Tenet Healthcare Corporation (THC) Q2 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Tenet's Healthcare Earnings Conference Call. My name is Larissa and I will be your operator for today's call. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Mr. Thomas Rice, the Vice President of Investor Relations. You may proceed, sir.

Thank you, operator, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow up question. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Thank you, Tom, and good morning, everyone. I'm very pleased with our solid performance in the second quarter. We generated $268 million of adjusted EBITDA, representing 9% growth over 2009 and a margin of 11.6%. We are in the midst of generating one of the strongest earnings trajectories in our recent history, and we faced a difficult comparison versus the second quarter of 2009, when EBITDA was up more than 50%. The 11.6% margin was the highest margin for a second quarter in the last seven years, and we achieved it in a difficult volume environment. The in-patient admissions picture was virtually identical to our first quarter, although there was a little more strength in our outpatient business in the second quarter relative to the first. When we released interim second quarter volumes on June 14, the volume picture for the quarter was stronger. Unfortunately, the final few weeks of June and all of July were soft, so we're off to a slow start for volumes in the third quarter. We also started the third quarter with a difficult comparison. Last year at this time, we were off to a strong start for Q3, with positive admissions growth in July. Turning back to the second quarter, total admissions were down 2%. But that's before you take into account a decline in both flu and OB/GYN-related cases. Had it not been for these two categories, total admissions for the quarter would have been down less than 1%. But we are most disappointed by the 7.2% decline in commercial admissions and the 5.4% decline in commercial outpatient visits. Providing context for our commercial volumes relative to the industry continues to be difficult. There is really only one data point so far for the second quarter, namely HCA's negative 5.3% statistic for what they termed "Managed Care and Other." Our comparable statistic would have been negative 6.2%. While commercial volumes are a part of our story, they are not the whole story. I hope you noticed that our commercial revenues grew by 2%. So clearly, something is helping us mitigate these volume declines. Here's some insight into what's going on beneath the surface of our commercial volume trends. First, there was a significant pickup in our commercial case mix index which increased 2.8%. Over a third of our decline in commercial admissions was OB/GYN-related. As many of you have written about the decline in U.S. birth rate, it's probably no surprise that the reduction in deliveries explains nearly 20% of our decline in commercial admissions in the second quarter. In addition, we had a favorable shift within the mix of our commercial payers from lower-paying to higher-paying health plans. The impact of these two factors, when combined with continuing increases in commercial pricing, resulted in commercial revenue growth of 2%. At the end of the day, it's this revenue growth and solid cost control which drove our 9% growth in EBITDA. Also, I don't want to overlook some areas of strength in the overall volume picture. Our outpatient business appears to be picking up after a weaker start to the year. Second quarter aggregate outpatient visits declined by less than 1%, while we saw positive growth in government outpatient of 2%. Our admissions through the emergency department were equal to last year's statistic. This is further evidence that elective procedures are most directly impacted by a slow economy. And to complete the volume story, note that total government admissions were flat, and adjusted admissions declined by just 0.6%. We continue to show strong numbers in the area of cost control and rates. And importantly, the delta between these two variables continues to expand. Inpatient net revenue per admission and outpatient net revenue per visit grew by 4.6% and 5.3% respectively, significantly outpacing a 3.8% growth in controllable costs per adjusted patient day. Collectively, these factors helped us to generate adjusted free cash flow of $121 million in Q2, bringing free cash flow for the first half to positive $21 million. That's a $23 million improvement on a year-to-date basis from last year and a significant achievement given the large cash consumption that's typical for our first quarter. Speaking of cash, excluding cash and insurance subsidiaries, we had a corporate cash balance of $600 million at the end of Q2. Taking only into account capital expenditures, July repurchases of $40 million of debt and our planned investment in outpatient centers through the remainder of the year, our year-end outlook for corporate cash is $500 million to $575 million. Based on the improvement in our performance over the last several years and our credit line availability, we believe this amount of cash exceeds our liquidity requirements, even after considering the normal first quarter seasonal usage. Our liquidity will be even greater if we received the full California provider fee and complete the sale of some of our medical office buildings. I want to spend a moment on two actions that will improve our financial flexibility. First, in order to improve cash flow and manage our debt maturities, today, we launched the refinancing of a portion of our $1 billion of 2013 debt. If we successfully complete this transaction as contemplated, our debt will drop by another $200 million to roughly $4.0 billion, our annual cash flow will improve by $11 million and our next significant maturity of debt will not occur until 2015. Second, we are now beginning to negotiate a new credit line. Because our credit line is used to support letters of credit, which expire next year, it makes sense to replace that line in the third quarter of this year. Today, our facility is $800 million in size and after taking into account outstanding letters of credit and other limitations, we have undrawn capacity of approximately $500 million. We will seek to maintain a facility of $800 million with a five-year term. We also believe that based on our improved financial condition and the current bank market, we will be able to improve our