Q2 2022 Community Health Systems Inc Earnings Call

July 28, 2022

Good day and thank you for standing by welcome to community Health systems second quarter 2022 earnings call. Please be advised that tastes conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Ross Comeaux, Vice President of Investor Relations.

Thank you, Matt Good morning, and welcome to community Health Systems Second quarter 2022 Conference call. Joining me on today's call are Tim Henson Chief Executive Officer.

Kevin Hammons, President and Chief Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical Officer.

Before I turn the call over to Tim I'd like to remind everyone that this conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts.

These forward looking statements are subject to a number of known and unknown risks, which are described in headings such as risk factors in our annual report on Form 10-K, and other reports filed with or furnished to the securities and Exchange Commission as a consequence actual results may differ significantly from those expressed in any forward looking statements in.

His 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.

Also all calculations, we will discuss also exclude loss or gain from early extinguishment of debt and impairment expense as well as gains or losses on the sale of businesses.

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

The second quarter was challenging in many regards as we navigated through a particularly complex operating environment, but simply stated we did not achieve the results we had expected.

During this call we will point to some of the issues affecting our results along with actions that are underway to improve performance.

We'll also discuss why we remain confident that our operational priorities and strategic growth initiative remains the right areas of intense focus to deliver the desired results.

Several factors came into play in Q2, resulting in our adjusted EBITDA decline.

Most pronounced being lower than forecasted net revenue continued pressure on the <unk> line and contract labor expenses, which improved sequentially, but remained well over prior year and lastly, a disproportionate negative impact on the operating results in two of our markets, which I will quantify later.

In terms of net revenue the decline was due to lower than forecasted volumes in a post COVID-19 search quarter based upon past history and lower net revenue per adjusted admission than anticipated due to the continued site of care shifts payor mix and generally lower acuity of our medical admissions.

Non patient revenues also decreased year over year.

Unfortunately, the lower net revenue had a high flow through to the EBIT line in the quarter and Conversely, we expect net revenue to improve in the future and we expect this incremental net revenue to drive a high flow through back to EBITDA.

Switching back to the quarter on a year over year basis same store admissions were down three 5%.

The main contributor to this decline was a greater migration of higher acuity short stay surgery cases that were historically inpatient status being performed as outpatient status as evidenced by a much smaller decline in adjusted admissions, which were down 50 basis points and in the same state.

Same store surgery decline of 30 basis points.

We've made targeted investments to increase surgical service lines capacity and volumes and we are pleased to see these strategies producing generate positive results are.

Our surgical volumes are 1% higher than 2019, while surgical case mix index increased 5% versus the pre COVID-19 baseline.

In terms of the pandemic, we provided care for approximately 2300, Covid admissions are 2% of total admissions compared to 3% of admissions during the prior year quarter and 12% last quarter on average public cases during the second quarter were lower acuity and less resource intensive on a year over year basis.

<unk> and sequentially.

Shifting to labor, we remained focused on our plan to retain our workforce, Richard new clinical employees and reduced contract labor.

Number of nursing hires increased by more than 30% compared to the first quarter and our turnover rate declined 20%. These are clearly favorable trends as we've worked to reduce contract labor and create sufficient permanent staffing for key services and market share gains as healthcare demand strengthens contra.

Contract Labor expense declined each month of the second quarter, and we finished June with 30% fewer contract labor FTE compared to the end of March still contract labor remains at very elevated levels versus prior year prior year without the higher acuity inpatient revenues previously seen in the Covid pandemic, which partially offset.

EBIT impact.

I already rates for contract labor are going down and we continue to aggressively execute our recruitment and retention initiatives to build and strengthen our stronger core workforce.

Through these efforts, we expect sequential quarterly improvement as the year goes on.

Earlier, I mentioned that negative operating operating results in two market had an outsized impact on the overall company performance in the second quarter.

First let me say that the vast majority of our 48 markets have adapted well given the challenging macro environment.

However, on a year over year basis. These two markets, which have historically had lower than company average EBIT margin accounted for 20% of the total company EBIT declined during the second quarter.

In a more normal operating environment the impact of underperforming markets in any given quarter is typically absorbed by stronger growth in performance in other markets.

This year, even in higher performing growth markets elevated labor costs have resulted in lower net revenue conversion rate that we've historically delivered.

It is important to read or reiterate that the majority of our markets are making progress and continue to appropriately adjust their operations and execute strategies designed to achieve long term volume and earnings growth.

Now I'd like to cover four areas of immediate and ongoing focus for the company opportunistic growth rebuilding our workforce incremental expense reduction initiatives and leveraging our CHF centralized resources.

First opportunistic growth.

Our management team has undertaken a strategic opportunities assessment to accelerate net revenue and EBIT growth across several key markets, which includes strengthening physician alignment service line investments payer strategies incremental access point expansion and evaluating potential strategic partnerships.

We are pursuing newly identified opportunities aggressively shifting labor capital and other resources, where most advantageous especially to markets with the highest growth potential.

We are optimistic this work can accelerate more growth and earnings improvement.

And we continue to invest in additional development opportunities on the inpatient side during the quarter, We opened northwest Medical Center Houghton, Our fourth hospital in Tucson, Arizona, We broke ground on a $66 million Tower addition, that will add 56 beds and more ER capacity, that's another north of well.

Related campus, and our Knoxville, Tennessee system.

We announced a $30 million investment at our hospital in Warsaw, Indiana as part of the Lutheran Health Network and later this year.

Good morning.

As part of multiple expansion projects and our Naples, Florida market.

On the ambulatory side of the business, we continue to expand access points in our markets and we're growing our ambulatory surgery center footprint as more surgical care shifts to the outpatient setting.

Newly new Afcs opened in Knoxville in Cleveland, Tennessee during the second quarter.

We now have 46 asce's across our portfolio with plant additions before the end of the year and a full pipeline in place for 2023.

Second rebuilding our workforce as everyone knows the Covid pandemic created seismic shifts across the industry affecting staff recruitment compensation and retention.

But as I mentioned earlier, we are now seeing sequential improvement that we expect to continue including progress in new higher rates and retention rates.

Our centralized nurse recruitment program supports all of our markets and it's achieving solid results and we have enhanced our benefits program to provide more tuition reimbursement and loan repayment option, which has received positive feedback from employees.

Our work to provide nursing education opportunities and to develop the next generation of nurses continues through our partnership with Jersey College.

Campuses are fully operational another will open in the third quarter and six more by the end of 2023 across these programs, we expect to graduate 1000, new nurses per year.

Third incremental expense reduction initiatives.

