Community Health Systems Inc (CYH) 2017 Q1 法說會逐字稿

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 First Quarter 2017 Conference Call. (Operator Instructions)

I will now turn the call over to Marianne Denenberg, Manager of Investor Relations. You may begin your conference.

Thank you, Mike. Good morning, and welcome to Community Health Systems' first quarter conference call. Before we begin the call, I would 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. 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 Universal Health Services, and the company's Home Care Division from our prior year results. All calculations we will be discussing also exclude discontinued operations, loss from early extinguishment of debt, impairment of goodwill and other long-lived assets and the gain or loss on sale of businesses, expenses related to government and other legal settlements and related costs, expenses incurred related to announced hospital divestitures, expense from fair value adjustments on a CVR agreement liability related to the HMA legal proceedings and related legal expenses.

With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Marianne. Good morning, and welcome to our first quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is with me on the call today; along with Tim Hingtgen, our President and Chief Operating Officer. Also with me on the call today is Tom Aaron, Senior Vice President of Finance; and Dr. Lynn Simon, President of Clinical Services and Chief Quality Officer.

We are pleased with our performance during the first quarter. Overall, the quarter was in line with our expectations and was a good start to 2017. We made progress across a number of areas, and we expect to see more progress as we move through the remainder of 2017. I will provide some comments on the quarter, give an update on our divestiture progress and talk about our outlook for the year. After that, I will turn the call over to Tim Hingtgen, our President and Chief Operating Officer, who will provide some additional detail around our operations. And then, Larry, our Chief Financial Officer, will provide some more color on our first quarter financial results.

Switching back to the first quarter, we saw a good performance in our physician practices. This is a good -- this is a group that's managed centrally by Dr. Lynn Simon over the past couple of quarters. This group has been focused on improving the efficiency of our almost 3,000 employed physicians. Through this work, that team has aligned physician recruitment and our strategic planning process, improved our new physician startup process as well as driving a number of other initiatives that would help us to deliver improvement in 2017 and '18.

For example, this team has done a good job on quality, and we have discussed the progress we've been making around serious safety event reductions. During the fourth quarter of 2016, we have experienced an 81% reduction for our legacy hospitals and 45% reduction for our former HMA hospitals. We started this program in our legacy hospitals in the second quarter of 2013 and in our HMA hospitals in the first quarter of 2015. We are very pleased with the success of our safety and quality initiatives across the country.

In terms of annual Medicare wellness visits, our affiliated clinics completed 17% more business quarter-over-quarter. Through the end of the first quarter, our clinics have received Medicare wellness visits from 23% of eligible [and] beneficiaries associated with these respective clinics, well above the national average. It's also worth noting that we are seeing good start-up improvement in our physician practices, which bodes well for increased productivity moving forward. So this group is off to a good start for 2017.

I'd now like to provide an update on our divisional structure and alignment. As you recall, when we spun 38 Quorum hospitals last year, we reduced our divisional structure from 6 divisions to 5 divisions. A number of executives also moved to Quorum at that time, at the time of the spin. With a number of announced hospital divestitures closing over the coming months, we're now reducing our number of divisions down to 4. We believe this change will help to improve the overall efficiency of our operations. Importantly, we do not expect disruption from this change as these markets will be managed by divisional Presidents and Vice Presidents that are already familiar with these markets.

Now I'd like to provide an update on our divestiture plan. And on Page 8 of our supplemental slides, we have also included some key highlights. Since our last earnings call on February 21, we have announced the close of a number of transactions as well as definitive agreements. In terms of closed divestitures, we have closed transactions for 11 hospitals, accounting for approximately $1.1 billion of annual revenue and low single-digit EBITDA margin. Gross proceeds from these divestitures, including working capital, generated $425 million of proceeds.

On April 28, we closed the Stringfellow Hospital transaction with The Health Care Authority of the City of Anniston, Alabama. As a reminder, Stringfellow is a 125-bed hospital.

On May 1, we closed the 8-hospital divestiture transaction with Steward Health system. Those hospitals included 3 in Ohio, 2 in Pennsylvania and 3 in Florida. On May 1, we closed the transaction of 2 of the 3 hospitals we expect to sell to Curae Health. The 2 hospitals included 95-bed Merit Health Gilmore Memorial in Amory, Mississippi, and 112-bed Merit Health Batesville in Batesville, Mississippi. We now expect the Clarksdale, Mississippi hospital to close in the second quarter of 2017.