capital allocation options, including lifting an existing limitation on stock repurchases. We think the combination of these actions, namely retiring $240 million of debt, extending $600 million of 2013 debt to 2020 and arranging a new credit line, will enable us to maintain an appropriately prudent capital structure and liquidity posture while adding new flexibility. Please keep in mind that any further decisions to make investments in our business, make acquisitions, retire debt or repurchase stock, are conditional upon our outlook, as well as the opportunities and market conditions at the time. So I can't project a future capital deployment strategy with greater precision today. To summarize, I'm pleased with our effective response to the continued weak economy and soft volume environment in the first half. When confronted by these extraordinary challenges, our management teams responded quickly to maintain our positive earnings trajectory. And once we generate volume growth, I'm confident that we can achieve some truly outstanding bottom line performance. Let me now turn the floor over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor, and good morning, everyone. As Trevor said, we are very pleased with our EBITDA and cash flow results for the quarter. There were two items we've pointed out in the release which could be characterized as non-recurring but they were identical in size and therefore, fully offsetting. The two items are a favorable Medicare bad debt settlement, offset by a reduction in revenue related to the Supplemental Security Income adjustment to Medicare reimbursement. I'll otherwise now give a little color on the other value drivers. First, as Trevor said on pricing, growth in per-unit revenues continues to make a solid contribution of profitability. We also have good visibility into future years' pricing. At this point, approximately 95% of our commercial contracting is complete for 2010, 75% for 2011 and 35% for 2012. Attributable costs again reflect good cost discipline with an increase of 3.8% for adjusted patient day. Salaries, wages and benefits was well controlled with an increase of 3.4% also on a PAPD basis, demonstrating our ability to effectively flex our staffing in response to fluctuating volumes. Supply costs increased just 1.2% per adjusted patient day relative to last year's second quarter. The one area showing cost pressure is other controllable costs, which were up 6.8% per adjusted patient day. There were increases in various elements of costs, some of which are non-recurring by nature, including a contractual settlement on a lease, a credit in the prior year's results, provider taxes and IT maintenance costs. Malpractice expense declined by $2 million or 7% relative to last year but increased by $14 million over the first quarter. Malpractice was negatively affected by a decrease in the discount rate and some individual claim adjustments. Otherwise, it would have been substantially less. If discount rates are stable or increase and we don't have the unusually large specific claim adjustments, there's opportunity for malpractice to decline in future quarters. However, since forecasting a malpractice expense is challenging, our outlook has been left conservative. Our bad debt ratio was flat relative to last year at 7.5% but there were a number of moving pieces which contributed to that result. Reported bad debt for the quarter included the benefit of a $28 million favorable adjustment for Medicare bad debts. In a related item, we also recorded unfavorable contractual adjustments for Medicare of $8 million. Netting the $8 million from the $28 million results in a favorable $20 million. This $20 million offsets the unfavorable SSI adjustment of the same magnitude referred to earlier. We also expect any recurring effects from these items to offset. The sum of uninsured maturity admissions declined by 2.2% in the quarter. This decline helped control the costs of providing uncompensated care to an increase of only $5 million in the quarter. On a totally separate subject, there has been some positive movement on CMS's response to the California provider fee legislation. There have been comments received from CMS, which have prompted an adjustment to the program but moved it much closer to approval. At this time, we expect the benefit we will receive this year to be $70 million, $30 million of which would be applicable to 2009. Having said that, we are leaving the $30 million contribution in the middle of our 2010 outlook range unchanged until the program passes the last step of formal CMS approval. Turning to our outlook. As you know, we raised our outlook for 2010 EBITDA by $50 million in early June. We remain confident with the new range of $1.035 billion to $1.1 billion as we expect acuity and shifts between commercial payers to continue to provide offset to aggregate volume statistical declines. This is consistent with the notion that the quality of commercial admits is better than what the unadjusted commercial volume statistic would suggest. To understand what the real impact of commercial volume losses is, one needs to add back the increase in acuity and the effects of payer shifts within commercial. This would bring the economic effects of commercial inpatient volume loss in the second quarter down to approximately 4%, rather than 7.2% and would put the effects of commercial pricing at around 7% to 7.5%. The details of our outlook are provided on Slide 12. The walk forward of cash from June 30 to December 31, as reflected on Slide 13, breaks down second half cash flow into its major components, so that you can more clearly see the positive cash generated from operations and the planned deployment Trevor mentioned earlier. You will note that we have reduced our outlook for year-end cash to reflect the potential for outpatient acquisitions and the $40 million of debt we repurchased in July. Although not yet formally reflected in the outlook, we show the pro forma effect of the range of cash we would use in the refinancing and debt repurchase transaction which we launched today. So to summarize. We have strong results for the quarter and earnings and cash flow. Commercial patient mix shifts continue to significantly offset gross statistical changes in volume. The potential upside of the California provider fee is nearing reality, and there is confirmation of our outlook for the year. I will now ask the operator to assemble the queue for Q&A. Operator?

