fine you know staff concerns and wanted to pick up or types of nursing physician. Some of them have left for state staffing agency pools or contract labor pool, Although again, nothing that we I kept and anticipate or we can't manage and in terms of the rate. We have seen some increase in rates and the contract labor space I'm working very hard with all the.

The other margin improvement initiatives initiative I too to offset those of course, but it is somewhat of an emerging headwind that we'll we'll be mindful of in terms of the our volumes and the subsidies. That's also something we tackled already on it a pandemic by partnering with our vendors I'm out there to adjust staffing once we thought we'd be volumes dropped.

We were able to work with them I reduce their expense and their staffing costs, which I think I guess the avoided a lot of what could have been some headwinds in terms of request for subsidy increases now obviously there are there is an uptick in our in our subsidies fan because you have to have some sort of fixed of course staffing in those contracts.

The other thing, which we we asked all the vendors to be vendors to be mindful of is their ability to attract or a goal for cares act funding as well and I believe in the last package I came through there's a new application process for those groups. We didn't qualify for some of the the criteria based upon your running 2018 practices to make special.

He'll so we're working with those groups that there is any shortfalls just to see if we can help them accessible scares that funds, but I'll turn over to Kevin for any other commentary yeah. The only thing I would add is you know some of the pressure on contract labor.

Overall staffing kinda rate.

Some of that is regional as well and then subject to the location, but I don't think we're experiencing anything different regionally it outside of the norm or what other people see.

Yeah.

Okay.

So some of that some of this the outpatient di business Coolsmooth telemedicine and other.

The live reformat, which were well positioned to take advantage of it.

Yeah, we had another good quarter of telemedicine volumes knows as more care goes into the the traditional practice I you know, we haven't had to come down from our our second quarter high but we're still pleased with the way the drive patients in that direction for all our practice visits with your patience as well.

And our last question will be from Josh Raskin from that front research. Please go ahead.

Hi, Thanks can you guys hear me better now.

We can't yet better night, perfect, sorry about that and I'll Echo the congratulations to Wayne for the last couple of decades, and certainly the Tim as well.

My question just on the prioritization of procedures that are coming back and any sort of help me with the process do you help the physicians with bad decision, making and rescheduling and you know how it was sort of community as the hospital operator part of that and do you think there will be an air being of the acuity as we get back to sort of.

A more normalized level of procedures and sort of the procedures that weren't prioritized are coming back as well.

Josh This is Tim I'll started off in terms of the prioritization of procedures that we we've worked closely with our medical staff through all phases of the pandemic.

We stay close with our employee practices and their patients through our own means of connected care and that's through some virtual mechanism ondeck through some I guess outbound calling from our practices, particularly for vulnerable patient, who perhaps haven't had it doesn't we happened to be analytics in our ambulatory medical record systems to make sure we did proactive outreach for.

Their safety and then for wellness and gaps in care doing the same thing, making sure were more proactive in our approach with these patients as volumes that have been suppressed due to the pandemic. We are pleased to again that the higher acuity procedures came back relatively quickly we had a good quarter in orthopedic volumes total joint didn't know there was a barge.

Mike ration of hip to on the ambulatory setting our outpatient surgery setting with the Medicare a new ruling on EBITDA to the tubing that rule for that we still managed to have pretty flattish volumes on here. So again, we look at that as all good indicators that we can partner effectively with employed an independent providers in our markets to bring that care back in the door.

Where we saw the shortfall was in the lower acuity and I'll say somewhat elected very elective care G. I. It was a a high proportion of our decline in the total surgery cases for the quarter on E. N. T was number two and with that you know we do look at the age bracket a lot of the G. I care, obviously for adults off.

Strictly seniors and then for the E. N T. We saw a pretty large decline in our pediatric H volumes for surgery. So we have a pretty good graph best to you know where those cases are.

Now in terms of what do we think we can get them back in the door will keep on connecting with those surgeons are those surgeons want to get those patients the care they need but at some point I think for G.I. per screen call. One off could be that's just turns into a new cycle, where you know if it's an annual or five you're calling out to be screening I don't know how how much pent up demand if it just moves into the next decade recycled.

Outpatient that's why we've been really focused on generating our own future being proactive in and doing our outreach in our surface mine development strategies.

Early on there were some guidelines by CMS and other states about you know what surgery teacher prioritized. So certainly following those guardrails that letting the medical staff individual community to size.

How they wanted to bring their patients back as they really are closer to knowing who needs the care and there's a lot of discussion around certainly if it's a higher acuity you need to get them back and but at the same time those patients that may have a workload elective or preventative procedure, they need to come in as well but for that.

Sure decline in health outcome, so really very focused on making sure we get those patients into gets care that they need in terms of your question related to the acuity and you know how sustainable is the higher levels of acuity I think with our intentional vidacare shift to ambulatory are focused on building out you know surgery Center.