In addition to the 11 hospitals that recently closed on May 2, we have 12 hospitals under definitive agreement. The 12 hospitals under definitive agreement account for approximately $1.5 billion of annual revenue and mid-single digit EBITDA margin. Estimated gross proceeds from these divestitures, including working capital, is projected to be about $950 million of proceeds.

In terms of definitive agreements, on March 14, we announced the definitive agreement to sell 4 hospitals in the State of Pennsylvania to Pinnacle. The hospitals in this transaction included the 100-bed Memorial Hospital in New York -- in -- Hospital of York -- in York, Pennsylvania, Lancaster Regional Medical Center in Lancaster, Heart of Lancaster Regional Medical, and the 165-bed Carlisle Regional Medical Center in Carlisle. This transaction is expected to close in the summer of 2017.

Yesterday, we announced the definitive agreement to sell 2 hospitals in the State of Texas to HCA. The hospitals in the transaction include the 358-bed Tomball Regional Medical Center in Tomball, Texas, and 67-bed South Texas Regional Medical Center in Jourdanton, Texas. We expect this transaction to close later in the second quarter.

Yesterday evening, we also announced a definitive agreement to sell Lake Area Medical Center in Lake Charles, Louisiana to CHRISTUS Health. This transaction is expected to close late second quarter.

Adding up the total hospital divestiture plan, it now encompasses 10 hospital transactions that include 30 hospitals, of which 11 have recently closed, 12 are under definitive agreement, and 7 under a letter of intent. These divestitures account for approximately $3.4 billion of annual revenue and mid-single-digit EBITDA margins.

Estimated gross proceeds from these divestitures, including working capital, are projected to generate $2 billion. The multiple from our 30-hospital divestiture plan is approximately 12x EBITDA. We expect the transaction for these hospitals to close during the first 9 months of 2017.

One change from the last divestiture update back in February is that the other divestitures that were included in our initial 2017 guidance, accounting for approximately 4% to 5% of our 2016 net revenue and mid-single digit EBITDA margin, is now under a letter of intent included in our 30-hospital plan.

Looking at our 4 hospitals -- looking at our hospital divestitures, our divestiture plan today includes appropriately $3.4 billion of annual revenue and projected proceeds, including working capital, of $2 billion -- of approximately $2 billion. This is up from last quarter, when our plan included approximately $2.8 billion in annual revenue and projected proceeds of approximately $1.5 billion.

On Page 9 of our supplemental slides, we show the divestiture growth we have experienced over the past several quarters. It's worth noting that these numbers include previously-closed transactions, such as the majority interest in our Home Health care division and sale-leaseback transaction for medical office buildings, both of which closed in late December. We are pleased with the progress we are making with our divestiture strategy. We're continuing to receive inbound inquiries from a number of parties interested in our assets, and we continue to evaluate whether a potential transaction would advance our portfolio optimization goals.

We will continue to provide updates as we reach definitive agreements and reach the close of transactions. Proceeds from these transactions will be used for additional debt paydown.

We're working to not only improve our debt-EBITDA ratio, but also working to reduce the overall amount of our debt. Our current divestiture plan will also allow us to move to a portfolio of hospitals that are better positioned in their markets, with better volume growth, higher EBITDA margin and improved cash flow. This will also allow us to direct future investments in our most attractive markets and regional networks, which provide a higher return on capital.

Now I'd like to talk about our 2017 guidance. Larry will provide more detail later. Our 2017 guidance includes net operating revenues, excluding expected divestitures, are anticipated to be $15.8 billion to $16.2 billion. Same-store hospital adjusted admissions growth is anticipated to be flat to up 1.5%. Adjusted EBITDA is anticipated to be $2 billion to $2.175 billion. Income from continuing operations is anticipated to be $0.25 to $0.90.

As it relates to our pending HMA legal matters, there has been no material change for several quarters. We continue to reevaluate the estimated liabilities covered by the CVRs on a quarterly basis. Our current estimate, including probable legal fees, continues to reflect that there will be no payment to CVR holders.

Tim will now provide some comments on our operations, and Larry will discuss results later.

Thank you, Wayne. I think we had a good first quarter, and we are off to a good start for 2017. As I think about the remainder of 2017, I see a number of areas of opportunity to drive improved financial performance across our core same-store hospitals and markets.

