Community Health Systems Inc (CYH) 2007 Q2 法說會逐字稿

Good afternoon, I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems' second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Please go ahead.

Thank you. Good morning and welcome to Community Health Systems quarterly conference call. With the on the conference call is Larry Cash, our Executive Vice President and Chief Financial Officer. The purpose of this call is to review our financial and operating results for the second quarter in year-to-date into June 30th, 2006. We issued an 8-K including a press release after the market closed yesterday with our financial statements as well as some income statement information on the second quarter and year-to-date for Triad in the final exhibit of our filing. For those of you listening to live broadcast of the conference call, on our website a slide presentation accompanies our prepared remarks. I would like to begin with some comments about the Triad transaction into the quarter and then turn the call over to Larry who will follow with a more detailed account of our financial results. Before I begin, I would like to read the following statement.

Statements contained in this conference call regarding stated operating results, acquisitions, transactions or other events are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made based on Management's current expectations or beliefs, as well as assumptions made by information currently available to Management. These are summarized under the caption Risk Factors and in documents filed by Community Health Systems, Inc. and with the Securities and Exchange Commission including the Company's annual reports on Form 10-K, quarterly report form 10-Q and current reports on form 8-K. These filings identify important risk factors and uncertainties that can cause actual results to differ from those in forward-looking statements.

First, we are very pleased that the transaction acquiring Triad Hospitals closed on Wednesday, July 25th. This transaction marks a significant milestone for the company and establishes us as the largest publicly traded hospital management company in the United States. We're now operate 129 hospitals in 28 states. We also operate one hospital in Ireland and through QHR manage an additional 170 hospitals. We believe that this represents a significant growth opportunity as we focus on improving these assets and we're looking forward to the challenges that an acquisition this magnitude of presents. Our combined hospitals will be managed by five division presidents headed by four current operating CHS executives and one Triad executive. We have added one additional division. Division one includes hospitals in Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, and Virginia. Division two will be comprised of hospitals in Arkansas, Louisiana, Missouri and Texas. Division three includes hospitals in Illinois, New Jersey, Pennsylvania, Tennessee and West Virginia. And Division four includes the hospitals out West including Alaska, Arizona, California, Oklahoma, New Mexico, Nevada, Oregon, Utah and Wyoming. Finally Division five will be comprised of hospitals in Indiana, Kentucky and Ohio and be managed by the Triad executive, prior responsibility was Indiana, Triad's most profitable state.

We have also hired Doctor Barbara Paul as our Senior Vice President and Chief Medical Officer. Dr. Paul is a graduate of Stanford University School of Medicine and is board certified in internal medicine. Our hospitals have strong positions in each of their respective markets, geographically diversified which reduces our risk. We strongly believe that the non-urban and the mid-size markets represent the most attractive opportunity for the future. Our geographic diversity means that no one state represents a disproportionate percentage of our revenues or earnings. We are the sole provider in approximately 65% of our markets, our 87 hospitals giving us a distinct competitive advantage. Both Triad and Community Health have been industry leaders in same store growth. This encompasses admissions as well as revenue growth.

We expect to maintain that competitive edge by using several key operating strategies. As you know physician recruitment has always been a key component of our operating strategy. That will not change, as we view physician recruiting as an important driver of both volume and growth in market share. Adding new physicians to our markets improves not only the quality but also the scope of health services provided in our communities. We believe that our standardized and centralized business platform has been one of the keys to our success. Some of these standardized business practices include ancillary support for such areas as pharmacy, laboratory, surgery and imaging. Our facility management department coordinates and manages all of our construction projects centrally. We also have a centralized group purchasing department that works diligently with our GPO to ensure that we get the best pricing and demonstrates why our company has the lowest supply cost as (inaudible) in the industry.

We are committed to deleveraging the company. We will gain approximately $50 million from the corporate overhead, another $434 million from supply purchasing synergies. We also believe that we can improve the margins on most hospitals significantly. Our hospital and corporate executives are clearly aligned with our stockholders to increase shareholder value. As a reminder, we did withdraw guidance for 2007 at the time of this initial announcement of Triad hospitals. We will be issuing guidance for 2008 later in 2007 or early in 2008.

Community Health Systems has delivered another very solid financial and operating performance for the second quarter of 2007. Our results continue to reflect our consistent execution. Net operating revenues for the quarter into June 30, 2007 total $1.2 billion or a 17.7% increase over the prior year compared to $1.1 billion for the same period last year. Adjusted EBITDA was $172.5 million, a 10.1% increase over the same period year ago. Net income was $54 million or $0.52 a share for the second quarter last year. Earnings per share from continuing operations increased 5.6% or $0.57 per share versus $0.54 per share for the same period. Adjusted for stock-based compensation, EPS would have increased 7.4%. Net operating revenues for the six months ending June 30th, 2007, increased 17.5% to $2.45 -- to $2.45 billion. EBITDA was $342.7 million, an increase of 8.7%. Income from continuing operations for six months ending June 30th, 2007, was $108 million or $1.14 compared to $1.13 for the same period a year ago. Again, adjusted stock-based compensation, EPS would have grown at 3.5%.