There's been about 50 surgery centers with another 10 or so that are a minority of partnerships. So most of our markets have a good ambulatory strategy that care I'm a property. So in some cases moves to the lower acuity setting on so I think from a hospital standpoint balancing that with our investments in capital on recruiting the right doctors expanded service lines the tranche.

For center I do think there is a lot of sustainability in our ability to continue to drive acuity and case mix improvements across the portfolio.

I will now turn the call back over to Mr. Smith for closing comments.

Well, thanks again for spending time with us today I want to once again express.

How big is great, but we don't want to all of our employees physician's medical stay is regional grows into hospital leadership interest will support teams corporate support teams we've been into from a full point of combating this global thing and get it in providing exceptional two for those.

We continue to live in now with our strategies to.

To provide outstanding care for patients to maintain your trust and partnership with where physicians employers to demonstrate our value to the community.

Sure and to reward shareholders and bondholders for their confidence and investment origination and once again. Thank you I am extremely grateful and appreciative for all your support over the last 20 years. This concludes our call today, we look forward to updating you on our progress once again, if you have any questions you can always readdress it or it goes six one.

ER or 657000, thank you [noise].

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Ladies and gentlemen, thank you for standing by and welcome to community Health Systems' third quarter 2020 earnings Conference call.

At this time all participants are whats multi mode. After the speakers presentation, there will be a question and answer session.

If you ask a question during the session you will need to press star one on your telephone.

Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today, Mr. boss called <unk>, Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you Mike Good morning, and welcome to community Health Systems' third third quarter Conference call.

Before we begin the call I'd like to read the following disclosure statement.

This conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts. These.

Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EBITDA for those of you listening to the live broadcast of this conference call a supplemental slide presentation has been posted to our website.

We will refer to those slides during this earnings call.

All calculations, we will discuss also exclude gain or loss from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses expenses from government and other legal settlements and related cost 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 valuation allowances recorded for promissory notes change in estimate for professional liability claims accrual tax.

Tax effect related to HMH legal settlement chains and tax valuation allowance with.

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

Thank you Ross and good morning, welcome to our third quarter conference call Im joined today.

On the call with.

Tim Anderson, our President and Chief operating Officer, Dr., Lynn Simon President clinical operations, and Chief Medical Officer, and Kevin Hammonds, Executive Vice President and Chief Financial Officer.

We're pleased with the strong results reported in the third quarter, especially as we managed through covert nitrogen.

They make while also advancing strategies designed to build on the company's recent partners ensure long term success I.

I want to credit our hospital leaders corporate management other sports teams and especially the frontline caregivers, who continue to meet the challenge of a global pandemic commitment professionalism and the level of human compassion that truly impresses me every single day.

Before we get into the quarter's results I hope, you'll indulge me just a minute to comment on other press release that we issued yesterday announcing my decision to transition from CEO of the company into the new role.

Of executive Chairman of the board of directors at the beginning of 221, Tim will become our new Chief Executive Officer, and a completely confident that these strategic energetic and an outstanding CEO.

Gotten to know them over the past few years in his role as President and COO I Trust that you are seeing his strong leadership capabilities his deep knowledge and experience in our industry and has intense personal commitment to this customer.

Certainly seeing the results of his labor is good work he has done to advance strategic and operational initiatives that are driving growth in our markets.

I could not be more pleased the team that will be our next CEO, let me say again.

And our board are completely confident EMS ability sure quality healthcare to increase the services, we provide in our communities and produce value for our shareholders. Please join me in congratulating team on this new job and responsibilities.

It's been my pleasure.

Privilege.

And I'm very grateful to have served as a CEO of community health system for more than two decades.

This is a great company with great people and great opportunities ahead.

Deeply grateful for the support of our board, our investors and all the people here and part of our organization and more than that a part of our effort to always provide safe quality care for our patients over.

And we are executing and we're moving forward.

As we continue to drive positive results as.

As executive Chairman of the board I'll remain involved in setting the strategic portion of the company and I'll continue to feel certain executive low level management responsibilities.

Now, let me turn to COVID-19, and then I'll briefly discuss the quarter results from give Tim and Kevin Lin an opportunity to share more detail galvanizing currently remains manageable in our markets. Our teams are doing an extraordinary job preparing for patients and with providers as well as those who have other IL therapies.

You can see the COVID-19 cases are climbing in many areas across the country and we are seeing right.

Rising number of infection cases in some of our markets I think we have learned a lot over the past several months about how to keep the central services open them safely operating and we will continue to do all we can to protect front line care givers and patients. While also working to ensure all services remain available for the patients.

Them.

Of course.

Honor code activity constantly we have proven we are.

Joe and adapt.

Good and change and should that become necessary in our response.

