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 Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to you, Mr. Ross Comeaux, Director 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 risk, which is 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 remainder, our results exclude Quorum Health Corporation and our joint venture in Las Vegas that was sold to Universal Health Services. All calculations we will be discussing exclude discontinued operations, loss from early extinguishment of debt, impairment of long-lived assets, expenses incurred related to the company's spin-off of Quorum Health Corporation, impairment of goodwill, expenses related to government and other legal settlements and related cost, expenses incurred related to the divestiture of the Home Health division, the gain on the sale of investments and unconsolidated affiliates, expense from fair value adjustments related to the HMA legal proceedings accounted for at fair value, underlying the CVR agreement, and related legal expenses. 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. 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. First, it goes without saying that we're not pleased with our performance during the third quarter. Over the years, we've seen some variability, but our inconsistent performance recently and in the third quarter simply has not been good enough. Operationally, we've experienced a great deal of change over the past few quarters. Assimilation of the HMA hospitals has been more difficult than anticipated. Our recent spin-off of Quorum Health, a realignment of our divisions, a number of new division Presidents and Vice Presidents, the promotion of our new Chief Operating Officer, consolidation on many of our back office functions and IT conversions. While we believe all of these changes will ultimately help to strengthen the company for our better long-term success, some of these changes have created challenges in the near term. And while we're confident in the outlook for our business and the new leadership team that we've put in place, we have not been satisfied with our performance over the past few quarters. Execution of our initiatives and strategies coupled with our infrastructure changes and refinement of our portfolio should well position us for the future. Our EBITDA margin was $10.6 million in the third quarter, well below our expectations. We believe our continued focus on operational enhancements and portfolio rationalization will yield positive margins and leverage improvements in the fourth quarter and into 2017. With regard to the third quarter, we did not achieve the net revenue growth that we had expected, a number of our expense items were higher than we projected. Both of these…

Thank you, Wayne. Before we discuss the specifics of our third quarter, we like to talk about our third quarter adjusted EBITDA performance compared to the 2016 adjusted EBITDA guidance that we discussed at second quarter conference call. As a reminder, our guidance for second half of the year contemplated EBITDA improvement from payer mix, volume improvement, physician practice, expense reduction and other factors. We'd expect to achieve about 30% of these benefits in the third quarter and the balance in the fourth quarter. Overall, there were a number of items that weighed on our third quarter actual versus unknown expectations which we will walk through below. First, our acquisitions in La Porte, Indiana, and Fayetteville, Arkansas, are performing well and tracking relatively in line of our projections. For third quarter, HITECH was $5 million benefit, which was approximately $8 million less than expected due to timing but this should be recorded in the fourth quarter. We now expect HITECH to come in around $70 million for the full year. We had $10 million less than expected due to Medicaid reimbursement reductions primarily in Texas on a payer mix and volume improvement. Volumes came in below our forecast of approximately 1.7%, compared to our prior guidance. This decline was approximately $35 million EBITDA reduction in our third quarter compared to our EBITDA expectation. In terms of physician practice, we did make about $10 million improvement during the third quarter, but the performance was about $10 million less than we anticipated. On the HIM expenses as well as our Central Business Office supply chain, our third quarter experience was in line with our projections. Finally, on the expense front, we did not meet our forecast, as operating expenses were about $40 million greater than our estimate, due primarily to higher than…

Thank you, Larry. Since our last earnings call in early August, we announced promoting Tim Hingtgen as our new President and Chief Operating Officer. Tim was serving as our Executive Vice President of Operations at the time, and he has now moved into a new role as our President and Chief Operating Officer starting on September 3. Tim had joined CHS back in 2008 from another public hospital company (24:28) successful division of presidents and with a track record of driving solid same-store net revenue growth, expense management and EBITDA margin expansion. We're confident that his proven effectiveness and leadership capabilities will help to drive further execution across our divisions. Tim has now been in his new role for the past 10 month, and we've asked Tim to make some additional comments on our business this morning.