During the second quarter non labor operating expenses were flat to prior year, our biggest opportunity and focus is further contract labor reduction in response to the current operating environment in select markets. We are consolidating some service locations and intentionally reducing capacity and staffing of course.

We will do this where it makes sense and in ways that balanced the labor supply challenges with our focus on growth and expanding market presence in the long term.

Fourth leveraging CHS centralized resources, our companywide resource programs are driving improved operational performance. For example, our transfer center achieved a 5% increase in inbound transfers transfers from non CH facilities versus prior year quarter and delivered solid gains.

Sequentially as well.

Centralized scheduling initiatives physician and nurse recruitment team.

Realization review and capacity optimization resources accountable care organizations and other centralized programs and expertise continue to support the advancement of operational goals and help enhanced competitive position in our markets.

I will also note that our managed care contracting team is targeting opportunities to improve rates on agreements coming up for renewal as well as proactively analyzing existing contracts and we see operate opportunity here.

In closing, let me reiterate that we are not satisfied with our overall results in the second quarter. However, we remain steadfast in our commitment to pursue every option and opportunity to improve.

To that end I want to thank our local health system and company leadership team, who remain optimistic about our future and who share our commitment to achieve the best results possible.

With that Kevin Let me turn the call over to you.

Thank you, Tim and good morning, everyone.

As Tim mentioned, our second quarter results came in well below our expectations as lower than anticipated volume and net revenue per adjusted admission impacted the topline.

That's the quarter progressed, the return of non Covid related patient volumes was lower than we anticipated.

Net revenue consisting of investment losses, and the runoff of transition service revenue from prior divestitures.

Further reduced our EBITDA and.

In contract Labor and wage inflation also impacted our financial performance.

Due to the impact of these factors in the current quarter, along with our updated thoughts for the balance of the year, which includes a more gradual return of deferred care and higher than anticipated inflationary pressures. We have revised our full year 2022 guidance, which I will cover later on the call.

Moving to the second quarter results.

Net operating revenues came in at $2 billion $934 million on a consolidated basis.

On a same store basis net revenue was down two 6% compared to the second quarter of 2021.

This was the net result of a 0.5% decrease in adjusted admissions and a two 1% decrease in net revenue per adjusted admission, which was negatively impacted by lower non patient revenue.

Adjusted EBITDA was $253 million.

During the second quarter, we recorded $8 million of pandemic relief funds with $1 million recognized in the prior year period.

Excluding pandemic relief fund adjusted EBITDA was $245 million with an adjusted EBITDA margin of eight 4%.

Volume improved sequentially.

But generally remains depressed as a result of the residual effects of the pandemic, while higher operating costs also due to the pandemic remain inflated.

Switching now to expenses.

On the labor expense side labor cost and contract labor expense remained elevated on a year over year basis.

We experienced an approximately eight 5% increase in our average hourly rate for employees on a year over year basis. However sequentially. We saw average hourly rates declined 40 basis points and expect labor inflation to remain relatively flat in the back half of the year.

Our contract Labor expense also increased significantly over the prior year during the second quarter of 2022 contract labor was approximately $150 million compared to $50 million in the prior year quarter.

Current quarter, However showed sequential improvement down from $190 million in the first quarter of 2020.

Moderation of contract labor is slower than we originally expected and we now anticipate future progress to continue.

It is also slower than we previously expected.

We continue to effectively manage our non labor related expenses. This would include supply costs as well as vendor related expenses, including insurance utilities rent and a number of other fixed cost.

Due to benefits from our margin improvement program efforts and focused expense management, we upheld absolute dollars relatively consistent over the past six quarters.

And we achieved these results, while incurring ramp up costs and opening three new hospitals.

With new access points.

Increasing use of software as a service all during a time of record high inflation.

Turning now to cash flows cash flows provided by operations were $154 million in the first six months of 2002 down from $280 million in the prior period.

Excluding the repaid Medicare accelerated payments that were made in the first six months of 'twenty. One cash flows provided by operations were $414 million for the first six months of 2021.

Lower EBITDA higher contract labor costs, and the timing of interest payments contributed to the lower cash flows in the first half of the year.

Moving to Capex for the first six months of 'twenty, two our capex was $191 million compared to $212 million in 2021.

Due to the lower performance in the second quarter, the company's net debt to EBITDA increased to seven one times.

Interrupted by the current operating environment, we remain focused on our longer term goals of lowering our leverage and increasing our free cash flow.

In terms of liquidity, we have no outstanding borrowings under the ABL with $894 million of borrowing base capacity available to us.

Also at the end of the first quarter, we had $346 million of cash on the balance sheet.

As a reminder, we have no debt maturities until 2026.

While the company's formalized divestiture program was completed in 2020, we continue to receive interest around other potential divestitures as.

As we received this interest we're analyzing the long term strategic fit the specific assets and we will continue to analyze the impact potential divestitures would have on our future financial leverage and free cash flow generation.

Now I'll walk you through the updated full year 2022 guidance.

Net operating revenues are anticipated to be 12, two to $12 5 billion.

Due to the lower net revenue expectation adjusted EBITDA is now expected to be one three to $1 $4 billion.

Net loss per share is anticipated to be a loss of $2 <unk> to a loss of $1 65.

Based on weighted average diluted shares outstanding of 128 to 129 million shares.

Cash flow from operations is now anticipated to be $500 million to $600 million.

Capex has been reduced to $400 million to $450 million to adjust for delays caused by disruptions in the supply chain.

And to align growth capital with the current labor market.

Cash interest is expected to be $820 million to $840 million.

As we think about the remainder of the year, we expect adjusted EBITDA to improve sequentially with the fourth quarter of 2022 still being our highest adjusted EBITDA quarter of the year.

As Tim highlighted we have a number of initiatives that are performing quite well.

As we work to address the challenges in this current environment, we remain committed to executing our strategic initiatives, which we believe are positioning the company for future growth and success.

And which we believe will continue to benefit all of our stakeholders.

We do not view 2022 is the new baseline rather it is a period of disruption and unusual events.

Looking out longer term, we believe the stronger return of deferred care the execution of our growth and strategic initiatives and successful expense management and continued focus on cash flow and capital structure management.

Will allow the company to achieve its medium term financial goals, which includes targets for 16% plus EBITDA margin positive annual free cash flow generation and reducing our leverage below five times.

For us at this point I'll turn the call back to you.

Thank you Kevin and thank you Tim at this point Matt.

Due to open up the call for questions. We will limit everyone to one question. This morning, but as always you can reach you said six 5% for 657.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time your question Thats been addressed and we would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our way.

Okay.