[Operator Instructions] You do have your first question from the line of Tom Gallucci from Lazard Capital.

You mentioned that the end of June was soft sort of since your pre-announcement, I guess. And then July has been soft as well. Can you maybe give us a bit more color on the types of categories on the volume side that have been weaker? You mentioned during the quarter, your OB seemed to be a big piece of it. But I'm wondering if the drop-off was in other categories in particular.

The trends are similar to what we've been seeing all year.

Meaning OB dropped off significantly in late June and then July?

You've got the same categories of weakness. And again, I think it's important not to focus too much on very short-term volumes. We're just trying to give some indication of trends here. But there are no trends that are unusual that are taking place that we haven't continued to see for the year inconsistent with what the comments are that I made earlier.

Okay. So similar categories that were weak, were just a little weaker. And then what about if you could just be...

Actually, from the standpoint of being a little weaker, it is the same categories. But it's against a much tougher comp. So I don't know that sequentially, you would see it as weaker.

Okay. And then my follow-up, I guess, is you mentioned more volume from higher-paying health plans. Is there any more color behind that and maybe why you're seeing that sort of a trend? Is there deductible differences or anything else that you might be able to identify that would cause the better utilization from one type from another?

I don't think so. I mean that comment was made to help explain how you take a negative 7% volume number, which I think that the audience may pay too much attention to, and generate growth in the revenue number of our overall commercial book of business, which is the important statistic that drives earnings ultimately. And that is one component of it. It can be due to many things including growth or relative lack of growth in different health plans.

And your next question comes from the line of Brendan Strong from Barclays Capital.

When we look at the commercial trends, I mean, they are very similar to what they were in the first quarter. So really, no big change here. I guess, as you think about the rest of the year, I mean, do you think if the unemployment rate stays similar to where we're at today, do you think we'll be looking at similar declines in commercial trends for the rest of the year?

