Ladies and gentlemen, thank you for standing by and welcome to Community Health Systems' Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Ross Comeaux, Vice President of Investor Relations. Thank you. Please go ahead sir.

Thank you, Mike. Good morning, and welcome to Community Health Systems' Third Quarter 2019 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 statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We also issued a separate press release regarding the company's intention to commence an exchange offering. For those of you listening to the live broadcast of this conference call a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations, we will discuss also exclude: gain or loss from early extinguishment of debt; impairment expense as well as gains or losses on sale of businesses; expenses incurred related to divestitures; expenses related to employee termination benefits and other restructuring charges; expenses from government and other legal settlements and related costs; expenses from settlement and fair value adjustments and legal expenses related to cases covered by the CVR; change in valuation allowance recorded for promissory notes; and change in estimate for professional liability claims accrual. With that said, I'd like to turn the call over to Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Ross. Good morning and welcome to the third quarter 2019 conference call. With us on the call today is Tim Hingtgen, President and Chief Operating Officer; Tom Aaron, Executive Vice President and Chief Financial Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer. First some comments on the company as well as on our performance. Then Tim will provide an update on operations and then Tom will provide some details on the financial results. In terms of the third quarter, we made significant progress again. We continue to leverage our investments in strategic growth initiatives organize and execute additional cost-saving opportunities and complete additional divestitures. Our strategies are working and our company continues to emerge as a stronger organization and one that better positioned for future success. In early October, we hosted our hospital CEOs and regional presidents at our corporate headquarters to discuss strategic growth opportunities and to share best practices. Coming out of these meetings, I'm impressed with the commitment and leadership skills of our hospital and marketing executives. We have developed a stable tenured and experienced group of local leaders who are making a positive difference in their markets. I'm particularly pleased with the initiatives these CEOs are taking to improve performance and encouraged to see how they are driving progress and results across all of our strategic imperatives: Safety and quality operational excellence connected care and competitive position. In terms of operations, our same-store volume growth remains strong as we continue to drive sequential improvements. We are a different company today than we were a few years ago with a smaller but stronger portfolio. Year-to-date same-store net revenue growth is as strong as it's been since 2012. Year-to-date, our admissions – adjusted admissions and surgery growth is as strong as it's…

Thank you, Wayne. I also will now quickly highlight our annual hospitals CEO and regional president meeting that took place a few weeks ago. Many of our hospital leaders shared specific measurable initiatives, that are driving better performance in their respective markets and it was very gratifying to see how they are executing on the strategic plans and improving their competitive positions. Across the organization, our leaders are aligned to our strategic imperatives and they are highly motivated to continuously improve and to deliver strong results. On today's call, I will walk through our volumes and share the latest in a few of our strategic focus areas. On the volume side, our same-store admissions improved 2.4%. Similar to last quarter, the increase in volumes was seen across a number of different geographies and markets. Surgeries grew 4.6% due to both physician and capital investments in orthopedics, cardiology, GI and other service lines. The ER business were up 2.4%, which was in line with our second quarter performance. This growth continues to be driven by our transfer center model, enhanced clinical and EMS outreach programs and freestanding ED growth. Same-store net revenue increased 4.1% and our adjusted admissions were up 3.6%. Net revenue per admission was impacted this quarter, due to our toughest comp of the year, as well as stronger outpatient revenue growth this quarter. Overall, we were pleased with our volume performance and remain focused on all of our opportunities to continue these trends. We are making solid strides across our operating initiatives, including physician practices, the transfer program, accountable care organizations or ACOs, inpatient investments, access point development, as well as others. Key to our same-store volume improvements include targeted access point investments, as well as heightened emphasis on primary care development. While we continue to invest in…