Our first question will come from Jason <unk> with Citi. Please go ahead.

Great. Thanks.

Thanks for taking my question. So there were two markets out of the 48 total that had a disproportionate impact on resolve so I guess first can you give us a sense of what the typical revenue and EBIT contribution of those two markets are as a percent of the total company operations. Just so we have an idea and then second does the second quarter's performance for those two lagging markets change.

How youre thinking about both the underlying demand and your competitive positioning within those markets specifically thanks.

Thanks, Jason for the question let.

Let me start at the end of that and I don't think that the.

Performance in those two markets change, how we think about the broader portfolio. We believe the dynamics were unique to those markets.

And as we plan accordingly.

We are planning for those.

Dynamics kind of easily.

In terms of.

Their impact on that.

Broader company their decline in net revenue.

EBITDA represented about 20% of the decline in EBITDA that we had for the quarter.

And neither neither of those markets I want to make sure I point out either of those markets are in our.

Our largest five states.

Yes, Jason this is Tim and I'll add onto kevins comments regarding the positioning of these markets for the long term.

Good.

Certainly we see them as outliers that performance of these markets as outliers, but a big portion of that was on the FW being contract labor side of the equation, where the market dynamics really just skyrocketed at levels that do not typically happen in a normal operating environment.

Some of the markets, where we're being very focused on consolidating services.

Across multiple campuses to take out some of the costs are the variable labor costs in particular, which we believe was just a large drag on the margin.

Also in terms of that monitoring which services to perhaps exit permanently but our goal is to position all of our markets and in the short term in particular, I am very well to do a better job of managing the operating expenses.

Just to make sure that matches the revenues that we're generating.

Our next question will come from a J rice with credit Suisse. Please go ahead.

Hi, everybody, it's Nick <unk> on for AJ today, and I appreciate you taking the question.

With volumes down so much can you kind of give us an idea of how on both inpatient and outpatient side the volumes exited the quarter.

And can you also kind of give us some idea of how youre thinking about how they trended in the back half. Thanks.

Sure.

We saw as we came out of the first quarter.

In March we saw.

Big uptick in volumes as we started the recovery from the surge of Covid that we saw early in the first quarter that was consistent with what we should see from previous surges and we saw that continue into April .

But it was really in the back half of the quarter the softness.

Dan.

Return of non Covid business.

Fell off.

<unk> continues as we had.

Seen with previous ways.

FERC business continued to come in so I would say that the back half of the quarter was softer.

In terms of that.

After the quarter I don't Tim do you want to add yes, great on Nick I'll add on to that I would describe the volumes throughout the quarter and our experience to be relatively choppy.

It kind of fits and starts if you will.

As I said earlier, a wide a wide array of performance across various geographies, which is not something we've typically seen and we had certain markets that had really grown quite nicely and consistently built back some business, but as I noted in my comments some at a lower net revenue conversion rate, which is which clearly impacted results and maybe more.

Difficult to step over the underperformance of those two markets, we called out today.

I would say we've also experienced some impact.

Due to vacation schedules due to some quarantine due to COVID-19.

Yes.

So Barry <unk> geography, and it's hard to quantify what why and where but we're working very very closely to make sure. We understand those trends on a daily basis, and as I said adjust our operating expenses accordingly, and in a real time environment as well.

Our next question will come from Ben Hendrix with RBC. Please go ahead.

Thank you very much guys just a couple of staffing stats here, where does your agency labor stand currently as a percent of total nursing hours and how has that progressed year over year and sequentially.

And then among the employed staff side, what's your turnover rate now versus pre COVID-19. Thank you.

Sure I'll start that off here, so our contract labor for the quarter represented about 10% of our total labor costs.

That compares to 13% in the first quarter. So we did bring it down.

Pre pandemic contract labor represented about 2% of our labor costs. So we're still at very elevated.

Elevated.

Percentage of our total cost of contract labor.

Yes. This is Tim I'll add onto that in terms of turnover as I mentioned, we are showing a sequential improvement in our retention rates.

And in a higher rate and we measure everything here daily by our end game. So that we're cognizant of the the two distinct variables in that equation and so we're very pleased with the progress we're making honestly with.

With the Covid impact of staff for <unk> with the hiring of the orientations.

We bring when we bring herself oriented it takes anywhere from four to 12 weeks, depending on the nurse's experience, we have likely not seen the full benefit of the hiring that I just referenced in the second quarter. It will come through in the third quarter as those new caregivers kickoff permanent assignments and we're able to really it's more of a contract les.

Ever.

Terms of the retention rates of the nursing turnover rate still elevated to pre pandemic levels, but we cut it about a half from the peak at the beginning or.

At the end of last year, when we saw more staff, leading for a travel assignment and frankly for burnout purposes, I mentioned on the last call that we were really focused on repatriating nurses, who love.

In 2021, and frankly throughout 2022.

We've had some success with that I don't think we're done with that work yet I think whats the children get back in school.

We may be able to bring some of those people back into the workforce again, so we're really focused on keeping those relationships tight with our care team members, who may have left the organization previously in the pandemic.

Our next question will come from Brian <unk> with Jefferies. Please go ahead.

Hi, Good morning. This is probably a philips on for Brian . So my question today, it's actually about leverage can you provide some detail on the status of your covenants, maybe discuss your outlook on cash generation in the near term and altogether, how does that factor into your approach to deleveraging.

<unk>.

Sure. So we are covenant light so we do not have any covenants.

To speak of.

And no concerns around that at this point, we do expect.

To generate positive free cash flow in the back half of the year and for the full year, we expect to be able to be back to free cash flow neutral.

So again, that's a much better position than we had been.

Or.

Years, historically, we've made a lot of progress in that area, we think.

We can continue to grow that free cash flow.

Into future periods.

It certainly does that give us some comfort along with the recovery and execution of a number of the growth initiatives that we've been talking about this morning.

And that will allow us to get back to our medium term target of being below five times levered.

Here within within four years.

<unk> kind of reiterated those medium term targets and still feel very comfortable that we can hit those.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Alright, great. Thanks.

Obviously, good to see that you're still looking at that.

Medium term targets on margin, but obviously given the magnitude of the decline in margin.

This year would love to get a little bit of color. If you could kind of help bridge us from here to there.

The decline was very rapid would you expect a rapid increase should we be expecting a meaningful improvement on that trajectory in the next year or two and then more modest or is it kind of.

Slow steady rebuild over the next four years.

It's just interesting to me I guess, if you go within that answer kind of comment on.

The improvement in labor that youre expecting against the improvement in volume that Youre expecting a team can be difficult to show improvement on both at the same time. If you have it there is a push and pull there so.

