Community Health Systems Inc (CYH) 2017 Q3 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 Third Quarter 2017 Conference Call. (Operator Instructions)

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 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 on 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 2 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 and 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 in that 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.

In terms of the individual storms, Hurricane Harvey hit the state of Texas in late August, impacting our DeTar Healthcare System in Victoria, Texas. Our health care system there includes DeTar Hospital North and DeTar Hospital Navarro. In that market, we experienced hospital closures and incremental expenses due to Hurricane Harvey.

In terms of Irma, that storm moved through the southeastern part of the United States in early September, impacting 19 of our hospitals in Florida and one hospital in Georgia for a prolonged period of disruption. The most significant impact on our operations due to Hurricane Irma was our hospitals in Key West and Punta Gorda, Florida. While our entire team did a great job managing through the hurricanes, these storms caused a number of disruptions to our operations. Combined, at this time, we estimate the loss net operating revenues and incremental expenses approximately $40 million, which does not include any insurance recoveries. And while we do not anticipate long-term effects, we expect some negative impact on the fourth quarter results.

So in summary, the hurricanes have been a disruption to our operations, both pre- and post-storm, but we have been extremely pleased with our company's response, and we expect to recover through this disruption in the fourth quarter.

Our team's focus on hurricanes did not distract us from patient safety and operations improvement efforts. I'm pleased with our investments in long-term volume initiatives, especially the third quarter rollout of our internal transfer center and our investment in ACOs, which Tim will discuss in more detail.

In addition, we continue to leverage data to manage our labor and supply costs. We believe we're building a strong platform, which we'll -- we can improve performance through this difficult volume environment.

Switching to divestitures on Page 7 of our supplemental slides, we have provided an update. Since our last earnings call, we have completed remaining 10 hospital divestures. This has been a long and complex process, which is -- require time, talent and distractions -- effectives. And I want to acknowledge the great job that our team has done in managing our divestitures.

Effective September 1, we completed the sale of our remaining 2 hospitals in the state of Washington to Regional Health. On October 1, we completed divestiture of 5 Pennsylvania hospitals and their associated assets to Reading Health System. Also, on October 1, we completed the sale of 103-bed Weatherford Regional and Weatherford, Texas to HCA. And earlier this week, we completed the sale of 2 hospitals, one in Clarksdale, Mississippi; the other in Sebring, Florida, to Curae Health and to HCA, respectively. As a result, we have completed the 30-hospital divestiture plan.

Our 30-hospital divestiture plan has met our expectations. Total gross proceeds, including working capital, were approximately $1.95 billion and roughly 12x EBITDA. Approximately $1.4 billion was used to repay term loan debt through the end of the third quarter, and we also paid down approximately $200 million of our ABS.

We continue to receive outbound inquiries from a number of parties interested in our assets. So with our 30-hospital divestiture program now complete, we're now increasing the next phase of our divestiture plan. We're now pursuing sale transaction of hospitals accounting for at least $2 billion of net revenue, which has increased from $1.5 billion last quarter.

Looking at this next group of divestitures to date, we have several signed letters of intent from the hospitals accounting for more than $1.2 billion in net revenue. Pro forma, adjusted for the sale of these divestitures, our company will have more stable markets with mid-teen EBITDA margins and better cash flow.

Our full year 2017 guidance includes the following. Net operating revenues less provision for doubtful accounts are anticipated to be $15.8 billion to $15.9 billion. Same-store hospital adjusted admissions is anticipated to decline approximately 2% to down 1.5%. Adjusted EBITDA is anticipated to be $1.67 billion to $1.725 billion (sic-see press release �$1.675b to $1.725b�). Cash flow from operations is forecasted to be $900 million to $1 billion. CapEx is expected to be $575 million to $725 million. HITECH is forecasted at $25 million to $30 million. Income from continuing operations per share is anticipated to be a negative $1.30 to $1.20 based on weighted average diluted shares outstanding of 112 million to 112.5 million shares.

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 includes probable legal fees, continues to reflect that there will be no payment to CVR holders.

Tim will now provide some details on our operations, and then Tom will discuss our results further. Tim?