With that I would like to review some key operating -- some key accomplishments for the quarter. First, our same store admissions were down slightly for the second quarter. Same store adjusted admissions were also down slightly for the quarter. And same store net revenue increased 4.5%. As we discussed at the time of the Triad announcement in March, both companies had several deals in the pipeline. We have since acquired Porter Health, an expansive hospital system providing services to patients across northwest Indiana. Hospital campuses are located in Valparaiso and in Portage, Indiana, with a total of 301 license (inaudible). Porter Health had trailing revenues approximately $235 million and a mid single-digit margins. Additionally we have a letter of intent with Empire Health Services to purchase two hospitals with 511 beds in Spokane, Washington. Washington would represent a new state for us, trailing revenues approximately $290 million with a mid single-digit margin. Aside from that transaction, we will be concentrating on the hospitals acquired in the Triad transaction and we'll be out of the acquisition arena for approximately the next two years, while we focus on improving performance at those hospitals.

The company recruited 295 new physicians for the first six months, compared with 241 recruited for the same period year ago. Our physician turnover is approximately 6 to 7%. We believe that our centralized physician recruiting represents an additional opportunity, as Triad did not have a centralized focus on physician recruiting. At this point I would like to turn the call over to Larry to provide you with a summary of financial results.

Thank you. While volume remains a challenge, we continue to be encouraged by operating results for the second quarter. Our consolidated admissions growth for the second quarter is up 10.9% compared to the same period last year. Adjusted admissions, which factors in outpatient business had 11.3% growth rate over the second quarter of last year. Our same store admissions decreased 0.2% or 20 basis points compared to the second quarter 2006. Adjusted for service foreclosures and admission loss in hospitals in our service area, that opened recently, same store admission would have increased 0.4%, 40 basis points. On a positive note, same store self-pay admissions declined 3.5% versus the prior year. Excluding the self-pay decrease and other adjustments, second store admissions would have increased 70 basis points. Same store adjusted admissions were down 0.4% or 40 basis points in the quarter. Net revenues in the second quarter increased 17.7% from $1.1 billion last year to $1.25 billion this year. On a same store basis net revenue increased 4.5% for the quarter.

Same store net revenue for adjusted admission increased 4.9% against a tough comp of over 7%. Same store net revenue per adjusted admission increased on a sequential basis 2.1%. Total same store surgeries decreased 2% due to a service closure of the serviceable program in one hospital and the move of some outpatient procedures to physician offices or other settings. Our same store Medicare case mix decreased 0.3%. We continue to deliver good EBITDA growth with a strong 10.1% increase of $15.8 million from $156.7 million to $175.2 million. On a same store basis EBITDA increased 1.3% from $157 million to $159 million for the quarter. Same store EBITDA would have increased 3%, excluding increase of stock-based compensation of $2.7 million. Consolidated income increased 2.7% from $52.4 million to $53.8 million. It would have increased 5.5% excluding additional stock-based compensation. And additionally we had about $3 million of additional interest on the stock we bought back in 2006.

For the second quarter EBITDA margin consolidated basis was 13.8%, down 100 basis points from a year ago due to the low single-digit margins of acquired hospitals and stock-based compensation. Same store EBITDA margin decreased 40 basis points, 14.5% compared to quarter ended June 30, 2006. Adjusted for stock-based compensation same store margin would have been down 20 basis points compared to the second quarter. For the second quarter our non same store margin was 8.9% on $147 million revenue and a trailer margin before acquisition of the non same store hospitals was approximately 5%. In the second quarter, consolidated operating expenses and percentage of net revenue were up 100 basis points due to non same store acquisitions, the additional stock-based compensation and bad debt. Payroll benefits were flat, 1% productivity improvement, supplies improved 10 basis points to 11.7%, and bad debt increased 100 basis points to 11.9%, up 60 basis points sequentially.

Other operating expenses increased 10 basis points. On a same store basis, payroll improved 20 basis points, supplies improved 30 basis points, offset by an increase of same store bad debt of 70 basis points, and other operating expense of 20 basis points. On a year-to-date basis consolidated admissions were up 11.8% and adjusted admissions were up 12.6%. Same store admissions were up 0.4 % and adjusted admissions were up 0.4% Adjusted for a decrease self-pay admissions and service closures and the affect of a new competing hospital, same store admissions would have been up 1%. Net revenues year-to-date increased 17.5% to $2.5 billion compared to the same period last year. On a consolidated basis, net revenue for adjusted admission increased 4.3% on a same store basis, net revenue increased 5.3% for the first six months, same store revenue inpatient revenue is up 3.2% and outpatient revenue is up 7.2%. Total same surgeries decreased of 2.3% and on a same store basis net revenue for adjusted admission increased 4.9% and same store Medicare case mix for six months in June 30th, 2007, decreased 0.4%

We have continued to have good consolidated EBITDA growth with 8.7% increase for the first six months compared to 2006, 343 versus 315. On a same store basis EBITDA increased 1.5%, consolidated EBITDA margin for six months ended June 30th, 2007, was 14% versus 15.1% for the same period a year ago. Again, due to low margins of acquired hospitals, bad debts and increase in stock-based compensation. Non same store margin was 8.3% and the trailer margins for acquired hospitals was approximately 5%. Same store margins for the six months ended June 30th, 2007 was 14.7%, down 50 basis points compared to the same period in 2006. Again, adjusted for increase in stock-based compensation, same store EBITDA would have increased 3.2%, and EBITDA margin would have decreased 30 basis points compared to the six months ending June 30, 2006. For the first six months consolidated operating expenses as a percentage of their revenue were up 110 basis points to the prior year, with the challenges in the low margins of acquired hospitals, increased stock-based compensation and increase in bad debt.

