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Good day, and welcome to the Community Health Systems' Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. I'd now like to turn the conference over to Mr. Anton Hie, Vice President of Investor Relations. Please go ahead.

Thank you, Rocco. Good morning, and welcome to Community Health Systems second quarter 2024 conference call. Joining me on today call are Tim Hingtgen, Chief Executive Officer; and Kevin Hammons, President and Chief Financial Officer. Before we begin, I must 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 SEC. 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. We've also posted a supplemental slide presentation on our website. All calculations we will discuss exclude impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs, expenses related to employee termination benefits and other restructuring charges. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Thanks, Anton. Good morning, and thank you for joining our second quarter conference call. At the midpoint of 2024, we are pleased with our progress, including a solid second quarter that produced both volume and earnings growth. In the second quarter, same-store net revenues increased 4.7% compared to the same period last year. Adjusted EBITDA for the quarter was $387 million compared to $373 million in the second quarter of 2023. Same-store admissions improved 3%, adjusted admissions improved 3.2% and surgeries were up 0.6%. About surgeries, I want to note that the second quarter increase is on top of a record surgery volume quarter for the company last year. So we were pleased to see same-store surgical volumes reaching yet a new high in the second quarter this year. This progress is driven in part by particularly strong outpatient case volumes, including in our ambulatory surgery centers, whose performance and results are complementary to their local affiliated CHS health systems. We also experienced generally strong outpatient volumes, including growth in emergency department visits, urgent care and in physician practices. In addition to year-over-year same-store growth, we also achieved sequential improvements over the first quarter of 2024 and we expect to carry this momentum into the second half of the year. Much of our growth is attributable to the strategic investments made in our markets which include ongoing physician recruitment and capital investments to expand access and capacity. We've invested more than $3 billion into our health systems since 2018 which includes new and replacement hospital facilities, bed and procedural space expansion, new technologies and a wide spectrum of access points and outpatient services. Earlier this year, we opened our new tower at Tenova, North Knoxville, where performance is already exceeding initial expectations. And a major expansion is underway in South Baldwin County, Alabama, which remains on track to open this year and will create incremental capacity and produce more growth in this rapidly growing market. Other recent openings include a freestanding emergency department in Huntsville, Alabama, which brings our company count to 18 freestanding EDs in total. Several new physician practice locations and investments to expand procedural space and services in multiple CHS hospitals. Regarding our portfolio, it has been widely reported that Novant Health ended its plans to acquire our North Carolina hospitals. That was an abrupt decision. But given the FTC's lawsuit, we were prepared for the possibility that the transaction would not be completed. We rapidly deployed CHS resources to support our North Carolina team and to further evaluate our position and potential future opportunities in the market. That work is ongoing. The divestiture of our Cleveland, Tennessee Hospital is on track and expected to be completed in the third quarter. Additional transactions are underway, and we continue to carefully review inbound interest related to other markets. We're very pleased with progress related to recruitment and retention of our workforce and the programs in place to support our teams. We hired nearly 3,000 registered nurses during the first half of 2024, and our nurse retention rate is very strong at its highest level in a decade. Our centralized recruitment program has expanded to include allied health positions in areas such as imaging, pharmacy, lab, respiratory and surgical services. Across these positions, hiring is up by more than 14% year-over-year. Other facets of cost management have been an area of strength this year with contract labor, supplies and other expenses trending down in the second quarter. Innovative solutions to improve care delivery in our business operations are another area of specific focus. During the second quarter, we announced an expanded partnership with Mark Cuban Cost Plus drugs. All of our hospitals will now be able to purchase select drugs from the Cost Plus drug marketplace, initially resulting in hundreds of thousands of dollars in savings and enabling the potential for even greater savings over time. On July 1, we deployed the third wave of our affiliated health systems onto our enterprise resource planning platform. The initiative, which we internally refer to as Project Empower now supports more than half of our hospitals and will be fully deployed by the end of the year. This investment is yielding deeper insights into our business functions, and we expect to identify opportunities for additional standardization, expense management and value creation as our experience with this enhanced operational tool matures. Our clinicians, caregivers and local leadership teams are making a real and positive difference in every community we serve. On Tuesday, we released our 2024 Community Impact Report, and I hope you have the opportunity to take a look at it. We are so proud of the quality of care and the breadth of services we provide and also what that means to our community as we generate meaningful economic impact. We are committed to causes that improve health and well-being, and we are powered by an amazing group of people who care deeply about others and who ensure that our purpose to help people get well and live healthier is always fulfilled. With that, Kevin, I'll turn the call over to you.

