Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems' Third Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. I will now turn the call over to Mr. Ross Comeaux, Vice President of Investor Relations. You may begin your conference.

Thank you, Mike. Good morning and welcome to Community Health Systems' third quarter conference call. Before we begin the call, I'd like to read the following disclosure statement. This conference call may contain certain forward-looking statements including all statement that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as risk factors in our Annual Report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will be referring to those slides during this earnings call. As a reminder, our discussion of our results excludes Quorum Health Corporation, the joint venture in Las Vegas that was sold to Universal Health Services, the company's home care division and the two hospitals divested in September. All calculations we will discuss also exclude discontinued operations, loss from early extinguishment of debt, impairment, as well as gains or losses on the sale of businesses, expenses incurred related to divestitures, gain on sale of investments in unconsolidated affiliates, expenses related to government and other legal settlements and related costs, expenses related to employee termination costs and other restructuring charges, expense from fair value adjustments on the CVR agreement liability related to the HMA legal proceedings and related legal expenses. Included in our discussion of our results are the sales transactions that we closed effective October 1. With that said, I'd like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Ross. Good morning and welcome to our third quarter conference call. Tim Hingtgen, our President and Chief Operating Officer is with me today on the call, along with Tom Aaron, our Executive Vice President and Chief Financial Officer. On today's call, I will provide some comments on our company, and then I'll talk about the outlook for the full year. Then, I'll turn the call over to Tim who will provide additional details around our operations. And Tom will provide more color on our third quarter results. In terms of our quarter, a number of headwinds impacted our results, including the hurricanes, the lower-than-expected net revenues and some increased costs. But before we walk through our business on this call, I'd like to take a moment to talk about the devastating hurricanes that impacted the communities we serve in Texas, and in and around the state of Florida. Our company has a long history of providing quality patient care, restoring health, and improving the lives in the communities we serve. We've always taken a great pride over the years. And I'm extremely proud of the way in which we, including our employees, hospital leadership, physicians, nurses, support staff and others, responded during the hurricanes. Their overwhelming commitment to putting patients first, helped to keep their patients safe, and limit the disruption, seen in our markets. As a company, our disaster planning teams also did a great job, transferring patients to other hospitals out of harm's way, securing additional supply chain resources, transporting backup generators and other necessary precautions to improve safety. Our caregivers and leadership, some of whom spent several nights in hospitals were able to provide at times, not only patient care before, during and after the hurricanes, but also shelter, food and support for their communities.…

Thank you, Wayne. I was also very pleased with our company's response to the hurricanes. Our disaster teams did a great job planning and our employees, hospital leadership, physicians, nurses and staff worked incredibly hard to keep their patients and their communities safe. We especially appreciate their efforts knowing that many of them were personally impacted by the storms as well. As Wayne mentioned, the hurricane, unfortunately, had a negative impact on our operations in the third quarter, and we expect a negative headwind in the fourth quarter as well. That said, Florida and Texas are key markets for us, so we have been putting the necessary investment and focus in these hospitals to drive growth. In terms of Florida, as you know, we've been investing in CapEx and physician recruitment, service line enhancement, and increased management focus in those markets. As we mentioned, we have seen recent progress in Florida. In fact, during the first two months of the third quarter compared to a similar time period last year, we drove positive admissions growth, adjusted admissions growth and surgery growth in the markets impacted by the hurricane including Georgia. So, while the hurricane was a setback for the full quarter and will impact the fourth quarter, we expect to see good performance in Florida in the fourth quarter and moving into 2018. Looking at our overall portfolio, it's worth noting that beyond the hurricanes, our feedback from a number of markets pointed to a soft healthcare utilization environment during the quarter. That said, we did see growth in several markets and in some key service lines. If we back out the hospitals impacted by the hurricanes, as well as, the eight divested hospitals that have closed in the past two months, our third quarter adjusted admissions were up 0.4%…

Thank you, Tim. During the third quarter, consolidated net revenue was below our expectations from a combination of lower-than-expected volumes, payer rates, along with increased bad debt. The lower net revenue combined with increased operating expenses negatively impacted our EBITDA and EBITDA margin. Adjusted EBITDA came in at $331 million for the third quarter, which was down approximately $100 million sequentially. Looking at our third quarter performance, we estimate the hurricanes reduced our net revenues and caused incremental expense of approximately $40 million in aggregate. On a sequential basis versus the second quarter, reimbursement reductions from the Texas Medicaid Waiver Program and Florida Medicaid were an approximately $10 million reduction, while HITECH reduced our EBITDA by approximately $15 million. As we expected, our divestitures were roughly a $15 million drag sequentially. Also, our net revenue came in below our expectations and our operating expenses came in higher than anticipated in part from the hurricanes. Now, for more details on the results of the third quarter, as a reminder, calculations discussed on this call exclude items Ross mentioned earlier. On a same-store basis for the quarter, we note the following. On a comparative third quarter 2017 versus 2016 basis, net revenues decreased $56 million or 1.5%. This is comprised of a 0.8% increase in net revenues for adjusted admission and a 2.3% decrease in volume for adjusted admissions. Our inpatient admissions declined 2.3%. Our ER visits were down 2.7%. Our surgeries were down 3.7%. Looking at our admissions, decreased OB volumes and increased observation days were a drag on our admissions similar to the second quarter. Our net outpatient revenue before the provision for bad debt currently represents 57% of our net revenues. Consolidated revenue payer mix for the third quarter of 2017 compared to the third quarter of 2016 shows…

