Community Health Systems, Inc. (CYH) Q4 2018 Earnings Report, Transcript and Summary

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 Q4 and Year-End 2018 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 fourth quarter and year-end 2018 conference call. Before we begin this 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 historically 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 Web site. We will refer to those slides during this earnings call. All calculations we will discuss also exclude gain or loss from early extinguishment of debt, impairment expense, as well as gains or losses on the sale of businesses, expenses incurred related to divestitures, expenses related to employee termination benefits and other restructuring charges, expenses related to government and other legal settlements and related costs, expense from settlement and fair value adjustments to the CVR agreement liability related to HMA legal proceedings, and related legal expenses. Change in estimate for contractual allowances and provision for bad debts during the fourth quarter of 2017 and just continued operations. 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 fourth quarter year-end 2018 conference call. With us on the call today is Tim Hingtgen, our President and Chief Operating Officer; Tom Aaron, our Executive Vice President and Chief Financial Officer; and Dr. Lynn Simon, our President of Clinical Operations and Chief Medical Officer. On today's call, I'll provide some comments on our company, as well as our performance during 2018. Then I'll turn the call over to Tim, who will give you an update on our operations and Tom will provide some additional color on the fourth quarter financial results and walk through our initial guidance. Overall, we had a strong finish to 2018 end of the year with good momentum, and as we move into 2019, you can now see from our strategic initiatives and hard work across the company that our positive results were showing up in our metrics now. For the quarter and the full-year our net revenue and adjusted EBITDA came in towards the high end of our guidance, and we actually beat consensus. In terms of fourth quarter, net revenue of $3.453 billion was driven by improved same-store adjusted admission growth, which was up 0.1% year-over-year as well as from the continuation of strong rates. Our same-store surgeries increased 0.9% and were positive for the second consecutive quarter. On the cost side we continue to make progress on our expenses, particularly on SWB front and our opportunities for further improvement across the expense lines in 2019. Adjusted EBITDA of $419 million for the fourth quarter was at the high end of implied guidance despite our divestitures and increased over year-over-year basis. Our adjusted EBITDA margin of 12.1% was our strongest performance of the year. In summary, we're pleased with our finished 2018. Our companies continue to enhance our position to drive additional growth in 2019 and beyond. Now, before we move forward I'd like to introduce Dr. Simon to provide us an updated on our quality initiatives. Lynn?

Thank you, Wayne. Providing safe patient care has been a focus of our organization for a very long time. Through Q3 2018, we have achieved 86.2% reduction in Serious Safety events from our baseline in April 2013 and we have consistently reduced the incidence of Serious Safety events for more than six consecutive years. This includes significant improvements in CMS focus areas such as hospital-acquired conditions. We have had a 56% reduction in central line infections over a three-year period and a 41% reduction in falls with injury. Just in the last year we have reduced our medication errors by 37%, and 36% of our hospitals have achieved zero Serious Safety events in the last 12 months. Continuous improvement in the patient experience is also a priority. We use evidence-based tactics such as hourly rounding and bedside chip reports to improve the patient experience and these behaviors also can improve clinical outcomes. Recent work includes a focus on caregiver communications with patients and their families. Enterprise-wide nurse communication scores a key HCAPs measure increased by two percentage points in the last year. And we expect our efforts this year to produce additional improvements. Finally, we are accelerating our work to connect with the patients in a consumer focused way, providing convenient access through centralized and online scheduling helps with new patient acquisition, patient retention and care navigation. Other touch points, especially digital interactions through mobile technology help keep our health systems connected to our patients before, during and after clinical encounters which we believe improves the patient experience, clinical results and our ability to develop closer relationships with people who have chosen our health networks for their health care services. These achievements are only possible because of the daily engagement skill and compassion provided by our physicians, nurses and other caregivers. Clinicians across our organization remain dedicated to continuous improvement, which we believe will continue to produce positive results. Wayne?