Thanks, Tim and good morning, everyone. Now I will discuss third quarter on a same-store and quarter-over-quarter basis. As a reminder, calculations discussed on this call exclude items Ross mentioned earlier. During the third quarter, net revenues increased 4.1%. This is comprised of a 3.6% increase in adjusted admissions and a 0.5% increase in net revenue per adjusted admissions. Excluding non-patient revenues such as TSA fees, our third quarter net revenue per adjusted admission would have been up 90 basis points and net revenue up 4.5% During the third quarter, our net outpatient revenues increased to 53.9% of our net operating revenues as growth on the outpatient side outpaced growth on the inpatient side. Consolidated revenue payer mix for the third quarter of 2019 compared to the third quarter of 2018 shows managed care and other, which includes Medicare Advantage increased 80 basis points; Medicare Fee-for-Service decreased 30 basis points; Medicaid decreased 10 basis points; and self-pay decreased 40 basis points. Looking at our adjusted admissions by payer, our managed care, Medicare Advantage, and self-pay volumes were all up while our Medicare Fee-for-Service and Medicaid volumes each decreased. During the third quarter of 2019, the sum of consolidated charity care self-pay discounts and uncollectible revenue increased from 32.3% to 32.8% of adjusted net revenue year-over-year, a 50 basis point increase. For the same-store expense items, our salaries and benefits as a percent of net operating revenue decreased 30 basis points, driven by FTE management. Supplies expense as a percent of net operating revenue for our same stores increased 20 basis points from higher implant spend related to surgery growth. Other operating expense as a percent of net operating revenues for our same stores increased 40 basis points due to higher IT and vendor related expenses and insurance costs. Our management…

Thanks, Tom. At this point operator, we're ready to open it up for questions. We’ll limit everyone to one question, so that you will have chance to call in. But as always we are available to talk to you and you can reach us at area code 615-465-7000.

[Operator Instructions] Your first question comes from A.J. Rice from Credit Suisse.

Hi, everybody. Congratulations on the continued gradual improvement in your admissions trends and your volume trends. I'm going to use my question though to ask and try to understand -- make sure I fully understand what you're trying to do with the debt exchange. And I guess, I've got three aspects to it that I'm trying to figure out is I see that you're obviously taking out the big maturity of 2022. There is still some secured stuff at 2021. And then obviously you've got 2023, which I guess you can deal with later. And there -- it could be a stub of the 2022s. So can you tell me is this just opportunistic that the big holder of the 2022s came forward and said, Let's do this? Or this part of several pieces that we'll see unfold over the next few months that you're trying to do to deal with these near- to intermediate-term maturities? And I guess, I would ask as well on the covenants, I think, you stepped down in March to 5 times debt-to-EBITDA. How -- are you comfortable with that? Is there anything about this exchange offer that's going to change that covenant? And then finally, you're giving up the revolver. I wondered whether -- have you recently been -- used that revolver in any way or is that not something you would need access to?

That was a great, one question A.J.

I think, I've got all of that. So I'm going to talk about the exchange first and then I'll get into some of the other maturities you mentioned. So -- on the exchange, we think it's an opportunity to deal with the 2022s as you mentioned. And we -- at least 83% of those are going to be included in the exchange. So those will -- our intended exchange would push those to 2027 secured and 2028 unsecured notes, the interest on the unsecureds don't change and the interest on the secured is at 8%. That's going to be $700 million regardless of participation. So it addresses that. We hopefully have a very successful exchange with participation that goes higher. It's also going to -- as we get into that -- so that's going to extend 2022s. It's also going to enable us to buy -- issuing a $500 million first lien note, we're going to take out our revolver which includes the covenant -- the first lien covenant that you were referencing. So we intend to take that out with a first lien offering use the proceeds to -- we're already on-track to pay off the 2019 stubs about $150 million. We'll also be paying off the 2020 stubs of $120 million. So -- and then whatever is left over there we will pay down our ABL and that will become our liquidity tool. So looking after the exchange, we will have addressed the 2019 stubs, the 2020 stubs and substantial portions of the 2022s and would be out of the revolver. On the 2021s, I think we're focused on this transaction. Right now, we are watching the markets. And sequentially that's really the next big maturity. So we'll pay some attention to that and then we'll just get focused on liquidity and executing a lot of the initiatives that we've been talking about be in a position to be cash flow positive and getting our leverage down.

Your next question comes from Josh Raskin from Nephron Research.

Hi, thanks. Good morning. First question is just around the portfolio sort of optimization process as it kind of winds down versus the middle of next year you mentioned. And as you think about your remaining portfolio and maybe exclude the three that have already been announced this week as well, what percentage of those are operating at sort of target margins or where you want them to be? And then maybe help us with the timing in terms of what's that path to reasonable margins for the remainder? And then the second question around CapEx, cutting that say $50 million at the midpoint is that just pushing back discretionary projects due to the timing of your cash flow this year? Or were there specific delays or projects that were canceled? Just want to understand the CapEx cuts as well.