Supplies improved 20 basis points. Payroll and benefits increased 30 basis points, bad debts increased 90 basis points and other operating were up 10 basis points. Same store operating expenses increased 50 basis points for 2006 with a strong improvement in payroll -- or supplies, 40 basis points offset by 10 basis points increase in payroll due to the growth in employee positions, a 60 basis point increase in bad debt and a 10 basis point increase in other operating expenses. Each hospital has its charity care policy generally ranging from 150% of the property level and up and also have administrative self-pay discount program that's provided on a case-by-case basis. Consolidated debt revenues percentage of total revenue decreased 40 basis points for the quarter, and same store self revenue decreased 90 basis points. Same store self-pay admissions percentage of total admissions decreased 20 basis points, a 3.5% decrease from the same quarter a year ago. Year-to-date same store self-pay admissions decreased 20 basis points as a percentage of total admissions and a 3.1% decrease over 2006.

For the quarter just ended consolidated bad debts s 11.9% versus 10.9 a year ago or an increase of 100 basis points. Our combined consolidated bad debt charity administrative discounts divided by adjusted net revenue is up 200 basis points, 18.6% versus 16.6% for the quarter. On a year-to-date basis consolidated combined bad debt charity administrative discounts divided by adjusted net revenue is up 130 basis points. Same store cash receipts were 103% of the collectible net revenue for the last 12 months ended June 30th, less bad debts. Consolidated cash receipts were 102%. Total AR days were 64, June 30th, 2007. This was an increase of 2 days. December 31st, 2006, same store AR days were 62.25. The allowance for doubtful accounts was $498 billion or 36.3% on June 30th, 2007.

The point-of-service collections at June 30, 2007 were 10% versus 8% at June 30, 2006. Community Health Systems continues to have a favorable payer mix. For the quarter ended June 30th, 2007, consolidated net revenue by payer sources were up as follows. Medicare 29.5%, Medicaid 11.6%, combined managed care and private owner 46.5%, and self-pay, 12.4% of net revenue. On a year-to-date basis the payer mix is as follows. Medicare 30.3%, Medicaid 10.9%, combined managed care and private owner 46.3%, and self-pay, 12.5%. Payer mix is one of the most important drivers of hospital revenue margin. Triad has a better pay mix than CHS historically and theoretically should have a higher margin. Triad's consolidated net revenue for adjusted admissions, about $9,600 versus CHS, $7,600. We believe this represents an opportunity for margin improvement in the future.

Cash flow from operations was $96 million for the quarter versus $116 million for the second quarter of 2006. On a year-to-date basis cash flow operations were $260 million versus $207 million, increased $9 million or 4%. Increase in cash flow from operations resulted in increase in net income of 1.7, increases in non-cash expenses for depreciation stock-based compensation, $17.5 million, an increase in cash generated from accounts receivable, $10.5 million offset by cash flow and supplies, prepaids and other current assets of $13.3 million and in accounts payable accrued liabilities and income taxes of $24 million. Total expenditures for the quarter were $68 million and year-to-date capital expenditures, $122 million or 5% of revenue which is in line with our historical spending. Balance sheet cash at June 30, 2007, was $21 million. At the end of the quarter, the company had available credit of $320 million. And at the time of the closing of the transaction, prior to transaction, we had a revolver of $750 million, and a delayed draw of $400 million available.

Looking at the balance sheet at June 30, 2007, we had $521 million working capital with approximately $4.8 million in total assets. Our debt to capitalization at quarter end was 52% and our fixed rate of debt was about 95% of total outstanding debt at quarter end. For the quarter, Community Health's earnings per share increased 5.6%, $0.57 versus $0.54, earned income of 53.8 versus 52.4. Adjusted for stock-based compensation, EPS for the continuing operations would have been up 7.4%. And now I'd like to spend some time talking about the debt related to the Triad acquisition. During last week of June, we priced the high-yield senior notes. These notes were issued at a slight discount, with a face amount of slightly over $3 billion, and an 8.875% coupon yielding 9% considered a discount. Interest in January -- in July. The notes mature July 15, 2015. Our first call will on July 15, 2011 at 104.438. Deferred financing costs are approximately $109 million, and will be amortized over the next seven years. We are also placed approximately $6.065 billion in term loans as well as the $750 million revolver, and the $400 million delayed draw. Again, we have not drawn on the revolver or the delayed draw.

All of these credit facilities have loaded three-month LIBOR plus 225 basis points. We do have approximately $2 billion in swaps and plays and anticipate additional slots to fix the larger portion of the debt over the next several months. Fixed-rate debt will be approximately 55% after the acquisition of Triad. The company has committed the recent debt on the balance sheet. We do have some built-in leveraging coming from expected synergies the first year. As Wayne Smith said we have approximately $40 million to $50 million in synergies from corporate overhead and another $34 million from supply purchasing synergies. We think we have built-in new leveraging opportunities over the next two or three years totaling $275 million EBITDA. We project margin improvement of $35 million on the CHS hospital portfolio representing 200 basis point improvement for those hospitals purchased over the last five years, representing approximately $1.8 billion revenue.

