Q3 2021 Community Health Systems Inc Earnings Call

October 28, 2021

Good day, and thank you for standing by and welcome to community Health Systems' third quarter 2021 earnings call. Please be advised that today's conference is being recorded.

I'd like to hand, the conference over to your speaker for today, Mr. Vohs, Como, Vice President of Investor Relations.

Thank you Jay Good morning, and welcome to community Health Systems' third quarter 2021 Conference call. Joining me on today's call are Jim Henson, Chief Executive Officer, Dr. Lynn Simon President of clinical operations, and Chief Medical Officer, and Kevin Hammons, President and Chief Financial Officer.

Before I turn the call over to Tim I would like to remind everyone that this conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts. These forward looking statements are subject to a number of known and unknown risks, which are described in headings such as <unk>.

Factors in our annual report on Form 10-K, and other reports filed with or furnished to the securities and Exchange Commission.

As a consequence actual results may differ significantly from those expressed in any forward looking statements in today's discussion.

We do not intend to update any of these forward looking statements.

Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS.

For those of you listening to the live broadcast of this conference call a supplemental slide presentation has been posted to our website, we will refer to those slides. During this earnings call. All calculations, we will discuss also exclude loss or gain from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses.

Expenses from government and other legal settlements and related costs.

Fences from settlement legal expenses related to cases covered by the CVR expenses related to employee termination benefits and other restructuring charges change in tax valuation allowance and gain on sale of investments.

Unconsolidated affiliates with that said I'd like to turn the call over to Tim Henson Chief Executive Officer. Thank you Ross Good morning, everyone and welcome to our third quarter Conference call.

We are very pleased with our third quarter operational and financial performance, especially at our healthcare team provided care for a large number of patients with COVID-19.

Despite the challenging environment, we continue to advance key growth strategies and other important operational improvement.

During the third quarter, the Delta variant spread through many of our markets across the Sunbelt states.

As a result, we provided care for approximately 15000 and patient coveted mission or 13% of our total admissions, which was our highest quarterly case count to date.

This compared to more than 3000 patient callback cases during the second quarter and 9500 during the first quarter.

And it is also worth noting that nonprofit health care demand was higher in the third quarter than in our prior quarters with elevated COVID-19 cases.

Since the onset of the pandemic the importance of our healthcare team and the critical role. They play in the communities. We serve has certainly been reinforced I am impressed with their professionalism and compassion and remain grateful for their commitment to providing safe high quality patient care.

Looking at the third quarter, we produced strong results despite the COVID-19 surge.

On a same store and year over year basis, net revenue increased seven 1%.

Same store admissions increased two 8% and adjusted admissions were $4 seven were up four 7% searches.

Surgeries increased one 5%, while ER visits were up 24, 2%.

As a reminder, during the third quarter of 2020, we drove solid volume recovery as industry volumes for returning so we were pleased with us year over year volume performance.

Looking at our third quarter volumes compared to the pre pandemic third quarter of 2019 same store admissions decreased 3%, while surgeries declined 4%.

Does it has further improved and were up 1% versus 2019 due in large part to our freestanding eds expansion strategy as well as level of elevated levels of corporate visits been testing.

Despite the COVID-19 surge in the third quarter being our largest to date non corporate demand was higher than the last significant surge in the first quarter of this year.

As a result, we delivered stronger volumes across all key metrics compared to the first quarter.

That said deferred care and related procedures have been impacted throughout the pandemic and we expect healthcare demand to return over the next several quarters.

And our recent investments, which I'll cover in more detail shortly will help meet growing demand for healthcare services in the months and years ahead and drive market share gains across our portfolio.

Moving now to EBIT during the third quarter on a consolidated consolidated basis, adjusted EBITDA was $482 million.

Excluding pandemic relief fund adjusted EBIT was $463 million, which was up 7% year over year with an adjusted EBITDA margin of 14, 8%.

Compared to the third quarter of 2019, and excluding release pandemic relief fund adjusted EBITDA increased 19% and our adjusted EBITDA margin was up 280 basis points. Despite operating 19 fewer hospital, which further validates our underlying confidence in our renewed core portfolio.

In terms of expense management for more than a year and a half now the pandemic has created a continuously changing operating environment requiring flexibility on a daily basis. This was certainly the case again during this quarter.

Our hospital leadership teams and providers have definitely advantage the ebbs and flows utilizing best practices, leveraging organizational resources and operating with agility, all while prioritizing safety for their patients and care teams.

They continue to effectively manage their resources to control expenses.

Similar to prior waves of called it we experienced increased costs related to staffing pharmaceuticals, and other supplies such as PPE and Covid testing.

And while the entire country is ready for the impacts of COVID-19 to subside, we remain confident in our ability to manage the dual track operation strategy for as long as the pandemic continues.

Our portfolio is strong and it is situated across parts of the country with attractive population trends and favorable economic conditions, which provide a solid foundation for growth over the next several years.

To broadly advance these growth opportunities we have previously highlighted investments in incremental debt capacity, new outpatient access points higher acuity service lines physician recruitment our transfer center service Telehealth technologies and in care coordination and patient experience. These.

These investments are working that greatly improved our competitive position and are creating opportunities for incremental market share gains into the future.