Thank you, Wayne. Before I comment on our operations, I wanted to first take a step back and share some of the thoughts I have gathered about the company during my last eight years. For starters, we have a strong foundation on which to build upon with over 150 hospitals, strong access points, a number of key regional networks, as well as a solid track record in terms of quality and producing excellent patient outcomes. We also have great people throughout our organization, including high-performing physicians, healthcare practitioners, hospital operators, and management executives. While we have some hospitals that are not performing at our level of expectation, we have a large number in our portfolio that are performing exceptionally well generating solid volume and revenue growth as well as improved EBITDA margin. We are also achieving solid results across both the number of service lines and in many of our geographic markets. As we think about the fourth quarter and moving into 2017, we are focused on a number of initiatives to strengthen our base business and improve our overall efficiency. While there are certainly a number of other areas where I'm concentrating, including more medium- to long-term strategic goals, the two areas receiving the most attention in the near-term are both volume and revenue initiatives and expense management. First on volumes; clearly we were not satisfied with our volume performance during the third quarter. July was weak, and we simply did not perform well enough during the final two months of the quarter to offset the slow start. We have a number of revenue initiatives that we are either rolling out or strengthening. These efforts are focused around service line improvement targeting higher acuity, physician practice improvement, ED volume development, and a number of others. In terms of ED…

Thank you, Tim. We're pleased to have Tim in this new role and look forward to seeing the operational improvements that we expect him to deliver. At this point, Mike, we're ready to open up for questions. We'll limit everyone to one question, so several of you have time on this call. But as always, we are available, if you need, you can get in touch with us at area code 615-465-7000. Mike?

And your first question is from A.J. Rice from UBS.

Thanks. Hi, everybody. Just maybe to talk about a little further what you're trying do with the divesture program. I know when you started way back with the spinout of Quorum and some early divestitures, it seemed to me your focus was primarily on getting rid of non-strategic assets and focusing on the network hospital portfolio in particular. It seems like it's evolved a little bit over time where an element of it is certainly paying down debt as well. Is there an objective for how much debt you'd like to pay down, say, by the end of next year, or whatever point from the divestiture program? And I guess you added this quarter to the properties that you're potentially selling. Is that an ongoing process that we could see more additions in the next few quarters?

Yeah, A.J. Look this process, we knew when we bought HMA, just as when we acquired Triad that we would have to rationalize our portfolio that we had facilities that did not fit. So that's one of the reasons that we had so many facilities, the reason we did the spin to start with. And then as we kind of look to the future, we want to make sure that we are in sustainable markets where we have good opportunity to deploy our resources and our capital so that we can expand in those markets going forward. So we will continue to look at properties, we'll continue to evaluate our properties in terms of ones that we think are beneficial. It's not just network location, we have a lot of hospitals that are competitive. We talked about Birmingham a lot. Birmingham is doing extremely well. We have a number of hospitals in Alabama, but nothing that close to Birmingham in terms of the network. But we have a lot of standalone facilities too we've got across the country that are very good facilities, performing extremely well. So we will continue to look at this process and we will do it by the ones we've identified in this group that we're working on now. As you said, we've added a few to it, but we think we're on the right track here. We haven't set any specific target number in terms of debt pay-down. We're more concerned about having improved margins and making sure that our operations work efficiently and our performance improves as well. So, as Larry said, we have a lot of interesting people and we're selling these hospitals at a good multiple. So it should be very helpful as we move forward. Larry, you want to add to it?

I'll just add, one of the things we're focused on is we're trying to get somewhere around 8 to 10 times EBITDA for these transactions. Fortunately we've got some NOL, which will help on the taxes for some of these facilities. We do look at the tax basis of what we're trying to sell and we also try to make sure if something we get started, we try to get it done. There would be some facilities that we may start a process that don't go and get done, we'll find something else. We have increased it each quarter that we've made the conference call from May to August to now, and we think this is a pretty good price for the facilities both on a percentage of revenue and on a multiple of EBITDA which will help delever the company, and more importantly help the margins going forward as Wayne said.