Thank you, Tim, and good morning, everyone. As Tim indicated, we were pleased with financial results as we delivered another quarter of steady improvement, which again was consistent with our expectations and reflects strong execution by our operating teams and the demand environment in our markets. The momentum in volume growth that began last year continues, leading to same-store growth across all key metrics, including a 3% increase in admissions, a 3.2% increase in adjusted admissions, a 1.1% increase in emergency department visits and a 0.6% increase in surgeries against a strong 6.2% surgical volume comp in the second quarter of 2023. Net operating revenues for the quarter were $3.140 billion, representing consolidated year-over-year growth of 0.8%. On a same-store basis, net revenue increased 4.7%, in line with our target for mid-single-digit growth for the year. The same-store top line growth was driven by the 3.2% increase in adjusted admissions, along with a 1.4% growth in net revenue per adjusted admission, which primarily reflected improved rates and incremental state Medicaid reimbursement partly offset by geographic mix shift. While we continue to see some shift from our Medicare fee-for-service business into Medicare Advantage in the second quarter, we were pleased to see solid commercial volumes with same-store adjusted admissions growing in line with the Medicare Advantage book. Adjusted EBITDA for the second quarter was $387 million, compared with $373 million in the prior year period and up slightly on a sequential basis, generally in line with our expectations. Margin for the quarter was 12.3%, up from 12% in both the prior year period and sequentially and consistent with our previous guidance for full-year margin in the mid-12% range. This performance reflects strong cost controls as a result of our ongoing efforts to drive productivity and efficiency gains in the face of lingering inflationary pressures on labor, supplies and other expense categories. We were again pleased with our performance on labor costs in the quarter. Average hourly wage rate was up 4% year-over-year, in line with our expectations for the full-year 2024 and helped by improved productivity and reductions across premium pay categories. We also continue to deliver improvement on contract labor spend, which was down approximately $3 million sequentially to $45 million and down $29 million or 39% from $74 million in the second quarter of 2023. Note this decrease in contract labor was slightly better than our expectation of contract labor remaining at approximately $50 million per quarter for the year. So we are pleased with the continued progress that reflects our recruitment and retention efforts along with lower hourly rates for contracted nurses. On supplies expense, we delivered an 80 basis point reduction as a percent of consolidated net revenue and same-store supplies expense per adjusted admission declined approximately 2% year-over-year. We were particularly pleased to see outperformance in the hospitals where we have implemented new technology and workflows and as part of Project Empower, which is providing better insight into procurement savings opportunities that we believe will continue to grow. Medical specialist fees were up slightly sequentially and increased approximately 5% from the prior year period, consistent with our expectation for a 5% to 10% increase for the full-year. We have been pleased with the progress of our hospital-based provider in-sourcing initiative since taking over operations from the former APP nearly a year ago and continue to evaluate further in-sourcing opportunities. Provider and other business taxes increased $25 million compared to the prior year quarter, primarily as a result of increases in Medicaid supplemental programs. Cash flows from operations were $101 million for the second quarter of 2024 compared with $86 million in the year ago period. Year-over-year improvement in cash flow primarily reflects improved earnings performance as well as lower cash payments for interest and improved cash from working capital, including accounts receivable, offset by higher cash tax payments. Capital expenditures for the second quarter of 2024 were $88 million and for the first half were $181 million on track for our 2024 guidance range of $350 million to $400 million. The divestiture of Tenova, Cleveland remains on track to close in the third quarter with estimated proceeds of approximately $160 million plus additional contingent consideration. And we believe that one or more additional transactions could close within the calendar year, providing substantial capital for the company to redeploy. As we have previously discussed, we estimate combined potential proceeds of more than $1 billion through a handful of transactions that are in various stages of evaluation or negotiation. In May, we priced an upsized tack-on offering of an additional $1.225 billion of our 10 7/8% senior secured notes due 2032. Using proceeds and cash on hand to redeem all of our $1.116 billion of remaining 8% senior secured notes due 2026 and to extinguished $130 million principal amount of 2028 notes for $98 million in cash. By capturing this discount, these transactions resulted in a combined pretax gain from early extinguishment of debt of approximately $26 million during the quarter. The net interest impact of this transaction is an increase of approximately $35 million on an annual basis. But given the timing of completion, the net effect on cash interest in calendar 2024 is minimal. Additionally, in June, we amended and extended our revolving asset-based loan facility, extending the maturity of our $1 billion ABL from November of 2026 to June of 2029. At quarter end, net debt to trailing adjusted EBITDA was 7.6x, slightly improved from the 7.7x last quarter and 7.9x at the end of 2023. We believe we have more than adequate liquidity to meet our needs going forward with approximately $600 million of borrowing capacity under the ABL along with the pending asset sale proceeds. Let me pivot and provide a brief update on Project & Power. We recently completed our third wave of deployments, implementing our new financial and supply chain systems and workflows at 25 additional hospitals and related businesses. We now have Oracle Business Systems running in 47 hospitals, and we are on track to complete our rollout by January 1 of 2025. With the first six months of 2024 in the books, we are tightening our guidance range for the full-year and slightly increasing the midpoint to reflect our increased confidence. Specifically, we now anticipate 2024 adjusted EBITDA of $1.520 billion to $1.600 billion, which consistent with prior guidance does not include any contribution from potential new supplemental payment programs nor does it assume any unannounced divestiture activity. While we are not providing formal quarterly guidance, I would remind everyone on the call that the third quarter is traditionally the softest quarter of the year from an earnings perspective due to seasonal factors, including heightened vacation activity, among both patients and physicians. Consistent with typical patterns, we expect the fourth quarter to be our strongest quarter of the year from an EBITDA and cash flow perspective. At this time, we'll turn the call back over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Today's first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning guys. And congrats on the quarter. Maybe, Tim, my first question, as I think about your comments on Novant and Kevin's comments about still kind of like that $1 billion goal of divestitures this year. How are you thinking about kind of the visibility into asset sales or your ability in your mind given the FTC's objections to the Novant deal to be able to announce further divestiture opportunities over the course of this year?