Thank you, Lynn. Before I comment on Operations, I would first like to talk about our current hospital portfolio. Today, we have a stronger portfolio of hospitals in more sustainable markets than we did four years ago or even a couple of quarters ago. 80% of our hospitals today are [technical difficulty] greater than 50,000 residents. And if you back out our anticipated future divestitures in smaller markets to support regional networks, 95% of our hospitals are in markets with greater than 50,000 residents. So, our company's hospitals are no longer predominantly in non-urban or rural markets, but instead we have more exposure to sub urban and urban markets with better population growth, better economic growth and lower unemployment. All of which provides an opportunity for improved growth potential. Over the past several quarters, our management team have implemented a number of new operational initiatives across the stronger hospital portfolio that I just mentioned. Recently, our market leaders alone with our corporate teams had made significant progress across areas such as patient safety and connectivity, competitive position in core markets, and operational efficiency. We substantially completed some of these initiatives in 2018 and we expect to complete or make additional progress on our initiatives in 2019. And while we have seen some benefits from these initiatives in 2018, we expect to deliver incremental improvements in 2019 and 2020 and we fully - as we fully implement programs that have not yet been completed and as we fully leverage all these initiatives over the coming quarter. Looking at our full-year performance of 2018 compared to the prior year, we drove same-store improvements per volume, net revenue per adjusted admission, net operating revenue and we produced good core EBITDA performance particularly the last three quarters of 2018. So, our overall - our core business delivery improved growth in 2018. As we complete additional divestitures and make additional progress on our operations and our divestiture program, we expect our same-store metrics to further improve. This will also lead not only to additional debt reduction, but also lead to better cash flow, performance and lower leverage ratios. Now, I'm going to briefly talk about our full-year 2019 guidance and Tom will provide more details later in the call. Our 2019 guidance includes the following, net revenues adjusted for expected divestitures are anticipated to be $12.8 billion to $13.1 billion, adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion. Now, I'd like to turn the call over to Tim for some additional comments. Tim?