Now I'd like to provide.

Some brief highlights on the third quarter it was a strong quarter.

Our investments in volume driving initiatives strategic margin improvement program.

The targeted capital investments produced very good results, our ability to quickly and effectively nerves in services. After some services closures in the early phases.

It's interesting I've turned out to be very productive.

Our efforts to secure a stronger go forward portfolio of hospitals has.

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The improved results all of these things should continue to drive margin results over time.

It's worth noting that we delivered improved metrics across a number of categories. During the third quarter compared to second quarter. As a reminder, the shelter in place recommendations and the government restrictions are elective surgeries negatively impacted our volumes net revenues from performance during the second quarter.

In the third quarter our mill.

Mission surgeries, and our business improved sequentially or.

Our same store volumes and net revenue growth remains below pre pandemic run rates and in a number of markets. We did see koby, knocking hot spots during the quarter, which negatively impacted.

Uncoated healthcare demand, including elective procedures in some areas despite.

Despite these issues with the current third quarter net revenue.

It was approximately 3.1 billion, which was up 2.9 on the same store year over year basis. Adjusted EBITDA was 431, which increased 11% versus last year and I want to point out.

Really funds from the carriers that were recognized.

In the quarter.

Adjusted EBITDA margin was 13.8% of 180 basis points versus last year.

In terms of expenses person net revenue, we made progress across as WB and other operating expense lines, while supply cost.

And finally.

As it relates to our capital structure during the quarter, we reduced our total debt lowered our debt to EBITDA ratio from a combination of EBITDA growth and repayment of debt finally, I'd like to comment on the portfolio our strategy for the past several years has been to essentially strategically reshape our portfolio.

Oil into a stronger hospitals and healthcare systems.

Most to make targeted investments in markets, where we see the most potential to drive long term growth we.

We are now finishing network with the divestitures completed in the third quarter and an expectation that we will complete the rest of our pending divestitures for the end of year. We will end our formal portfolio optimization strategy. We are pleased with our remaining markets and confidence that we can effectively produce value with this portfolio.

Our singular focus is on market development and long term growth in the markets, where we operate.

Accelerated investments in high return Capex opportunities on both inpatient and outpatient side of the business, meaning are completed and many more are in the pipeline and the strength in services and increase access points across these markets.

I'm proud of all our company's accomplishments during the first three quarters of the year I'm very proud of the people who work across this organization and I want to again recognize.

Additions to nurses and other employees.

Is to improve their work.

We continue to prove their work is essential in her role again I want to know.

Very optimistic about our future.

And how grateful I am for marks been my experience as the CEO.

Health systems, and how appreciative I am for.

All of your support through the years I look forward to serving as executive Chairman of the board of directors and now I would like to turn the call over to Dr. Lynn Simon.

Thank you Wayne.

I would like to thank all of our hospital leadership teams, that's not caregiver support staff and physicians for their commitment to their patients and communities and for their resilience throughout this extraordinary here.

The teamwork and collaboration and their dedication we have cared for thousands of kind of the 19 patients ensuring safety professor.

And oncomed patients as well as our employees and clinicians.

To date through the end of the third quarter currently providing care for approximately 25000 COVID-19 patients across our hospitals emergency departments and outpatient care settings.

I mentioned on last quarters earnings call, we experienced an increase in 19 patients in the summer, particularly across the Sunbelt states.

During the quarter in our hospitals and outpatient care settings. The care for approximately 8000 confirmed that 19 patients in July.

Currently 6000 in August and approximately 4000 in September.

In total we saw more of a 19 patients in the third quarter than we did in the first half of the year.

The increased competition counts have created challenges for the hospital industry all across the country.

Due to our early stage planning, including our dual track framework, combining clinical and operational expertise.

And with the strong support of our supply chain facilities, and logistics infection prevention HR and employee.

Indications and other corporate support functions, we've been able to effectively manage certainly opened 19 prevalent across all markets.

Looking forward, we can see that continue to increase in many parts of the country and the ultimate duration of the pandemic remains unknown we.

We continue to monitor cases through our internally developed the 19 tracking dashboard for real time visibility of COVID-19 cases in all of our hospitals.

We're focused on.

Pasadena contingency planning.

In case of the so called twin demick influenza and commit or just additional layers of COVID-19 by leveraging the expertise and resourcefulness of our hospital teams and the support of our corporate assets.

We will continue to support our hospitals at a number of ways.

The supplies our centralized distribution system is engaged in sourcing and logistics as it relates to bundled layers TPG pharmaceuticals, and other critical supplies that are needed to treat come in 19 patients.

From a capacity management standpoint, we are monitoring.

And overall hospital utilization and proactively planning to expand capacity and insured necessary staffing where and when needed.

Considering delaying here in a few years of contract income and 19.