We also believe we can generate an additional $165 million for margins improvements in the Triad portfolio. This represented 350 basis point improvement, on approximately $5.5 million in revenue. Additionally we believe that the past discretionary capital expenditures from both companies should generate $75 million on the $455 million in capital spent. Triad's quarterly year-to-date performance as provided by upper management is included in the final exhibit or 8-K. For the quarter consolidated admissions increased 2.4%, adjusted admissions increased 4.6%. Consolidated quarterly revenue increased 7.8%. Consolidated EBITDA for the quarter decreased 17% from $187 billion to $154. There are several reasons for the decline. First are the merchant costs of approximately $10.5 million, additional payroll benefit costs of $18 million incurred, 20 or 30 basis points were incurred, bad debts were also higher by $18 million or 120 basis points for the quarter ended June 30, 2007, same store admissions increased 0.5%, adjusted admissions increased 1.9% and revenue increased 4.8%. Wayne will now provide (inaudible).

We're very pleased with the solid second quarter results for Community Health Systems. Our revenue margin trends through the first half of 2007 validate the strength of our operating model. And we expect our growth to continue as we improve hospital operations, add enhanced services and recruit physicians. As you probably know, this will be our last report on CHS individually. All future calls will reflect the combined companies. With that, I am happy to now open the call for questions. If you would like to talk to us after the call you can reach us at 615-465-7000.

(OPERATOR INSTRUCTIONS) First question is from Tom Galucci with Merrill Lynch.

Thanks very much. Two quick ones. First, was wondering if you have any specific debt pay-down goals now at this point as we look out over the next year or two? The second one was, you mentioned $165 million in incremental EBITDA opportunities in the Triad facilities, can you give us some additional color on where you specifically you expect that to come from? What area of the hospitals?

There are no specifics on debt paydown. If you look our history, we are forcing the load after the LBO, I think after it was done, it was about an eight multiple, about a seven before it went public, it's six thereafter, about where we are now. And we got it down to about three or four years, so debt to EBITDA, we start to look on a similar type trend over the next several years but no specific dollar amounts. So that would come through equity or equity-related transactions or possibly some asset sales, which we won't provide any specifics today. As relates to $165 million, if you look at it, we had a little bit better success over the years of fluctuating volume and controlling payroll and same store payroll, supplies, about 17% of supplies with about 12%, they have a higher case so there are still opportunities above the $34 billion. And then finally, our other operating expenses, we think there's some synergies we can accomplish in various services and corporate office efforts and things of that nature that we do here. I would add that we would not think bad debts would be part of synergies. We're not predicting that bad debts would get substantially better in Triad or Community Health Systems. But in area of payroll, supplies and then to a lesser extent of operating expenses.

Okay. And then just one final one. At the Triad hospital level, have you seen much turnover in terms of the C suite of managers or has it been fairly stable from that perspective so far?

We haven't owned Triad very long.

In the last six months --

No, there has only been -- as far as I can tell, there has only been one CEO that left since we announced this transaction and he actually got promoted and got a job at another company at a higher level. And as you might expect, we have been in all the hospitals, we're continuing to work on them now daily and we have not had any turn over as far as I know.

Thank you very much.

Next question is from Adam Feinstein with Lehman brothers.

Good afternoon. Just a few questions, Larry and Wayne, here. I wanted to see, you guys did a good job managing through the bad debt issue. But obviously it is wreaking havoc on other sectors. I wanted to see, could you spend a minute just talking about your current accounting policy with respect to bad debt and have you seen any changes in your collection rate over the past quarter and then I have a follow-up question about the Triad deal.

Every month we analyze the historical informational on collections and project that forward. We have about 64% of allowance on our self-pay and if you consider our accounts that got a written off, it would probably be over 80% at that one time. We have done a better job in service collections, which we think probably helped us on bad debts. The other thing, we do have our own collection company. I know some other companies don't have that opportunity, so we can always adjust our staffing and efforts as we get more self-pay business. But we're still getting 70% of our bad debts through the pure uninsured business. And again, about 30% from coinsurance. And the collection rates for those are staying fairly constant in around 10% range on pure self-pay and around 50% on the deductible and coinsurance. There's a lot of effort now to try to do a better job on deductibles and coinsurance in our collection company. We made a little headway but not substantial.

As far as where bad debt sort of handled, we didn't change any policies or any analysis. We did higher bad debts in our non same store hospitals in this quarter than we had seen historically. And that's just the results of those hospitals. They are good hospitals just the bad debts were up a little bit in those areas as it relates to where bad debts sort of happen. They were up a little bit in Illinois, Oklahoma and Tennessee, one hospital, but not anywhere substantially up that much like (inaudible) or the hurricanes and other stuff we had a couple years ago. The only other item I would add, the charity was up a little bit. It was up a little bit in Florida and again in Tennessee. We are still having some issues as it relates to collections, bad debts in Tennessee, because of what happened a couple years ago. But we have got the new program in Tennessee. It's a little early, but it might give us some help in the future.

And then just a follow-up question with respect to the Triad deal. Could you talk a little bit about the opportunity going forward in terms of tweaking the portfolio. You have been very effective doing that over the years. Maybe talk a little bit about your thought process there. I know it is early. Have you had identified -- but in terms of what are some of the metrics you will be looking at? And then additional question as well, about the systems and the ability to integrate the various systems as well? Thank you.