In terms of expenses, I'm highly focused on driving better same-store expense performance across the company. In the first quarter, we did a good job of managing SWB, both on a sequential basis and compared to full year 2016. As I mentioned before, we are continuing to work with local market leaders on matching the cost structure of each respective hospital with their hospital or networks revenue outlook. As part of this work, we are enhancing our labor analytics tool in our core hospitals. This work, coupled with our recent divisional changes that Wayne just talked about, will be helpful in driving incremental improvements moving forward.

Finally, I would like to provide a quick update around our high-opportunity hospitals initiative. As I've mentioned in the past, we started this framework in the fourth quarter of last year, where we identified an initial 15 hospitals or 3 per division that have historically operated at a higher EBITDA margin but have experienced some EBITDA decline in 2016.

For each hospital, we conducted an in-depth operational assessment, completed focused strategic planning, and layered on increased oversight to drive improved EBITDA performance. While we believe we are still in the early innings of this initiative for these 15 hospitals, we are seeing good progress with improved net revenue and EBITDA growth across the group.

In summary, we are off to a good start for 2017, but I see a number of opportunities for better performance. I look forward to providing an update on our second quarter earnings call. Larry?

Thank you, Tim. As you are aware, we had a difficult consolidated comp in the first quarter due to a few divestitures, which included Quorum, Las Vegas and sale of our majority interest in Home Health division. We also had one fewer business day for an impact of leap day. That said, adjusted EBITDA of $527 million was in line with our expectations.

And now I'll discuss the results of the first quarter. As a reminder, calculations discussed exclude those items noted earlier. On a same-store basis, first quarter of 2007 (sic) [2017] versus 2016 net revenue grew $32 million or 0.7%. Now this was comprised of a 2.1% increase in net revenue per adjusted admission and a 1.4% decrease in volume or adjusted admissions. Our in-patient admissions declined 1.5%. Declines were in the areas of readmission and OB-related. Our ER visits were down 0.2%, and our surgeries were down 1.8%. And we had very little flu impact on our adjusted admissions.

As a reminder, leap day was a difficult comp during the first quarter. If we adjust for the impact of leap day on a year-over-year basis, we estimate same-store admissions, adjusted admissions and surgeries were all approximately flat during the first quarter, while ER admissions were up by 1%.

In the first quarter, we recognized a British Petroleum revenue settlement of approximately $15 million. This settlement offset the volume and EBITDA decline from severe weather in the Northeast of $3 million and an unanticipated drop in EBITDA of $12 million from 2 divestitures that have not closed as quickly as anticipated. We received a small BP settlement of about $3 million last quarter, and we expect some additional payments in the next 3 quarters.

I'll describe a few same-store trends between our former HMA facilities and the legacy CHS facilities. For the first quarter, compared to 2016, the former HMA facilities experienced a 1.7% decrease in admissions compared to 1.4% in legacy; a 1.7% decrease in adjusted admissions compared to 1.2% at the legacy; a decrease in surgery cases at 3.7%, while legacy experienced a 0.9% decline; a decrease of net revenue of 0.7%, while legacy was up 1.5%.

We are continuing to see some favorable growth from some of our HMA hospitals. And in terms of our HMO portfolio, HMA first quarter performance compared to the fourth quarter in calendar 2016 was improved for net revenues, admissions, adjusted admissions, EBITDA (inaudible) adjusted for an impact of leap day. It's worth noting that approximately 20% of the HMA hospitals we called out last quarter as a drag on the business improved in the first quarter. These 20% account for 65% of the admissions and surgery declines in the first quarter, which is [down at] 90% of decline in admissions for all of 2016.

Our net outpatient revenue, before provision for bad debts, currently represents 56% of our revenue. Our consolidated revenue payer mix for the first quarter of '17 compared to the first quarter of '16: managed care and other increased 140 basis points; Medicare decreased 130; Medicaid was flat; and self-pay decreased 10 basis points.

Consolidated charity self-pay discounts, plus bad debt expense, for the 3 months comparative periods has increased from 25% to 27.1% of adjusted net revenue, a 210 basis point increase. Same-store increase from 26% to 27.3%, 130 basis point increase. We increased our self-pay discount percent earlier in 2017 than we increased it in the first quarter of 2016.

For same-store expense items in the first quarter compared to the first quarter of '16, our salaries and benefits as a percent of net operating revenue for same-store increased approximately 30 basis points.

Supply expense as a percentage of net operating revenue was flat. Increased implant costs were offset with savings in other supply areas. Our other operating expense as a percent of net revenue for the same-store increased 90 basis points. The increases in the first quarter of '17 versus the first quarter of '16 were driven by higher medical specialist fees, business taxes and information systems.