As always we lead with safety and following CDC infection prevention guideline and with proactive opened 19 testing, especially for high risk patient populations and pre procedural testing and ensuring facility spaces provide safe workplace social distancing requirements.

Forward, we remain confident in our ability to manage through this pandemic safely efficiently and effectively Tim. Thanks, Len first I want to say, how incredibly honored I am about the opportunity to become the next chief Executive Officer of CHF at the beginning of next year I'm excited about where our organization is headed and the.

Progress, we are making and like Wayne I'm optimistic about our future our.

As a company we have a strong culture of caring and accountability waning of course has been an extraordinary chief executive and leader for CHS for all of US and I look forward to working closely with him in his new role as executive Chairman of the board of Directors I'm.

Im very grateful for the confidence and trust that has been placed on May five Wayne and our board.

Shifting to third quarter results on top of the ongoing management of the pandemic. Our hospital teams also successfully manage through two significant hurricanes during the quarter.

In August and Laura cause minor disruption to facilities, and Texas, and Arkansas Walden September Hurricane solid cost more significant disruption and our Baldwin County, Alabama market and less significant impact and other Florida and Mississippi market ahead.

Ahead of these hurricanes, we instituted our hurricane preparation plan and our hospital leaders and medical staff to fantastic, we're maintaining operations throughout and after these weather events.

Going forward, we are refining our dual track strategy, which we believe will allow the company to successfully care for incremental opened 19 and not over 19 patients.

And we continue to monitor each market and we're prepared to dial up or dial down elective procedures. If it is warranted.

Now I would like to provide some comments on our third quarter performance.

Looking at our same store net revenue and volume on a year over year basis in the third quarter, our net revenue increased 2.9% as higher acuity improve contact contract rates and favorable payer mix offset negative volumes.

Admissions were down 6.2% and adjusted admissions were down 11.5%.

Surgeons work surface were down 5.8% with cardiology orthopedics and other service lines contributing to the sequential recovery.

The Arpus were down 18.4% similar to the second quarter. Our EBITDA declines are primarily due to lower acuity patients not presenting of the E. R.

Mmm traffic, representing typically higher acuity patient volume has returned to closer to historical run rates.

On the expense side, we managed variable cost down during the second quarter as volumes were negatively impacted by restrictions on elective procedures and shelter and place orders as volumes and net revenue return in the third quarter. Our hospital leadership team managed variable costs very well.

Combined with savings from our strategic margin improvement program drove improved EBITDA and EBITDA margin performance during the third quarter.

Overall, we were pleased with our third quarter performance and I'm excited about the strategic progress we have made during the year.

Well the management of Cobot Nineteena, certainly garnered much of our attention and focus we have also continued to effectively execute our strategic plan.

In terms of net revenue initiatives, we are seeing the benefits from investments into physician practices patient connectivity the transfer center Agios.

And other initiatives these.

These investments have helped the company recapture medical procedures as markets reopened during the second and third quarter and as we look forward, we plan to leverage these initiatives to earn incremental market share across our core market.

Our planning and execution related to our strategic margin improvement program remains on track this.

This plan was formalized about a year ago, and we continue to implement these plans and that new incremental opportunities.

Expect this program to deliver margin expansion opportunity for years to come.

On the Capex side I'm very pleased with our recent investments looking back since 2018, two today, we have added over 200 bed, including replacement hop, excluding a replacement hospital projects across a number of market in.

In addition, we have a number of new projects that were just completed or will be completed in the near term to highlight just a few projects and laporte, Indiana. We completed the 84 bed replacement facility, which opened last Saturday and Tucson, Arizona, We plan to open our 18th that micro hospitals during the fourth quarter and a larger full service.

Acute care hospital with a target of 2022 opening date is under construction in another quarter of Tucson, and Fort Wayne, Indiana, We expect to complete the St. Josephs replacement hospital to be renamed Lutheran Downtown Hospital by this time next year and we have an extensive pipeline of service line investments as well as access.

Points to complement existing market.

As a result, we are very pleased with the strategic progress. We have made this year and project, particularly during the year with so many unexpected and uncontrollable challenges.

This progress has been made possible because of strong dedication incredible effort across the entire company.

Looking beyond this year, we remain highly focused on delivering long term growth for all stakeholders.

Kevin I will turn the call over to Peter Thanks.

Thank you, Tim and good morning, everyone.

Similar to last quarter I will not cover all of our typical financial metrics today, but instead I would refer you to the 8-K in our slide deck for additional details.

As a reminder, we previously with through our 2020 financial guidance and we are not providing 2020 guidance today due to a number of factors, which we have recently discussed.

Into income during the quarter.

On a same store basis net revenues increased 2.9%.

This was comprised of 11.5% decrease in adjusted admissions and a 16.2% increase in net revenue per adjusted admission.