I would be speculative to answer the question directly but this is driven by the things that we've talked about. So employment is key. It creates more people that could potentially be covered under commercial insurance. You've got the shifts among payers. That's very important in driving the revenue number. And you've got this issue with elective procedures, most importantly, OB. And I think what we're trying to do is highlight a more important economic trend, which is again, similar to the first quarter. The volumes that we've been losing the most that are contributing to those volume loss numbers are the ones with the least value associated with them. And that is in part how we've been able to continue to grow revenues even in the face of those weak volume numbers.

I would just add that certainly we think our actions will help drive commercial volumes in the future. And, as you say, the economy improving, will drive commercial volumes more favorably in the future. But having said that, for the sake of conservatism, the middle of our range in the outlook presumes that the trends through the first half are sustained through the year. So for purposes of the outlook, we have presumed that the economy does not turn, and that there's no other windfall that would change the current trend. But obviously, we're working to operate in a different direction and create growth.

Okay, sure. And then, I don't know if there's any other color you guys can provide on the Medicare side as well. I mean, that's part of the business that you'd think would be kind of stable, but there's some declines there on the admission side too. So I presume part of that's because of some procedures being delayed because of co-pays possibly but any color around that?

Steve, do you want add some color on that?

Sure. Brendon, I think you're right. I think we are beginning to see some increase in elective surgeries of Medicare patients. That too has been impacted by the downturn in the general economy. But, for example, orthopedic surgery and Medicare was up 1% in the quarter compared to the same quarter prior year. So I think we're beginning to see that. But it's only a small glimmer at this point.

And your next question comes from the line of Gary Lieberman from Wells Fargo.

I was hoping that maybe you could talk a little bit about what you're continuing to do in terms of attracting physicians and maybe some other measures that you're taking to try to reverse the trend or at least ameliorate the trend on the commercial managed care admission front?

First of all, the number for the quarter, 245 active staff, net of attrition, added to staff. That's consistent with the forecast we made at the previous quarter for the year. But above and beyond that, we've accelerated our physician alignment activities. And each of our hospitals now has a customized physician alignment plan. And we've added a number of tactics to that particular plan, including the rollout of office-based Health Information Technology through our joint venture partner Med3000. We are tying our doctors more closely to our facilities through this HIT set of products and that will make a difference longer term. Additionally, we are reactivating a number of organizations that we had 10 or 12 years ago that are called Physician Hospital Organizations. These are entities that are jointly owned by physicians and hospitals, and allow for contracting on a single signature, whether it be with a commercial payer or a governmental payer. So we're doing a number of things, Gary, to increase our physician alignment that should translate into growing our volumes, especially our commercial volume.

Okay. And then one follow-up. There's a lot of focus this quarter on one particular acquisition that you guys indicated you were looking at. Could you bring us up to speed on what your current thoughts are in terms of potential acquisitions and kind of where you might be looking and where you might not be looking?

Sure. I think first of all, it's important to understand, we don't need to make acquisitions to meet our goals. So we believe we continue to have significant margin upside in the current portfolio. And we spent a lot of time in June and July in Investor Relations activities, talking to people about those sources of margin expansion. We are actively pursuing acquisitions in the outpatient imaging space. These are small dollars but they're very accretive and they generate very high IRR. I'd like to make acquisitions in our Service business in order to expand our scale but those tend to be very expensive, and they're hard to find the right fit. And then on acute acquisitions, it does seem as though the supply side of that market is increasing very steadily. But we're going to continue to be very careful in that area, looking for selective acquisitions where we would have a high degree of confidence in generating returns that would be well above our cost of capital. And other than that, I really can't be more specific. It'll be very situation-dependent.

And your next question comes from the line of Doug Simpson from Morgan Stanley.

Trevor, could you just talk a little bit. Just stepping back, if we look at the unit price increases the industry's seeing, they're above GDP. And then we've got this dynamic where we're seeing a sluggish commercial utilization. I mean, is there a broader sort of question looking out two years? I mean do you foresee any change in strategy relative to pricing to try to get volumes back up just sort of an affordability issue? Or is it more just when the economy rebounds, we should get some pickup from that? I mean, can you separate the two?