Any color on that thanks.

So as I mentioned this year was somewhat unique and we don't believe that 2022.

Baseline.

The decline in revenue.

Had a very high flow through to EBITDA and likewise, we expected FX revenue returns, it's going to have a very high flow through.

EBITDA in the plus side.

We think that there is.

A fair amount of deferred business still out there.

Consider where we were pre pandemic in 2019, we've made a lot of progress we've added a number of service lines and access points, we've taken market share in a number of our markets.

And we believe that asset to FERC care comes back into the system.

Large in our markets, we are going to capture that and we will get.

Again, a high flow through into EBITDA, we're staffing and want to be prepared.

To accept that.

Volume when it returns.

And we've made some investments in a number of these growth areas and we'll continue to do so.

Albeit we may take some targeted looks.

It looks at certain service lines in some markets.

Make some other decisions generally speaking.

We are being we're preparing ourselves to do that on the expense side, a number of things contract labor, we believe will moderate.

Traveling nurses will come back into it.

It's more of an employee's arrangement that will continue to take pressure off contract labor.

And we are continuing to see improvement in that albeit it.

Slower pace than we had expected.

And there are some macroeconomic.

Factors probably in that.

Causing that slowdown, but it is still trending in the right direction and then on other expenses, which is.

A percent maybe as a percent of net revenues not the right measure, but if you look at our other operating expenses per adjusted admission.

Based on our volume I think maybe a better measurement fair way to look at it we have manage those expenses quite well.

We've managed to keep our non labor expenses flat over a number of quarters. Despite a number of conditions as I mentioned we.

I think theres more opportunity and runway for us to continue to manage those expenses as well and step over some continued inflation. So we think we can get leverage on our margin as again as revenues return. We think we can still get leverage on our expense line and continue to grow margins.

Our next question will come from Josh Raskin with Nephron Research. Please go ahead.

Thanks, Hey, good morning, I was wondering if you could give us a little bit more color on the monthly progression of EBITDA through the quarter not necessarily monthly EBITDA numbers, but.

Sort of Directionally, how that was improving and then with June puts you on a trajectory to attain the second half guidance or are you still assuming some meaningful improvement for there and then just lastly.

Back on the intermediate term margins, where do you need to get occupancy too.

The water to attain those margins and I would just look at occupancy down almost 600 basis points sequentially in the quarter and how much that has to come back in order to achieve.

Margins given your fixed cost leverage.

Sure Let me just let me start off.

No.

EBITDA for the second quarter kind of throughout the quarter was a little bit choppy.

And up and down kind of throughout the quarter, we do feel good about where we are exiting.

The quarter and are up in.

Our opportunity in front of us in Q3, and Q4 to achieve these results now we did bring the guidance down from our previous expectations.

Largely due to.

Some uncertainty around what the economic impacts may have on patient behavior.

Which.

We don't have clear insight into the same where we were in light of where we did at Texas <unk>.

And knowing that.

For instance, we had a 75 basis point rate and interest rates yesterday.

The announcement of <unk>.

Second quarter GDP decline today, we don't know what the broader impacts will be on patient behavior.

And.

Recessionary period, probably for the first time when.

No.

Patients have higher Copays and deductibles.

<unk> said we.

Think our initiatives and we're positioned well, but some of this there will be coming back ultimately it will come back and we're going to be positioned to capture.

Hi, Josh This is Tim I'll answer the occupancy question or at least to touch on the occupancy question a couple of points on this one.

Obviously, we're always looking to better utilize our fixed capacity our fixed operations.

With every incremental K store volume that comes in we do a better job of covering that.

Fixed does that fixed cost I do want to point out that throughout the quarter bear variable labor spend variable labor staffing was very well managed but I think we've found out on this new higher cost structure on that variable labor.

The negative impact on flow through of net revenue conversion to EBITDA, that's where it really hampered our ability to drive through the earnings in the quarter, but in terms of occupancy rates. The reason, we have a difficult time, just saying we want to be at 65% by this period, we have some markets that are at a 100% and we're adding more beds.

Mentioned, the Naples market will be opening up over 100 beds over the next couple of quarters out of that Mark because they run at high occupancy rate and we have other markets that just have larger physical footprint, where it dilutes. The overall occupancy performance in our strongest market, but what I would also share with you.

Even though occupancy percentages publicly reported it's a little bit more difficult to assess the full use of our fixed capacity with such site of care shifts.

As we mentioned we had a large movement of inpatient surgery.

Outpatient classification in the quarter, that's a continuing trend.

Something thats unique to us, but those patients biomarkers still occupying our fixed inpatient beds.

It is not captured in that occupancy calculation, so just to clarify that.

In terms of that site of care movement those types of things, we're plenty happy to have that in an ASC setting, which we are expanding rapidly as well.

The vast majority of our most competitive markets do have an ambulatory surgery asset located within that so we certainly are positioned well in that regard, but we also have no problems with that care, taking place within our hospital settings to help us drive that better fixed cost leverage throughout throughout the margin profile for that market.

Our next question will come from Stephen Baxter with Wells Fargo. Please go ahead.

Yeah, Hi, Thanks, I wanted to ask about the contract labor outlook I appreciate the comments.

Maybe declining a little bit more slowly than you would have hoped for.

Just trying to understand how that fits into the context of maybe some slower return of demand here I would have thought if that were the case, maybe the contract labor what kind of be the first thing to go to match up with that lower revenue.

And then just with your hiring up so much I was little bit surprised to hear you say I think all of these are going to you said the hourly rate wage decreased a little bit from first quarter to second quarter.

Should we be thinking about that in his hiring picks up.

You may be thinking about maybe some sequential increases to those numbers. Thank you.

Sure on the contract labor.

We were at $190 million in the first quarter of contract labor $150 million in.

In the second quarter, we had previously indicated we expected to exit the year.

Approximately $70 million.

For the fourth quarter I would say our updated guidance considers us now exiting the year closer to $100 million in the fourth.

Fourth quarter of contract labor.

And so sequentially kind of.

Lowering from where we are.

Now to get into that $100 million in the fourth quarter.

In terms of our expectation on the labor cost.

Hit initially.

Projected in our labor inflation to be about 4% for the year and I think we're close to being on track for that we've seen about a 5% growth.

Okay.

This last quarter similar 78% in the first quarter, but.

But we've anniversary your belief, we're going to anniversary most of those increases.

That were put in place in the third and fourth quarter of last year, which is why we're saying sequentially. No further growth and we think that will continue on in the back half of the year and so we should we're not expecting much labor sequential labor inflation in the back half of the year.