Thank you, Tom. At this point, operator, we are ready to open it up for questions. We ask that you limit the questions to everyone to one question, so several of you can get a chance to get on the call. But as always, we're available to talk to you, and you can reach us at area code 615-465-7000.

Your first question is from Frank Morgan, RBC Capital Markets.

Good morning. I was curious if you could talk a little bit on the CapEx front. Obviously, the CapEx in the quarter relative to the cash flow from ops, but when I look at the guidance on CapEx for the year relative to what you spent year-to-date, the $428 million, there seems like a pretty big delta of things that could be happening in the fourth quarter. So, I was just curious if you could talk about CapEx into the fourth quarter. And then, maybe how that would change going into next year with another round of big divestitures, maybe the CapEx that would be required on those? And then secondly, just any comments on this HOPD final rule that came out. I notice the 340B spending has been cut. Would that be a positive? I just want to verify that that would in fact potentially be a positive for you and maybe how much of an impact that would be. Thanks.

All right. Thanks, Frank. So, on our CapEx, just to point out when we look at our CapEx this year so far compared to prior years not necessarily 2016 only, but we've had fewer expenditures in 2017related to replacement hospitals. You might have heard us talk about some replacement projects coming up in Lutheran and other markets. And so, that will start to pick-up a little bit probably in the latter part of 2017 and into 2018. We also tried to call out that the first six months of the year just happened to be lower. We picked that back up in the third quarter. And just to emphasize, we are spending more strategic CapEx in the markets we see as our core market, so that would be new ASCs, free-standing EDs and access points, and while at the same time maintaining necessary capital in all other hospitals. So, we do see some of that ramp up continuing in the last quarter of 2017, Frank. And then with respect to the outpatient rule, we did see that and we accessed something CMS put out and that was a big benefit, in the information CMS put out, it shows that the for profit hospitals benefited in their outpatient rate by 2.7%. I think the total they showed for them was about 4.6% pick up in the outpatient rates effective January 1. We did a quick look at our hospitals. We're a little bit lower than that, but still it's a big improvement. I'd also point out, we did see that some groups are protesting that final rule and so we'll wait and see how that comes out.

Your next question comes from Chris Rigg, Deutsche Bank.

Hi. Good morning. I was just hoping you could give us a sense for, of the $1.95 billion targeted gross proceeds, how much you had received by the end of the third quarter? Effectively, what's reflected in the financial statements at this point? Thanks.

Yeah. So, Chris, we had two closings just in the prior week, which were about $20 million or roughly $20 million of cash as those were smaller facilities. Other than that, then all of those gross proceeds were received as of that September 30 balance sheet that you're looking at. And gross proceeds, just to point out, that includes cash we received, it includes some cash for working capital if they did not buy working capital, we retained that. That's still on our balance sheet. And it might not have been collected yet. And then, the other source of things are small amount of notes and capital leases with the buyers.

Your next question comes from Brian Tanquilut, Jefferies.

Hey. Good morning, guys. I guess for Tom or Tim. As I think about volumes, right, I mean we've obviously faced challenged volumes for quite a while now and in the macro environment stuff. So, how should I think about what you can do that's new to reinvigorate volumes? I mean as I look at your surgical volumes, obviously that's under pressure as well. Is there anything specific you would call out there whether – your views on what's driving that other than macro, and what you can do to turn that around? Thanks.

Yeah. I think you noticed that we said several times that we have focused our spending on access and outpatient facilities and transfer centers. I think we think there's an opportunity in our markets to improve our volumes which may not be true in nationally that much, but I think we have plenty of opportunity. Tim, you want to detail again real quickly what that means and where we are.