It's a very tough question. Because we have examined this question quite extensively here. I think there's several ways to approach it. So first of all, I think we are still in an environment where there is not a direct correlation between pricing and volume. There just doesn't seem to be any evidence of that. I think that volume is driven by all of the strategies that we outlined about physician alignment and about competitive positioning within markets and the local economies. And again, you get into these micro-localities where really the particular employment position in a very small market makes a difference. I think going forward, in terms of changing strategies, we have employed for some time a differentiating strategy on clinical quality. We thought that, that would generate differentiated volumes. And there were quarters when it appeared to be doing so but I'm not sure you can make a blanket statement on that. I think that as transparency increases and as health plans focus more on delivering value to their customers, the quality differentiation will have to play an important part. I want to make sure, even though we have generated strong increases in per unit revenues over the past several years, we still believe that our pricing positions us very effectively in terms of delivering value in the markets. Rarely are we the high-priced provider in a market. That position is usually held by a large not-for-profit system in a particular market. And then in terms of dealing with us from a health plan perspective, we have a very efficient revenue cycle, a very efficient back office. We have very few disputes with the payers. And so, we try to point out to them that as they look at the overall cost of doing business with providers, we tend to be positioned very effectively. I think the strategies will continue to be legitimate and valuable for the foreseeable future. When you get into several years from now into tiering of networks and more restrictive networks and so forth, I think we're also well positioned for that. And that is where you may begin to see opportunities to link price and volume. But I don't think it's -- the industry's just not there today.

Okay. And is there any, as you look back to prior slowdowns, either regionally or nationally, a sense of timing with utilization slowdowns and relative to downturns in the economy, how long that may take to play out in terms of a lag effect?

It's really hard. We haven't seen one this long. And I don't think anybody -- I mean, I've talked to all sorts of people in the industry, I don't think anyone has seen one this widespread or this pervasive.

And you have your next question from the line of Sheryl Skolnick from CRT Capital Group.

I want to probe on the change in acuity a little bit more if I could. And perhaps if you look at those remaining, for lack of a better word, heads in the beds ex the OB/GYN, ex the respiratory/flu. And you look at your ER visits, is there any link or any indication that patients being admitted for treatment or surgery through the ER are of higher acuity today than they were a year ago?

Sheryl, I think we have a couple of data points that would tend to suggest that the patients are more acute that are being admitted. If you look at the commercial managed care patients that get admitted through our ER and compare the Q2 '10 results to Q2 '09, the case mix index is 3% higher than it was in '09. So it would suggest that the commercial patients coming in through the ER are indeed sicker than they were a year ago. The other point is that Trevor mentioned that our overall ED admissions are flat compared to the same quarter prior year. The fact that we had 2,000 fewer visits for influenza would, in fact, increase the overall case mix index of patients we're seeing in the ED. And therefore, those admitted would be higher acuity. So I think those two data points reinforce the observation that our ED is admitting sicker patients than it was a year ago.

Yes. Because I'm wondering if we're seeing the showing up later and sicker effect of delaying what's elective, let it become urgent, then let it become emergency and whether that might be the very early stages of an interesting trend that could further offset from the headwinds in commercial managed care.

Well certainly, we have been concerned about that from a theoretical point of view. It's a little early to call that. But that's the sort of activity we would expect to escalate if, in fact, that bolus of pent-up demand is coming forward, we would see it through the ED as you suggest.

And I can count on you all to have that data at your fingertips. Thank you. And then as a follow-up. Trevor, the refinancing and reduction of debt that you're doing is, I think, timely and interesting, as well as the -- and a good thing as well as look at the credit facility. But you intrigued me with one of your comments, which is having the flexibility to do share repurchases. Rather than read anything into that, could you share with us your thoughts on once you have that flexibility, whether or not you would be inclined to do it assuming, for example, you had that flexibility today?

Well after intriguing you with that comment, I went on to say that I wouldn't say anything more about those kinds of activities at this time because it would be dependent on the situation at the time after we have gained that flexibility. The situation meaning what are the market conditions, what's our outlook, what opportunities have we had to deploy the capital and what at that time is the best use of capital.