And then for the year those will average out to about a 4%.

Our next question will come from Andrew Mok with UBS. Please go ahead.

Hi, This is robin on for Andrew average length of stay was down 10% sequentially can you help us understand the drivers of that specifically how did that trend between COVID-19 and non COVID-19 volumes. Thanks.

Sure I'll kick that one off Robyn thanks.

In terms of length of stay improvement we've mentioned previously.

Near quarter end at a few investor conferences are focused on improving our capacity optimization.

Stood up the centralized utilization review program standard case management protocols have been rolling out throughout the first half of the year. So I believe we're getting a really solid traction on those initiatives.

As you pointed out it frees up certainly some critical capacity to help us take out some of those variable expenses on staffing if we're more efficient with how we're operating on the length of stay in terms of the breakdown between.

Covid and non Covid, we obviously saw a nice decline in the cobalt length of stay because the acuity was so much lower for the most recent admissions versus what we saw previously fewer critical care fewer vented patient what have you, but we saw relatively the same improvement across both corporate and non COVID-19 care.

We saw some easing of our placement.

Patients into post acute settings that was upon us in the first quarter. So I think that really helps us again drive better placement, but even not discharged to home every indicator. We look at we by and large softened some good progress because of our focused efforts and initiatives.

We will now turn the conference over to Mr. Heng Chen for any closing comments.

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

Second quarter was challenging we remain focused on the opportunities we have across our portfolio to improve results and to achieve long term stability and growth that benefit all of our stakeholders I would like to once again, thank all of our caregivers and leadership team for their ongoing commitment to help people get well and live healthier and to ensuring.

We continue to provide high quality healthcare services and the markets we serve.

We look forward to updating you on our progress as we move forward and to continue to work diligently to achieve our results as always if you have additional questions you can reach us at 605 or 657.

Thank you and have a great day.

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

[music].

Good day and thank you for standing by welcome to community Health systems second quarter 2022 earnings call.

Please be advised that tastes conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Mr. Ross Comeaux, Vice President of Investor Relations.

Thank you, Matt Good morning, and welcome to community Health systems second quarter 2022 conference call.

Joining me on today's call are Tim Henschen, Chief Executive Officer.

Kevin Hammons, President and Chief Financial Officer, and Dr. Lynn Simon President of clinical operations and Chief Medical Officer.

As discussion, we do not intend to update any of these forward looking statements.

Also all calculations, we will discuss also exclude loss or gain from early extinguishment of debt and impairment expense as well as gains or losses on the sale of businesses.

I'd like to now turn the call over to Tim mentioned, Chief Executive Officer, Great. Thank you Ross Good morning, everyone and welcome to our second quarter Conference call.

The second quarter was challenging in many regards as we navigated through a particularly complex operating environment. That's simply stated we did not achieve the results we had expected.

During this call we will point to some of the issues affecting our results along with actions that are underway to improve performance.

We'll also discuss why we remain confident that our operational priorities and strategic growth initiatives remain the right areas of intense focus to deliver the desired results.

Several factors came into play in Q2, resulting in our adjusted EBITDA decline.

In terms of net revenue the decline was due to lower than forecasted volumes in a post COVID-19 search quarter based upon past history.

And lower net revenue per adjusted admission than anticipated due to the continued site of care shifts payor mix and generate lower acuity of our medical admissions.

Non patient revenues also decreased year over year.

Switching back to the quarter on a year over year basis same store admissions were down three 5% in.

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We've made targeted investments to increase surgical service line capacity and volumes and we are pleased to see these strategies producing generate positive results are.

Our surgical volumes are 1% higher than 2019, while surgical case mix index increased 5% versus the pre COVID-19 baseline.

<unk> and sequentially.

Shifting to labor, we remained focused on our plan to retain our workforce recruit new clinical employees and reduced contract labor.

EBIT impact.

I already rates for contract labor are going down and we continue to aggressively execute our recruitment and retention initiatives to build and strengthen our stronger core workforce.

Through these efforts, we expect sequential quarterly improvement as the year goes on.

Earlier, I mentioned that negative operating operating results in two market had an outsized impact on the overall company performance in the second quarter.

First let me say that the vast majority of our 48 markets have adapted well given the challenging macro environment.

However, on a year over year basis. These two markets, which have historically had lower than company average EBITDA margins accounted for 20% of the total company EBIT declined during the second quarter.

In a more normal operating environment the impact of underperforming markets in any given quarter is typically absorbed by stronger growth in performance in other markets.

This year, even in higher performing growth market elevated labor costs have resulted in lower net revenue conversion rate that we've historically delivered.

It is important to read or reiterate that the majority of our markets are making progress and continue to appropriately adjust their operation and execute strategies designed to achieve long term volume and earnings growth.

First opportunistic growth.

We are pursuing newly identified opportunities aggressively shifting labor capital and other resources, where are most advantageous, especially to markets with the highest growth potential.

We're optimistic this work can accelerate more growth and earnings improvement.

Related campus, and our Knoxville, Tennessee system.

We announced a $30 million investment at our hospital in Warsaw, Indiana as part of the Lutheran Health Network and later this year, we will begin to open even more inpatient bed is part of multiple expansion projects and our Naples, Florida market.

On the inventory side of the business, we continue to expand access points in our markets and we are growing our ambulatory surgery center footprint as more surgical care shifts to the outpatient setting.

<unk>, New <unk> opened in Knoxville in Cleveland, Tennessee during the second quarter.

We now have $46 <unk> across our portfolio with plant additions before the end of the year and a full pipeline in place for 2023.

Second rebuilding our workforce as everyone knows the Covid pandemic created seismic shifts across the industry affecting staff recruitment compensation and retention.

But as I mentioned earlier, we are now seeing sequential improvement that we expect to continue including progress in new higher rates and retention rates.

Our centralized nurse recruitment program supports all of our markets and is achieving solid results and we have enhanced our benefits program to provide more tuition reimbursement and loan repayment option, which has received positive feedback from employees.

Our work to provide nursing education opportunities and to develop the next generation of nurses continues through our partnership with Jersey College four campuses are fully operational another will open in the third quarter and six more by the end of 2023 across these programs, we expect to graduate one new nurses per year.

Third incremental expense reduction initiatives.

During the second quarter non labor operating expenses were flat to prior year, our biggest opportunity and focus is further contract labor reduction in response to the current operating environment and select markets. We're consolidating some service locations and intentionally reducing capacity and staffing of course.

We will do this where it makes sense and in ways that balanced the labor supply challenges with our focus on growth and expanding market presence in the long term.

Fourth leveraging CHS centralized resources.