Thank you, Wayne. Overall, we performed well in the fourth quarter and we are focused on delivering incremental growth in 2019 and beyond. As Wayne mentioned, our portfolio is much stronger today than just a few years ago. And our current portfolio allows us to implement our strategic initiatives in a higher percentage of our hospitals due to the strengthening of our current portfolio which includes better market demographics. In terms of our volumes, we were pleased to see the same-store adjusted admissions turn positive during the fourth quarter increasing one-tenth of a percent and for this same group of 112 hospitals which we've included on Slide 7 of our supplemental slide presentation, we experienced sequentially stronger same-store performance for both admissions and surgeries during each quarter of the year. These trends point to not only a stronger group of hospitals but also the progress we have made across our operational initiatives that accelerate our growth which I'll talk more about in a minute. Switching back to our fourth quarter volumes, we estimate the flu had an approximately 50 basis point headwind on our same-store admissions. So excluding the impact of the flu, our admissions would have been roughly flat during the fourth quarter. The flu also negatively impacted our same-store ER visits. We are continuing to see fewer lower acuity patients in our ER as those patients are generally migrating to lower cost care settings. The transition we have been preparing for with the strategic access point growth of our own urgent care, walk-in care and primary clinic care networks across our markets. Our admissions to the ER however are strengthening due to our focus on service lines and acuity enhancements, transfer central implementation and other initiatives. Now I'd like to provide some comments in our operations. We've been pleased with our same-store improvement, which have included better volume, improved net revenues per adjusted admission and stronger net revenue growth. For full-year 2018, our same-store net revenue increased approximately 3%. And as Wayne mentioned, as we complete additional divestitures and more fully leverage our focused initiatives, we expect our same-store metrics to further improve. Our ACO strategy has been a very effective element in its first year. We launched this initiative in nearly all of our markets in early 2018 allowing us to better align with our independent and employee physicians. Moving into 2019, we've experienced increased ACO participation adding approximately 20,000 Medicare fee for service life and have had a very strong 97% renewal rate of our independent primary care physicians and we've added over 150 new independent physicians for the 2019 program year. Our Transfer Center program is helping to drive sequential volume improvements and providing additional operational visibility into our individual hospitals. It is also allowing for opportunities to better align physician hiring with market demand and to expand or grow service lines where appropriate. We have rolled out the program in approximately 85% of our targeted facilities, now supporting 51 hospitals in 14 markets thus far. Implementation for the balance of the hospitals is expected to be completed for the back half of this year. In terms of physician recruitment, we continue to align our hiring with our multi-year strategic planning process to ensure we are adding physicians that best match each hospital in market service line strategies. Through this disciplined approach, our 2018 total provider recruitment is up 16% year-over-year and our employee physician retention rates have improved by approximately 300 basis points over two years. Also we broadly implemented online scheduling to more patients have convenient access to our providers with about 80% of our primary care physicians now online and we continue to expand the platform into specialist scheduling. In our markets, our hospital leadership teams are focused on building stronger healthcare systems and providing high quality care. As such, we are investing capital expenditures across the continuum of care including high return opportunities on both the acute and non-acute side. Our capital spending was 3.7% of net revenue in 2018 and we expect our capital expenditures to increase to our historical average of approximately 4% during 2019. We are investing in several expansion projects in key markets this year which will provide the ability to serve growing demand and drive incremental revenue and volume growth. A few examples include acute care bed expansions in Birmingham and Palmer, Alaska, surgery expansions in both Knoxville and Las Cruces, cardiac expansions in Naples and Fort Wayne and among other acute care investments in our other core markets. In 2020, we plan to open an 18 bed Micro Hospital in Southwest Tucson Arizona, and in 2021 we plan to open a new 70 bed hospital in the Eastern part of Tucson. These investments will further strengthen our inpatient presence and growth potential across our Tucson network. On the access point side, in 2018 we increased a number of our freestanding emergency department's urgent care and walking clinics by 10% as we add an additional breadth and scale to support our existing hospital markets and networks. Looking at 2019, we will continue our outpatient development focus with a strong pipeline of opportunities. We will add two additional assets in the first-half of the year and we'll open a number of additional Urgent Care walking clinics and other access points. We expect all of this capital to help drive incremental net revenue and EBITDA growth. We're also continuing to invest in our Behavioral Health and Rehabilitation businesses. For full-year 2018, our same-store behavioral patient days increased 7.6% and our same-store rehab patient days increased 11.2% and we had incremental behavioral and rehab expansions coming in 2019 defer to this growth trends. So in summary, we delivered improved performance during 2018 as well as during the fourth quarter versus the prior year. We are encouraged by the potential of our hospital portfolio due to our ongoing investments and the focused execution of our strategies. Before turning the call over to Tom, I would like to make a few comments regarding expense management. We continue to focus on efficiency across all of our three primary expense line items. In terms of our SWB expense, our hospital department leadership teams have been effective at driving good SWB efficiency throughout 2018 and we expect this performance to continue moving forward. In terms of supply expense, in 2018 we changed and reorganized the supply chain leadership structure. Today, we are now utilizing new strategies to drive better results including the standardization of multiple commodity like products that our hospitals purchased. We also are implementing new initiatives that more fully utilize our size and scale across clinical product categories. And to support all of this, we are completing our supply chain technology deployment organization wide this year which will allow for incremental supply expense savings in 2019 and 2020. For the other expense line, we're utilizing some of the same strategies that we are implementing across our supply chain to reduce our vendor costs. And based on organizational needs and where we can gain the greatest expense efficiency, we are in some cases converting outsourced services in-house or vice versa by outsourcing certain services where that adds greater value. So in summary, we expect to make further improvements across our expense categories in 2019. Tom?