When we started this and did our initial analysis and review, we found that Triad, like CHS, had good top line growth, good revenue growth, good same store volume growth, actually their revenue per admission was higher than ours. All of those were positive things as we looked at this. Where we found opportunities pretty quickly was in expense areas. Larry has mentioned one in terms of supply expense. When we go through the categories, every category, we think there is an opportunity. As we did our work, we have done all this due diligence, we've been working on these hospitals, we also think there is a good opportunity on the top line in terms of physician recruiting. They were very decentralized. We are very centralized in terms of the way we go about recruiting positions. We have identified by hospital their physician needs for the future and we think we can be helpful in terms of physician recruiting, which is a big driver of volume growth as you know.

We spent a long period of time trying to perfect our work in our emergency rooms as it relates to emergency room admissions. We have done a lot of good work with that, we have a lot of good systems in place, we talk about ProMed all the time, we are out publicly -- Triad does not have any systems, they have not done any analytical work in terms of emergency services. There admission rate is lower than ours which historically you think would be higher because generally speaking they may have hospitals that have a larger numbers of specialists. So there are top of the line opportunities and without going through every one of them, every category, just compliance in terms of supplies, we are more compliant than they are. If we move the compliance up, so as we look at this, we are encouraged about opportunities in terms of margin improvement. Larry might want to talk about the systems, and systems by the way there's a couple things that we don't have to do which really helpful us. We are both part of the same TPO. So we don't have to change the supply system. That is an area we don't have to spend a lot of time and effort that sometimes it causes confusion in hospitals. And then because of the HDA relationship, Larry can comment on the (inaudible) relationship, but we also don't have to make big system changes here anytime in the relative near future. Both of those are helpful to us. So we can concentrate on operations and improving operations and improving the margin.

HCA provides all the accounting support for the Triad facilities and general accounting payroll and quite a bit of receivable support also. We have extended that contract past what the day was, which will give us the opportunity to concentrate on doing the conversion effort they had. Actually that conversion effort has been delayed a couple times, there's not been any hospitals brought up on it yet. We're going -- for some of the (inaudible) they do in one of the hospitals in Texas is coming up, we're going to put a different system in. We are working through the systems activity right now, with our large contract at (inaudible) and we like a lot in the [McKessan] system, it's in a good operating facilities up in Indiana. We are doubtful -- we don't have a specific rush to put systems in like we do in the preceding 55 hospitals are down. We used to put them in the first 90 days or 120 days. This is going to take a exercise and in the end we'll have systems for the right size hospitals to try it and also the right size of the us. We believe they are working on a concept to put the same system in all hospitals and we will put systems in more on the size of the hospitals and the needs of the hospitals.

Very good. One quick follow-up question and I will get back in the queue here. As we think about a normalized CapEx, and Triad's CapEx was always higher than yours, what do you think a good CapEx ratio is on a on normalized basis looking forward, any way you want to measure percentage of revenue or whatever else you might think is relevant? But what is the normalized CapEx in your view?

If you look at it, Triad probably spent close to 9% of revenue rate on 8% the last five years, we probably spent close to 5%. We both spent a little money on some replacement hospitals next year or this year. If you look Triad, the 9% spending, 25% of that had been on replacement hospitals, one of the things we first did is stop efforts into (inaudible) activities such as Hawaii. There are several opportunities in Dublin, Ireland that we're not going to pursue. There was another location in New Mexico we won't be pursuing. We stopped that. That type of spending we've slowed down. If you look at the larger (inaudible) rates, it has been under 7% on revenue and CapEx the last couple years and we spent about 5% not specifically guidance, but what we try to do is bring it inside the HCA number for both companies in the 6% range. It probably will not happen in 2008 because we're both working on some replacement hospitals. But I think that'd be our goal, to be somewhere around 6%, instead of a historical 9% they've been spending and the 5% we have been spending.

Thank you very much.

Next question is from Gary Lieberman with Stanford Financial Group.

Good morning. With regards to the results of Triad, was there anything in the quarter that stood out positively or negatively, anything that might need more immediate attention there?

It's clear they did have positive adjusted -- adjust admissions a little bit more than us and they had a -- the revenue per unit which was less than we would expect. Payroll seems to -- the income statement shows the payroll's moved up. It's something that wasn't adjusted as the volume and revenue came in. There was $10.5 million of merger expenses and there's also some opportunity even after that in other operating. We'll working on where it is in the next couple of quarters to get it better. We've still got the same amount of margin opportunities even though it is starting out lower than what it did. It started now lower than it was last year. We still think there's good opportunity, a very good opportunity going forward, it's just harder work.

What do you think is the biggest challenge if you looked over the next 12 to 18 months with the integration of the Triad hospital?

We have a lot of opportunities in areas of growing revenues and physician recruitment as Wayne talked about in ER. It is making sure we work on the right priorities first, and not rushing and doing something like a too fast new systems integration is something we don't want to do. We have a lot of opportunities, and work with the CEOs and keep them focused there.

We have to be careful we don't do something so fast that we disrupt the medical community or create any problems for ourselves. Having said that, I don't think we've seen anything that is discouraging. Actually most of the things we've seen are very encouraging. And we think there are a lot of opportunities going forward. So it's like any other integration process. We need to be thoughtful, careful, do the right things, prioritize in terms of the big issues that we need to solve first and then move forward. But I think the good news is they've got a number of good CEOs. And their management teams seem to be motivated and have the right thought process, so I think just try bringing some of our discipline to this, we will be able to make those improvements without creating any real issues.