You have the next question from the line of Darren Lehrich from Deutsche Bank.

I guess I just wanted to go back to the M&A strategy question that was asked previously. And I think Trevor, you've laid out maybe three things that are on the table that you're really kind of focusing on: imaging; some things in the services side of the business, I guess, that would be more revenue cycle oriented; and then selectively acute care. I guess, just given what's unfolded over the last three to four months, is there anything that you've brought up to your board that you would firmly say is off the table from here? Can you just help us think a little bit more clearly about capital deployment on the acquisition side and whether you've made any firm decisions about what's off the table?

I don't really have anything to add to what I said earlier. And no, I don't think anything is particularly off the table. But by our actions, I think you can gain insights into what we're thinking.

Okay. And you mentioned that the medical office building's sale was something you're still working through. Can you just give us an update about that and any other asset sales that might be contemplated from here?

Sure, Biggs, do you want to give the updated office building?

Sure. It's been a long process but we have continued to look to sell medical office buildings. You may recall in a prior call, I commented that rather than try to sell them all in one large transaction, we've broken them up into smaller transactions by market or by region in order to make financing more readily available for purchasers. And we presently do have a number of them under contract, but having said that, a real estate contract isn't done until it closes. And so it's premature to say that there is definitively any additional cash coming in. But we're certainly hopeful that we will have at least some of them get to the point of close this year. If not this year, then into next year.

And is there a range of, I guess, either numbers of assets, square footage that's sort on the block? Can you just help size what you're working on at this point?

Yes. The total opportunity that remains in front of us, for those that we're still trying to market, I'd put in the range of $100 million. But once again, there can be no assurance that we will ultimately close on all those or that that's the amount that would be received. But just for the sake of sizing what the opportunity is, that's a reasonable number to work with.

And the EBITDA loss relative to that $100 million would be what?

It's nominal. As we said before, these are properties which don't generate a lot of earnings for us. We think that quite frankly, another owner that's a professional real estate manager will be able to operate them more efficiently, number one. And secondly, to the benefit of our physician tenants. And so it makes sense for these to change hands in just about all respects.

And your next question comes from the line of A.J. Rice of Susquehanna.

Maybe first off, you just gave us your update and if there is any update on thoughts on things like the managed care contracting outlook for next year. Your thoughts on how the FMAP extension and the COBRA state of play, those payer dynamics looking into the forward year might -- what's your thinking on those at this point?

And actually, I would like to thank you on the issues of COBRA and FMAP for injecting some rational thought into the hysteria that seems to surround those topics. I guess, I'll take FMAP first. I don't think I'm telling anybody on the call something they don't already know. But the Senate appears to be willing to continue to work on this. I can understand why they would not have necessarily wanted to pass something before the recess. But it's important to the governors. We have tried to estimate what an effect on us would be if the FMAP incremental money were not continued, and it hit directly and only to the Medicaid budgets of every state. And if we proportionally were hit directly. So I don't know if you should call that a worst-case analysis but it's a direct flow-through directly to us of eliminating those funds, and the total would be what, Biggs, it was...

It'd be just under $70 million but I emphasize, that is kind of the worst-case number because we don't think that it would flow directly in that case.

It is inconceivable it would actually work that way. But seems to me that people are sort of pricing in fears that are far greater than that. On COBRA...

I should point, that's the annual number.

So on COBRA, it's been very difficult for us, as we've said repeatedly for a long time, to identify which patients are affected by that and so forth. And it maybe that we're seeing the results of that COBRA roll-off now. I don't know but I still think that one's just totally amorphous. And then with respect to the pricing environment, it's obviously never easy, but the fact that we are essentially done for 2010 and 75% contracted for '11 and into the mid-30s in terms of percentage of our managed care business done for 2012 gives us an extraordinary amount of visibility into what we think pricing trends are into 2011 and 2012. And it's obviously considered in the comments that we've made today.