Sure. So Josh on the divestiture program, I think I'd look at this program that were in the $2 billion of revenue $1.3 billion of proceeds. The divestitures up to this point have been in an aggregate very low single-digit EBITDA margins. And so when we look at it and we allocate CapEx and interest cost to that those are negative cash flow hospitals. And so, we had a nice amount of proceeds from those sales to date. So that's roughly $750 million of proceeds. The other $550 million that were -- we announced one transaction on Monday with -- involving three hospitals. The hospitals that are remaining on the divestitures for the most part are higher single-digit than what we've executed so far. So the dynamic that we've seen through the 2017, 2018 and 2019 divestitures are these ones with slightly higher EBITDA margins. The -- we're getting as a percentage of revenue better proceeds. When you look at the EBITDA multiples those are more in the typical range you might see 9.5 times to 11 times. And so we -- that's what we're into right now on the divestitures. I think if you look back historically, we believe from many of the operating initiatives that we've already implemented with labor, we're getting into supplies right now. Some of the 120 basis points improvement you see quarter-over-quarter some of that is from those initiatives, but some of it was helped by the divestitures and getting the lower-margin hospitals out. When we look at the rest of our portfolio, we do think we'll have some lift as we ramp up the divestiture program because they will still be averaging the -- divestitures will be below our average and we should be getting lift from that as well. I think when…

Sure. Good morning, Josh. In terms of margin profile and opportunities, obviously we're very speculative in terms of our opportunities in so many of the remaining portfolio markets. As I mentioned, we're really focused on where can we invest our capital dollars going forward to augment the recent bed and surgical expansions that have come online and that are driving some really solid growth in those markets that I referenced. As part of our strategic planning process, we always look on -- at the market data on where there's opportunities, where there's out-migration. We look at where we can invest per access points. And as I said, new bed expansions, ED access point, all those things continue in those markets that are going to remain in the portfolio. It's a three to four-year capital planning program. We have our capital -- our capital cost plan kind of rolled off that same type of a time frame. So, we have a pretty good view as to where we have ongoing portfolio expansion opportunities.

Your next question comes from Ralph Giacobbe from Citi.

Thanks. Good morning. Just wanted to ask about guidance. And I know it's always tough to base things on the consensus numbers. But, it looks like you missed EBITDA by $6 million, but took down the guidance at the midpoint by about $50 million but kept revenue. So just hoping you can reconcile that and sort of the lower implied 4Q. And then you mentioned the cost reduction initiative. Is this sort of a new program? And then any help on sort of sizing the savings at this point in particular as it relates to 4Q. Thanks.

Yeah. Thanks Ralph. So on the guidance, as we looked at this we've been -- are looking at our volume trends. And since second quarter of 2018, we've been improving our volume trends and that's continued. We're very happy with where we are on that. When we look at our net revenue per adjusted admission, I'm just going to exclude the other revenue through the second quarter that had grown about 2.7%, with the second quarter actually performing better than that. And so, we were not only really performing well on the volume, but on rate, we had it very strong through the second quarter. The rate, if you exclude the other revenue, was up 0.9% in this quarter, which is lower than we would expect. That's lower than even some of the historical years we've had, and when we look at this quarter that was the primary driver, when you look at revenue that was driven mostly by volume. The revenue could have been bigger and that would have helped our expense profile as well. And so, because of that we just want to be careful and without -- when we look at these trends that we're seeing movement to outpatient and the dynamic that has on our rates, we just want to be mindful of the most recent trend that we've had on rate. And so we put that in. We're still holding a pretty ambitious volume growth and we are going to pick apart, the pieces on the rate that we can manage. I mean I think on the payment, denials downgrades are an important area there. We saw an uptick in the third quarter that will look at how -- specifically, what's happening there and address what we've -- our processes and see what we can…

Your next question comes from Sarah James from Piper Jaffray.

Hey, this is Chris [Indiscernible] on the phone in for Sarah. My questions are on outpatient investments. You mentioned that the spend is ongoing. And just given the pace of growth there I'm wondering if you guys could call out any sort of evolution where those dollars are being spent specifically? And if you're seeing any narrowing of the spending gap that we've traditionally seen between some of the outpatient and some of the acute care investments that you guys have made? Thanks.