Sure, Brian. Let me take that. So with the Novant deal, obviously, Novant was kind of in-state provider. And what we're seeing, particularly in many of the other opportunities for divestitures is the group of buyers is changing. And many of both for-profit and non-for-profit health care systems are looking outside of their traditional area of service to expand the FTC, I think, has been somewhat of an issue for transactions now for a few years. So as I look at the remaining opportunities and current deals that we're negotiating right now, the buyers are all out of market, typically out of state, similar with the Cleveland, Tennessee deal that we've already announced. The buyer is a non-profit based in Georgia. And so we really don't see any headwinds on being able to complete the other deals that we're currently working on.

Got it. Okay. And then maybe, Kevin, we're getting a lot of questions on trying to size the potential opportunity or a tailwind from the DPP payments, New Mexico and Tennessee. I know you haven't really given the quantification of that, but anything -- any comment you can make to help us try to frame the benefit from those things?

Sure. We've been a little hesitant to be out there given that these programs are not yet approved by CMS. And in fact, New Mexico has not yet been submitted by the state's CMS. So what I would say is we do believe these programs are material to us. But until we get a little more clarity in terms of what's going to be approved and in what form just a little hesitant to go out there with any quantification. But that said, we do believe that they'll be materially beneficial to us.

Got it. Understand. Thank you.

Thank you. And our next question today comes from AJ Rice at UBS. Please go ahead.

Thanks. Hi, everybody. A lot of discussion this quarter about public exchange volumes, how that's helping year-to-year, what percentage of total it is as well as also the two midnight rule. Do you have any thoughts you can give us on how that's impacting your results this quarter?

Sure, AJ. We have certainly seen a decrease in observations and an increase in kind of short stay admissions. Now we attribute a significant portion of that to the work that we've done internally with our physician adviser group that's helping us qualified those short stays for admissions. And I would say in terms of behavior from the payers, we're still seeing a pretty significant amount of denials and downgrades coming from the payers. But all that said, we have made progress in reducing the number of observations increasing short stays that we believe is beneficial. In terms of exchange business and maybe related to redetermination, we have seen a decrease in the volume of Medicaid patients. But likewise, we've seen an increase in commercial business. Now we don't have complete line of sight when a patient comes in with an exchange insurance maybe versus a regular Blue Cross commercial insurance. But if we look over across our portfolio, we see the decrease in Medicaid with an offsetting increase in commercial, we believe that substantially most of that business is getting picked up by commercial. We're not seeing a similar increase in self -pay. So we're not losing it to the uninsured, but probably picking it up is commercial exchange business. I would think that we look a lot like national averages in terms of where we are in the exchange business. We have benefited by being in states like Florida and Texas that have had some of the highest exchange business enrollment. So that's been beneficial for us.