Our companywide resource programs are driving improved operational performance for example, our transfer center achieved a 5% increase in inbound transfers transfers from non stage at facilities versus prior year quarter and delivered solid gains sequentially as well.

Centralized scheduling initiatives physician and nurse recruitment team.

Utilization review and capacity optimization resources accountable care organizations and other centralized programs and expertise continue to support the advancement of operational goals and help enhanced competitive position in our markets.

In closing, let me reiterate that we are not satisfied with our overall results in the second quarter.

However, we remain steadfast in our commitment to pursue every option and opportunity to improve and to that end I want to thank our local health system and company leadership team, who remain optimistic about our future and who share our commitment to achieve the best results possible.

With that Kevin Let me turn the call over to you.

Thank you, Tim and good morning, everyone.

As Tim mentioned, our second quarter results came in well below our expectations as lower than anticipated volume and net revenue per adjusted admission impacted the topline.

As the quarter progressed, the return of non Covid related patient volumes was lower than we anticipated.

Other net revenue consisting of investment losses, and the runoff of transition service revenue from prior divestitures.

Further reduced our EBITDA and.

In contract Labor and wage inflation also impacted our financial performance.

Moving to the second quarter results.

Operating revenues came in at $2 billion $934 million on a consolidated basis.

On a same store basis net revenue was down two 6% compared to the second quarter of 2021.

This was the net result of a 0.5% decrease in adjusted admissions.

And a two 1% decrease in net revenue per adjusted admission, which was negatively impacted by lower non patient revenue.

Adjusted EBITDA was $253 million during.

During the second quarter, we recorded $8 million of pandemic relief funds with $1 million recognized in the prior year period.

Excluding pandemic relief fund adjusted EBITDA was $245 million with an adjusted EBITDA margin of eight 4%.

Volume improved sequentially, but generally remained suppressed as a result of the residual effects of the pandemic, while higher operating costs also due to the pandemic remain inflated.

Switching now to expenses.

On the labor expense side labor cost and contract labor expense remains elevated on a year over year basis.

We experienced an approximately eight 5% increase in our average hourly rate our employees on a year over year basis. However sequentially. We saw average hourly rates declined 40 basis points and expect labor inflation to remain relatively flat in the back half of the year.

The current quarter, However showed sequential improvement down from $190 million in the first quarter of 2020.

Moderation of contract labor is slower than we originally expected and we now anticipate future progress to continue.

It is also slower than we previously expected.

Due to benefits from our margin improvement program efforts and focused expense management, we have held absolute dollars relatively consistent over the past six quarters.

And we achieved these results while incurring ramp up costs and opening three new hospitals, a host of new access points and increasing use of software as a service all during a time of record high inflation.

Turning now to cash flows cash flows provided by operations were $154 million in the first six months of 2002.

From $280 million in the prior period.

Excluding the repaid Medicare accelerated payments that were made in the first six months of 'twenty. One cash flows provided by operations were $414 million for the first six months of 2021.

Lower EBITDA higher contract labor costs, and the timing of interest payments contributed to the lower cash flows in the first half of the year.

Moving to Capex for the first six months of 2002, our capex was $191 million compared to $212 million.

In 2021.

Due to the lower performance in the second quarter, the company's net debt to EBITDA increased to seven one times.

Although interrupted by the current operating environment, we remain focused on our longer term goals of lowering our leverage and increasing our free cash flow.

In terms of liquidity, we have no outstanding borrowings under the ABL was $894 million of borrowing base capacity available to us.

Also at the end of the first quarter, we had $346 million of cash on the balance sheet.

As a reminder, we have no debt maturities until 2026.

While the company's formalized divestiture program was completed in 2020, we continue to receive interest around other potential divestitures.

As we received the centers we are analyzing the long term strategic fit the specific assets and we will continue to analyze the impact potential divestitures would have on our future financial leverage and free cash flow generation.

Now I'll walk you through the updated full year 2022 guidance.

Net operating revenues are anticipated to be 12, two to $12 5 billion.

Due to the lower net revenue expectation adjusted EBITDA is now expected to be one three to $1 4 billion.

Net loss per share is anticipated to be a loss of $2 <unk> to a loss of $1 65.

Based on weighted average diluted shares outstanding of 128 to 129 million shares.

Cash flow from operations is now anticipated to be $500 million to $600 million.

Capex has been reduced to $400 million to $450 million to adjust for delays caused by disruptions in the supply chain.

And to align growth capital with the current labor market.

Cash interest is expected to be $820 million to $840 million.

As we think about the remainder of the year, we expect adjusted EBITDA to improve sequentially with the fourth quarter of 2022 still being our highest adjusted EBITDA quarter of the year.

As Tim highlighted we have a number of initiatives that are performing quite well.

And which we believe will continue to benefit all of our stakeholders.

We do not view 2022 is the new baseline rather it is a period of disruption and unusual events.

Looking out longer term, we believe the stronger retirement deferred care the execution of our growth and strategic initiatives are successful expense management and continued focus on cash flow and capital structure management will allow the company to achieve its medium term financial goals, which includes targets for <unk>.

16%, plus EBITDA margin positive annual free cash flow generation and reducing our leverage below five times.

At this point I'll turn the call back to you.

Thank you Kevin and thank you Tim at this point Matt.

Ready to open up the call for questions. We will limit everyone to one question. This morning, but as always you can reach you said 654 hundred 65 7000.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Anytime you question Thats been addressed and we would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our way.

Our first question will come from Jason <unk> with Citi. Please go ahead.

Great. Thanks. Good morning, Thanks for taking my question. So there were two markets out of the 48 total that had a disproportionate impact on our results. So I guess first can you give us a sense of what the typical revenue and EBIT contribution of those two markets are as a percent of the total company operations. Just so we have an idea and then second does the second quarter.

Performance for those two lagging markets change, how youre thinking about both the underlying demand and your competitive positioning within those markets specifically thanks.

Thanks, Jason for the questions.

Let me start at the end of that.

Don't think that the.

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Performance in those two markets changed how we think about the broader portfolio. We believe the dynamics were unique to those markets.

And as we planned accordingly, we're planning for those.

Dynamic kind of immediately.

In terms of is.

Their impact on them.

Broader company their decline in net revenue.

EBITDA represented really about 20% of the decline in EBITDA that we had for the quarter.

And neither neither of those markets I want to make sure I point out either of those markets R. R.

Our largest five states.

Yes, Jason this is Tim and I'll add onto kevins comments regarding the positioning of these markets for the long term.

Good.