And just to repeat, I think Wayne said we will be out of the acquisition market for a couple years here, other than the one in Spokane, and we've stopped at a noble type projects they're working on, which gives us time to focus on the core operations and put all our efforts on that.

Thanks a lot.

Next question is from Ken Weakley of Credit Suisse.

Good afternoon. I don't know if I missed this discussion but did you go through the difference in bad debt ratio between the two firms, for the three months ended June?

No, I didn't. The bad debts, we were something like 64%, I think they're somewhere around 70% from an allowance perspective. I think the income statement shows them being about 10.5% for the quarter 10.2%. We run higher bad debts. There is an accounting difference in the way some of the discounting is done, and looking at Medicaid and other things of that nature. But they do give discounts, which I think they lowered their bad debts a little bit in 2005. We've put that in place. There is a difference there. We don't give upfront discounts. Occassionally, our hospitals do give some prompt pay discounts and other stuff, a little bit more in the a quarter that we have historically. But that is a difference we'll have to address as it relates to giving a self-pay discount to everyone.

The other question I had if I could, Triad typically had a higher surgical case rate -- not case rate, a higher proportion of total admissions from surgeries from what I remember the most of firms having. I don't know if it is because of a the geographic footprint, their physician composition or the way they account for surgeries, can you maybe discuss some of the opportunities available on the surgical side those both with the integration of the companies or maybe just help me understand why there's such differences between the two?

The first is a count issue. There was an accounting difference in what was counted and how it was done. We are going to adjust that to our way of doing accounting and we'll keep the data in such a way that we can still report the same store information, but there was an accounting difference.

And also, they are in some really good growth markets. That's one of the things that's exciting to us, is the fact that these mid-size markets that they are in have a lot of growth opportunity. And that probably has been driving a lot of surgery for them as well.

It's higher hours which drives some of the revenue difference and some of the supply difference. But unfortunately our earnings have not been driven with that higher case mix.

One way you, Community as a standalone used to explain the story, you would describe what your revenue base would be if you had the optimal number of physicians and all that, so -- You probably haven't had time to do this, but as you look to the Triad asset base relative to market share if it is optimized with physician recruitment and capital spending, how much revenue opportunity is there at the existing -- what is it for the existing community hospitals? If I remember, it's a couple billion left.

It was about $12 billion and gross run rate is about $5 billion, it is not -- (inaudible) above 55% is the level, you've got a little issue. We can say that about our facility, 85% or so providers and (inaudible) opportunity. Triad has some sole provider markets, it's only about 20 I believe. And the combined company have about 85 or so. But still sole providers. But clearly they don't have as much opportunity because there is competition. There's opportunity there, when we have the CEOs talk, they talked about some of the opportunities, but some of it is just improving their existing operations and doing a better job in the market.

They also have three (inaudible), which we certainly don't subscribe to that philosophy of starting up hospitals unless we think it's a great opportunity. But there is substantial opportunity for growth in those markets. They have been going for a couple years, and two or three years. There over the hurdle to start with. There is one coming on in Austin next year, some time, I believe, and it will be a little slower but you will ultimately get a fair amount of growth out of those.

We have quantify the revenue, probably our $12 billion is their $20 billion is what's in the market. You have more competition in their market than ours. There's still some migration, their actually doing a better job in the market. They have better growth rate, they are above 1.1%. We are below that. There is a better growth rate in their markets. But I think the comparable numbers are $20 billion versus our $12 billion.

Thanks so much.

Next question comes from Darren Lehrich of Deutsche Bank.

Good afternoon. I did want to just ask one question about your process. To test Triad's receivables against your policies, have you gone through that already or is that something you will want to be doing the first couple quarters out of the chute?

We did it as part of due diligence. And we've done some reviews of what's gone along. In a closer quarter was reviewed by our auditors the end of June. There will be more work in that area done in the next couple quarters along with other things such as projects that got started and might not get done from capital manager and reviewing other activities. One accounting difference we have noticed is the way physician recruitment is done. We amortize it and they charge it off to expenses as a loan and we have seen a couple physician loans which may not be as collectible as we think they should be. We have done some work on receivables, probably more work to get done as you are correct on the next couple quarters.

In terms of -- I don't know if you have made any public comments on, but any public comments, but many have tried the major projects you've officially committed to, obviously the ones that are currently in process like Austin that are going to open next year? Can you remind us what you officially committed to at this point?

What was said and we intend to do is fulfill whatever legal obligation we do for whatever we are there. Having said that, we're looking at everything, every project to determine whether or not we want to restructure a change and add to it, reduce it or not do it. All those options are available to us. The ones we're legally obligated to, we're going to fulfill our commitments. We do you think we can be helpful in those projects in substantially reducing the cost particularly in terms of big construction projects. We've reviewed our construction projects versus the Triad construction projects and there is a large difference in terms of the spending process and how much, size and opportunity and all of those kinds of things. We are encouraged by that. There is a lot of opportunity for us with all of those project. There are a substantial number of them.

Okay. Great. And as far as the approach with physicians, trying to have this big PLG group that they did in every hospital, I know you have more of a technical physician group in in your hospitals. Is there anything that you will be doing anything as it relates to the PLG strategy?