Okay. Maybe to follow-up.

Yes, maybe last point I'd make on that. There is a pretty wide variation from market-to-market with exchange penetration.

Interesting. Just a follow-up question. You mentioned increased or continuing payer scrutiny on observation status case. I wanted to broaden that out. There's been this discussion about the labor impact and maybe getting some of that in the rates. Are you still seeing that in your managed care rates are getting a little help catch up on labor and broader than just two midnight rule. How about just utilization review activity? I know some of that got used up with the Change Healthcare cyber Attack. Is that all back to normal at this point?

Yes. So in terms of rates, our reimbursement or new contracted rates are coming in for next year pretty similar to where they came in this past year, probably the last two years. So I still believe that some of the incremental labor cost is flowing through. The rate increases we're getting are still about 100 basis points above what we had seen traditionally and looked a lot like what they look like coming into 2024. In terms of the change health care, we did not experience a significant disruption related to change. So that, I would say has kind of worked its way through, and we don't have any real lingering impacts from that.

Okay. Thanks a lot.

Thank you. And our next question today comes from Ben Hendrix at RBC Capital. Please go ahead.

Thank you very much. Just a quick question to follow-up on the growth you've seen on the exchange side, been a lot of questions about the fate of the enhanced subsidies in 2026. I wanted to get your thoughts on the impact you've seen from that contribution to growth in exchange volume? And then what you think the levers are for maybe retaining some of that coverage assuming that we do see a kind of a roll-off of those enhanced subsidies beyond 2025? Thanks.

Sure, Ben. This is Tim. I'll take that one, and Kevin, feel free to weigh in. In terms of the look forward for the expiration of some of those enhanced subsidies in '26 as you framed out. A lot of it obviously depends upon the political scene at that particular point in time. So lots of debate in a wildcard there. I can tell you, from an efficacy standpoint, we remain very active in making sure that we're telling our story through the Federation of American Hospitals and our own lobbying activities across our states to make sure that everyone understands the importance of the affordability of the exchange business to make sure we continue with some of the gains we've experienced over the last several years. Again, we can't quite size up what the risk is, but we're very, very involved in making sure that we're advocating for continuation of that type of funding.

Thank you.

Thank you. And our next question today comes from Steve Baxter with Wells Fargo. Please go ahead.

Yes, hi. Thanks. Two questions here. I guess, first, it would be great to hear you talk a little bit about the same-store growth on the volume side. We expect in the back half and whether you expect surgical growth could be better as you kind of maybe go against some easier comps? And then the second question, the other OpEx, looks like it's a pretty big step up sequentially on a dollar basis. I would have thought that maybe could have been Medicaid supplemental payments, but then I'm not really seeing that in the revenue per AA. So just trying to understand what's driving up the other OpEx dollars sequentially? Thank you.

Yes. Let me start with the other OpEx dollars. So it was up approximately 130 basis points of net revenue. 100 basis points of that increase is related to the supplemental provider tax payments that were recorded this year. Of course, with those, we do get supplemental revenue and will take an increase in provider tax payments with the additional revenue at any point. But that is what drove up that other operating expense line item. There is some timing differences as the provider tax payments do get separated from the revenue recognition. So that can be a little bit lumpy from quarter-to-quarter. So it's not an exact one for one or two for one or what have you. But overall, the net revenue from those provider tax did flow through the net revenue line in there as well.