On a same store basis, our salaries wages and benefits expense decrease 0.8% down 160 basis points as a percent of net revenue.

<unk> expense increased 5.1% up 40 basis points as a percent of net revenue.

Our operating expense increased 1.9% down 30 basis points as a percent of net revenue.

And higher EBITDA continued and continued management of our working capital also contributed to the increase.

For the first nine months of 2020, our cash flow provided by operations were $2.1 billion. This compares to cash flows from operations of only $191 million during the first nine months of 2019.

Other increases and decreases including increased cash from air collection, and lower malpractice claims payments were offsets.

Turning to Capex, our Capex for the first nine months of 2020 $317 million or 3.7% of net revenue compared to $322 million or 3.2% of net revenue in the prior year we.

We have continued to invest capital into our core portfolio to strengthen our markets.

As it relates to liquidity at the end of the third quarter. The company had $1.8 billion of cash on the balance sheet.

Switching to the cares act and Nemacur lead funds, we did not recognize into income any relief funds from the carry back during the quarter.

So far in 2020, we have received approximately $719 million through the public health and social services Emergency fund in both general and targeted distributions, including.

Including approximately $155 million received during the quarter.

We recognized approximately $448 million in the second quarter into income as a reduction in operating costs and expenses.

No funds recognized in the third quarter. The remaining $271 million is currently on our balance sheet as a deferred liability.

In terms of the relief funds government issued multiple changes to the qualification criteria since June thirtyth.

We are evaluating the most recent HHS disclosures.

Were issued on October 22nd and expect to recognize a portion of the deferred grants in future periods.

As we've previously discussed we received approximately $1.2 billion in Medicare accelerated payments to support near term liquidity in April.

In the third quarter, we returned approximately $22 million of vast it was related to divested facilities.

Currently the recruitment of Medicare accelerated payments scheduled to begin one year. After the payment was issued which will be next April April 2021.

In terms of our divestiture program, we are nearing the completion of our formal plan.

Subsequent to the end of the third quarter.

We closed two additional transactions from which we generated approximately $265 million of incremental proceeds.

At this point, we are substantially complete with our divestiture program. We do have definitive agreements for the sale of four additional hospitals that we expect to close prior to the end of the year and those will generate a relatively low amount of proceeds.

Moving to the balance sheet and capital structure at the end of the third quarter, we had approximately $12.9 billion of long term debt and no near term maturities.

Companies next maturity of $197 million is not due until February of 2022.

Interest by $18 million.

When combined with the Paydown of our ABL, which will be an earlier. This year. We have produced on an annualized basis, our cash interest by approximately $33 million.

Through these efforts and our improved adjusted EBITDA, we have lowered our leverage ratio and reduced our cash interest in summary.

We are confident that following our strong results in our recent capital structure work along with current cash on hand divestiture proceeds and our ability to borrow under our ABL, we have ample liquidity to manage through the continued current crisis returned to normal operations and position the company for growth moving forward.

With that Wayne I will turn the call back over to you.

Kevin at this point operator, we're ready to open it up for questions. We will limit everyone to one question sort of several you'll have.

On this call both as always we're able to talk to you at any time you can reach us at every six months forces so the balance.

As a reminder to ask a question you will need to press star one on your telephone withdraw your question press the pound or hash key.

Please standby will be compiled acuity roster.

Your first question comes from Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, and Wayne Thanks for all your.

Your work and your support over the years and Tim Congratulations.

So I guess my question would just be on the margin than the pace of recovery that you're seeing obviously, a lot of moving parts with acuity going up but volume still pressured. So just want to hear how you're thinking about that you have the pace of recovery through Q4 and into next year as well.

One of the margin lift that Youve you delivered you think it's sustainable once we see more normalized.

Acuity and revenue Great addition trends thank you.

Sure Brian This is Kevin I will take that so.

As we have managed through.

With lower volume, we have certainly done I think an exceptional job of managing our labor cost. So we've been able to flex labor.

Consistent.

And according to the lower volume the margin improvement program work that we really started late in 2019.

A lot of those initiatives are focused on non patient facing.

Expenses.

Well with how we contract purchase services, how we're contracting for supplies.

We believe those to be.

Very sticky so to speak so we believe those.

Expense reductions will continue going and going forward as volumes come back and so that margin lift will will be more permanent.

Don't forget that our portfolio portfolio rationalization program.

It's also designed to improve our margin kind of going forward and we're beginning to see.

To come through.

Your next question comes from Josh Raskin.

Research. Please go ahead.

Josh Raskin your line is open.

Your next question comes.

Great mortgage.

Capital markets. Please go ahead.

Good morning, and congratulations weighing in on these new roles that you'll make this transition.