Now I would like to share with you some of our recent growth oriented investments. They include the JV opportunities, we announced last quarter with partnerships across rehab long term acute care and behavioral health.

The opening of new AFC in the Knoxville, Tennessee, and Tucson, Arizona markets.

The recent completion of an Ob and neonatal intensive care expansion at Grandview Medical Center in Birmingham, Alabama, where we have now added more than 70 beds over the past three years.

Remember opening of a new hospital in downtown Fort Wayne as part of the return Health network.

The upcoming opening of our 17th freestanding EDI Bentonville, Arkansas, which is part of our northwest Arkansas network.

De Novo Hospital campus support in Tucson, Arizona, which is scheduled to open in early 2022.

We are also excited about the recently announced expansion of fitness physicians regional health care system in Naples, Florida.

This includes the construction of 100, new beds at our two existing hospital campuses in that market and the early 2022 addition of a third hospital campus in North Naples, which will specialize primarily in orthopedic surgery and rehabilitation.

Beyond these projects, we have a growing pipeline at both inpatient and outpatient investment opportunities, which we expect to further develop and strengthen our core markets even more.

We have been pleased with our progress this year and in our overall execution in the midst of a challenging operating environment.

Due to our strong performance, we are raising our adjusted EBITDA guidance again this quarter.

And looking forward, we remain extremely optimistic about our portfolio and markets as well as the opportunities ahead of us to drive long term incremental EBITDA and cash flow growth at this point I will turn the call over to Kevin for additional details on the quarter and to provide more thoughts on our future outlook Kevin.

Thank you, Tim and good morning, everyone.

As Tim highlighted it was another strong quarter for the company.

We delivered solid financial performance and further advanced a number of our strategic initiatives.

Through the recent transformation, we've undertaken to reposition the company, we introduced strategies to drive net revenue growth and improve efficiency throughout the organization.

As well as to strengthen our balance sheet.

We completed our divestiture program, which allowed for debt Paydown and additional focus on our core markets.

We made improvements to the capital structure, extending maturities and reducing annual cash interest.

And we've made operational improvements, which have improved our margins.

We are pleased with all of this recent progress and excited about the opportunities in front of us.

Switching back to the third quarter performance.

Net operating revenues came in at $3 billion $115 million on a consolidated basis.

On a same store basis net revenue was up seven 1% from the prior year.

This was the net result.

Of a four 7% increase in adjusted admissions and a two 3% increase in net revenue per adjusted admission.

Which faced a difficult comp from the prior year.

Excluding non patient revenue, which was lower year over year net patient revenue per adjusted admission was up 3% compared to the prior year.

Adjusted EBITDA was $482 million.

During the third quarter, we recorded approximately $19 million of pandemic relief funds.

With no relief funds recognized in the prior year period.

Excluding those pandemic relief funds adjusted EBITDA was $463 million.

With an adjusted EBITDA margin of 14, 8%.

In terms of expenses supply costs increased in the third quarter, a result of higher pharmaceutical and other costs associated with carrying for additional COVID-19 patients.

Contract Labor expenses increased in the third quarter similar to prior Covid ways during which Covid case counts were elevated.

As a reminder, our contract labor expense is recorded in the other operating expense line.

It's worth noting that our strategic margin improvement program has remained on plan during the year. The formalized program continues to drive efficiency across the organization and the execution helped to offset cost pressure across all three expense lines during the quarter.

We expect this plan will drive incremental savings over the next several years.

Turning to cash flow.

Cash flows provided by operations were $400 million for the first nine months of 2021.

This compares to cash flows from operations of $2 1 billion during the first nine months of 2020.

The comparison versus the prior year as difficult as the <unk>.

$2 1 billion in cash flow from operations. During the first nine months of 2020 included $1 billion $159 million of accelerated Medicare payments received and $715 million of pandemic relief funds received.

Declining net revenue during the first three quarters of 2020.

Resulted in declining accounts receivable, which was therefore, a benefit to working capital cash flows last year.

Conversely, with strong net revenue growth in the current year.

We have a net working capital drag as accounts receivables have increased.

We expect this net working capital headwind to ease in future quarters.

Excluding repaid Medicare payments cash flows provided by operations were $667 million for the first nine months of 2021.

Moving to Capex for the first nine months of 2021, our Capex was $334 million <unk>.

Compared to $317 million in the prior period.

Our capex was up 5% in the first nine months of this year, despite operating fewer hospitals than a year ago.

Our core market to benefit from the rollout of our strategic initiatives.

Along with the high return capital to fuel additional growth.

And as Tim mentioned, we have a strong pipeline of opportunities that we expect will drive incremental EBITDA as well as increased cash flow performance going forward.

In terms of liquidity, we continue to have no outstanding borrowings and approximately $728 million of borrowing base capacity under the ABL with the ability for that to increase up to $1 billion.

Also at the end of the quarter.

Had $1 3 billion of cash on the balance sheet.

As of September 32021, the company had $814 million of Medicare accelerated payments remaining to be repaid which were recorded as a current liability on the balance sheet.

Rather than repay these remaining Medicare accelerated payments over the next several quarters through the regularly scheduled recruitment process by CMS. The company has elected to repay the remaining outstanding balance of Medicare accelerated payments to CMS with cash on hand.

