Good day, and thank you for standing by. Welcome to Community Health Systems Third Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Ross Comeaux, Vice President of Investors Relations.

Thank you, Jay. Good morning, and welcome to Community Health Systems' Third Quarter 2021 Conference Call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer. Before I turn the call over to Tim, I would like to remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations we will discuss also exclude loss or gain from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses; expenses from government and other legal settlements and related costs, expenses from settlement and legal expenses related to cases covered by the CVR expenses related to employee termination benefits and other restructuring charges, change in tax valuation allowance and gain on sale of investments and unconsolidated affiliates. With that said, I'd like to turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Rob. Good morning, everyone, and welcome to our third quarter conference call. We are very pleased with our third quarter operational and financial performance, especially as our health care teams provided care for a large number of patients with COVID-19. Despite this challenging environment, we continue to advance key growth strategies and other important operational improvements. During the third quarter, the Delta variance spread through many of our markets across the Sun Belt space. As a result, we provided care for approximately 15,000 inpatient COVID admissions or 13% of our total admissions, which was our highest quarterly case count to date. This compared to more than 3,000 inpatient COVID cases during the second quarter and 9,500 during the first quarter. And it is also worth noting that non-COVID health care demand was higher in the third quarter than in our prior quarters with elevated COVID-19 cases. Since the onset of the pandemic, the importance of our health care team and the critical role they play in the communities we serve has certainly been reinforced. I am impressed with their professionalism and compassion and remain grateful for their commitment to providing safe, high-quality patient care. Looking at the third quarter, we produced strong results despite the COVID surge. On a same-store and year-over-year basis, net revenue increased 7.1%. Same-store admissions increased 2.8% and adjusted admissions were up 4.7%. Surgeries increased 1.5%, while ER visits were up 24.2%. As a reminder, during the third quarter of 2020, we drove solid volume recovery as industry volumes were returning. So we were pleased with this year-over-year volume performance. Looking at our third quarter volumes compared to the pre-pandemic third quarter of 2019, same-store admissions decreased 3%, while surgeries declined 4%. ER visits further improved and were up 1% versus 2019 due in…

Thank you, Tim, and good morning, everyone. As Tim highlighted, it was another strong quarter for the company. as we delivered solid financial performance and further advanced a number of our strategic initiatives. Through the recent transformation we've undertaken to reposition the company, we introduced strategies to drive net revenue growth and improve efficiency throughout the organization as well as to strengthen our balance sheet. We completed our divestiture program, which allowed for debt paydown and additional focus in our core markets. We made improvements to the capital structure, extending maturities and reducing annual cash interest. And we've made operational improvements, which have improved our margins. We are pleased with all of this recent progress and excited about the opportunities in front of us. Switching back to the third quarter performance. Net operating revenues came in at $3.115 billion on a consolidated basis. On a same-store basis, net revenue was up 7.1% from the prior year. This was the net result of a 4.7% increase in adjusted admissions and a 2.3% increase in net revenue per adjusted admission, which faced a difficult comp from the prior year. Excluding nonpatient revenue, which was lower year-over-year, net patient revenue per adjusted admission was up 3% compared to the prior year. Adjusted EBITDA was $482 million. During the third quarter, we recorded approximately $19 million of pandemic relief funds with no relief funds recognized in the prior year period. Excluding those pandemic relief funds, adjusted EBITDA was $463 million, with an adjusted EBITDA margin of 14.8%. In terms of expenses, supply cost increased in the third quarter, a result of higher pharmaceutical and other costs associated with caring for additional COVID patients. Contract labor expenses increased in the third quarter similar to prior COVID waves during which COVID case counts were elevated. As…

Thank you, Kevin, and thank you, Tim. Jay, at this point, we're ready to open up the call for questions. We'll limit everyone to one question this morning. But as always, you can reach it 615-465-7000.

[Operator Instructions]. Our first question comes from the line of Brian Tanquilut of Jefferies.

Congrats on a good quarter.

Thanks, Brian.

So I guess my question is, obviously, everyone is worried about the cost side of things and whether it's labor and supplies and whatnot. But it's clear that you guys managed the cost side well even with increased utilization of temp labor. So as I look at things and the turnaround that you've done over the last few quarters, maybe if you can share with us what exactly are the initiatives that you're doing or that you've set up to implement as it relates to driving revenues and admission trends? And also on the other side, just the cost and margin enhancement moves that you've outlined, what are those things more concretely? And where do we stand in terms of like what innings are we in, in terms of realizing those benefits?