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 community 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 in business and 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 2 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 health care 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 8 divested hospitals that have closed in the past 2 months, our third quarter adjusted admissions were up 0.4% on a sequential basis. And while the hurricanes and overall environment impacted our performance, we are continuing to strategically invest in our strongest markets, and those we are focusing on for future growth and margin expansion. This includes strategies such as service line enhancements, physician practice development, incremental outpatient access points, investments in the behavioral health and post-acute space and the expansion of our new transfer program initiative.

We continue to add strategic access points in many markets with a number of locations recently opening or in the latter stages of completion. For instance, in Las Cruces, New Mexico, we are opening a freestanding ED in the fourth quarter, which will be the first asset to open in the state. Also in that market, we recently opened additional urgent and walk-in centers, taking our total to 5 and 2 more are planned for opening in 2018.

In our Tucson market, we'll be opening our second asset as we continue to build out that network's presence across the countywide service area.

Now I would like to provide an update on our transfer program, which I expect will drive improvements into 2018. As a reminder, this program helps to manage the inbound referrals to our hospitals and their emergency departments from both affiliates and nonaffiliated hospitals in a particular region. In most of our markets, the call center phone lines are outsourced to contracted partners who specialize in this service. We have recently begun to in-source and centralize this function for some select markets following the third quarter opening of our own internal call center here in Franklin.

During the third quarter, we fully transitioned 9 of our hospitals and one of our market to our in-house operation center. Early -- very early on, we are already seeing that moving this function to our own platform has multiple advantages, including more real-time visibility into daily ED, bed management and case management operations at the affiliated hospitals, improved data capture that will amplify the service line development strategy and related volume growth opportunities, which are inherently unique by market and a clear improvement in the service to and the satisfaction of the referring facilities.

Since we transitioned these 9 hospitals to our in-house operation center, our admission capture rate has improved and the feedback from the users in the market has been positive. We expect to transition 18 additional hospitals on to our in-house platform during the fourth quarter of 2017 and into the first quarter of 2018. And we'll continue to migrate other select hospitals and markets as we move through the year. We anticipate solid incremental acute care growth opportunities by combining this enhanced transfer center model with our focused service line development strategies.

To further align both employed and independent physicians around quality in the market served by our affiliated hospitals, we're developing accountable care organizations, or ACOs, in many locations. In 2018, we estimate that these new ACOs will expand this value-based care model to approximately 300,000 Medicare fee-for-service lives. This initiative encompasses more than 400 physician groups and 122 affiliated CHS hospitals nationwide. We believe this alignment will help drive quality as well as further transition our company to value-based care and population health reimbursement models.

Before I turn the call over to Tom, I wanted to quickly provide an update on our corporate division operation structure. With the focus on better performance and enhanced efficiency, we reduced our divisional structure down to 3 divisions from 4 divisions during the third quarter. As part of this change, we moved 4 key network markets to a regional model, whereby assisting leaders within our organization have been promoted to regional presidents who directly report to me. These markets include our Lutheran network, which Wayne just commented on; our Alabama market, our Northwest health care network in Tucson and our Merit Health network across Mississippi. Our division model continues to be the right structure for many of our hospitals and networks. We believe this new structure is better suited to help drive ongoing growth in the markets I just mentioned.

And now I'll turn it over to Tom.

Thank you, Tim. During the third quarter, consolidated net revenue was below our expectations from a combination of lower-than-expected volumes and 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 $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 quarters 2017 versus 2016 basis, net revenues decreased $56 million or 1.5%. This was 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 managed care and other, which includes Medicare Advantage, decreased 40 basis points. Same-store down 50 basis points. Medicare decreased 80 basis points. Same-store down 10 basis points. Medicaid increased 50 basis points. Same-store increased 80 basis points, and self-pay increased 70 basis points. Same-store self-pay down 20 basis points. Consolidated uncompensated care or charity care plus discounts plus bad debt expense for the 3-month comparative periods, has increased from 27.7% to 30.9% of adjusted net revenue, a 320 basis point increase. Same-store increased from 29.3% to 30.9%, a 160 basis point increase.