We will continue the PLG. What we hope to do is to modify going forward. We have hired two physicians from Triad that were running the PLGs. It is our intent to continue PLG to try to figure out how we can best utilize the PLGs for the future. Appeals to the physician leadership groups were much more strategic in nature in terms of what they were doing. They thought about what was going on in the community, talk about the issues of moving the hospital forward. Our physician advisory board is much more technical in nature and trying to keep physicians apprised of all the things that are going on in terms of reimbursement and utilization and resource management and case management. We think putting the two of those together gives us the best product for the future and the best opportunity of the future to make improvements. As I mentioned earlier we have also hired Doctor Barbara Paul to help us put this all together as well. We are encouraged about it. We have not had any issues whatsoever. We have been to a number of PLG meetings across the country. We started to bring in some of the Triad physicians into our group to understand what we're doing. So it will take us a while to get there but it will work when all is said and done. It will be a lot more productive. More productive for the facility, the community, as well as the physicians that are in those communities.

Okay, thanks. My last question here maybe if you just clarify, the $75 million that you're talking about in your synergy slide, can you go a little more into detail about what those projects are and where of the future return is coming from?

Yes. That's about $450 million CapEx in the last 15 months or so. What you have is we generally have averaged about four multiple major projects, it's the ER project, surgery center, bed expansion or additions of that nature. Also it is spending on a replacement hospital, you expect to get those started off on that activity such as Cedar Park, Texas. What we have done is we have averaged about four multiple on the projects. We have used six multiple, 75 million, and we're monitoring the completion of those projects to make sure the first year gives us 75 or more, $75 million, as much as $85 million EBITDA from that. And it's one of the things we've done a pretty good job job of, we monitor all projects over $500,000 for 18 months. I -- Triad may have done that with what has been done, but we put forth a lot of effort to try to make sure we get it. That is what we're doing here. If you spend a lot of CapEx, you should be able to see a growth in the dial. That is where that $75 million comes from.

That is the combined CapEx of the two companies, correct?

Leaving out maintenance CapEx. They spent 2.5% of revenue for maintenance, we spend about 1.5%. Although they're down this year so far to 2. I think 2 will be what we spend going forward that leaves out maintenance CapEx.

Thanks very much.

Next question is from Matthew Borsch with Goldman Sachs.

I think we lost Matthew.

My questions were answered, thank you.

Next question is from Matt Ripperger with Citigroup.

Coming back to the supply cost of $34 million, can you just comment on how quickly you expect to achieve that. Will it be scaled in through the first year? Is that through greater purchasing clout or through any kind of change in ordering at the Triad portfolio?

Two things, throughout the first year, we should be able to see that. We have done a really good job, pharmacies, drugs, we have 2.7% of our revenue now is drug expenses down 20 basis points the first six months. Our indications are Triad is much higher than that. We have done a very good job on compliance in other areas. In addition, the HPG, which both companies will benefit in the latter part of the first year. Triad facilities will benefit from that. Our facilities will benefit from that. It would be more compliant and also looking at specific programs and trying to put those in place, doing what we have done for the past few years with the Triad facilities.

Thank you. Related to the JV partnerships, I understand most of those have some type of put or call provision to them. Can you comment as to what percentage of Triad's JV have those provisions and whether any of the partners have notified you of their intent to exercise them?

Only about half of them, we think. We have not been notified of any so far in terms of doing anything different. That might changes, once they they get to know us, in a short period of time, so far. We are committed to fulfilling the obligations in terms of the JV strategy. We have a different view of JV strategies than Triad did. We're going to work to accommodate those.

One last question. You mentioned you your self-pay admissions that that legacy community was down in the quarter, seems like that is somewhat of an outlier in the industry. Can you comment on what you're doing differently or the markets you're in that might have contributed to that difference?

We are not short on cash. Some of that was in Texas and other places. We probably have done made a better job of qualifying for Medicaid, and we have also done a fair amount of effort to try to make sure that all the appropriate activities takes place. Then from the length of stay perspective, we cut the length of stay some but the admissions are there, but some of that was in some of the border states that had big growth. Also we had a lot of activity before in Alabama, where a lot of construction work had been done and also I think we have come around on the 10 care situation, it's not the rapid growth we had before, because we've anniversaried that. It is not growing as much. The bad debts were up. We didn't have the rapid growth inpatient revenue for self-pay business, which causes revenue growth to be lower especially inpatient but the outpatient self-pay revenue is still up about 8% in the quarter year-to-date. The outpatient, a large percent of that comes to the emergency room. 75% of our self-pay admissions comes from the emergency room, so it's the outpatient growth in self-pay revenue that is probably driving some of the bad debt growth.

Thanks very much.

Next question comes from Christine Arnold of Morgan Stanley.

Good morning. Two follow-ups. Are the results of Triad available in terms of their quarter results?

The results are on an 8-K we filed last night. In key operating data and we also did cash flow.

Got it. As far as the supply cost reduction it seems like a big part of what you're doing. How do you think about the reaction of the physicians at the Triad hospitals? Are they receptive to perhaps the formularies and the other changes you're going to make and also you talked a little bit about how you intend to reduce costs in different cost categories. Could you talk about the changes you might be making to macro strategy? They had this JV strategy, how do you feel about that and other underpinnings of their strategy?