I was hoping to get a little more color around the you made some commentary I think landed about the the number of patients over the March quarter any additional color you can provide around how underlying utilization was in terms of surgeries and add Mitch and I'm curious how did that transition into that.

Fourth quarter is that we are the trends that you saw maybe in that.

Say in the last month of the quarter. We did is that carried over into that.

Current quarter and then have.

Have you had any need to require much to do voluntary suspension of services. So for the fourth quarter. Thank you.

Great practices, Sam I'll start it off and then obviously Lynn if you have anything to add both Bray.

We obviously started the third quarter with the higher surges of Covance cases in our Sunbelt States. We commented on that during our second quarter earnings call.

We also I think shared some of the impact that is having on our volumes from the June recovery on the June recovery by the way certainly benefited from a great deal of pent up demand. We were very focused on getting that business in the door and we did see some shifting or deferral Dom in July into August, but that the cobot search subsided as we expect.

We saw more elective cases come back into the hospitals and from our vantage point most of the deferred care or that the delayed care was that consumer driven not so much related to resources on our end. We felt we were very well staffed and equipped to work through that we only had two states that had I think what I would call them broker I guess required.

Orders for curtailment elective cases, those being some counties in Texas, and Mississippi, but for the rest of our markets again, just the normal throttling up and down and being responsive to consumer concerns or or request to defer care, but that the forefront I think we've got a great deal of our backlog in the third quarter were still very focused on.

Adding a new pipeline of business as we talked about in the call. So far today with all of our investments and our strategies.

In terms of our heading into October or September was a good month heading into October we are pleased with the further progression of our volume recovery. We are as we pointed out today seeing some resurgence of call that havent necessarily seen any requirements for.

Dolls are curtailing elective services so for monitor on a day by day basis, where we think it's prudent to do so we will lend has instituted a very rigorous pre procedure testing program. So we believe we have a good pulse everyday on the pre surgical prepas precinct pre procedure patients on Ami to.

Monitoring for upticks in Talbot, filthy would see that happening, we'd obviously make operational adjustments on as warranted.

Yes.

Your next question comes from Ralph Giacobbe from Citi. Please go ahead.

Thanks, Good morning, I guess as you think about the longer term effects of the pandemic any thoughts on just population factors within your markets and maybe stemming out migration to larger cities. There are any of your.

Thoughts there and then.

We're obviously, where we remain Cowen still I noted lower acuity that you cited maybe remind us again to your strategy and sort of your transfer center is an access point plan.

And if you're accelerating any of those initiatives to kind of capture the volume that's not presenting at the hospital. Thanks.

Ralph I'll start it off and again anyone feel free to jump in here, but in terms of longer intent impact population shift I think we've mentioned that for the last couple of quarters and we continue to read certain articles that say there does seem to be some desires for urban.

Well there is to look at some suburban or non urban location have we seen any uptick in any of our markets. I think it's too soon to tell but the trend that we'll certainly watch in terms of the movement of the acuity.

From one sector to the other I would say we've been planning for this structural shift if you will for lower acuity care to cook the outpatient setting for the last several years with active fund strategies freestanding eighties the AMC.

Even I think pretty regular updates on our progress in our investments into those on the access point.

I think they serve us very well and then would call that I think you see some acceleration into urgent care settings for instance versus the lower.

Duty business.

So we're pleased that we have been really thoughtful and strategic in how we build out those but at what point were consumer focused strategy get to where the customer is now they're really serving some of those structural shift.

The transfer center Im really as a conduit for us to connect our affiliated hospitals in our network, we were maybe lower acuity to our higher acuity assets as well as non CHS hospitals and the surrounding areas.

We've invested our capital and service line advanced fence cardiac neurosurgery trauma that transfer center enables us to move those patients from the lower acuity setting into our sites of care that we've invested and we're really pleased with the results.

In the third quarter. Despite note that declined at admissions, we did see an increase in transfer center activity, which which just shows how impactful it spend that help us build outs of the complexity and the performance of our market.

So Ralph.

We haven't seen any.

Change.

Increases in terms of population shift or any of those kinds of things this quarter.

And this year.

Store hospitals that we've had for a number of years and the market has been relatively stable.

We are a number of years and the opportunity we have going forward.

To increase our market share in these markets in the regions. We did this.

This year was to down to a sustainable group schools that we could grow.

Thats, where we find ourselves today and were excited about the opportunities for our continued growth in those markets with or without the addition.

Lumpy relationship.

And I think we are well positioned on both the outpatient and inpatient side and just to point out I made the comment earlier, we've added over 200 that end market, where we have opportunities to grow our presence in our market share key.

Key markets like Birmingham, Knoxville, Naples in Tucson put on the list that.

Well find a stronger portfolio, we've been investing in it we didn't acquire any new hospitals, but we certainly I think that had built out to what would be akin to a normal acquisition or a couple of acquisitions over the last couple of years.