Okay. And then just maybe a follow-up on that. One thing that I encounter, I guess, and I'd be interested in your perspective on it is the sustainability of the cost trends. Obviously in the face of the weak commercial volumes and the other dynamics around this economic downturn, you've been able to have very good cost controls on key items like labor and supplies. But I think there's sort of this concern that if these payer pressures continue to exert themselves out there, at some point, you sort of hit a wall on that cost savings. I guess, I'm trying to get my arms around and wonder if you've thought about the issue of whether -- does all of this go hand-in-hand if the cost opportunities you're realizing are hand-in-hand with some of the banks that are driving the commercial volume pressures, for example? Or do you see a point of time where some of the sustainability of some of these things gets called into question?

As you face a declining volume environment, it does get more difficult to continue to reduce staffing because you run into certain core and minimum staffing. But that's why we really some time ago turned our attention to more creative approaches to cost reduction, such as those that are part of the Medicare performance initiative. And that really gets to a whole different range of cost opportunities in the utilization of supplies and length of stay and even the clinical practice of medicine. That, together with the investments we're making in technology, should open up new opportunities for us in cost management beyond the traditional levers that were largely oriented towards labor. And again, I also should point out how really outstanding our performance has been in the revenue cycle. I mean, that's an important cost driver, and we have been very effective in managing that, both from an expense and a cash flow perspective.

And you have your next question from the line of Kemp Dolliver from Avondale Partners.

Questions are on volumes. First on your volume outlook for the year, it looks like you are expecting some improvement in the second half versus the first half. And just wanted to get your rationale behind that, given that Q1 likely had some weather disruption, which would leave one to think that Q2 would have shown better trends. But they look very similar in many regards. So that's what's behind my thought process.

Okay. So I may ask Biggs to speak to the outlook for volumes for the second half.

Sure. I think that you're right. We are expecting, if you're looking at it from a year-over-year trend standpoint, some improvement in the second half. It's our belief that our actions will drive volume. Plus on the outpatient side, the acquisitions that we're making that will fall under our hospital licenses will add volume on outpatient. But I think it's a moderate level of growth that's projected second half over first half, from a trending standpoint. At a gross level, it may prove to be relatively flat to the first half because of seasonality. But from a year-over-year trending standpoint, yes, we're expecting some improvement as a result of our actions, be it physician recruitment, redirection, the outpatient acquisitions and everything else we're doing to drive volume. But it's a very modest amount of growth that we're expecting relative to the first half.

That's fine. And also several years ago, you all changed your admission criteria to eliminate a lot of short-term stays. And with the rack audits and I think other payer pressures, there appears to be intensified industry pressure, increasing observation stays, et cetera. What are you seeing in terms of your very short-stay cases as it relates to the commercial book?

Well, as you point out, we made these changes several years ago. So we've really gone through anniversary dates already of those changes. The good news has been we've done really well in the rack audits. The bad news has been we've probably depressed our admissions intentionally for some period of time. But that's really washed out before now.

So no new pressures from there then?

No, not to us. If we had not implemented those different criteria, which principally involve using the [ph] (1:01:12) interquell system which is a method essentially of providing the same screening to admissions that the payers ultimately provide and that the rack auditors are using. So if we hadn't done that, probably we'd be in a position of seeing many admissions denied and overturned and rack audits coming up with big claims.

Your next question comes from the line of Justin Lake from UBS.

Just a follow up question on the operating cost side. I'm just trying to get some perspective on obviously, you've done a great job there over the last few years. If you could think back maybe three to five years ago, what your kind of core operating cost inflation trend look like and compare it to where you are now, I'd be curious.

That's a hard one. I can't remember what the inflationary trends were but I can tell you that our cost base wasn't nearly as good. If you go back a few years, we were having volume losses and we were staffing at levels that were too high for the volumes we were experiencing and constantly trying to chase that sort of after the fact and get our cost base right-sized. But the processes we have in place now enable us to flex routinely on a daily basis now with great tools in place. And so that's not core inflation but certainly from the standpoint of our ability to manage cost growth, it is a big value driver.