Sure. And to point out some of the comments that were made earlier, we did have several markets that were posting positive volume gains because of the strategies I'll run through right now, but we've referenced the transfer centers in our comments. This in-source model has actually ramped up very nicely. We're expanding the model to bring more hospitals on that visibility and the growth that's resulting from it. Number one, at the local level, so they can see what business opportunities may have been missed in the past due to operational problems. And number two, a better, more user-friendly call center model for the incoming facilities has yielded some really nice growth opportunities for us in the first wave of this release. On the ACO alignment that I talked about, we've had more than we expected levels of interest from independent and affiliated clinic groups. The doctors are very engaged in this. They're looking for this type of partnership model to population health manage, improve the management of their patients, but that alignment also will help us fortify our primary care and our service line development strategy. And as I mentioned, that's pretty broad irrespective of the type of market, we are seeing these ACOs develop in some of our non-urban markets as well as in our urban markets. The access point expansion that we've referenced has also been a good lift for us in the markets where we strategically invested. The urgent cares right now is about 80 across our networks. We have about 30 more in the development pipeline with varying dates of opening. We have four more FSEDs that will be opening by the second quarter of 2018 and then we have about 20 ASC deals, the partnerships with our doctors and the communities will also drive that alignment, but also give us some footing on some volume development.

So just quickly, we have a number of really solid markets that are doing well. As I mentioned earlier, once we finish this process, I think we'll be having a very stable portfolio. Florida has turned for us. We saw good results prior to the hurricane in Florida. Our surgeries were up about 6%. So there's evidence here. In my way of thinking, there's evidence here that the things we're doing are the right things to move us forward and there are volume opportunities.

Your next question comes from Ralph Giacobbe, Citi.

Thanks, morning. In midpoint of the fourth quarter guide, just over kind of $400 million of EBITDA, do you think that's a good sort of run rate, so around $1.6 billion of EBITDA sort of ex additional sales? And then if I add back the $40 million for the hurricane impact, I'm sort of at the $371 million EBITDA number for the quarter, about 10% margin or so. Given that most of the asset sales are for sort of the low and mid-single digit margin hospitals, the argument was that we'd sort of see a lift in margins. Obviously, top line pressures are hurting that. But I guess can you help us at all what you see as normalized margin target for whatever your ending portfolio looks like? Thanks.

Yeah. I think the other thing to consider there as you try to sequentially build up to that with adding back in the hurricane impact is when we look historically in our volumes and our margins, lot of that is coming off volumes going from Q3 to Q4. We see a substantial lift there. So we've got that modeled into our expectations and both on the volume side and the expense management and then to get us to the guidance there.

So don't forget, this divestiture program has been a major effort, it's been requiring a lot of, as I said, time and talent, and has been a distraction. And so, as we've kind of worked through that, hopefully we'll be through this in a relatively short period of time, but I think what we're going to end up with is a very stable group of hospitals that are good performers with some mid-single digit margins – double-digit margins.

Your next question comes from Josh Raskin, Nephron Research.

Thanks. Good morning, guys. Two quick questions. One was – I think you mentioned the higher costs for implants. I just wanted to sort of juxtapose that with the decline in surgeries and see what was going on there. And then, secondarily, there's been some reimbursement changes and some pressure on labs around PAMA, and I was curious if you guys have received any interest or if there's a thought there that there may be some divestiture opportunities and proceeds maybe down the line on the labs as well?

I don't see that the lab portion of this (32:52) is all that material when it's all said and done. I don't know about...

The implants, just on that, Josh. We're looking at that as a percentage of revenue and other metrics as well. And when we're looking at that, we're looking at opportunities where we've got arrangements with vendors that if business is moved to that vendor that we have a lot better pricing on those. And so, when we talk about those, those are the opportunities that we believe using data that we're now starting to get, we can put in front of our hospitals and let them have conversations with the physicians to get us where we need to be.

Your next question is from Justin Lake, Wolfe Research.

Thanks. Good morning. I'll try to squeeze in a couple here. So first, just given the run rate of the EBITDA going into the fourth quarter. Can you give us an idea of where you sit versus covenants, if that's the right run rate to jump off into 2018 on, given this set of facilities? And then, can you talk to Fort Wayne? There's been some stories in the news about some competition there. Can you give us an idea of what percentage of your EBITDA comes from Fort Wayne at this point, and what's going on in that market in your mind? Thanks.

Yeah. Justin, we don't normally comment on individual markets. I think what we're doing in Fort Wayne, we're doing all the right things. We're making good progress. We've recruited a number of physicians. We have a very stable workforce. We're in the process of trying to determine a location for a new replacement facility, which we think will be extremely helpful. There has been a lot of distraction in the market. I will tell you that we fully intend to protect our assets, protect our reputation, and our joint venture partners in terms of their investments kind of going forward. So this is a distraction, but it's not to the extent that we think that it's all that material when it's all said and done here. We're doing all the things in the market, and it will continue to improve going forward.

And then, Justin, to the point on the EBITDA margin, just to emphasize the comment I made about the third quarter that we think the third quarter EBITDA margin was impacted by 160 basis points from divestitures and the storms. And on top of that, the comment I made before about moving from third quarter to fourth quarter, we've historically seen pick-ups in volume and margin in those quarters as well, which I think you ought to consider just as you try to model that.