Which it has now completed during the month of October move.

Moving forward the company will begin receiving the full amount of cash reimbursement on future Medicare claims.

Due to our strong performance during the quarter, we have raised our guidance the updated full year 2021 guidance.

For net revenues is now anticipated to be $12 billion and $150 million to $12 billion and $350 million.

And adjusted EBITDA is anticipated to be $1 $780 billion to $1 billion 820, as we've increased our full year range.

As a reminder, our 2021 adjusted EBITDA guidance does not include any previously recorded pandemic relief fund or any pandemic relief funds that may be recorded in the future.

Cash flow from operations is anticipated to be $800 million to $900 million.

And increased to $75 million at the midpoint.

Cash flow from operations guidance excludes the repayment of Medicare accelerated payments that have occurred throughout the year.

Capex is now expected to be $450 million to $500 million.

And net income per share is anticipated to be $1 to $1 20.

Based on a weighted average diluted shares outstanding of 129% to 131 million shares.

Looking at the past three quarters, we have made significant progress on these goals as we've expanded our EBITDA margin.

<unk> strong positive free cash flow year to date.

And further reduced our leverage which is five nine times as of September 30.

We look forward to delivering additional progress across all these metrics as we move forward.

Ross at this point I will return the call back to you.

Thank you Kevin and thank you Tim.

Jay at this point, we're ready to open up the call for questions.

We will limit everyone to one question. This morning, but as always you can reach us at 615 or six five to seven.

Thank you at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again Thats star one on your telephone keypad. Our first question comes from the line of Brian <unk>.

Jefferies. Your line is open.

Hey, good morning, guys congrats on the good quarter.

Thank you.

Yes. So I guess my question is obviously everyone's worried about the cost side of things, whether it's labor and supplies and whatnot, but it's clear that you guys manage the cost side, well, even with increased utilization of temp labor. So as I look at things and the turnaround that you've done over the last few quarters.

Maybe if you can share with us what exactly are the initiatives that youre doing or that you've set out to implement as it relates to driving revenues in admission trends and also on the other side just the cost and margin enhancing enhancement moves that you've outlined what are those things more concretely in where do we stand in terms of like what innings are we in.

In terms of realizing those benefits.

Sure. Thanks, Brian.

There's probably a number of things we can cover there. So let me start and I'll certainly, let Tim jump in on the expense side.

We've talked about are our margin improvement program.

First I'd start by saying, we did see certainly some drag on labor costs, particularly contract labor.

But much of that we see has been directly related to the elevated COVID-19 costs.

Certainly as nurses had left and there's been a higher utilization.

Traveling nurses as well as the rates that we're paying those nurses.

He has been directly related we saw that in earlier waves and then we see that.

Some moderation of that as Covid cases go down so as we look forward.

And expect Covid cases to go down we certainly expect some moderation of those costs.

Related to our margin improvement program.

Have numerous initiatives across the organization.

Any of them are not patient facing.

Correctly initiatives.

Many in the supply chain area, where we have been negotiating contracts on a national basis for.

For both supplies as well as purchase services.

<unk> advantage of our scale and leverage which has allowed us to reduce cost.

We have a number of initiatives in terms of how we are processing.

Certain types of claims.

And which has allowed us to just become more efficient.

In terms of some other initiatives, we have going on related to maybe more directly to labor.

We have certainly invested in many of our.

How we support our nurse staffing we have moved a lot of our recruitment into our centralized recruiting function, which we have a lot of experience with from a physician recruiting function, which we centralized years ago, we're doing something similar with nursing.

And we believe that that's much more efficient, particularly in today's environment, where we can attract.

From outside maybe the the geographic region.

So those are the things that initially come to mind Tim.

Sure there are some things I missed sure. Thanks, Brian for the question and I think I think Kevin and a nice job covering kind of the opex and the strategic margin improvement program as key drivers for margin going forward.

I'd like to talk about the top line as you know and are very focused on growth objectives.

First of all we certainly believe we're in a stronger portfolio.

In stronger markets as we outlined today on our prepared remarks, I'm really pleased with our investments taking groups showing kind of the growth in the earnings gains that were putting up our year over year and even compared to 2019. So good organic growth in that portfolio is still something we're investing in we are very thoughtful strategic planning processes.

We've talked a lot about our transfer center, we really look forward to further optimizing that in the quarters and years to come we get such great insights into what's happening in our markets based upon our daily activities and the transfer center, which is teed us up nicely for where we should be spending our capital Max for capacity expansion, adding new service lines.

Routing to providers to further advance market share. The other avenue is related to some of our de Novo projects. We've covered with you our new hospital projects are growing freestanding <unk> portfolio. The joint ventures, we have and are investing in in terms of post acute care and behavioral health all of those things we're confident.

We will drive strong long term.

Opportunities in the portfolio.

We've also talked about the importance of having a balanced growth philosophy, and we're investing in our inpatient side of the business and the ambulatory side.

Outpatient side of the business really is growing very very nicely. So I hope that's helpful and it speaks to our confidence in what we're doing to truly drive long term value here.

Thank you next question comes from the line of Frank Morgan of RBC Capital. Your line is open.

Good morning I.