Sure. I guess what I was trying to get to was obviously you've done -- the second question was just -- or the follow-up there was just I'm trying to get from a core perspective what you've been able to drive yourself, which has obviously been a lot versus what you've kind of benefited from just on lower typical nursing inflation and things like that.

I see what you're saying. Well look, we have really driven this improvement in productivity and this better performance on labor. The outside factors have been mixed on that. We've had pressures from labor unions. We've had continued competitive wage pressures. And then we had some benefits from lower turnover, that was really caused in large part by the economy but also by a series of initiatives we undertook. So I guess you want that sort of macro rundown. I'd say there have been net probably neutral to slightly positive factors from the environment on labor but huge positive factors from our own management techniques and the implementation of systems to manage that. On supplies, we've had sort of relentless upward pressure on the high-value supplies and fairly benign pricing pressure on commodity supplies. But once again, our efforts to manage utilization, to substitute and use equivalent but less expensive drugs and supplies, and to be more conscious of the waste of supplies, the whole series of initiatives in the supply chain have really driven outstanding performance there. And then I've mentioned revenue cycle earlier and those, of course, are the huge drivers that cost.

Right. So you think these are replicable though looking forward, as the reimbursement environment gets tougher. I guess that's the real key.

Well I think independent of the reimbursement environment, as I said a few minutes ago, we continue to find new opportunities and new ways of being more efficient and saving money.

And your next question comes from the line of Ralph Giacobbe from Credit Suisse. Ralph Giacobbe - Crédit Suisse AG: I just wanted to go back to volume and just kind of reconciling the pre-announcement down 1.2% on the volume side and in the quarter down 2% sort of implies that the last several weeks of the quarter obviously you were down kind of 4% to 5%. And I know it's hard to sort of extrapolate just those last three weeks but I guess, first, I mean, is there nothing in those results that are meaningfully different other than just a sharper decline within admission trends across-the-board? And then two, when you said that July remains soft, is that in the context of the full 2Q results or the last three weeks of the quarter?

The July was pretty consistent with the end of June. So it's softer than the second quarter. But don't forget, the really tough comp for last year's July. So I think it's again, when you get into these really short-term periods where you're analyzing volumes, the prior year performance is important. The current year, if there's something from a service line perspective is important. And I think it's too limiting of a period to draw any broader conclusion than that, except just as a point of disclosure, we wanted to make sure we said look we're off to a slow start for the third quarter on volumes. As Biggs points out, we've taken into account in our outlook for the year that there's no dramatic recovery in volumes in the second half. Ralph Giacobbe - Crédit Suisse AG: Okay. That's helpful. Thanks. And then I just want to go back to the managed care side. I may have missed this. I know you gave sort of the percentages of the business that's locked in for the next couple of few years. I just want to make sure the rates on that. Have you sort of talked about what, kind of, the average rates are and/or maybe whether they're anything meaningfully different than the rates we've seen over the last couple of years?

No, we haven't talked about it. We just find that it gets played right back to us. It's relatively consistent with what we've been able to do to date but we're working hard to get it.

And we do have our last question from the line of John Rex.

So with that, I think I'll just proceed to make a couple of closing comments. This quarter, we took a decline of 2% at admissions. We turned it into 3.3% growth in revenues and almost tripled that rate of growth in EBITDA. And we should be able to do a lot better than that once we begin growing volumes again. We achieved new milestones in margins and free cash flows. Ad those are very important to keep in mind. We're taking excess cash and we're reducing debt. We're reducing the company's risk by extending maturities of our 2013 debt. And we plan to increase our flexibility by arranging a new credit line. During June and July, we engaged in an extensive amount of Investor Relations activity. We're going to resume this in September by attending the Morgan Stanley conference and continuing to do one-on-one meetings in a few cities. And with that, operator, thank you and this concludes our call.

Ladies and gentlemen, that concludes our presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.