Looking at our same-store expenses in the first quarter compared to calendar '16. Our salaries and benefits as a percentage of net operating revenue decreased approximately 60 basis points, owing to the better expense management that Tim referred to. Supply expense as a percentage of net operating revenue for same-store is up 20 basis points, primarily from increased implant expense.

Our cash flows from operations were $242 million for the first quarter of '17. This compares to $294 million in the first quarter of '16. Cash flows from operations declined year-over-year due to the following items: Cash flow attributable to divestitures was roughly a $25 million reduction; the timing of payments for payroll negatively affected cash flow from operations by approximately $60 million; the decrease in cash received from HITECH was roughly a $60 million reduction; the improvement in A/R days more than offset third-party settlements. Combined, this was roughly a $100 million benefit to cash flow. A/R days improved 2 days, March '17 versus March '16. Other decreases, including working capital changes, reduced cash flow by about $45 million and we did have the shareholder settlement of roughly $40 million.

Turning to CapEx. The first quarter was $146 million and only 3.3% of net revenue. The lower CapEx was in part due to the limited replacement hospital spending during the first quarter.

Moving to the balance sheet. At the end of the first quarter, we had about $14.7 billion of long-term debt, which is down about $100 million since the first of the year and approximately $1.9 billion from the end of 2015. As Wayne walked through earlier, we are pleased with the progress we're making in our divestiture plan. Our current divestiture plan, including last week's and yesterday's closing, is expected to generate approximately $2 billion of proceeds, including working capital.

The tax leakage for these divestitures is expected to be approximately 5%. We expect this group of transactions to close during the first 9 months in 2017. And these proceeds will be used to further debt reduction. It's worth noting, the interest level in our assets remains high, and we are receiving attractive multiples for the hospital divestitures, which is accretive to our current debt-to-EBITDA and our enterprise value-to-EBITDA ratios. The divestitures also helped to improve our volume outlook, EBITDA margin and cash flow generation.

On Page 10 of our supplemental slide presentation, we've included the 2000 (sic) [2016] annual pro forma impact of the 30-hospital divestiture plan. If you adjust for these divestitures from our 2016 same-store results, admissions improved 30 basis points, adjusted admissions improved 30 basis points, surgeries improved 50 basis points. On an annual pro forma basis, the divestiture assets in '16 and expected divestitures for the 30 hospitals improved our consolidated margin -- EBITDA margin by approximately 170 basis points.

For the first quarter of 2017, same-store results without these 30 hospital divestitures planned improves as follows: revenues increase 50 basis points; admissions and ER visits, 40 basis points; adjusted admissions and surgeries, 20 basis points; payroll as a percentage of revenue gets better by 80 basis points; and EBITDA margin improves by 2 basis points.

Now I'd like to comment on our recent debt offering. In March, we completed an offering of $2.2 billion of 6.25% senior secured notes due 2023. The proceeds were used to purchase all of our 5.125% senior secured notes due August of '18 and our term loan F due December '18. We reflected the additional interest expense from this offering in our revised guidance. The only long-term debt maturities due prior to 2019 will be our $250 million on our A/R securitization due November 13, 2017. And then, we also have $450 million due in November '18.

In terms of our bank covenants through the fourth quarter of '17, our maximum secured net leverage ratio is 4.5, and our minimum interest coverage is 2.0. We are in compliance with both covenants on March 31 with a secured net leverage ratio of 3.9 and interest coverage ratio of 2.39. Our EBITDA cushion on the senior secured ratio is 11%, and our EBITDA cushion on our interest coverage is 16%.

Before we move to guidance, I'll just talk quickly about the first quarter consolidated performance compared to the first quarter 2016. If you adjust for the impact of our divestitures in Quorum, Las Vegas, JV, and Home Health, the leap day and the HITECH drop and other acquisitions we did, our EBITDA performance was almost flat during the first quarter. Additionally, our 3/31/17 quarterly EPS of $0.08 includes an additional tax expense of about $16 million or $0.14 EPS related to the new accounting standard, which changes how differences in compensation expense for share-based awards for accounting tax purposes are recognized upon vesting. Share price has dropped from the date -- from the grant date. This effect should probably only be in the first quarter of the year of any significance in amount.