I was hoping you could maybe break out in that other <unk> how much of that actually is attributable to the to the agency labor usage and then maybe talk a little bit about how that was during the quarter at the end of the quarter, maybe where he is today.

Then it also just maybe some general commentary on the non Covid.

Nice volumes that you have maybe a little color specifically between in an outpatient how that ended the quarter and then where that is today. Thank you.

Sure. So we haven't specifically given.

The amount of what that contract labor at it.

It fluctuates.

Significantly quarter to quarter, because it kind of bounces around between the labor.

And contract labor.

So, but what I would say is it's it has increased pretty significantly sequentially over the second quarter and is above where it was in the first quarter, but we were really able to offset that if you look at the other operating expense.

Comparatively year over year dollar amount is almost flat.

All of that increase that we had in that line item related to labor, we were able to offset with other savings.

Various categories, whether its purchase services or other efficiencies that we gained.

Largely due to these.

These initiatives that we had.

Put in place our operating initiatives.

Or are.

Margin improvement program.

Yes, Frank this is Tim and in terms of our non COVID-19 volumes in the quarter as we pointed out had really strong staff across all of the key indicators improving upon our first quarter performance.

<unk> Big wave of Covid, and we saw that generally across the board, but one thing we did see some crowding out of some inpatient surgeries in the quarter as we made way for more inpatient Covid care. We also.

Deferred some elective orthopedic cases, which we expect to pick up in upcoming quarters.

As a result of just trying to preserve that capacity outpatient surgery was strong for the quarter, we had sequentially improved outpatient surgeries.

Throughout the year, beating both 2000 Twenty's compound 2019 as comps so really pleased with our investments.

And recruiting the right specialists to our markets and building on our primary care networks of care, making sure that were really driving that market share growth on both the inpatient and outpatient side of our markets.

Thank you next question comes from the line of Josh Raskin of Nephron Research. Your line is open.

Hi, This is actually Mark go on for Josh Thanks for taking the question.

Just wondering if you've seen any demographic data points, suggesting that volumes could be migrating out of cities and into more suburban markets like the ones you operate in.

And would also appreciate any thoughts just more generally on what youre seeing in terms of market share changes within your footprint.

Thanks, Mark This is Tim I'll start off the answer to that question in terms of specific data I can't point you to one stores, we do have plenty of anecdotal data and reading articles similar to I'm sure you are reading in terms of perhaps some urban flight into the suburban markets.

So we believe we're positioned well our assets as you know, let's take in northwest, Indiana outside of Chicago on the size of the Tucson market the size of the Birmingham Fort Wayne Naples, All of these communities I think are well positioned for that demographic shift.

Even prior to that demographic shift we were pleased with the growth prospects in those markets and we believe any of that migration would only be a value add.

Yes, I would just point out even going back to the 2020 census.

It's certainly pointed to states that we're in like Arizona, Texas, Alabama.

Alabama, Florida are larger states it certainly been picking up population.

From other parts of the country and then more recently.

Even as Tim mentioned anecdotally, but if you look at a lot of what's being reported around real estate.

You can see that the markets that we're in seem to be certainly growing and we know that there is more of a both a demographic move towards some of the <unk>.

Sunbelt states some of the lower tax jurisdictions.

Largely due for economic growth as well.

Thank you next question comes from the line of Andrew Mok of UBS. Your line is open.

Good morning.

Can you speak to some of the volume trends into October.

Just some context for how noncore, but utilization is rebounding following the latest decline in Covid cases.

Hi, Andrew This is Tim I'll start us off here in terms of our Covid I guess I'll say trajectory. We did see admissions peaked in the midpoint of the quarter near the end of August actually the patient days really did not start tapering off until the latter part of September.

We still are experiencing elevated levels of cold it beyond.

I guess I'll say, our low points in previous searches. So we're still seeing pretty I guess elevated levels of COVID-19 volume in our hospitals as I said in my remarks. The care teams have just done a phenomenal job of managing that on a day to day basis, I'll say multi times, a day basis, making sure that we're taking great care of those patients.

But in terms of the rebound of the non Covid care as we pointed out we really held onto a good portion of that business relatively well throughout the quarter I believe the consumer and the providers comfort level with their safety in our care settings with vaccination does lead to less of the dip.

For all of the elective care that we had seen in previous searches, but with that being said again the deferred here that we're looking out for are those cases that we've delayed just to preserve our our inpatient capacity for Covid cases.

Our teams work regularly with the surgeons, our outreach program directors to make sure that we're bringing those cases back in as soon as the patients who are ready to do so and so from that vantage point, we do feel confident that that business will work its way back into our systems in this quarter into the first half of next year.

Thank you and our last question comes from the line of Kevin Fischbeck of Bank.

Bank of America. Your line is open.

Okay, great. Thanks.

To go to the margin.

Discussion I think you guys.

So it's a pretty good improvement in margins recently.

A lot of moving pieces in the margin number this year between sequestration and Covid costs.

Everything else contract labor et cetera.

Guys. What do you think the core margin is I guess, if we were trying to normalize everything we try to think about where you guys are on a core basis relative to that margin target that you've outlined.

Is the actual reported number a pretty good estimate for where you are actually operating today or are there any kind of major adjustments, we should be making and when we think about what.