Thank you, Tim. Now I will provide additional details on our fourth quarter performance. As a reminder, calculations discussed on this call exclude items Ross noted earlier. On a same-store basis for the quarter, we noted the following. During the fourth quarter of 2018, net revenues increased 1.9%. This was comprised of a 0.1% increase in adjusted admissions and 1.8% increase in net revenues for adjusted admissions. Our inpatient admissions declined 0.5% as Tim mentioned earlier excluding our estimate the impact from the flu, our admissions would have been flat. Our surgeries increased 0.9% and our ER visits were down 3.2%. Our fourth quarter net revenue was impacted by stock and bond market declines during the quarter. The market declines reduced the value of investments held in deferred compensation plans resulting in lower other revenue and a corresponding reduction benefit expense which has no impact on EBITDA on a net basis. Excluding this net revenue impact, our fourth quarter net revenue per adjusted admission would have been up 2.9% and our total net revenue up 3%. So our net revenue per adjusted admission continues to be solid. During the fourth quarter, our net outpatient revenues were over 52% of our net operating revenues. Consolidated revenue payer mix for the fourth quarter of 2018 compared to fourth quarter 2017 shows managed care and other decreased 50 basis points, Medicare fee for service decreased 40 basis points, Medicaid increased 90 basis points, self-pay was flat. Consolidated revenue payer makes on a full-year basis shows Managed care and other increased 60 basis points, Medicare fee for service decreased 60 basis points, Medicaid increased 20 basis points and self-pay decreased 20 basis points. Looking at our same-store adjusted admissions per payer class on Managed care Medicare Advantage and self-pay volumes were all up while our Medicare fee for service and Medicaid volumes were down. For the quarter, the sum consolidated charity care self-pay discounts and bad debt expense for the three months comparable periods increased from 30.4% to 31.1% of adjusted net revenues, 70 basis point increase, during the same period same-store increased 60 basis points to 30.9%. For the full-year, the sum of consolidated charity care self-pay discounts, bad debt expense increased from 29.6% to 31% of adjusted net revenue of 140 basis point increase. Year-over-year increase for the quarter full-year was driven by higher self-pay discounts as a percentage of total revenue. For the full-year, same-store increased 40 basis points to 30.9%, for the same-store expense items, our salaries and benefits as a percent of net operating revenues for same-stores decreased approximately 120 basis points, the decrease was driven primarily by improved FTE management. Supplies expense as a percent of net operating revenues for our same-stores increased 10 basis points higher implant costs from increased surgeries offset lower commodity spent. Our other operating expense as a percentage of net operating revenues for same-stores increased 80 basis points increases in fourth quarter 2018 versus the prior year were driven primarily by higher medical specialist fees, provider taxes and insurance costs. As Tim, mentioned, we see opportunities for further expense management this year and we expect to drive the additional supply expense savings in 2019 and 2020. Switching to cash flow as we discussed on last quarter's call, we made a $266 million payment in the fourth quarter which ended the U.S. Department of Justice Investigation and so - lawsuits that were initiated and pending and known to the company before the company's acquisition of HMA in January of 2014. However please put this legal matter behind the company, the payment impacted our cash flow from operations this quarter. For the fourth quarter of 2018, our cash flows provide my operations were negative $165 million due to the payment of the before $266 million settlement. For the full-year 2018, our reported cash flow from operations was $274 