Certainly we see them as outliers that performance of these markets as outliers, but a big portion of that was on the SW being contract labor side of the equation, where the market dynamics really just skyrocketed at levels that do not typically happen in a normal operating environment.

Some of the markets, where we're being very focused on consolidating services across multiple campuses to take out some of the cost the variable labor costs in particular, which we believe was just a large drag on the margin also in terms of that monitoring which services to perhaps exit permanently.

Italy, all but our goal is to position all of our markets. Some in this in the short term in particular, I am very well to do a better job of managing the operating expenses.

Just to make sure it matches the revenues that we're generating.

Our next question will come from a J rice with credit Suisse. Please go ahead.

Hi, everybody, it's Nick <unk> on for Hh today, and I appreciate you taking the question.

Yet with the volumes down so much can you kind of give us an idea of how on both inpatient and outpatient side the volumes exited the quarter and you also kind of give us an idea of how youre thinking about how they trended in the back half. Thanks.

Yeah.

Sure.

We saw as we came out of the first quarter.

In March we saw.

A big uptick in volumes as we started the recovery from the surge of Covid that we saw early in the first quarter that was consistent with what we should see from previous surges and we saw that continue into April .

But it was really in the back half of the quarter. This the softness.

Again.

Return of non Covid business.

Fell off and Didnt continue as we had.

Seen with previous waves.

FERC business continued to come in so I would say that the back half of the quarter was softer in terms of that.

First after the quarter, Tim do you want to add yes, great on Nick I'll add onto that.

Describe the volumes throughout the quarter and our experience to be relatively choppy.

It kind of fits and starts if you will.

As I said earlier, a wide Hawaii array of performance across various geographies, which is not something we've typically seen and we had certain markets that had really grown quite nicely and consistently built back some business, but as I noted in my comments some at a lower net revenue conversion rate, which is which clearly impacted results and maybe more dip.

<unk> to step over the underperformance of those two markets, we called out today.

Now I would say we've also experienced some impact.

Due to vacation schedules due to some quarantine due to COVID-19 again.

So varied by geography, it's hard to quantify what why and where but we're working very very closely to make sure. We understand those trends on a daily basis, and as I said adjust our operating expenses accordingly, and in a real time environment as well.

Our next.

<unk> will come from Ben Hendrix with RBC. Please go ahead.

And then among on the employed staff side, what's your turnover rate now versus pre COVID-19. Thank you.

Sure I'll start that off here, so our contract labor for the quarter represented about 10% of our total labor costs.

That compares to 13% in the first quarter. So we did bring it down.

Pre pandemic.

Contract labor represented about 2% of our labor costs. So we're still at very elevated.

Percentage of our total cost of contract labor.

Ken This is Tim I'll add onto that in terms of turnover as I mentioned, we are showing a sequential improvement in our retention rate.

And in our higher rates than we measure.

Everything here daily by our end game, so that we're cognizant of the the two distinct variables in that equation and so we're very pleased with the progress we're making honestly with.

With the Covid impact of staff quarantine with the hiring of the orientations.

We bring when we bring ourselves oriented it takes anywhere from four to 12 weeks, depending on the nurse's experience, we have likely not seeing the full benefit of the hiring that I just referenced in the second quarter. It will come through in the third quarter as those new caregivers kickoff permanent assignments and we're able to really it's more of a contract late.

<unk> in terms of the retention rates of the nursing turnover rate still elevated to pre pandemic levels, but we've cut about in half from.

From the peak at the beginning.

At the end of last year, when we saw more SaaS, leading for a travel assignment and frankly for burn out purposes, I mentioned on the last call that we were really focused on repatriating nurses who bought.

In 2021, and frankly throughout 2022.

We've had some success with that I don't think we're done with that work yet I think what so let me get back in school.

We may be able to bring some of those people back into the workforce again, so we're really focused on keeping those relationships with our care team members, who may have left the organization previously in the pandemic.

Our next question will come from Brian <unk> with Jefferies. Please go ahead.

Hi, Good morning, Hi, Phillips on for Brian . So my question today, it's actually about leverage can you provide some detail on the status of your covenants, maybe discuss your outlook on cash generation in the near term and altogether, how does that factor into your approach to deleveraging.

<unk>.

Sure. So we are.

Net life, so we do not have any covenants.

To speak of.

And no concerns around that at this point, we do expect to.

To generate positive free cash flow in the back half of the year and for the full year, we expect to be able to be back to free cash flow neutral.

So again, that's a much better position than we had been.

Four seven.

Years, historically, we've made a lot of progress in that area.

We can continue to grow that free cash flow.

Into future periods.

That certainly does that give us some comfort along with the recovery and execution of a number of the growth initiatives that we've been talking about this morning.

And that will allow us to get back to our medium term target of being below five times levered.

Here within within four years.

Kind of reiterated those medium term targets and still feel very comfortable that we can get them.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Alright, great. Thanks, I guess, obviously good to see that you're still looking at that.

Medium term targets on margin, but obviously given the magnitude of the decline in margin.

This year would love to get a little bit of color. If you could kind of help bridge us from here to there.

The decline was very rapid would you expect a rapid increase should we be expecting a meaningful improvement on that trajectory in the next year or two and then more modest or is it kind of a <unk>.

Low steady rebuild over the next four years.

It's just interesting to me I guess, if you're also within that answer kind of comment on the.

The improvement in labor that you're expecting against the improvement in volume that you're expecting it seemed to be difficult to show improvement on both at the same time, we feel that there's a push and pull there so.

Any color on that thanks.

So as I mentioned this year was somewhat unique and we don't believe that 2022 is purely a new baseline.

The decline in.

In revenue had.

<unk> had a very high flow through to EBITDA and likewise, we expect the NSF revenue returns, it's going to have a very high flow through to <unk>.

EBITDA in the plus side.

We think that there is a fair amount of deferred business still out there.

Consider where we were pre pandemic in 2019, and we've made a lot of progress. We've added a number of service lines and access points, we've taken market share in a number of our markets.

And we believe that asset to FERC carrier comes back into the system.

<unk> in our markets, we are going to capture that and we will get.

Again, a high flow through into EBITDA.

We're staffing and want to be prepared.

To accept that.

Volume when it returns.

And we've made some investments in a number of these growth areas and we'll continue to do so.

Albeit we may take some targeted looks.

It looks at certain service lines in some markets.

Make some other decisions generally speaking.

We are being we're preparing ourselves to do that on the expense side, a number of things contract labor, we believe will moderate.

Traveling nurses will come back into it.

That's more of an employee's arrangement that will continue to take pressure off contract labor.

Lines, and we are continuing to see improvement in that albeit it.