Where the normalized margin is today.

Thanks, Kevin.

Yeah.

I would say that we believe that where we're operating the margin.

We're.

Reporting today is as good.

Barometer of where we are from an operation standpoint, we put out at the beginning of the year kind of our medium term targets.

Be above 15% margin.

And that kind of two to four year timeframe I would say that the way we're looking at it we're ahead of schedule.

We've made some great progress.

On our way there with certainly.

It has accelerated a number of our initiatives.

And so.

Do believe we are ahead of schedule of getting to where we think we will we will we want to be and we will get.

We're certainly as we sit here today believe that.

Over the next few quarters will continue to make.

Address continue to grow margins.

As you can see from our guidance.

We expect to be in the high 14% for the full year.

Fourth quarter at the midpoint slightly above 15%.

And I would say that our expectation is we'll continue to grow into 2022.

Thank you we will now turn the call over to Mr. <unk> for closing remarks, thanks, Jay and thanks to everyone for spending time with us today.

In closing I would like to mention again, how grateful we are to all of our employees across the organization our physicians providers regional presidents in hospital leadership teams, who continue to demonstrate our true purpose of helping people get well and live healthier I also want to thank our company's leadership team for their important role in supporting our market and product.

Continued focus on successful execution.

We are pleased with our strong year to date performance and we look forward to updating you on the rest of the year in a few months. Once again, if you have any questions. You can always reach us at 6154 657000 have a great day.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.

[music].

Okay.

[music].

Good day and thank you for standing by welcome to community Health Systems' third quarter 2021 earnings call.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your speaker for today, Mr. Vohs coma, Vice President of Investor Relations.

Thank you Dave Good morning, and welcome to community Health Systems' third quarter 2021 Conference call. Joining me on today's call are Jim Henson, Chief Executive Officer, Dr. Lynn Simon President of clinical operations, and Chief Medical Officer, and Kevin Hammons, President and Chief Financial Officer.

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.

Expenses from government and other legal settlements and related costs.

Sensors from settlement and legal expenses related to cases covered by the CVR expenses related to employee termination benefits and other restructuring charges change in tax valuation allowance and gain on sale of investments and unconsolidated affiliates.

With that said I'd like to turn the call over to Tim Henson Chief Executive Officer. Thank you Ross Good morning, everyone and welcome to our third quarter Conference call.

We are very pleased with our third quarter operational and financial performance, especially at our health care teams provided care for a large number of patients with COVID-19.

Despite the challenging environment, we continued to advance key growth strategies and other important operational improvement.

During the third quarter, the Delta variance spreads through many of our markets across the Sunbelt states.

As a result, we provided care for approximately 15000 and patient coveted mission or 13% of our total admission which was our highest quality talent today.

This compared to more than 3000 patient callback cases during the second quarter and 9500 during the first quarter.

And it is also worth noting that nonprofit healthcare demand was higher in the third quarter than in our prior quarters with elevated COVID-19 cases.

Since the onset of the pandemic the importance of our health care team and the critical role. They play in the communities. We serve has certainly been reinforced I am impressed with their professionalism and compassion and remain grateful for their commitment to providing safe high quality patient care.

Looking at the third quarter, we produced strong results despite the COVID-19 surge.

On a same store and year over year basis net revenue increased seven 1% same store admissions increased two 8% and adjusted admissions were $4 seven were up four 7%.

Surgeries increased one 5%, while ER visits were up 24, 2% as.

As a reminder, during the third quarter of 2020, we drove solid volume recovery as industry volumes for our returning and we were pleased with us year over year volume performance.

Looking at our third quarter volume compared to the pre pandemic third quarter of 2019 same store admissions decreased 3%, while surgeries declined 4%.

Our visits further improved and were up 1% versus 2019 due in large part to our freestanding eds expansion strategy as well as that level elevated levels of covet visits been testing.

Despite the COVID-19 surge in the third quarter being our largest to date non corporate demand was higher than the last significant surge in the first quarter of this year.

As a result, we delivered stronger volumes across all key metrics compared to the first quarter.

That said the burn care and related procedures have been impacted throughout the pandemic and we expect healthcare demand to return over the next several quarters.

Moving now to EBIT during the third quarter on a consolidated consolidated basis, adjusted EBITDA was $482 million.

Excluding pandemic relief fund adjusted EBIT was $463 million, which was up 7% year over year with an adjusted EBITDA margin of 14, 8%.

Our hospital leadership teams and providers have definitely manage the ebbs and flows utilizing best practices, leveraging organizational resources and operating with agility, all while prioritizing safety for their patients and care teams.

It continued to effectively manage their resources and control expenses.

Similar to prior waves of called it we experienced increased costs related to staffing pharmaceuticals, and other supplies such as PPE and Covid testing.

And while the entire country is ready for the impacts of COVID-19 to subside, we remain confident in our ability to manage the dual track operation strategy for as long as the pandemic continues.

These investments are working that greatly improved our competitive position and are creating opportunities for incremental market share gains into the future.

Now I would like to share with you some of our recent growth oriented investments that include the JV opportunities, we announced last quarter with partnerships across rehab long term acute care and behavioral health the opening of new afcs, and the Knoxville, Tennessee, and Tucson, Arizona markets.