million this compares to fourth quarter 2017 cash flow from operations of $156 million. Full-year - cash flow from operations of $773 million, in terms of year-over-year cash flow decrease during 2018. We added slide 11, which highlighted few items worth noting versus prior year. The HMA legal settlement payment fourth quarter of 2018 reduce cash flow from operations by approximately $266 million. Retirement benefit payments were retirees and payments to employees for severance or early retirement were approximately $26 million reduction. CVR spent - cost and government settlement and legal costs reduce cash flows by approximately $9 million. Not on the slide but worth mentioning is that we paid $84 million more in interest in 2018 and cash from divested hospital accounts receivable was $100 million left for 2018. In terms of the year-over-year cash flow decrease during the fourth quarter of 2108, there a few items worth noting versus prior years as well. HMA legal settlement produced cash from operations by approximately $266 million. Retirement benefits, plan payments to retirees were approximately $8 million reduction government settlement, legal costs reduce cash flow by approximately $3 million dollars. Similar to the full-year in the fourth quarter of 2018, we paid, $77 million more interest and a cash from divested hospital's accounts receivable with $32 million left in 2018. Turning to CapEx or CapEx for the fourth quarter of 2018 was a $114 million or 2.3% of net revenue, well our full-year 2018, CapEx was $527 million or 3.7% of net revenue. During full-year 2017, our CapEx was $564 million or 3.5% of net revenue. With comparing full-year CapEx to prior years our 2018 CapEx is lower did limited replacement hospital spending and more targeted CapEx focused on our higher return core hospitals. We expect our capital expenditures increased our historical average of approximately 4% during 2019. As Tim mentioned, 2019 we will be investing capital in number promising growth opportunities above the inpatient and outpatient side. Moving to the balance sheet, at the end of fourth quarter we had approximately $13.4 billion of long term debt which is down from $13.9 billion at start of the year. Our current maturities of long term debt at the end of the year were $204 million versus $33 million at the end of 2017. And at the end of the fourth quarter, we had approximately $200 million of cash on the balance sheet compared to roughly $560 million at the end of 2017. Moving forward, as we make additional divesture progress, we expect further reduce our debt. On February 15, 2019 our credit facility was amended with requisite revolving lender approval to amend our first-lien debt to EBITDA ratio unanswered covenant introduced the extender robbing credit commitments to $385 million from previous $425 million level. The new financial covenant provides for a maximum first-lien debt to EBITDA ratio of five to one from July 1, 2018 through December 31, 2018, 5.25 to 1 from January 1, 2019 to December 31, 2019 5.0 to 1 from January 1, 2020 through June 30, 2020 4.5 to 1 from July 1, 2020 through September 30, 2020 and 4.25 to one thereafter. So - provides company with additional flexibility if we execute our strategic plans. We expect our first-lien debt to EBITDA ratio to move lower over time from a combination for core EBITDA growth coupled with additional debenture through these first-lien debt. I will now walk through our 2019 guidance. For 2019, net operating revenues are anticipated to be $12.8 billion to $13.1 billion after adjusting for expected divestitures. Same-store adjusted admission growth is expected to be flat to up 1%, adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion, income from continuing operations per share is anticipated to be negative $1.60 to negative $1.25 based on weighted average diluted share outstanding of 114 million to 114.5 million. Cash flow from operations is forecasted $600 million to $700 million, and CapEx is expected to be $475 million to $575 million.