So, A.J., I would add to this. These are good facilities. There is good physicians and employees working in these facilities. We're highly sensitive as we think about this, we think about facilities and where they're located and who they might work with that might be more productive than being part of our system when it's all said and done. So it is a well thought out and a careful process as we kind of move forward.

The next question is from Brian Tanquilut from Jefferies.

Hey, good morning, guys. Larry, as I think about the leverage gap, it drops to four times in 2017. I think you laid it out that you're trying to get the divestures done by mid next year at the latest. So how should we think about that as we do the lookback? And then the other component of the question is just as HMA's assets continue to deteriorate from a same-store perspective, how does that come into play, obviously, with EBITDA being the denominator in the leverage computation? Thanks.

We laid out attrition, we got here. Attrition did come down in the third quarter on the senior secured debt. It's in pretty good shape on the interest test. Selling the assets at a pretty good multiple like this will be helpful. We expect to have some sales done before that stepdown. The other thing is and we've generally like to have a bit more of a cushion and we may consider trying to change that stepdown sometime next year or sometime before next year and when it applies. But we're in good shape now and expect to be in good shape at the end of December, but we will consider doing that and think about that with our financial advisors. But as it relates to the senior secured, selling these type of assets at a multiple we're selling at is very, very helpful to the senior secured test.

The next question is from Chris Rigg from Susquehanna Financial.

Hi. Good morning, guys. Just to think about the HMA facilities, kind of looks like their performance is starting to flatten out at least a little bit. I was wondering if you could just give us some details around whether – just to compare this legacy CHS versus HMA, physician attrition, CEO turnover. And just generally speaking, do you think we're near an inflection point in the next quarter or two where things could start to get better? Or is it still too early to call? Thanks a lot.

Let me make one comment and maybe others will want to add. We did highlight that the revenue, which has been running roughly 2% down, was down 0.6%. That's probably one of the better quarters they've had. We did comment on the last call if you went back and looked at the hospitals they've owned since 2012, and they were down 7% or 8%, admissions 4%. They've gotten better through this nine-month period, and they got better in 2014 when we owned it, 2015, and a bit better now. They are struggling a little bit with surgeries, which is something we're very focused on little bit with volume, but the revenue and some of that's because of the work we've done on managed care and trying to get a little bit more managed care business. I think they will continue to improve. I think we're getting close (36:34) and clearly they will not be at the legacy this year, but we think sometime next year at the HMA facilities, as Tim said and Wayne just referred, I think we'll see them close the gap and doing quite well that with some of the assets we sell will be HMA and some of the legacy that will help their performance.

So just in terms of process, as you know, we had to change a number of executives in HMA facilities. We've done IT conversions. We've had a lot of work to do. We've recruited a lot of physicians and maybe too aggressively, but I think, we're beginning to see that there is a real opportunity here in those facilities. And again, we continue to think about these facilities the same way we do any facility that we've acquired, long-term how it's going to work, is it going to be sustainable for us, and is it in a sustainable market. And we like Florida a lot obviously because of the fact the demographics are so good.

Just one other point. The physician satisfaction, the employee satisfaction has improved since we got it and it's closing in on (37:41) legacy is, which is a good thing. The other is we've started our safety program that we talk about where we reduced (37:48) safety events roughly 75% or so. We're making similar progress in HMA hospitals, which will help those relationship with physicians, and that's well underway there.

The next question is from Frank Morgan from RBC Capital.

Good morning. Larry, and maybe Tim could have some comments here, as I look through your walk-through from the third quarter to the balance of the year, I was hoping you could prioritize the big three items to get to fourth quarter guidance. It seemed like it's more on the seasonality side and the service line adds along with physician practices and other. So I was just hoping you could kind of go through those categories, maybe a little more detail on exactly what you see is the most likely drivers to get to those numbers for improvement. And then the follow-up would just be if you take the third-quarter number in your walk-through guidance, is that a good number to annualize off of as we start thinking about 2017, understanding that that's probably independent of any divestitures? Thanks.