Switching to our full year 2017 guidance. The only change to our EPS line is due to the higher interest expense associated with our debt offering we completed in March. 2017 full year guidance: Again, operating revenues anticipated to be $15.8 billion to $16.2 billion after you adjust for divestitures; adjusted EBITDA of $2 billion to $2.175 billion; cash flow from operations is forecasted in $1.050 billion to $1.225 billion; CapEx is expected to be $625 million to $775 million; income from continuing operations is anticipated to be $0.25 to $0.90 and on weighted average shares of 112 million to 113 million; and the debt offering lowered our high end of the guidance by $0.20 and the low end of the range was trimmed by only $0.05.

While we typically do not provide quarterly guidance, just want to add a couple of things about the divestiture headwind for the second quarter. Our first quarter consolidated EBITDA came in at $527 million. Based on recent divestiture closings and anticipated closings during the quarter, we estimate an approximately $10 million to [$15 million] drag on our adjusted EBITDA during the second quarter. And also, it's just worth noting that our second quarter does include Easter. And last year, it was in the first quarter. Wayne?

Thanks, Larry. Before we go to the -- open up for questions, I just want to publicly acknowledge and express my appreciation to Larry. All of you all know Larry is retiring this month. He's been not only a significant contributor to the Community Health Systems, but professionally, I know he's been very helpful to a number of you all.

So we appreciate everything you've done for us, Larry. All of us do. And thank you very much for your contribution to this industry.

Thank you, Wayne.

With that, at this point, operator, we are ready to open up for questions. (Operator Instructions)

But as always, we're available to talk to you. You can reach us at area code (615) 465-7000.

(Operator Instructions) Your first question is from A.J. Rice from UBS.

Larry, I want to echo those best wishes to you in retirement. I wish you the best. On the question side, I guess it's 2 parts to it -- to my single question. The commercial business stepped up as a percentage of 140 basis points year-to-year, and you also had a pick-up at HMA. I wonder, can you -- are you attributing either of those to a stronger economy, either nationally or in Florida? Or are these mostly your initiatives? Or as you drill down, any thoughts on those 2 dynamics, improved commercial performance and improved performance at HMA in terms of volumes and all?

First of all, thanks, A.J. The consolidated -- and I said consolidated is up 140 basis points. It's less than that, probably 50 basis points because of the -- we had Quorum in last year and Quorum is gone. But I think we are seeing improving employment growth and we are seeing pretty good results, especially in the out-patient side for managed care, getting, for the most part, good prices. And I think we all -- we do have, in our managed care, a little bit of Medicare Advantage. So there's a little bit of movement from Medicare to that. But I think we're pretty pleased that we're still seeing some same-store managed care growth. That's helped our pricing 2.1%, which is pretty good for us. Compared to last year, we were under 2%. So that's a good movement. Especially the fact that the surgeries didn't go up. We also are starting to see a little bit higher intensity in our surgeries. A little bit higher percentage of our surgeries are -- have implants, which drives better acuity, and our case mix improved on our managed care business, which was helpful. So all that together. But I think our economy is catching up with some of the other locations, which helped Medicaid, which is relatively flat, and self-pay was down 10 basis points.

Okay. And anything on HMA specifically?

HMA is a little bit better in Florida. We have had -- we've done some good contracting in the managed care side there, and I think Florida has improved some, which is probably helpful to the overall managed care in Florida and (inaudible) because most of the hospitals in Florida are HMA hospitals.

The next question is from Gary Lieberman from Wells Fargo.

Larry, thanks for all the help over the years, and congratulations on a very well-deserved retirement.

Thanks.

As you guys go forward, you now had 2 pretty good quarters after a rough patch. It looks like the acquisitions -- or rather the divestiture pace may be slowing down a little bit. I guess, can you talk about how you may be refocusing your efforts on working to improve the operation of the remaining hospitals?

Yes. You're right. We've been working very hard on divestitures. But we've also been making a lot of progress on our operations, but there's a lot of opportunity left. We should see more improvements in the latter part of the year based on the initiatives we have in place now. But we are -- we have -- as I said this a number of times on calls, we're a better company today than we were yesterday or last year, and we are continuing to improve our skill level, believe it or not, in terms of our operations. So our focus now going forward will be operations oriented. We are about finished with our divestiture process. This 30 just about lines it up. We've got -- may have -- there may be one or 2 more, but we're not specifically thinking about doing anything significant for the rest of the year. So I think we're on the right track, and I think we'll continue to make improvements.