Sure Chris. This is Tim. I'll take that one. In terms of outpatient investments still looking at our pipeline for freestanding EDs, we have three that are under construction as we speak. We have others that we're in the process of sourcing land and planning out the profile for that expansion of that important access point that's served us very well. It certainly has been a contributor to our ED volume growth for the last couple of quarters in particular. Other areas of investment have been in the ambulatory surgery space. Won't give you any specifics because some of those deals are still in the formative stages if you will where we have documents with doctors that we haven't announced them publicly, but we're looking forward to making some announcements of investments in growth both in the ASC space in the near future. We continue to invest in the urgent care, walk-in care, or what we call on-demand care platforms. We've done some refinements of those access point strategies over the last several quarters. And as I noted we put more energy and emphasis on primary care practice development and I also referenced the incredible growth we've seen in our primary care visits year-over-year. Those are historically lower-dollar CapEx investments. To get to the second part of your question, how is that migrating to the inpatient side, as Tom mentioned, we have a micro-hospital that's under construction in our Tucson market. It'll be our first in the company. We look forward to bringing that on line on in 2020. We are also pursuing further bed expansions beyond those that I just mentioned in markets that we anticipate will be having some capacity crunches as we want to try to stay ahead of this so deploying more doctors to inpatient capacity. Surgical capacity we have a large project in Las Cruces, New Mexico that comes on line in the fourth quarter. Really a large-scale OR expansion to keep up with demand in that market. So, I think overall, we've been very balanced a little bit more heavily weighted to the outpatient in 2018 early part of 2019. I think you'll see more of it go into the acute side of the business in the upcoming quarters.

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

Great. Thanks. I guess that answer might address this a little bit. But I guess when we look at the revenue per adjusted admission some of the trends that you're seeing whether it's commercial growing a little bit slower than the other payers or this growth in outpatient that you're talking about I appreciate that the Medicare rate is going to be better next year. But these other things seem like they're more kind of structural that we'll continue to see commercial grow less than government. Just demographically that outpatient is going to continue to grow faster than inpatient just the way the trends are going. So, what is the real kind of reason to think that this pricing trend is going to be significantly better than where it is right now? And what pricing do you really need to be able to see that conversion of the volume growth into actual EBITDA growth?

So, a couple of things. We've been kind of underway for many years with this move to outpatient. So we think this is an existing headwind. It might be a little heavier in certain quarters. You might recall we had a quarter earlier this year that we had -- actually our admission growth was in excess of our adjusted admission growth. So this happened to be just a pretty acute quarter where the outpatient grew so quickly. And we think with the -- on the volume side there that yes, we will continue to see that. We think certain procedures are going to be performed more on an outpatient basis. And so on the rate some of the other things that we're getting into I mentioned the revenue cycle making sure, we're paid for everything, we're entitled that we minimize denials and downgrades. The other pieces on this where we think there are opportunities are on the pay-for-performance. And so arrangements with the commercial payers and other payers that we earn incentives in our revenue cycle for quality and other measures that we negotiated with them is an opportunity for us as well. And I'd say more broadly outside of the revenue side, when we've shared examples of this, Tucson is a great example where we've moved a substantial portion of their business quickly from inpatient to outpatient and actually improved our EBITDA margin. And I think that's one of the areas -- and it's one of the areas on our cost initiatives is in the outpatient and clinic setting to improve our cost profile there. So, we agree with you that that trend is here for a -- that's a long-term trend that we're going to have to deal with. And we think on the expense side, it's an important way, but also there are a few pieces on the revenue side, where we can enhance. I think acuity of services and Tim you might want to talk about service lines and how that impacts not only inpatient but outpatient can drive revenue as well.

Sure. I'll add on to your comments regarding the inpatient profile as well. In terms of where we're putting the capital spending and the planning for the future, obviously, we're targeting a heavier commercial mix for the reasons you noted in terms of it really driving our net revenue per admission at a rate that's greater than the government payers in particular. So with that being said, that is a key component of all of our pro forma modeling for where we invest our capital dollars. So we think levering off in terms of those investments in those markets should help us improve our net revenue per admission. In addition, the ongoing rate negotiations getting prominence in market share in the markets to improve our profile, so I think all that is underway. In terms of service lines, let me first point out, I think everyone's faced with the migration of total needs to outpatient. We've become so proficient at managing the length of stay of these patients to less than two minute -- two bed nights that they now are moving to outpatient status. So, obviously, we're getting paid less for that at the same cost on the implants, et cetera, historically. We're fixated right now on working with our vendors, with our doctors to make sure that we can create a value proposition on that particular implant category, as it migrates more to the outpatient setting. Other service lines that we're investing: neuroscientists, for neurosurgery transfer centers bringing it to more patients for that service line. Again, all the ED and the EMS liaison programs that we have in place bringing a higher acuity patient to our hospitals should drive that case mix and that also can improve our net revenue per admission.