Your next question comes from Gary Taylor, JPMorgan.

Hi. Good morning. I just wanted to clarify one comment, then I had a question. Tom, I think you had said if you take the adjusted admissions same-store down 2.3% and excluding hurricane and I'm not sure what else, but I thought you said positive 0.4%. Did I have that correctly?

Yeah. Gary, what we are talking about is if you look at our unimpacted hospitals, so just take our same-store and carve out the hurricane-impacted hospitals, carve out divestitures. If you look at the remaining same-store, sequentially, we saw a 0.4% increase in adjusted admissions Q2 to Q3.

Your next question comes from Kevin Fischbeck, Bank of America Merrill Lynch.

Great. Thanks. I just want to focus on growth because I think that's, at the end of the day, the most important thing because you guys keep selling assets and paying down debt, but it seems like the organic EBITDA growth continues to be negative. So, when you think about all the initiatives that you're doing to try and drive volumes, et cetera, and cut costs, I mean, do you think that you can grow EBITDA next year off of kind of the base of assets? And when you mentioned before about the margin profile in kind of the mid-teens range of the assets you have after the next round of deals get completed, what's the growth rate of that core asset base over the last year? I just want to understand what we should expect this company to look like and grow at after this divestiture is complete.

Kevin, I'll take the first crack at this and certainly Tom or Wayne can add any comments they'd like. But we are focused on the growth, as we pointed in the call today, playing better offense. I mentioned transfer centers, ACO alignment, access point expansion. We also are focused on growing that post-acute space, behavioral health, and rehab in particular, which do have growth capacity for us with that very little incremental cost, so we should get good conversion rates on that revenue. That as well as all of the other initiatives: driving admissions, adjusted admissions, and surgery volumes, we have some fixed costs that we can get better utilization of, we'll convert more of that net revenue to stronger EBITDA margins. I don't think that fundamental of our industry is going to change. Where we do see care migrating to the outpatient section or sector with some of these strategies, we do have to be cognizant of our cost structures. We've been working on that for several quarters now. It's an ongoing process for us. It takes the time and attention of our hospital leadership teams, our divisional leaders, and our regional leaders to make sure that we are indeed driving margin on whatever the ultimate net revenue profile is for that book of business.

So if you look at what we'll end up with here once it's all said and done, the number of hospitals we'll end up with, as we've said all along, it's a twofold test in terms of sustainable markets where we have good demographics, number one, and then opportunity to deploy our capital and continue to grow in those markets with sustainable hospitals. I think we're on track to do that. As I said earlier, I think this portfolio will look very different as we kind of get through all these other distractions along the way to get there.

I will add, the service line development strategy is key, and that is driven by successful physician recruitment. I believe we have a much more disciplined approach on heading into this year and into next year as to where we need to focus our energy, our resources, and our investments to drive surgery volumes. We've recruited a good number of GIs in this past quarter, which should help us release some of the volume pressures we've seen on that line. So we like what we see in terms of the work being performed in our local markets with the support of the corporate teams here.

Our last question comes from Ana Gupte, Leerink Partners.

Yes, hi. Thanks for squeezing me in. So I'm just trying to see with the $2 billion in revenue and the net proceeds with the closed sales and what you have in progress. And then I think with the current run rate, you are somewhere running slightly below $1.6 billion. And you said that you're okay and you have a cushion for the interest coverage covenants, as I understood now. In 2018, how do you think all that's going to net out assuming mid-single digits EBITDA margin on the asset sales, unless it's something different? If you can give us some color.

Yeah. I think just continuing the comments that Wayne and Tim just made as far as with the divestiture program, our remaining portfolio leaves us in markets where we are more competitive. We have better opportunities to negotiate fair rates and maintain our volumes. We've got opportunities to partner, if we'd like to, with physicians and other providers in those markets. So we believe that's going to help us with that margin. Just the recent quarter, when you consider the hurricanes and divestitures, looking forward, we do not think we're going to have an issue with covenants going forward.

I will now turn the call over to you, Mr. Smith, for closing remarks.

Thank you, again, for spending time with us this morning. And as we mentioned, we are very proud of our company's reaction to the hurricanes. Our hospital teams and staff did a great job working through these hurricanes to keep patients in their community safe. We plan to work through the remaining disruptions during the fourth quarter. We remain focused on our strategies we've outlined over the past several quarters, which is positioning us to be a better company. And as always, we want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers, chief nursing officers, and division operators for their continued focus on operational performance. This concludes our call today. We look forward to updating you on our progress throughout the year. Once again, if you have any questions, you can always reach us at area code 615-465-7000. Thank you very much.

This concludes today's conference call. You may now disconnect.