Gary, looking back a year ago in the second quarter, we were down a little over 20%. So like I did that reconciliation of what you own and don't own and HITECH and things of that nature. We're probably down more like 15% in the third quarter of 2016 and under 10% in the fourth quarter, and we're basically flat for the first quarter. So we've made pretty good progress, but I think there's a lot, as Wayne said, a lot of good progress, especially in the second half of the year with all the initiatives that everyone -- that Tim talked about and everyone else has got going on.

And as we conclude these divestitures, obviously, our margins get better, our cash flow, and broadly everything improves. But then, there's a real opportunity for us to enhance our margins going forward, and that's where the big opportunity is here, we think, for the future.

The next question is from Brian Tanquilut from Jefferies.

Larry, thanks again for all the help over the years and congrats. So a two-part question for me. Wayne, just to follow-up on that comment that you just made. So if you guys are thinking that we're pretty much done with divestitures for this year, how are you thinking about longer-term leverage, and then all the debt maturities coming up again in 2019? And then, tying that with, I think, there was one slide deck that -- or slide that you put up earlier this year showing the profile of your hospitals in terms of how competitive the markets are and their market positioning. I think there were 4 different buckets. So how do you put all that together as you think about kind of like concluding the divestiture strategy, at least for the time being?

As you might expect, divestitures have been a significant diversion for us in terms of working through all the process, dealing with all the issues related to divestitures. So that in itself will open a lot of time for us to work on other issues. So once you kind of get through this, the margin, I think there's a slide somewhere that shows you what the margin goes to. It goes to almost 13%. And that's just with the things -- that's basically just the opportunity here in terms of reduction in the number of facilities. So our opportunity going forward is -- and Tim's got all these initiatives, which we won't go into all the detail about them, but we have a huge number of initiatives going on that we think will be very helpful. As we said all along, the strategy here now going forward is sustainable markets. As Larry mentioned, we're getting a little growth in our markets now, sustainable hospitals and sustainable markets. There is no question that if we can improve our margins going forward, it helps us in terms of debt reduction as well. So I think we're on the right track. And I don't know, Larry or Tim -- you Tim, either one of you want to add to that?

Yes, I might just add, if you go back a year ago around this time, we did the spin. That's 38 hospitals. You got these 30 hospitals. I think when you talk about sort of being done, we're done for 2017. There may be something else come along, but nothing -- sitting here in May, you're not going to start working on something that's probably going to get done by the end of the year. But as you hear interest and look at taxes, there may be some divestitures in the future, but not affecting in 2017. If you look at the debt to EBITDA, probably at the end of the year, pro forma for the divestitures, [and the net] we'll have will be somewhere in the mid-6s, maybe a little less than that on debt to EBITDA. And probably in 2018, we probably expect to be somewhere below 6. So -- and I think that puts us in a better position. As far as maturities, we got rid of all the 2018 maturities. We got some January of 2019 maturities, which we'll be thinking about, and the next maturities after that are December of '19, and I think we'll be well positioned a year from now or maybe even sooner to address those maturities.

So there's -- the other thing, I said this a couple of times at conferences, that if the right opportunity were to come along in some of our larger markets, larger facilities, and we got 12x, which we're getting currently with our single-digit margin facilities, just because of the size of our debt, we may take advantage of that opportunity when it's all said and done.

The next question is from Joshua Raskin from Barclays.

I'll echo the comments of thanks for Larry as well. My question is on payer mix. You guys saw an improvement in payer mix, commercial up, I think you said 140 basis points. I guess, maybe help us understand how that fits relative to some of the other hospital companies that we're seeing? And what do you think the major differences are for Community? Why are you guys seeing that benefit relative to some of the others?

Yes, Josh. 140 is consolidated. It's probably more like 50 basis points same-store, which I don't know everybody else's numbers, but clearly not having Quorum in the first quarter compared to the year ago helped out. One of the things we're doing when we have divestitures, we're improving our payer mix. The 30 hospitals we got going now have a -- when they are gone, that will push the payer mix back up and help the payer activity. We are seeing a little bit of movement from Medicare to Medicare managed care, which we put in managed care. I think you do a pretty good analysis about the employment and what's growing. And you point out that our markets are starting to have a little bit of employment growth. We've got a good opportunity (inaudible). We probably lost some market share back in 2015 and '16. Hopefully we're getting a little bit of that back right now. Volume was basically flat once you adjust it for leap day. Our surgery case mix is up and our managed care patient -- case mix was up.

(inaudible) focused on our service line development, which we've not done before, which I think is helping us as well.