And Steve, I'll touch on the volume, the same-store volume growth. With the key drivers for us, obviously, the return on the investment for some of those growth projects we've been talking about, including our incremental beds in the Knoxville market and other bed expansions over the past several quarters in our key markets. We've called out really successful physician recruitment over the last couple of years. We're still ramping up those providers very successfully, which I think led to the strong clinic visits in the first and second quarters of this year, which we believe bodes well for procedural volumes in the latter half of the year. We also had some really good improvements in capacity optimization, length of stay management about a 5% improvement over prior year quarter, which opened up more capacity. Putting all three of those things together, we have our transfer center that can then place more patients in our facilities. So we've got more specialty coverage, more capacity and the ability to grow our inpatient and outpatient business from outlying markets. We had a really good ED admission quarter, good BMS volumes. Strong growth in our rehab programs, our post-acute settings. And as we've already called out, we've had some benefit from the 2-midnight rule clarification as well as the work of our physician advisers. So we believe the fundamentals are solid and something we can build upon in upcoming quarters.

Thank you. And our next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, this is Evan on for Andrew. A couple of your peers took up acute admissions expectations for the back half of the year and you alluded to structurally higher demand. Just curious to get your views on that and how it relates to your outlook? Thanks.

In terms of higher demand in the back half of the year, I think we're seeing demand continue to come back into the health care system. Historically, the back half of the year has been slightly better than the first half of the year. And I think our guidance kind of reflects that in terms of revenue and EBITDA being slightly better in the back half of the year heavily weighted to Q4. And as we've said, kind of multiple times over the past quarter, I believe what returned first back into the system kind of post -- some of the pandemic with government insured patients, commercially insured patients work a little slower to come back in, primarily as a result of some of the inflationary trends in high deductibles and co-pays. And I think the longer we get out or the longer those patients have been outside the system the more likely they are that they actually do come back. Maybe with their conditionings having gotten even a little bit worse, but we're starting to see a pickup in business and screenings and checkups and all of that leads ultimately to higher acuity services down the line. And we're seeing a better balanced growth between commercial and government-insured patients than we saw in the early part of last year, and we do expect that to continue through the remainder of the year.

Thanks.

Thank you. [Operator Instructions]. Today's next question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Just quickly on the cash flow. I'm just curious if there were any timing issues in the quarter and maybe what specifically drove that increase in accounts payable?

Hey, Josh, the big timing issue in the second quarter really relates to our annual payment of our 401(k) match. We make that just once a year it's about a $65 million to $70 million payment. And then in the back half of the year, we start to recoup that as we continue to accrue for that match. It's a non-cash expense for the remainder of the year. So that's always a headwind in the second quarter for us and so we do expect not only not to have that in the first quarter, it was annual bonus payments. The accruals for both of those items will be helpful in the back half of the year and then collections always are stronger in Q4, which leads to the fourth quarter being typically our strongest cash flow quarter of the year.

Got you. That makes sense. And then just on the volumes. Last quarter, I think inpatient sort of screened is a little bit stronger than outpatient and that seems to flip a little bit this quarter. So was there something specific that drove that?

I'd point to a couple of things. We continue to make some inpatient capital investments. We opened up a new bed towers. I believe Tim has mentioned in his comments in Knoxville that was opened in March. So that is helping drive more inpatient business. Some of our other higher acuity service lines that we've invested in driving some of the inpatient and then converting some of the observations to the short stay admissions is also helping on the inpatient side. But then we are also seeing good growth in outpatient. Our investments kind of vary market-by-market, depending on where we have capacity needs. We're investing on the inpatient side, where we have available capacity. We're making investments on the outpatient side. So we're pretty balanced there as I see it right now. We also have another inpatient tower opening up in the fourth quarter in Foley, Alabama, which should also help drive some incremental inpatient business for us.

Yes, Josh, this is Tim. I would describe our growth relatively balanced on the inpatient and outpatient side. There may be some slight fluctuations quarter-to-quarter, but we've targeted our investments to grow both of those areas of business, I guess, I would say in relative relation to each other. There is some variation by market. But the good strong outpatient surgery growth that we've referenced earlier, obviously, was specific -- a specific area that we targeted over the last several years, including with our ambulatory surgery center investments with joint venture partnerships. So we've been really deliberate about making sure we're putting outpatient access where our consumers want it and need it so that we can continue to capture more of the total share of spend in our markets.

All right. Thanks so much.

Thank you. And this concludes today's question-and-answer session. I'd like to turn the conference back over to Tim Hingtgen for any closing remarks.

Great. Thank you, Rocco, and thanks to all of you for joining our call today. As always, if you have additional questions, you can reach us at 615-465-7000. Have a great day.