Thanks, Tom.

One more thing, Wayne. Finally, in terms of 2019, I want to get this out. We did want to point out a few sequential headwinds from the fourth quarter to the first quarter. As a reminder, the payroll tax reset reduces EBITDA in the first quarter versus the fourth quarter. We also want to point out deductibles and coinsurance resent for our patients in the first quarter. And also in the first quarter we're making core operational investments which we expect to continue to drive solid core growth in the back-half of the year. We expect these investments to help drive better volumes and expense savings, such as our initiatives on the supply/expense side. Wayne?

Is that it for now?

That's it for now.

Okay, great. At thing point, operator, we're ready to turn it over and open it up for questions. We're going to limit everyone to one question so several of you will have time to get on the call. But as always, we're available to talk to you and you can reach us at area code 615-465-7000.

[Operator Instructions] Your first question comes from Brian Tanquilut from Jefferies.

Hey, good morning guys. Congrats. I guess the question for Wayne and Tom, as I think about your guidance; it's assuming a pretty healthy expansion in margins for 2019. And that's obviously on top of 90 basis points of margin expansion in '18. So, if you don't mind just walking us through where the confidence comes from that you can grow margins at that pace, and where you can squeeze more costs out of the system especially with a 0% to 1% same-store assumption? Thanks.

So, let me just talk just a second about where we are, and where we are with the leadership within the organization, and how well we're doing, and how committed our executives are across this company. And we're making great progress. And I think we think there is plenty of opportunity left. And our strategic imperatives have really ignited a lot of energy throughout the organization. So, I think we're on the right track. And so I'll let Tom get to the fundamentals.

All right, Brian, so thanks for the question. On the margin expansion we really see two sources. Number one is, as we've mentioned and we tried to highlight this on slide number seven, that Tim mentioned, with what we're getting down to on our core hospitals. These are hospitals with a history of volume growth on the admission side, a history of better rate. And so we feel very comfortable with a rate that we can grow our same-store revenues. That's going to lead to margin expansion. And then on top of that, some of the expense-control initiatives we've got some of the volumes and growth initiatives that we've talked about. So that's going to be one side of it. We've got a core of hospitals that has a history, and with the investment we're making, we think a bright future. The second piece of that is going to be from the additional divestitures. And you could do some math on that. If you just take a look at, at least $900 million of revenue that we're going to be divesting, mid single-digit margins on those, and pulling those margins out with proceeds will - that in effect will have the impact of raising - giving us some lift on the margin as well. So, we feel very comfortable with - and from our history, we're seen this in '17 and we've seen it in '18, the ability to not only improve margin but improve our free cash flow through the divestiture program and other initiatives. So, that's a source of the guidance there.

Your next question comes from Ana Gupte from SVB Leerink.

Hey, thanks. Good morning. On the guidance again, as far as the asset sales go, can you break out for us the core growth that you have versus the asset sales that - in a proceeds and the timing, just give us a sense for your guidance versus what consensus and we're baking in?

So, Ana, it's Tom again. We're banking on roughly 3% same-store net revenue growth. And then we've called out, we think, the growth in adjusted admissions is going to be between flat and up 1%. So, and as I just mentioned, the core hospitals we're getting down to a good history of growing adjusted admissions, good history of getting rate, so that's the driver of that. And then the other thing I'd point out, if those are the ones with the better history that means some of the divestiture ones that are mid single-digit margins don't have the growth history, don't have the rate history. Again, that's panned out when you contrast those to the page seven slide. So, anyway, it's roughly 3% same-store net revenue growth.

So, on an inpatient basis we had a very strong quarter in terms of the net revenue growth on inpatient. And our case mix index continues to become even stronger, so there's plenty of opportunity there going forward.

Your next question comes from Frank Morgan from RBC Capital Markets.

Good morning. I guess staying on that subject around the guidance. Obviously two sources there, your same-store portfolio. But how much would you attribute to just improvement in that remaining same-store base after divestitures versus the impact of actual divestitures? Thanks.

So, Frank, we haven't called that out exactly, but we can tell you we're most excited about the opportunities on the supply side. I think through our hospital operators we've made great progress for several quarters in a row and SWB side. We think that's sustainable. What we're talking about on the expense side, where on the supply expense side, we're making investments. Those investments will continue through this year. We think we'll continue to improve throughout '19, into '20. On the expense, some of those initiatives will get into purchase services as well, and some opportunities there. And I'm going to let Tim highlight a few of some of the - on the volume side, some of the initiatives we've had, the investments we've made in physicians that we think is going to really contribute side.

So, Tom, my comment before we go to Tim on the margin at the midpoint and the margin at the upper end of the guidance, because I think that sort of gets to Frank's question.

Yes, Frank, so we're at - I think that it's 12.9 is the midpoint of the margin that we're putting out there. We think that that's very achievable when you put the combination of the divestitures out there, and then these initiatives that Tim will speak to that we're - some of those were further along, some we will be making and you'll see more of the impact later in the year and into 2020.