The recent completion of an Ob and neonatal intensive care expansion at Grandview Medical Center in Birmingham, Alabama, where we have now added more than 70 beds over the past three years.

In November opening of a new hospital in downtown Fort Wayne as part of return Health network.

The upcoming opening of our 17th freestanding EDI near Bentonville, Arkansas, which is part of our narcolepsy, Arkansas network.

And a de Novo hospital campus to fourth in Tucson, Arizona, which is scheduled to open in early 2022.

We are also excited about the recently announced expansion of that this division's regional health care system in Naples, Florida.

Beyond these projects, we have a growing pipeline at both inpatient and outpatient investment opportunities, which we expect to further develop and strengthen our core markets even more.

We have been pleased with our progress this year and in our overall execution in the midst of a challenging operating environment.

Due to our strong performance, we are raising our adjusted EBITDA guidance again this quarter.

Looking forward, we remain extremely optimistic about our portfolio and markets as well as the opportunities ahead of us to drive long term incremental EBITDA and cash flow growth at this point I will turn the call over to Kevin for additional details on the quarter and to provide more thoughts on our future outlook Kevin.

Thank you, Tim and good morning, everyone.

As Tim highlighted it was another strong quarter for the company as we delivered solid financial performance and further advanced a number of our strategic initiatives.

Through the recent transformation, we've undertaken to reposition the company, we introduced strategies to drive net revenue growth and improved efficiency throughout the organization.

As well as to strengthen our balance sheet.

We completed our divestiture program, which allowed for debt Paydown and additional focus on our core markets, we made improvements to the capital structure, extending maturities and reducing annual cash interest.

And we've made operational improvements, which have improved our margins were.

We are pleased with all of this recent progress and excited about the opportunities in front of us.

Switching back to the third quarter performance.

Net operating revenues came in at $3 billion $115 million on a consolidated basis.

On a same store basis net revenue was up seven 1% from the prior year.

This was the net result of.

Of a four 7% increase in adjusted admissions and a two 3% increase in net revenue per adjusted admission.

Which faced a difficult comp from the prior year.

Excluding non patient revenue, which was lower year over year net patient revenue per adjusted admission was up 3% compared to the prior year.

Adjusted EBITDA was $482 million.

During the third quarter, we recorded approximately $19 million of pandemic relief funds with no relief funds recognized in the prior year period.

Excluding those pandemic relief fund adjusted EBITDA was $463 million.

With an adjusted EBITDA margin of 14, 8%.

In terms of expenses supply costs increased in the third quarter, a result of higher pharmaceutical and other costs associated with carrying for additional COVID-19 patients.

Contract Labor expenses increased in the third quarter similar to prior Covid ways during which Covid case counts were elevated.

As a reminder, our contract labor expense is recorded in the other operating expense line.

We expect this plan will drive incremental savings over the next several years.

Turning to cash flow.

Cash flows provided by operations were $400 million for the first nine months of 2021.

This compares to cash flows from operations of $2 1 billion during the first nine months of 2020.

The comparison versus the prior year as difficult as the $2 1 billion in cash flow from operations. During the first nine months of 2020 included $1 billion $159 million of accelerated Medicare payments received and $715 million of pandemic relief funds received.

Declining net revenue during the first three quarters of 2020 resulted in declining accounts receivable.

Which was therefore, a benefit to working capital cash flows last year.

Conversely, with strong net revenue growth in the current year.

We have a net working capital drag as accounts receivables have increased we.

We expect this net net working capital headwind to ease in future quarters.

Excluding repaid Medicare payments cash flows provided by operations were $667 million for the first nine months of 2021.

Moving to Capex for the first nine months of 2021, our Capex was $334 million compared.

Compared to $317 million in the prior period.

Our capex was up 5% in the first nine months of this year, despite operating fewer hospitals than a year ago.

Our core market to benefit from the rollout of our strategic initiatives.

Along with the high return capital to fuel additional growth.

And as Tim mentioned, we have a strong pipeline of opportunities that we expect will drive incremental EBITDA as well as increased cash flow performance going forward.

In terms of liquidity, we continue to have no outstanding borrowings and approximately $728 million of borrowing base capacity under the ABL with the ability for that to increase up to $1 billion.

Also at the end of the quarter, we had $1 3 billion of cash on the balance sheet.

As of September 32021, the company had $814 million of Medicare accelerated payments remaining to be repaid which were recorded as a current liability on the balance sheet.

Which it has now completed during the month of October move.

Moving forward the company will begin receiving the full amount of cash reimbursement on future Medicare claims.

Due to our strong performance during the quarter, we have raised our guidance the updated full year 2021 guidance.

For net revenues is now anticipated to be $12 billion and $150 million to $12 billion and $350 million.

And adjusted EBITDA is anticipated to be $1 $780 billion to $1 billion 820, as we've increased our full year range. As a reminder, our 2021 adjusted EBITDA guidance does not include any previously recorded pandemic relief fund or any pandemic relief funds that may be required.

Ordered in the future.

Cash flow from operations is anticipated to be $800 million to $900 million.

And increased to $75 million at the midpoint.

Cash flow from operations guidance excludes the repayment of Medicare accelerated payments that have occurred throughout the year.

Capex is now expected to be $450 million to $500 million and net income.