Got it. Got it. That makes sense, Wayne. And then, just on the 12 multiple, obviously, that seems is very attractive, especially relative to where you guys are trading or where any of the public trade companies are trading. Is that more reflective, you think, of the EBITDA margin opportunity for the buyers? Or do you think there's a general disconnect between public and private markets, and that even for higher-margin hospitals you think you could get higher multiples?

Well, one of the things is, is that we've attracted a lot of strategic buyers who have opportunities in and around their markets. Generally speaking, I think that's one of the reasons that people are interested. And by and large, these are opportunistic properties. I mean, we think they're good properties going forward. And so by us going from 200 to 100 and whatever it is, gives us a lot more focus on this. But probably we spread our wings a little too far to start with. But this is a great opportunity, I think, for them and for us as evidenced by people paying 12x for these properties with single-digit margins. They obviously think they can improve the margin.

I'll just add, we sort of managed this internally, the people that used to do the acquisitions, and we had one new person join Larry down there. They've done a good job. And so I think that by management internally, you can look at your tax basis, you can look what the future is, and we picked the right buyer for us and get good proceeds for us.

The next question is from Chris Rigg from Deutsche Bank.

I'll echo all the previous comments Larry, [heading straight], go forward. So I guess, and this answer might be obvious, but Wayne, when you sort of think about the way you view the company going forward, and historically, it was sort of M&A-driven growth, I guess how would you characterize the philosophy of the company going forward? Is it solely focused on cash generation and just margin improvement? Or you still want to selectively look at M&A down the road?

I think we will continue to look for M&A -- for opportunities to expand our footprint. Most importantly now, we believe -- and it doesn't exclude us from buying a hospital, but I think what we are trying to do now is to look at our footprint and look at some of the markets where we've got a significant presence, and even in the markets where we're the sole provider, expand our footprint in terms of, obviously, in our out-patient diagnostics, freestanding EDs, freestanding urgent care centers, all of the above. All those should be accretive as we go forward. I think the objective here is now is to how we enhance the patient experience and how we attract patients, more patients going forward. I think that's -- in whatever area, and whether it be in-patient or out-patient. But I don't think there's -- the need for a large tertiary in-patient now is beginning to come less (inaudible) kind of going forward. So fast-forward out, in 5 or 6 or 7 years, I think you will see more expansion. Everything is going to out-patient, we're at 56% or 57%. So I think that's the opportunity. And deploying our capital in markets where we have higher margins, we'll get a better return as well.

The next question is from Ralph Giacobbe from Citi.

Also want to echo best wishes to you, Larry. I appreciate the help over the years. Just in terms of, you guys mentioned better same facilities sort of expense performance, and certainly saw good improvement on the labor side. I guess the question is, what do you expect controllable operating expense per adjusted admissions to grow sort of sustainably over time? And then, when you brought down the divisions 5 to 4, can you give us a sense at all of magnitude of how much savings that could drive?

Well, we're currently growing revenue per adjusted admission 2 to -- we're saying 2% to 3%, and I expect our expenses to be less than that. We had a better first quarter here than we did the preceding quarters. We've still got some opportunities, especially in the labor line. I think the supply line, there's a lot of efforts there in our strategic sourcing. We're doing a lot of consolidation in and around our payables and trying to have a common master index for buying. A lot of efforts around physician practices, which will help us in the second half of the year a lot. The one category, medical specialist fees, is something we got to work a bit more on. That's growing, but we're -- it's probably the fastest-growing line we've got. We've got a lot of thoughts about how to do that better from that perspective. So I'd say that it would be -- the revenue per adjusted admission is going to grow 2% to 3%. We'd want to be more like 1.5% to 2% on the expenses.

Larry, you might comment on the shared service approach as well.

Yes, and Wayne just said that we've now got 6 service centers. We've moved over 90% of our hospitals into the shared service centers. We've started to see a little bit of benefit of that. I think our receivables performance was a little bit better here, a lot of it last year, so we've been doing a lot of conversions, which would have affected it. We've also got a consolidated effort around health information management. They're operating at a lower cost today than they were before. We're doing a consolidated payroll that we did a years ago. Getting a lot more analytical information, which Tim talked about. And then the one that's still underway, which we invested a little money, is the centralized payable. Then tied with that is some purchasing information. So all those are embedded into the plan to do better and they're all pretty much on target. We did also work on our health benefits. We've made some changes in our claims administrator and also made some changes in our drugs, which will help us for the year. But I -- and you're right about the comment. We've got to recognize that the revenue per unit may be 2% to 3%. We've got to operate more effectively, trying to keep the costs under that, which we didn't do in the latter -- mid-part of '16, and we did better in the fourth quarter and better in the first quarter.