We aren't going to do any acquisitions in (inaudible) for two years. We are working internally to work on the existing opportunities of this transaction along with our other (inaudible) the last couple years. We have got to go slow and cautious but we think there's opportunities there to do that. Keep in mind some of the physicians are joint ventures and some of their transactions so they will be supportive. We'll be very cautious about how we go about doing that.

If you look at our historical performance, we had 14 hospitals that are over $100 million in revenue, Triad had 23, our margins on those hospitals were 17% or so and theirs is something like 13%, 14%. Those hospitals were equivalent size hospitals with equal size medical staffs. We were able to accomplish what we think we need to accomplish and those facilities without a lot of difficulty. I don't think this will be destructive as it relates to physicians. We are very careful about how we do these things. We will be open about them, work with medical staffs to do them. As you go in terms of supply issues, just about every category that we talked about historically in terms of the things we have standardized and centralized that work for us -- by the way, the formulary and all that is just one piece of this, it will be important but it is not a big driver of everything, there's just about every category we worked on through the years that we will be able to make improvements. What you will see is incremental improvements in a lot of areas, not one big area that will make a huge difference other than the supply side which we think works pretty well going forward.

For instance, the managed care area, working on managed care in the state, Triad sort of decentralized that process on a provisional level.

So you're seeing opportunities on pricing with managed care?

We have been getting 5%, 7% -- Triad had 4 to 6%, so I think that will continue. There may be isolated incidences that are a little bit better, but clearly it helps if you have more hospitals.

Triad was negotiating -- they were organized, as you may or may not know, they were organized in an unusual way in that they might have a division where they would have a hospital in California, one in Alabama, when in Mississippi and one somewhere else instead of by state. We are organized by state and by the fact that we're organized by state, we have 13 hospitals in one state, 17 hospitals in one, we do get a little help in terms of negotiating rates when we do it collectively. And we do it collectively on a state-by-state basis.

To clarify the JV question, I understand you won't be acquiring but as far as the JV center in place, any rethinking of that existing relationship?

What we said is we fulfill our obligations, I don't think we are in the business to -- there are several kinds of JVs. There are physician (inaudible) which we like, we think are appropriate, we will work hard to improve those, go forward and may do more of when it's all said and done. There are the large not-for-profit JVs, which are fine and we will work through those and then there are the foundation JVs that they have which I think Triad used that as an acquisition strategy, we have never needed to do that for acquisitions to give away or sell or however you put it in terms of equity in our facility to get a transaction done. So we won't be doing that, I assure you. We will have -- We have met with a lot of foundations, we've met with the joint venture partners. We are perfectly fine with them, they're fine with us. We will do well. We are very straightforward and we will fulfill our organizations obligations and do well together.

Thank you.

We have time for one final question for your last question is from Jason Gurda of Bear Stearns.

Just had a couple odds and ends. Do you have a dollar amount in how much capital commitments you have outstanding over the next year?

The information is provided in the filings for us and for of them. I can tell you what we do have in requirements is some replacement hospitals, which is most of that issue. If I remember correctly, that we'll spend close to $300 million this year and that's in the filings about what kind of hospitals we are replacing, between us in Triad, and next year like $170 million of activity for 2008 and by the end most of those replacement hospitals are done. There is one in Oregon, that will still be done and probably one in Valparaiso to be done and maybe one in Birmingham that should be done pass the '08 time frame and one in Barstow, California which I believe it's $65 million but it's spelled out in our K.

I will get the additional details from there. A quick question, you mentioned there is an accounting differences in how you and Triad reserve for bad debt. Any idea, if you apply your reserving policy to Triad to the second quarter, what the difference would have been in bad debt expense?

We closed it about a week ago. I don't think it has been a substantial difference. There is some difference in the way some of the Medicaid accounting was done, there was a difference self-pay. Clearly in our policy of not giving discounts, then their 10.2% would have been probably 11, 11.5%. Because the discounts have held their self-pay down. But all that does is raise bad debts and raise revenue by the same amount.

Okay, so no impact on that. The final question, I think you mentioned this earlier but what did you say that your cash receipts were as a percentage of the revenue on an LPM basis?

On same store it's 103% and on consolidated it was 102%, just like the (inaudible) were up a little bit on the non same store, our cash receipts was a little lower than 103%.

Anything we should read into the slightly lower amount on the non same store hospital?

Following acquisitions it takes a little bit of time to get the approval from the government to build. We won't have the same issue at the Triad hospitals from that process, but generally -- we bought the one in Louisiana and bought the one in Indiana, because their receivables were up a little higher than they thought. Also one of the non same store hospitals in Illinois because of the lack of payments in the state of Illinois in the second quarter on Medicaid.

Thank you.

I would now like to turn the call over to Mr. Wayne Smith for closing remarks.

Thank you very much for spending time with us this afternoon. Our proven ability to deliver improved results will continue to be a distinct advantage for Community Health Systems. We believe our track record is the best indicator for our future successes including integration of Triad. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers and chief nursing officers and group operators for their excellent operating performance for the second quarter. Additionally, we want to welcome all the Triad employees and colleagues to the Community Health System family. We remain focused on our business strategy and improving results. Once again, if you have any questions you can reach us at 615-465-7000.

That concludes today's Community Health Systems second quarter conference call. You may now disconnect.