Your next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Great. Thanks.

The second better able to pay down some debt in the quarter.

At $1.8 billion, the cash on the balance sheet.

Got a couple hundred million dollars.

Proceeds how much cash do you.

Do you think about the kind of actually being available for.

Climate and how should we think about the ability to actually reduce leverage through free cash flow going forward.

Sure This is Kevin.

No.

There's still a lot of uncertainties around.

David and.

When the next search will be.

Certainly the accelerated Medicare.

Money that was provided by the government.

To give us assistant parent throughout the.

The pandemic period, which no one knows how long that's going to last and there's likely to be around until we have a vaccine.

That being said with the.

New rules around when that repayments starts which is not full April of next year.

And then extends out over a period of time.

There will be approximately roughly $450 million of the accelerated payment.

We'll be paid back in 2021.

Okay, and and so Thats still leaves us a fair amount of cash on hand to kind of navigate through the pandemic and just through some of the unknown.

Your next question comes from Andrew <unk> from Barclays. Please go ahead.

Hi, good morning, and congratulations again to both Wayne and I wanted to follow up on Covance patient I think you quoted 18000 cases in the quarter across the hospital system can you share how many of those cases, where inpatient admission and related way can you provide some of the characteristics of the typical cobot impatient thats treated in their hospital for items.

Good day insurance coverage and ventilator usage. Thanks.

Great. Andrew This is Tim I'll kick it off and then hand, it over to Dr. Simon on some of the clinical aspect in terms of the numbers. We provided about 45% of that was on the inpatient side of the business.

In terms of payer mix similar to what we you've heard or read recently.

Most of the patients are older older age 65, and above higher penetration of Medicare Medicare advantage.

Patients.

Obviously, it's something we keep track of in terms of advancing the clinical care alternative Dr. Simon.

Just.

Demographic standpoint, and certainly we're seeing a little lower.

In early on in that sense.

And then we're seeing a little more medsurg bundle patients.

But still strong on the east side as well a little bit of shifts in that.

The nation's number.

First thing from a clinical standpoint, we're seeing these patients require little longer hospital stay doubling.

Extended a little bit on that.

He signed and the inpatient side, but.

Overall.

We're seeing elsewhere improve.

Mortality center there.

I mean does it there.

Okay and.

Last season, the ventilation early on programming et cetera are all the things.

That you hear about I think the conditions are getting much more comfortable in their trade that and I think mercy outcomes improved as well as it relates to that encouraged for therapeutic and others coming down the pipe.

Your next question comes from AJ Rice from Credit Suisse. Please go ahead.

Hi, everybody.

Best wishes the way the quite the right and congratulations to Tim on the new role.

I would just go back to asking about.

Yes about labor generally Ed.

What are you seeing is we sort of been through the six seven months of this.

Endemic in terms of your nurse turnover use of temporary staff.

Wages and then I guess also on the labor front, if I could ask you where the our volumes being down.

As much as they are and across the industry I know you use IAR staffing firms.

Typically have to subsidize them when there is weakness in the <unk>.

Volumes are you re negotiating those deals is there a way to do that.

As EBITDA headwind this year that may be turns around as the year volumes come back next year.

Hey, Jay I'll kick that one off in terms of contract labor trends.

I think we did a good job of eliminating contract labor obviously in the latter part of the first quarter and the second quarter, when our inpatient volumes versus the process. So.

So we actually had a pretty significant decrease in contract labor utilization, we have seen that the needs for contract labor to to go back up over the last several weeks in particular as we've had cobot cases surge.

Staff turnover rate, but I think they're up a little bit for nursing.

For various reasons that we've all read about some fine DAP concerns and wanted to pick up or types of nursing physician. Some of them have last four state staffing agency pools or contract labor pool, but again, nothing that we get and anticipate or we can manage.

And in terms of the rate we have seen some increase in rates and the contract labor space.

Working very hard with all the other margin improvement initiatives initiative to to offset those of course, but it is somewhat of an emerging headwind that we'll we'll be mindful of in terms of the our volumes and the subsidy. That's also something we tackled early on in the pandemic by partnering with our vendors out there to adjust staffing once we thought.

The volumes dropped so we were able to work with them reduce their expense and their staffing costs, which I think I guess that avoided a lot of what could have been some headwinds in terms of request for subsidy increases now.

Obviously, there is an uptick in our in our subsidies ban because you have to have some sort of fixed of course staffing in those contracts.

The other thing, which we asked all the vendors to be vendors to be mindful of is their ability to attract or coal for cares act funding as well and I believe in the last package I came through there is a new application process for those groups. We didn't qualify for some of the criteria based upon year, ending 2018 practices to make special appeal.

So we're working with those groups. If there is any shortfalls to see if we can help them ex accessible cares that funds that I'll turn over to Kevin for any other commentary, yes, only thing I would add as some of the pressure on contract labor.