<unk> per share is anticipated to be $1 to $1 20.

Based on a weighted average diluted shares outstanding of 129% to 131 million shares.

Lastly at the beginning of this year, we introduced our medium term financial goals, which included achieving 15% plus adjusted EBITDA margins delivering positive free cash flow annually and reducing financial leverage below six times.

Looking at the past three quarters, we have made significant progress on these goals as we've expanded our EBITDA margin.

Given strong positive free cash flow year to date.

Further reduced our leverage which is five nine times as of September 30.

We look forward to delivering additional progress across all these metrics as we move forward.

Ross at this point I will return the call back to you.

Thank you Kevin and thank you Jay.

Jay at this point, we're ready to open up the call for questions.

We will limit everyone to one question. This morning, but as always you can reach us at 615 or six five to seven.

Hey, good morning, guys congrats on the good quarter.

Thank you.

Yes. So I guess my question is obviously everyone's worried about the cost side of things, whether it's labor and supplies and whatnot.

It's clear that you guys manage the cost side, well, even with increased utilization of temp labor. So as I look at things and the turnaround that you've done over the last few quarters.

In terms of realizing those benefits.

Sure. Thanks, Brian.

There's probably a number of things we can cover there. So let me start and I'll certainly, let Tim jump in on the expense side.

We've talked about are our margin improvement program.

First I would start by saying, we did see certainly some drag on labor costs, particularly contract labor.

But much of that we see has been directly related to the elevated COVID-19 costs.

Certainly as nurses had left and there's been a higher utilization.

Travel nurses as well as the rates that were paying us those nurses.

Had been directly related we saw that in earlier waves and that we see.

Some moderation of that as Covid cases go down so as we look forward.

And expect Covid cases to go down we certainly expect some moderation of those costs related to our margin improvement program, we have numerous initiatives across the organization.

Many of them are not patient facing.

Directly initiatives, but many in the supply chain area, where we have been negotiating contracts on a national basis.

For both supplies as well as purchase services.

<unk> advantage of our scale and leverage which has allowed us to reduce cost.

We have a number of initiatives in terms of how we are processing.

Certain types of claims.

And which has allowed us to just become more efficient.

In terms of some other initiatives, we have going on related to maybe more directly to labor.

We have certainly invested in many of our.

How we support our nurse staffing we have moved a lot of our recruitment into our centralized recruiting function, which we have a lot of experience with.

Physician recruiting function, which we centralized years ago, we're doing something similar with nursing.

And we believe that that's much more efficient, particularly in today's environment, where we can attract.

From the outside maybe the geographic region.

So those are the things that initially come to mind Tim.

Sure there are some things I missed and assure thanks, Brian for the question and I think I think Kevin and a nice job covering kind of the opex and the strategic margin improvement program as key drivers for margin going forward.

I'd like to talk about the top line as you know and are very focused on growth objectives.

First of all we certainly believe we're in a stronger portfolio of stronger markets as we outlined today on our prepared remarks, I'm really pleased with our investments taking brewed showing kind of the growth in the earnings gains that were putting up our year over year and even compared to 2019. So good organic growth in that portfolio is still.

Something we're investing in we are very thoughtful strategic planning processes, we've talked a lot about our transfer center, we really look forward to further optimizing that in the quarters and years to come we get such great insights into what's happening in our markets based upon our daily activities and the transfer center, which is teed this up nicely for where we should.

<unk> spending our capital Max for capacity expansion, adding new service lines recruiting to providers to further advance market share. The other avenue is related to some of our de Novo projects. We've covered with you our new hospital projects are growing freestanding <unk> portfolio. The joint ventures, we have.

Our investing in in terms of post acute care and behavioral health all of those things. We're confident we'll drive strong long term opportunities in the portfolio.

We've also talked about the importance of having a balanced growth philosophy, and we're investing in our inpatient side of the business and the ambulatory side.

I think we see that pulling through and as a matter of fact in the third quarter, we had 8% net revenue growth in both inpatient and outpatient sides of the business. Despite the COVID-19 surge. So the outpatient side of the business really is growing very very nicely. So I hope that's helpful and it speaks to our confidence in what we're doing to truly drive long term value here.

Thank you next question comes from the line of Frank Morgan of RBC Capital. Your line is open.

Good morning.

I was hoping you could maybe break out in that other <unk> how much of that actually is attributable to the to the agency labor usage, and then may be talk a little bit about how that was during the quarter at the end of the quarter, maybe where he is today.

Then it also just maybe some general commentary on the non Covid.

Nice volumes that you have maybe a little color specifically between in an outpatient how that ended the quarter and then where that is today. Thank you.

Sure. So we haven't specifically given.

The amount of what that contract labor.

It fluctuates.

Significantly quarter to quarter, because it kind of bounces around between the labor.

And contract labor.

Comparatively year over year dollar amount is almost flat.

All of that increase that we had in that line item related to labor, we were able to offset with other savings.

Various categories, whether its purchase services or other efficiencies that we gained.

Largely due to these.

These initiatives that we had them.

Put in place our operating initiatives.

Or are.

Our margin improvement program.

Yes, Frank this is Tim and in terms of our non COVID-19 volumes in the quarter as we pointed out had really strong staff across all of the key indicators improving upon our first quarter performance.