Slower pace than we had expected.

And there are some macroeconomic.

Factors probably in that.

Causing that slowdown, but it is still trending in the right direction and then on other expenses, which.

A percent maybe as a percent of net revenues not the right measure, but if you look at our other operating expenses per adjusted admission.

Based on our volume I think may be a better measurement of a way to look at it we have manage those expenses quite well.

We've managed to keep our non labor expenses flat over a number of quarters. Despite a number of emissions as I mentioned we.

Think theres more opportunity and runway for us to continue to manage those expenses as well and step over some continued inflation. So we think we can get leverage on our margin.

Again as revenue returns, we think we can still get leverage on our expense side and continue to grow margins.

Our next question will come from Josh Raskin with Nephron Research. Please go ahead.

Thanks, Hey, good morning, I was wondering if you could give us a little bit more color on the monthly progression of EBITDA through the quarter not necessarily monthly EBITDA numbers, but.

Just sort of Directionally, how that was improving and then with June puts you on a trajectory to attain the second half guidance or are you still assuming some meaningful improvement for there and then just lastly back.

Back on the intermediate term margins, where do you need to get occupancy too.

Margins given your fixed cost leverage.

No.

EBITDA for the second quarter kind of throughout the quarter was a little bit choppy.

And up and down kind of throughout the quarter, we do feel good about where we are exiting.

The quarter and are up in our.

Our opportunity in front of us in Q3, and Q4 to achieve these results now we did bring the guidance down from our previous expectations.

Largely due to <unk>.

Some uncertainty around what the economic impacts may have on patient behavior.

Which.

We don't have clear insight into the same where we were in light of where we get at Texas <unk>.

And knowing that.

For instance, we had a 75 basis point rate and interest rates yesterday.

The announcement of <unk>.

Second quarter GDP decline today, we don't know what the broader impacts will be on patient behavior.

Yes.

Recessionary period, probably for the first time when.

Patients have higher co pays and deductibles.

<unk> said, we think our initiatives and we're positioned well that some of this there will be coming back ultimately it will come back and we're going to be positioned to capture.

Hi, Josh This is Tim I'll answer the occupancy question or at least a touch on the occupancy question a couple of points on this one.

Obviously, we're always looking to better utilize our fixed capacity our fixed operations. We know with every incremental K store volume that comes in we do a better job of covering that fixed does that fixed cost I do want to point out that throughout the quarter variable labor spend variable labor staffing was very well managed.

But I think we've found out on this new higher cost structure on that variable labor.

The negative impact on flow through of net revenue conversion to EBITDA.

That's where it really hampered our ability to drive through the earnings in the quarter, but in terms of occupancy rates. The reason, we have a difficult time to say we want to be at 65% by this period, we have some markets that are at 100% and we're adding more beds.

The Naples market will be opening up.

Over 100 beds over the next couple of quarters out of that market because they run at high occupancy rate and we have other markets that just have larger physical footprint, where we.

It dilutes the overall occupancy performance in our strongest market, but what I would also share with you.

Even though occupancy percentages publicly reported.

A bit more difficult to assess the full use of our fixed capacity with such site of care shifts.

As we mentioned we had a large movement of inpatient surgery.

Two outpatient classification in the quarter, it's a continuing trend.

Its something thats unique to us, but those patients by and large are still occupying our fixed inpatient beds, they're just not captured in that occupancy calculations. So just to clarify that.

In terms of that site of care movement those types of things, we're plenty happy to have that in an ASC setting, which we are expanding rapidly as well.

Our next question will come from Stephen Baxter with Wells Fargo. Please go ahead.

Yes, hi, thanks.

Wanted to ask about the contract labor outlook I appreciate the comments.

Declining a little bit more slowly than you would have hoped for.

Just trying to understand how that fits into the context of maybe some slower return of demand here I would've thought if that were the case, maybe the contract labor what kind of be the first thing to go to match up with that lower revenue.

How should we be thinking about that in his hiring picks up.

Should we be thinking about maybe some sequential increases to those numbers. Thank you.

Sure on the contract labor.

We were at $190 million in the first quarter of contract labor of $150 million in.

In the second quarter, we had previously indicated we expected to exit the year.

Approximately $70 million.

For the fourth quarter I would say our updated guidance considers us now exiting the year closer to $100 million in the fourth.

Fourth quarter of contract labor.

And so sequentially kind of.

Lowering from where we are.

Now to getting to that $100 million in the fourth quarter.

In terms of our expectation on the labor cost.

We had initially.

Projected that our labor inflation to be about 4% for the year and I think we're close to being on track for that we've seen about a 5% growth.

And this last quarter, similar 7% to 8% in the first quarter, but.

But we've anniversary your belief, we're going to anniversary most of those increases.

That were put in place in the third and fourth quarter of last year, which is why we are saying sequentially. No further growth and we think that will continue on in the back half of the year and so we should we're not expecting much labor sequential labor inflation in the back half of the year.

And then for the year those will average out to about a 4%.

Our next question will come from Andrew Mok with UBS. Please go ahead.

Sure I'll kick that one off Robyn thanks.

In terms of length of stay improvement we've mentioned previously.

Our quarter ended a few investor conferences are focused on improving our capacity optimization.

Stood up a centralized utilization review program standard case management protocols have been rolling out throughout the first half of the year. So I believe we're getting a really solid traction on those initiatives.

As you pointed out it frees up certainly some critical capacity help us take out some of those variable expenses on staffing if we're more efficient with how we're operating on the length of stay in terms of the breakdown between.

Covid and non Covid, we obviously saw a nice decline in the cobot length of stay because the acuity was so much lower.

For the most recent admissions versus what we saw previously fewer critical care fewer vented patient what have you, but we saw relatively the same improvement across both corporate and non Covid care, we saw some easing of our placement.

Patients into post acute settings that was upon us in the first quarter. So I think that really helps us again drive better placement, but he did not discharged to home.

Every indicator, we look at we by and large softened some good progress because of our focused efforts and initiatives.

We will now turn the conference over to Mr. Heng Chen for any closing comments.

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

The second quarter was challenging we remain focused on the opportunities we have across our portfolio to improve results and to achieve long term stability and growth that benefit all of our stakeholders.

Once again, thank all of our caregivers and leadership team for their ongoing commitment to help people get well and live healthier and to ensuring that we continue to provide high quality healthcare services and the markets. We serve we look forward to updating you on our progress as we move forward and to continue to work diligently to achieve our results.

As always if you have additional questions you can reach us at 615 or 657000.

And have a great day.

Sure.

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

Q2 2022 Community Health Systems Inc Earnings Call

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