Looking at our uncompensated care in the quarter. We experienced an increase due in part to the increases in self-pay volumes, much of this from the hurricanes, patient co-pays and deductibles, increases in self-pay discounts as a percentage of net revenue and prior divestitures of certain hospitals that have lower bad debt as a percentage of revenue. For the third quarter, our bad debt as a percent of net revenue before bad debt was up 160 basis points to 15.4% on a consolidated basis and was up 70 basis points same-store.

Overall, lower-than-expected net revenue and incremental expense from the hurricanes impacted our expense lines as a percent of net revenue. For the same-store expense items in the third quarter of 2017 compared to the third quarter of 2016, our salaries and benefits as a percentage of net operating revenues for our same-stores increased approximately 80 basis points. Hurricane impacted and divested hospitals account for 50 basis points of the 80 basis point increase. The increase was driven by higher physician expense, which more than offset lower employee benefit cost.

Supplies expense as a percent of net operating revenue for our same-stores increased 30 basis points. While pharmaceutical costs were flat, higher implant costs drove the increase. Other operating expenses as a percent of net operating revenues for our same-stores increased 170 basis points. Increases in the third quarter of 2017 were driven by a combination of higher medical specialist fees, contract labor, taxes and insurance costs. Despite a number of divestitures, our year-to-date corporate costs as a percentage of net revenue are below 2015, which is prior to the start of our recent divestiture activity.

Looking at our third quarter EBITDA performance. If we exclude the impact from the hurricanes and divestitures, our adjusted EBITDA margin would've been 160 basis points higher. In terms of our total operating spend, our same-store operating expenses were up 1.8% in the third quarter and 2.1% year-to-date. It's worth noting that we're working on a number of initiatives designed to reduce our operating spend, particularly around supplies and for vendor-related costs. We expect to see some progress in the fourth quarter and in 2018.

Switching to cash flow. Our cash flows provided by operations were 115 -- sorry, $114 million for the third quarter of 2017. And this compares to cash flows from operations of $178 million during the third quarter of 2016. For the first 9 months of 2017, our cash flows provided by operations were $617 million compared to $810 million. Year-to-date, cash flows from operations declined year-over-year due to a few items. The timing of payments for payroll negatively impacted cash flow by approximately $55 million. The decrease in cash received from HITECH was roughly a $75 million reduction. Other decreases, including divestitures and working capital changes, reduced cash flow by approximately $60 million.

Moving to CapEx. Our CapEx for the third quarter of 2017 was $154 million or 4.2% of net revenue. Year-to-date, our CapEx is $428 million or 3.5% of net revenue compared to $561 million or 4% of net revenue through the first 9 months of 2016. When comparing the year-to-date CapEx to previous years' amounts, 2017 CapEx is lower due to limited replacement hospital spending and more targeted CapEx focused on our higher-return core hospitals. In addition, we are allocating relatively more CapEx towards additional access points as well as service line buildouts around cardiology, orthopedics and other high-acuity areas.

Moving to the balance sheet. At the end of the third quarter, we had approximately $13.9 billion of long-term debt, which is down approximately $900 million since the start of the year and approximately $2.8 billion from the end of 2015. Also, since the beginning of 2017, our current maturities of long-term debt have been reduced by over $400 million. And we have had $590 million of cash on the balance sheet as of September 30.

In terms of our debt, it's worth noting that over the past 6 quarters, we've reduced our current maturities of long-term debt and long-term debt by nearly $3 billion. And as Wayne mentioned, we recently expanded our divestiture program. Beyond our announced and closed 30 hospitals, we are pursuing additional divestiture transactions for hospitals accounting for at least $2 billion of net revenue and on average, mid-single-digit EBITDA margins. These proceeds will primarily be used to lower our debt. It's also worth noting that we have signed several letters of intent to sell hospitals accounting for $1.2 billion of net revenue. The $1.2 billion is part of the $2 billion.

In terms of our bank covenants, our maximum senior secured net leverage ratio is 4.5x through December 31, 2019, and our minimum interest coverage ratio is 1.75 through the end of 2017, which will increase to 2x thereafter. We were in compliance with both covenants on September 30 of 2017 with secured net leverage ratio of 3.80 and an interest coverage ratio of 2.45. As of September 30, 2017, our EBITDA cushion on our secured net leverage ratio is 15%, and our EBITDA cushion on our interest coverage ratio is 29%. Based on refinancings accomplished during 2017, we have no senior note maturities until November of 2019. And today we have over $1 billion of senior secured capacity. Over the next several months, we'll continue to assess the most efficient way to manage our capital structure as we move forward. Wayne?