Your next question comes from Gary Taylor from JPMorgan.

Hi, guys. This is Anthony Makdessi on for Gary. I just had a quick question regarding the divestiture plan. You have sold about 23 hospitals now for $2 billion of revenue and have recognized about $750 million of gross proceeds. But the plan calls for $2 billion of -- about $2 billion of revenue with gross proceeds of $1.3 billion. So I want to kind of reconcile where this $550 million of future proceeds is going to come from given that you've already hit your annualized net revenue number in the plan. Thanks.

Hey, Anthony, so we've been trying to describe this as at least $2 billion and this has actually been a good opportunity for us. As I mentioned, some of these lower-margin hospitals that we've divested in 2018 and 2019 to-date have been negative cash flow hospitals. And to be able to get proceeds on those, it's been beneficial to the company. And as I mentioned that's partially to -- contributes to our improvement in our EBITDA margins. That is -- that's produced a very low amount of proceeds relative to revenue, but the EBITDA multiples have been very good on those divestitures that we've had to-date. So the divestitures to come when we said at least $2 billion will be in the excess of $2 billion divestitures. And as I mentioned, those are going to be slightly better EBITDA margin hospitals, so as a percentage of revenue proceeds will be higher, the EBITDA multiples will be more in the traditional range. But it is something that we expect the additional divestitures will benefit our margin going forward.

Your next question comes from Steve Tanal from Goldman Sachs.

Thanks guys. Maybe a follow-up on that and one other the topic just to follow-up and you then covered a lot of ground. So I was doing some math on the same sort of angle and I guess if we just take the midpoints of the ranges you all described 9.5 times to 11 times EBITDA, obviously another $550 million to raise seems to imply something in the order of $55 million of EBITDA. And I don't know what you call high single-digit margins, but if it's 7.5%, it's like $700 million of incremental revenue. Is that the right ballpark given that you have earmarked these hospitals that'll close by mid 2020? And then just the other thing I wanted to follow-up on is just the discussion around revenue per adjusted admit. That was helpful. Maybe just a little bit more clarity on kind of the impact of the payer mix and then acuity as well overall in the quarter? Thanks.

All right. So on the divestitures, the math that you described is the correct way to kind of calculate estimates of what the revenue -- what the EBITDA might be on the go-forward divestitures. So I think you're on the right track there. On the revenue per adjusted admission, so I would say just a couple of other thoughts on that is with total Medicare patients, Medicare and Medicare Advantage those obviously are growing. The Medicare Advantage for us this quarter was a higher growth rate where we have been tracking the national averages and we are up above the national averages in the third quarter on the growth of Medicare Advantage. That said look at what we yield off that that's slightly below Medicare. And so that -- just that shift from traditional Medicare to Medicare Advantage that impacts our net revenue per adjusted admission. And as we mentioned Medicaid was down slightly. Self-pay is a small amount of our admissions and our adjusted, but that is growing. And that's been accelerating growth late second quarter and during the third quarter, but again not a significant portion. So those dynamics -- by the way we are getting growth in our commercial volumes in our revenue. It's just that not quite the clip that we see in Medicare Advantage and the self-pay. So that's one of the dynamics. The other dynamic you see and this is just to calculate the adjusted admissions, but as you get into case mix exchanges and link the state exchanges those drive up the calculation of adjusted admissions and has the impact of driving down the net revenue per adjusted admission. And again I think one second quarter where the admissions exceeded the adjusted and we -- and lo and behold we had a very high net revenue per adjusted admission in that quarter. So I think those are the primary dynamics that we'd call out for the third quarter, the payer mix and then also that length of stay. There are a few other minor items in there, but those are the bigger ones. They tend to average out over time. We are still -- net revenue per adjusted admission we're still over 2% year-to-date. And so -- but this was a weaker quarter on that stat.

Now I will turn the call over to Mr. Smith for closing comments.

Thank you again for your time this morning. As we've outlined on the call today, we're encouraged with all the progress we've made so far this year. Moving forward, we're focused on continued execution of strategies we discussed on today's call and we look forward to a strong finish to 2019 and stronger performance in 2020. 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 operating performance and quality. This concludes our call today. Once again, if you have any questions you can reach us at 615-465-7000.

Ladies and gentlemen, this conclude today's conference call. Thank you for participating. You may now disconnect.