Sure. Thanks, Brian. There's probably a number of things we can cover there. So let me start, and I'll certainly let Tim jump in. On the expense side, we've talked about our margin improvement program. First, I'd start by saying we did see certainly some drag on labor cost, particularly contract labor. But much of that we see has been directly related to the elevated COVID cost. Certainly, as nurses have left and there's been a higher utilization of travel nurses as well as the rate that we're paying those nurses has been directly related. We saw that in earlier waves, and then we see some moderation of that as code cases go down. So as we look forward and expect coded cases to go down, we certainly expect some moderation of those costs. related to our margin improvement program, we have numerous initiatives across the organization. Many of them are not patient-facing directly initiatives, but many in the supply chain area, where we have been negotiating contracts on a national basis for both supplies as well as purchase services taking advantage of our scale and leverage, which has allowed us to reduce cost. We have a number of initiatives in terms of how we are processing certain types of claims and which has allowed us to just become more efficient in terms of some other initiatives we have going on related maybe more directly to labor we have certainly invested in many of our - of how we support our nurse staffing. We have moved a lot of our recruitment into a centralized recruiting function which we have a lot of experience with from a physician recruiting function, which we centralized years ago. We're doing something similar with nursing. And we believe that, that's much more efficient, particularly in today's environment where we can attract from outside maybe the geographic region. So those are the things that initially come to mind, Tim, I'm sure there's some things I missed.

Yes, sure. Thanks, Brian, for the question. And I think Kevin a nice job covering kind of the OpEx and the strategic margin improvement program as key drivers for margin going forward. I'd like to talk about the top line, as you know, and our very focused growth objective. First of all, we certainly believe we're in a stronger portfolio and stronger markets as we outlined today on our prepared remarks. I'm really pleased with our investments taking brew, showing kind of the growth and the earnings gains that we're putting up year-over-year and even compared to 2019. So good organic growth in that portfolio is still something we're investing in. We have very thoughtful strategic planning processes. We've talked a lot about our transfer center. We really look forward to further optimizing that in the quarters and years to come. We get such great insights into what's happening in our markets based upon our daily activities in the transfer center, which has teed us up nicely for where we should be spending our capital next for capacity expansion, adding new service lines, recruiting new providers to further advance market share. The other avenue is related to some of our de novo projects. We've covered with you our new hospital projects, our growing freestanding ED portfolio, the joint ventures we have and are investing in, in terms of post-acute care and behavioral health. All of those things, we're confident will drive strong long-term opportunities in the portfolio. We've also talked about the importance of having a balanced growth philosophy. We're investing in our inpatient side of the business and the ambulatory side. I think we see that pulling through as a matter of fact, in the third quarter, we had 8% of net revenue growth in both inpatient and outpatient side of the business despite the COVID surge. So the allocation side of the business really is growing very, very nicely. So I hope that's helpful and speaks to our confidence in what we're doing to really drive long-term value here.

Next question comes from the line of Frank Morgan of RBC Capital.

I was hoping you could maybe break out in that other ops line. How much of that actually is attributable to the agency labor usage and then maybe talk a little bit about how that was during the quarter, at the end of the quarter, maybe where it is today. And then it also just maybe some general commentary on the non-COVID nice volumes that you have. Maybe a little color specifically between in and outpatient how that ended the quarter and then where that is today?

Sure. So we haven't specifically given an amount of what that contract labor is. It fluctuates significantly quarter-to-quarter because it kind of bounces around between the labor and contract labor. So - but what I would say is it's - it has increased pretty significantly sequentially over the second quarter and is above where it was in the first quarter. But we were really able to offset that if you look at the other operating expense comparatively year-over-year dollar amount is almost flat. So all of that increase that we had in that line item related to labor, we were able to offset with other savings in various categories, whether it is purchase services or other efficiencies that we gained largely due to these initiatives that we had - have put in place our operating initiatives or our margin improvement program.

Yes, Frank, this is Tim. And in terms of our non-COVID volumes in the quarter, as we pointed out, had really strong staff across all of the key indicators, improving upon our first quarter performance, the last big wave of COVID. And we saw that generally across the board. The one thing we did see is some crowding out of some inpatient surgeries in the quarter as we made way for more inpatient COVID care. We also deferred some elective orthopedic cases, which we expect to pick up in upcoming quarters as a result, just trying to preserve that capacity. Outpatient surgery was strong for the quarter. We had sequentially improved outpatient surgeries throughout the year, beating both 2020 comp and 2019's comps. So really pleased with our investments in recruiting the right specialists to our markets and building out our primary care networks of care, making sure that we're, again, really driving that market share growth on both the inpatient and outpatient side of our market.

Next question comes from the line of Josh Raskin of Nephron Research.