Thank you, Tom. At this point, operator, we are ready to open it up for questions. (Operator Instructions) But as always, we're available to talk to you, and you can reach us at area code (615) 465-7000.

(Operator Instructions) Your first question is from Frank Morgan, RBC Capital Markets.

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 noticed the 340B spending has been cut. Would that be a positive? Just want to verify that, that would in fact, be -- potentially be a positive for you and maybe how much of an impact that would be?

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 the 2016 only, but we've had fewer expenditures in 2017 related 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 6 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, freestanding EDs and access points, and while at the same time, maintaining necessary capital at 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. And 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% pickup 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.

I was just hoping you could give us a sense for 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?

Yes. So Chris, we had 2 closings just in the prior week, which were about $20 million of -- or roughly $20 million of cash. Those were smaller facilities. The 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 by working capital, we retained that. That's still on our balance sheet, and it might not have been collected yet. And then other sorts of things are small amount of notes in capital leases with the buyers.

Your next question comes from Brian Tanquilut, Jefferies.

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 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?

I think you noticed that we've 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 kind of detail again real quickly what that means and where we are?

Sure. And I'll 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-sourced 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 ACOs develop in some of our nonurban 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've strategically invested. The urgent cares, right now, we have about 80 across our networks. We have about 30 more in the development pipeline with varying dates of opening. We have 4 more assets 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 their volume opportunities.

Your next question comes from Ralph Giacobbe of Citi.

In the point of the fourth quarter guide, just over a 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 x additional sales? And then if I add back the $40 million for the hurricane impact, I'm sort at a $371 million EBITDA number for the quarter, about 10% margin or so. Given that most of the asset sales were 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 help us with what you see as normalized margin target for whatever your ending portfolio looks like?

Yes. I think the other thing to consider there as you try to sequentially build up to that with the adding back in the hurricane impact is when we look historically in our volumes and in our margins, a lot of that is coming off volumes, going from Q3 to Q4. We see substantial lift there, so we've got that modeled into our expectations. And in 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 -- required a lot, as I said, the time and talent and has been a distraction. And so as we kind of work through that and hopefully, we'll be through this in relatively short period of time. But I think what we're going to end up is a very stable group of hospitals that are good performers with some mid-single-digit margins. Double-digit -- double-digit margins.

Your next question comes from Josh Raskin with Nephron Research.

Two quick questions. One was I think you mentioned the higher cost 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 Panama. 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 this 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 businesses 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 we can 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.

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 where you sit versus covenants if that's the right run rate to jump off into 2018 on, given the 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 how much -- what percentage of your EBITDA comes from Fort Wayne at this point and what's going on in that market in your mind?

Yes, 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 the location for a new facility there, which will be extremely -- 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 is not -- it's not to the extent that we think it's all that material when it's all said and done. We're doing all the right 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 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 with we've historically seen pickups 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.

I just wanted to clarify one comment, and then 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?

Yes. Gary, what we are talking about is our -- 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 0.4% increase in adjusted admissions Q2 to Q3.

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

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 the kind of that 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's 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 out in the call today, playing better offense. I mentioned transfer centers, ACL 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 costs, 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 had some fixed costs that we can get better utilization of. We'll convert more of that revenue to a 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 division 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 when 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. I think as I said earlier, our 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 think -- I believe we have a much more disciplined approach heading into this year and into next year. As to where we need to focus our energy, our resources and our investments to drive surgical, 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.

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're 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-digit EBITDA margin on the asset sales, unless it's something different, if you can give us some color.

Yes. I think just continuing the comments that Wayne and Tim just made, as far as the -- with the divestiture program, we are -- 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. And so we believe that's going to help us with that margin. When we consider our -- just the recent quarter, when you consider the hurricanes and divestitures looking forward, we did not think we're going to have an issue with covenants going forward.

I will now turn the call over to 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.