<unk> Big wave of Covid, and we saw that generally across the board, but one thing. We did see is some crowding out of some inpatient surgeries in the quarter as we made way for more inpatient Covid care. We also.

Deferred some elective orthopedic cases, which we expect to pick up in upcoming quarters.

As a result of just trying to preserve that capacity outpatient surgery was strong for the quarter, we had sequentially improved outpatient surgeries.

Throughout the year, beating both 2000 Twenty's compound 2019 as comps were really pleased with our investments and recruiting the right specialists to our markets and building on our primary care networks of care on making sure that were really driving that market share growth on both the inpatient and outpatient side of our markets.

Thank you next question comes from the line of Josh Raskin of Nephron Research. Your line is open.

Hi, This is actually Mark <unk> on for Josh Thanks for taking the question.

Just wondering if you've seen any demographic data points, suggesting that.

That volumes could be migrating out of cities and into more suburban markets like the ones you operate in and would also appreciate any thoughts just more generally on what youre seeing in terms of market share changes within your footprint.

Thank you Mark this is Tim I'll start off the answer to that question in terms of specific data I can't point you to one source, we do have plenty of anecdotal data and reading articles similar to I'm sure you are reading in terms of perhaps some urban flight into the suburban markets.

Even prior to that demographic shift we were pleased with the growth prospects in those markets and we believe any of that migration would only be a value add.

Yes, I'd just point out even going back to the 2020 census.

It's certainly pointed to.

Dates that were in like Arizona, Texas.

Alabama, Florida are larger states have certainly been picking up population.

From other parts of the country.

More recently.

Even as Tim mentioned anecdotally, but if you look at a lot of what's being reported around real estate.

You can see that the markets that we're in seem to be certainly growing and we know that there is more of a both a demographic move towards some of the.

Sunbelt States.

Some of the lower tax jurisdictions.

Largely due for economic growth as well.

Thank you next question comes from the line of Andrew Mok of UBS. Your line is open.

Good morning, Tim.

Can you speak to some of the volume trends into October.

Just some context for how non Covid utilization has rebounded following the latest decline in Covid cases.

Hi, Andrew This is Tim I'll start us off here in terms of our Covid I guess I'll say trajectory, we did see admissions peak and the midpoint of the quarter near the end of August actually the patient days really did not start tapering off until the latter part of September we.

We still are experiencing elevated levels of called it beyond our I guess I'll say, our low points in previous searches. So we're still seeing pretty I guess elevated levels of COVID-19 volume in our hospitals as I said in my remarks. The care teams have just done a phenomenal job of managing that on a day to day basis, I'll say multi tier.

On a day basis, making sure that we're taking great care of those patients, but in terms of the rebound of the non COVID-19 care as we pointed out we really held onto a good portion of that business relatively well throughout the quarter I believe the consumer and the providers comfort level with their safety in our care setting.

<unk> with vaccination does lead to less of the deferral of elective care that we have seen in previous surges, but with that being said again the deferred care that we're looking out for are those cases that we've delayed just to preserve our our inpatient capacity for Covid cases, our teams work regularly with the surgeons are.

Outreach program directors to make sure that we're bringing those cases back in as soon as the patients are ready to do so and so from that vantage point, we do feel confident that that business will work its way back into our systems in this quarter into the first half of next year.

Thank you and our last question comes from the line of Kevin Fischbeck.

Bank of America. Your line is open.

Okay, great. Thanks.

Wanted to go to the margin.

Discussion I think you guys.

It showed some pretty good improvement on margins recently and a lot of moving pieces in the margin number this year between sequestration and COVID-19 costs.

Everything else contract labor et cetera.

Guys. What do you think the core margin is I guess, if we were to try to normalize everything we try to think about where you guys are on a core basis relative to that margin target that you've outlined.

Is the actual reported number a pretty good estimate for where you are actually operating today or are there any kind of major adjustments, we should be making and when we think about what.

Where the normalized margin is today.

Thanks, Kevin.

Sure.

I would say that we believe that where we're operating the margin.

Reporting today is as good.

Barometer of where we are from an operation standpoint, we put out at the beginning of the year kind of our medium term targets.

Be above 15% margin.

And that kind of two to four year timeframe I would say that the way we're looking at it we're ahead of schedule.

We've made some great progress.

On our way there with certainly.

It has accelerated a number of our initiatives.

And so we do believe we are ahead of schedule of getting to where we think we will we will we want to be and we will get.

We're certainly as we sit here today believe that.

Over the next few quarters will continue to make progress continue to grow margins.

As you can see from our guidance.

We expect to be in the high 14% for the full year.

Which would indicate or imply.

Fourth quarter at the midpoint slightly above 15%.

And I would say that our expectation is we will continue to grow into 2022.

Thank you we will now turn the call over to Mr. <unk> for closing remarks.

Thanks, Jay and thanks, everyone for spending time with us today.

Continued focus on successful execution.

We are pleased with our strong year to date performance and we look forward to updating you on the rest of the year in a few months. Once again, if you have any questions you can always reach us at 6154657.

Have a great day.

<unk>.

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

Have a great day.

Q3 2021 Community Health Systems Inc Earnings Call

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