Yeah. The HITECH is in pretty good shape. The government just approved a 90-day test, which is helpful. Medicaid reimbursement should be good, the physician health information management, we've been making progress on that. About two-thirds of the $30 million is seasonality, which we believe it would be similar to what it has been historically for Florida. Some of the service lines takes a little bit more work. The reduction expenses here outlined at $10 million is a pretty good number. The other improvements around the payroll, supplies and payer mix. Payer mix should improve. A lot of y'all follow managed-care companies as we follow also. Usually the managed care mix gets better in the fourth quarter versus the third, and so that would be helpful. Plus we've gotten some increases in the fourth quarter that weren't there in the third quarter, so that would be there. The physician practices will take some good work. We've got a lot of talented people working on it. But I think that's probably one that we will take some pretty good execution to get done. That's probably the one that would be in – probably the service line in Florida will take some good execution.

The next question is from Gary Lieberman from Wells Fargo.

Maybe just to stick with the roll forward. As you look back to the prior quarters, you had a number of disappointing quarters. Sort of what can you do differently or what do you plan to do differently, so that you are able to achieve the improvement in the walk forward that you've outlined here?

There's probably more detailed support around the physician practice where it's been more – the team has been together a little bit longer. They didn't make a lot of progress in the third quarter, not as much as we wanted, and it's outlined on numbers of issues and both to do with some of the less starting physicians getting once (40:36) better or a little bit of attrition activities, some of the volume activity, and it will be monitored a lot more effectively I think. Tim also said one of his number one priorities is on the expense management, I think that will help in the other improvement category around the payroll and supplies activity. The payer mix, we didn't make a big change in the volume, the ranges were down 0.2%, right now year-to-date, and we got a range negative 0.3% to positive 1.3% and there's a lot of effort, but we didn't count on volume being the big driver here in the fourth quarter. We do think that our improvements are achievable (41:12). What the problem last quarter and clearly on the expense side, the payroll was not managed as well. Generally we improve man-hours for adjusted admission. They used to stay flat or went slightly in the wrong way, and in the health insurance, we got some efforts underway on the health insurance, made a little progress in the third quarter, but not near what we needed to be. And I think we did make some progress in supplies. They were up 20 basis points in the third quarter versus I think 90 basis points a year. In the quarter before that, there was a lot of efforts in different programs on the supplies both in plants and other activities. We did make some progress in the third quarter on drugs, and we continue to do that. So, it's a very focused effort and I don't know, Tim, do you want to add anything to that?

Yeah. Just a minute before we get there. I just want to – I think we're better today than we have been in the past in terms of our capability to analyze and get to and solve problems quickly. Tim has done a great job in terms of organizationally making sure that we follow through. We have a lot more discipline today than we had in the last three or four quarters or so. And Tim might talk a bit about a few of the initiatives that we have both on the revenue side and expense side, but we have enhanced initiatives and a lot of discipline behind that. So, that's the reason I feel confident that we're going to make good progress here in the next quarter and 2017.

Sure. I'd like to add that our divisions presidents have had more time to work with these hospitals, some of them new to their portfolio of assets they are managing, and that has entailed some more one-to-one deep dives and reconciliation of their performance to whether volumes are materializing as expected or not and where volumes don't materialize, we are able to shift our cost structure much more quickly this quarter. We've gone through a very, very extensive bridge plan process for Q3 to Q4, and as Wayne said, each division has upped their reviews and monitoring of achievement of the supply line. We've also rolled out a considerable amount of near-term expense reduction items related to supplies. As I mentioned in my comments, we're working closely with the medical staffs to make sure that we get the best pricing with the best product and with the buy-in of those medical staffs to help us accelerate on that. One other item that we did that I'd like to comment on is, we've identified a grouping of our hospitals, who are of high opportunity that have not had the earnings performance that they historically have had. Those are group of hospitals that the division leadership and their hospital executives have come together on, built a very, very detailed action plan to make sure that we get the resources and play to help restore them to their prior levels of earnings and growth. And we're starting to see some of the early impact of that as well.