The next question is from Ana Gupte from Leerink Partners.

So congrats, Larry, as well, and thank you so much for all your support. I wanted to go back to guidance again. It's the second quarter, you've reiterated guidance, and I don't think I saw a waterfall as you normally have. So as you're thinking about the puts and takes and the upside and downside risk, can you talk about the line items? And are they more volume-related and physician productivity-related to the upside relative to on the expense line, either docs or other supply and purchasing efficiencies and the like?

Yes, if you go back to what we did, we did a midpoint reconciliation of 2016 to the midpoint of 2017. There's not much change there. The divestitures are $110 million. We're probably going to have another $100 million come out on divestitures, maybe a little bit less than that based on timing. We get a little bit of acquisition pickup from the La Porte and Fayetteville activity. We've got the leap day, which probably cost us about $20 million. We also lost about $50 million of HITECH. Pricing and volume was probably somewhere in the $30 million to $40 million of benefit, and the physician practices, $20 million to $25 million. Expense management is about $70 million of it. As I just went over a lot of initiatives built around those shared service centers, around our HIM, health insurance stuff, which we hope to get $70 million. We decided not to repeat the same schedule we did before, but because we've kept EBITDA guidance the same, the $527 million was pretty much what we had expected it to be. So I think that's why we didn't redo the bridge, and we'll wait till the second quarter for something that needs to change. Some people commented about the volume being negative. If you adjusted for the leap day, our volume was basically flat and our guidance is 0% to 1.5%. We're not going to have the leap day challenge going forward. So I think we're still comfortable with our 0% to 1.5%.

Got it. Okay. One follow-up. You and one of your peers earlier today also seem very bullish on Medicare volume, particularly, also, on the managed Medicare side. Is this more the baseline was low? Or is something else changing in terms of their prior auth or [taxes]?

Well, I think the companies you're talking about work pretty hard to have pretty good managed care relationships. And I think our managed care has done a pretty good job getting us most of our contracts. So I do think we do participate in a lot of the managed care contracts with the major managed care companies, which makes us a little bullish competing against, maybe, some of our competitors.

The last question is from Kevin Fischbeck from Bank of America Merrill Lynch.

And thank you, Larry, for all your help over the years. I guess I just wanted to maybe follow-up on that last point that you made about the volume number. And I appreciate that without leap year, you're talking about basically flattish volumes for Q1. But to get to the midpoint of that guidance for the year, is there anything that you would point to that kind of says the back half of the year should be closer to 1 than to flat?

Yes, I'd say our psych business is doing better. We've internalized that. We've done a much better job of getting some of our psych business. Our orthopedic business, which is one of the specialists we're recruiting for, Dr. Simon did a good job with her service line from that perspective. And I think that they're -- I think we're also -- feel pretty bullish about our ability to get a little bit more ER business and ER transfer business, some efforts we've got going on there, and I think there. And we've also had a fairly long run of OB being down. I think that will anniversary itself here, you would think. Then also our readmissions have started slowing down. So that activity would be the ones. But from a specialty perspective, behavioral, orthopedics and the ER activity we've got going on would be the categories that we feel good. This should help us in the second -- or in the next 3 quarters.

And then, as -- when you look at the portfolio of core Community versus HMA, do you expect a disproportionate amount of that volume improvement to come from either one of those buckets?

We're starting to see the narrowing of the gap. We have not narrowed the gap enough on surgeries, so there's a lot of work Tim has got underway to get the surgery business up. And I'd say, other than surgeries, I'd say that they'd be pretty comparable, both admissions and adjusted admissions. We have not quite got the surgeries for the HMA hospitals, some of which are in the divestiture category that we've announced. But I'd say, other than surgeries, it'd be pretty much throughout the company.

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

Thank you, again, for spending time with us this morning. We are very focused on our strategies we have outlined over the past several quarters. I want to specifically thank our management team and staff, hospital Chief Executive Officers, hospital Chief Financial officers, Chief Nursing Officers, division operators, for their continued focus on operating performance.

And again, a special thanks to Larry, and a wish for a happy retirement. This concludes our call today. We look forward to updating you on all of our progress through the year. Once again, if you have any questions, you can always reach us at (615) 465-7000.

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