Overall staffing and kind of rate.

Some of that is regional.

Well that is subject to the location but.

I don't think we're experiencing anything different regional exists outside of the norm.

What other people.

Okay.

Some of the some of this outpatient CD business Coolsmooth total notices and others.

Delivery format, which we were well positioned to take advantage of.

We had another good quarter of telemedicine volumes.

As more care goes into the traditional.

Traditional practice side, we havent had to come down from our our second quarter high but we're still pleased with the ability to drive patients in that direction for all our practice visits with new patients as well.

And our last question will be from Josh Raskin from that front research. Please go ahead.

Thanks can you guys hear me better now.

We can yes, better guide perfect, sorry about that and I'll echo the congratulations to Wayne for the.

The last couple of decades, and certainly to Tim as well.

My question just on the prioritization of procedures that are coming back and sort of help me with the process do you help the physicians with that decision, making and rescheduling and how it was sort of community as the hospital operator part of that and do you think there will be an AD being of the acuity.

As we get back to sort of a more normalized level of procedures and sort of the procedures that were and prioritized are coming back as well.

Josh This is Tim I'll start it off.

In terms of the prioritization of procedures that we we've worked closely with our medical staff through all phases of the pandemic we.

We stay close with our employee practices and their patients through our own means of connected care and thats through some virtual mechanism on that through some I guess outbound calling from our practices, particularly for vulnerable patients who perhaps haven't had that we tap into the analytics in our ambulatory medical record systems to make sure we did proactive outreach for there.

Safety, and then for wellness and gaps in care doing the same thing, making sure were more proactive in our approach with these patients as volumes that have been suppressed due to the pandemic fleet.

We are pleased again that does the higher acuity procedures came back relatively quickly we had a good quarter and orthopedic volume.

Total joints, even though there is a large migration of hip to on the ambulatory setting our outpatient surgery setting with the Medicare new ruling on that to the to the night rule for that.

We still managed to have pretty flattish volumes on hits. So again, we look at that as all good indicators that we can partner effectively with employed and independent providers in our markets to bring that care back in the door, where we saw the shortfall was in the lower acuity and I'll say somewhat elective very elective care GPI and with a high proportion of our decline.

And the total surgery cases for the quarter on NTT was number two and with that we can look at the age bracket, Tom a lot of the JCI care, obviously for adults, particularly seniors and then for the anti we saw a pretty large decline in our pediatric H volumes for surgery. So we have a pretty good BRAF best too.

Where are those cases are now.

Now in terms of why do we think we can get them back in the door will keep on connecting with those surgeons those surgeons want to get those patients the care they need but at some point I think for G. III for screening colonoscopy that just turns into a new cycle, where you know if it's an annual or a five year call. It ought to be screening I don't know, how how much pent up demand as it just moves into the next day care cycle for.

Outpatient that's why we've been really focused on generating our own future being proactive and and doing our outreach in our surface by development strategies.

And early on there were some guidelines by CMS and other states about surgery future prioritized certainly following those guardrails that letting the medical staff individual communities to side.

How they wanted to bring their patients back as they really are closer to knowing.

The care and Theres a lot of discussion around certainly higher acuity you need to get him back then but at the same time those patients that may have.

More of a code elective our preventative.

Procedure, they need to come in as well to prevent future decline and health outcomes. So really very focused on making sure we get those patients and to get the care that they need in terms of your question related to the acuity and how sustainable is the higher levels of acuity I think with our intentional site of care shift to ambulatory are.

Focused on building out search.

Surgery centers with about 50 surgery centers, we have another 10 or so that are minority partnerships. So most of our markets have a good ambulatory strategy that care on the property. So in some cases moves to the lower acuity setting on so I think from a hospital standpoint balancing that with our investments in capital on recruiting the right doctors expanded service.

Slide the transfer center I do think there is a lot of sustainability in our ability to continue to drive acuity and case mix improvements across the portfolio.

I will now turn the call back over to Mr. Smith for closing comments.

Well, thanks again for spending time with us today wont to once again express Lew great. What we offer to all of our employees physician's medical stay as regional grows into hospital leadership to interest will support teams corporate support teams, we've been a different full front of competitiveness globally and as we said.

So if you will to those.

We continue to move ahead now with our strategies to.

To provide outstanding care for patients to maintain their trust and partnership of our physicians and floors to demonstrate our value to the community.

Sure and to reward the current shareholders and debt holders for their confidence and investment origination and once again. Thank you I am extremely grateful and appreciative for all your support over the last 20 years. This concludes our call today, we look forward to updating.

On our progress once again, if you have any questions you can always Regis at area code six months.

For six or 7000, thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2020 Community Health Systems Inc Earnings Call

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