This is actually Marco on for Josh. Thanks for taking the question. I was just wondering if you've seen any demographic data points suggesting that volumes could be migrating out of cities and into more suburban markets like the ones you operate in. And I would also appreciate any thoughts just more generally on what you're seeing in terms of market share changes within your footprint?

Thanks, Marco. This is Tim. I'll start off the answer to that question. In terms of specific data, I can't point you to one store. We do have plenty of anecdotal data and reading articles similar to I'm sure you're reading in terms of perhaps some urban flight into the suburban markets. So we believe we're positioned well. Our assets, as you know, let's take in Northwest Indiana, outside of Chicago, on the size of the Tucson market, the size of Birmingham, Fort Wayne, Naples, all these communities, I think, are well positioned for that demographic shift. Even prior to that demographic shift, we were pleased with the growth prospects in those markets, and we believe any of that migration would only be a value add.

Yes. I'd just point out, even going back to the 2020 census has certainly pointed to states that we're in like Arizona, Texas Alabama, Florida, our larger states have certainly been picking up population from other parts of the country. And then more recently, even as Tim mentioned, anecdotally. But if you look at a lot of what's being reported around real estate, you can see that markets that we're in seem to be certainly growing, and we know that there's more of a - both a demographic move towards some of the Sunbelt states, some of the lower tax jurisdictions is largely due for economic growth as well.

Next question comes from the line of Andrew Mok of UBS.

Good morning. Can you speak to some of the volume trends into October and you provide some context for how non-COVID utilization is rebounding following the latest decline in COVID cases?

Andrew, this is Tim. I'll start us off here. In terms of our COVID, I guess, I'll say trajectory, we did see admissions peak in the midpoint of the quarter, near the end of August, actually the patient days really did not start tapering off until the latter part of September. We still are experiencing elevated levels of COVID beyond our - I guess, I'll say, our low points in previous surges. So we're still seeing pretty, I guess, elevated levels of COVID volume in our hospitals. As I said in my remarks, the care teams have just done a phenomenal job of managing us on a day-to-day basis, I'll say, multi-times-a-day basis, making sure that we're taking great care of those patients. But in terms of the rebound of the non-COVID care, as we pointed out, we really held on to a good portion of that business relatively well throughout the quarter. I believe the consumer and the providers comfort level with their safety in our care settings with vaccination does lead to less of the deferral of the elective care that we had seen in previous surges. But with that being said, again, the deferred care that we're looking out for are those cases that we've delayed just to preserve our inpatient capacity for COVID cases. Our teams work regularly with the surgeons, our outreach program directors to make sure that we're bringing those cases back in as soon as the patients are ready to do so. And so from that vantage point, we do feel confident that, that business will work its way back into our systems in this quarter into the first half of next year.

Question comes from the line of Kevin Fischbeck of Bank of America. .

Just wanted to maybe go to the margin discussion. I think you guys have shown some pretty good improvement in margins recently. There's a lot of moving pieces in the margin number this year between sequestration and COVID costs and everything else, contract labor, et cetera. Do you guys - what do you think the core margin is? I guess if we were trying to normalize everything, if we're trying to think about where you guys are on a core basis relative to that margin target that you've outlined. Is the actual reported number a pretty good estimate for where you're actually operating today? Or are there any kind of major adjustments we should be making and when we think about what - where the normalized margin is today?

Thanks, Kevin. I would say that we believe that where we're operating the margin that we're reporting today is a good barometer of where we are from an operations standpoint. We put out at the beginning of the year, kind of our medium-term targets to be above 15% margin in that kind of 2- to 4-year time frame. I would say that the way we're looking at it, we're ahead of schedule. We've made some great progress on our way there. We certainly have accelerated a number of our initiatives. And so we do believe we're ahead of schedule of getting to where we think we'll - we want to be and we'll get. We're certainly, as we sit here today, I believe that over the next few quarters. We'll continue to make progress, continue to grow margins. As you can see from our guidance, we expect to be in the high 14% for the full year, which would indicate or imply fourth quarter at the midpoint, slightly above 15%. And I would say that our expectation is we'll continue to grow into 2022.

We will now turn the call over to Mr. Hingtgen for closing remarks.

Thanks, Jay, and thanks, everyone, for spending time with us today. In closing, I would like to mention again how grateful we are to all of our employees across the organization, our physicians, providers, regional presidents and hospital leadership teams who continue to demonstrate our true purpose of helping people get well and live healthier. I also want to thank our company's leadership team for their important role in supporting our markets and for their continued focus on successful execution. We are pleased with our strong year-to-date performance, and we look forward to updating you on the rest of the year in a few months. Once again, if you have any questions, you can always reach us at 615-465-7000. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.