One thing, just I know a lot of people have been talking about Hurricane Matthew and we didn't show it as a go backwards here, but we also had about a similar amount of issues in one of our Pennsylvania hospitals, then went the other way in the third quarter, so those two offset. So, some people have made a reference to Hurricane Matthew and that's how we handled it.

The next question is from Josh Raskin from Barclays.

Thanks, good morning. I guess, I just want to juxtapose all the physician additions. I think Wayne mentioned it was a record level of recruitment last year in the third quarter and then when you look at surgery volumes, I think you mentioned HMA ran about 500 basis points behind the legacy assets. And so, I'm just curious with all the physician recruitment, why – I understand why you're seeing a little bit more losses on the salaried physicians, but why are we not seeing sort of that uptick in volumes or is it just maybe these are not surgeons that are getting recruited et cetera, just any color there?

Tim, do you want to talk about it?

Sure. We are tracking the ramp up of our new providers and where we're not seeing that improvement, we've added extra resources in terms of directors of physician outreach to help integrate those new surgeons or procedure list into the communities. Everyone of our new providers in Florida, for instance, we have a very specific plan as to how we can help them grow their clinic encounters and then ultimately grow the network and the hospital's growth in the future.

We've also gone back and looked at acuity in our facilities, and determined whether or not we did get enough surgeons and how we might enhance our acuity. And so we're working now to focus our recruiting on those kinds of physicians more than primary care.

Yeah, I think probably last year, there was a fair amount of recruitment was in the primary care section, and it's targeted a little bit better this year.

The next question is from Gary Taylor from JPMorgan.

Hi, good morning. Two-part question. One, given the pretty substantial increase in Europe public market's borrowing costs. I wondered if you could comment on your view of the relative attractiveness of refinancing. And then the second question is, given the really substantial loss of shareholder value, could you just comment on the rationale for putting the poison pill in place?

Well, let me do the first about the public market as far as debt. There is no real immediate refinancings that we got to do right now. I think the next one is sometime August of 2018. And I think still the senior secured debt that we can do would be reasonably attractive, especially if we perform as we've outlined here in the fourth quarter. The REIT activity we did do, we called out a real estate REIT transaction that we hope to get done in the next couple of months. And we'll disclose it when we close. And it would be either – it's the non-hospital assets, so it's either medical office building or office building or radiology diagnostic center or something like that. We're not opposed to – we got a lot of physician joint ventures and partnerships which become problematic if we're doing a lot of REIT activity. There may be some smaller hospitals that could work for us in a REIT, we haven't gone on that path yet, but we're looking at it from the MOB perspective.

So the primary reason that we put in the pill really was to give our process that we have going on an opportunity to work. And to sort of prevent somebody from buying so many shares as they end up controlling the process instead of our board controlling the process. And as a short-term pill, it's over within April, and I think it will give us time to work through this, I don't know what will come out of this, but it will give us an opportunity to work through the process. So, it's really more about that. It certainly was not directed, we have talked to our large shareholders were not directed in trying to do anything different other than to let the process work.

The next question is from Ralph Giacobbe from Citi.

Thanks. Anyway to get a sense of how much of volume pressure is maybe just related to your markets in general versus market share losses you're seeing. And then you mentioned some of the revenue improvement, any thoughts on expectation on when you would see that come through and to the extent that revenue trends or organic revenue trends remain 1% to 2%, do you have enough on the cost side essentially to offset the negative leverage of that type of revenue? Thanks.

Let me take the latter part of that first. We would clearly have a lot of cost opportunity, the cost has been going up too much, and I think the efforts are here to try to improve the cost. We do believe that the payer mix will continue to improve, that we're seeing right now a pretty good managed care payer mix and decent increases in that and we're looking hopefully this year and next year from that perspective. On the revenue trend, I think CHS is fairly in good shape for the year, the HMA facilities are not, and I think we are continuing to make a lot of progress trying to get involved in a lot of volume, losses are probably more predominantly in the HMA facilities, so they go hand-in-hand there, so we've improved the HMA facilities. From a volume perspective, the revenue got a little better more from mix, the revenue will get better now after the overall company get better.

The next question is from Justin Lake from Wolfe.

Hey, guys. Just recovering from that Justine. So, I just wanted to...

(49:56).

Thanks. Just in terms of volumes, one of the thing is that we keep hearing from the urban-based hospitals is just, look it's a tough market in terms of volume in general, and therefore they're going and spending more time in dollars, investing in rural and suburban outreach, trying to take share, especially on the higher acuity side. I'm just curious, is there some way that you have to measure your market share in terms of – what you're keeping, I stemming out migration has always been part of the model in terms of hiring physicians and all that, but are you seeing any impact from that and is there anything you could do to stop it if you are?

Well, we've done a couple of things in terms of the – we have established transfer centers over the past year around the country, so that even facilities that we don't own have one place to call and there are a number of other people who have done this as well, but we've seen a lot of success in our transfer centers. We also have worked very hard in the last quarter or so to make sure that we don't have any people that leave us, that don't get seen, so that our throughput in terms of our EDs and our physicians' offices has been greatly enhanced. We're putting in centralized scheduling in our physicians' offices across the country, which is another way that we can help that as well. So I think we're addressing the issue; look, there's a lot of competition, and we're fully aware of the competition and we're competitive and we're happy to be in this where we have an opportunity to gain market share ourselves doing a number of things. I don't know, Tim, do you want to add to that or not?

I want to echo the focus on our access points, whether that be the freestanding EDs, the emergency department throughput, urgent cares, anything that there is more consumer focus, we certainly have put more energy and attention to achieving best-in-class metrics for those.

Justin, if you look at the categories where we're losing volume, flu and respiratory, and I think that's got a lot to do with the practice of medicine and it's down 100 basis points or about half the volume in-patient volume growth. Our OB and delivery, I think other people would have called that out as just not as much OB newborn activity, that's probably about 60 basis points, and in readmissions, it has lots to do with the practice of medicine changing. So (52:21) we probably are losing, maybe losing some market share. When you look at the absolute drop in the admissions and where it's occurring, it's generally in those three categories and that's predominantly tied to a lot of the type of markets we operate in.

And we have time for one more question. The last question is from Kevin Fischbeck from Merrill Lynch.

Okay. Great. Thanks. Just wanted to see if we could get a sense of what you think the real kind of 2016 EBITDA base is if we breakout all of the deals that you've done throughout 2016 if you take out the EBITDA performance at the beginning of the year, UHS, et cetera? And then also take out, I guess, it sounds like you're saying about $100 million of EBITDA for what you're going to sell next year. What is the starting point 2016 adjusted number that we can think of and then how do you think about growing that base into 2017?

Kevin, you're right if we finish up the year somewhere in the $2.2 billion to $3.8 billion range. There is probably $75 million tied up for the QHC and $20 million or $25 million for Las Vegas and we don't expect many of the transactions to close. There is roughly $100 million thereabouts that would come out. The issue is when it's going to come out? Majority of it will come out probably in the first half of the year. There could be some of these transactions – could be more transactions there. So, that would be a starting point there. When you look at 2017, there'd be less HITECH, probably at least half the HITECH would probably go away. We've got a lot of initiatives around the supply chain, sourcing, central business office activity, some improvements to physician practices we're doing will be there again, so most activity you see in the fourth quarter around physician practices and other improvements would be there for the whole year, the next year. And then, we've sort of got another year of some of the consolidation effort on the business office and the HIM activities. So, that's some of the things we're thinking about that will help. And I think some of the volume initiatives that Tim talked about would cause a little bit better volume and revenue in 2017 than we'd have in 2016.

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

Thank you again for spending time with us this morning. We're very focused on our strategies that we've outlined earlier. You will see us improve, as we always have done historically. We want to specifically thank our management team, staff, hospital chief executive officers, hospital chief financial officers and chief nursing officers and division operators for their continued focus on operations. Once again if you have a question, you can always reach us at area code 615-465-7000.

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