Sure. Thanks, Tom. As the theme is continuing the core markets are strong. We have been investing in those markets. And as you can see from slide seven, of the 112 hospital core portfolio, you can see growth emerging from those markets. So, I believe that a key driver of obviously our projections for next year. We've talked in the past about the multiyear strategic planning process, making sure we're recruiting doctors and providers in our market to driver service lines and acuity. And as I said, you see that shining through in 2017 and 2018 in some of our core markets. The CapEx investments that we reference on the inpatient side, in Birmingham and Palmer, Alaska, surgical services in Las Cruces, Cardiac in April, these are all hospitals that on a regular basis have to capacity constraints, so we do see upside for our CapEx investments getting a good return on that capital, but also fueling incremental growth. And then supporting all of these service side initiatives, we continue to see progress on the transfer centers. The deployment is actually ahead of schedule. We have sequential quarter-over-quarter improvement in received transfers across the enterprise. And most importantly, we're seeing a growth of non-CHF hospitals utilizing the service, bringing patients into our networks to drive those core service lines that we've been investing in. Access point on primary care development, making sure that we're fortifying our markets to drive acuity is also a key imperative for us, and as I said, 15% growth year-over-year in signed providers. We have started about 30% more year-over-year, with a good pipeline yet to commence in 2019.

Your next question comes from A.J. Rice from Credit Suisse.

Thanks. Hi, everybody. I wanted to ask you a little bit about what you're thinking of with respect to the capital structure, I guess there's two parts. One, the amendment that you did, thanks for the comments, Tom, but is the principle reason for that amendment is just to get flexibility to be able to pay down the 155 that's coming due this year? And then my longer-term question is, business is on a good trajectory, initiatives are starting to kick in. At some point, you got to think about the reworking the capital structure, I think. Do you sort of take 12 to 18 months and let the initiatives play out before you revisit that, or is this something that you would do more near-term? What is your thinking about how the trajectory of the business is on and how that relates to your thinking about reworking the capital structure?

All right, thanks, A.J. So, first of all, on the amendment, really with respect to the amendment, we did a major refinancing last year where we set the previous covenant terms. And when we were modeling divestitures and so forth and we thought we were going to have much more divested proceeds at this point in time that we would've used to pay down first lien and to manage that first lien ratio. Now that the divestitures are going to be coming later, in 2019, we thought it would be good idea to give ourselves cushion. We did not need the amendment for our fourth quarter. We were still under the existing covenant. But going forward and given the timing of divestitures we thought that'd be a good idea. And it does help on other fronts as well, A.J., for some of the other stubs that we'll be paying down. With respect to the capital structure, we are very focused right now, the operating initiatives that Tim and Wayne talked about, and getting those into place because we feel like that's going to drive margin. And margin is going to be very important for us when it does come time to address the capital structure. We also think it's going to be a good idea to have the exact amount and timing of our divestiture proceeds, understanding how we look post divestiture and the amount of the proceeds and so forth. I think we will need to get through Q1. We'll start assessing those and scoring those based on where we are. Really no set timing, but again, we'll be in a better position to start assessing it beginning in quarter 1, and then just keep an eye on that, that along with the markets.

Your next question comes from Ralph Giacobbe from Citi.

Thanks. Good morning. You mentioned the hospital closures in the release, which I don't think you've talked much about in the past. Are there more potential closures; are they incremental to the list of hospitals that you've had for sale? And then can you maybe just help frame the economics when you do close a facility? And then separately, can you ultimately sell that land or help us think about that as well? Thanks.

Sure. I'll grab that one, Ralph. Thanks for the question. Let me first kind of frame it out to the prior year 2018 divestiture and closure decisions. On the closures, those were markets where we had existing assets. So it was a much of a strategic decision as a margin improvement decision where we could by and large move a good book of that business into existing assets in the market and strengthen our regional networks. As far as our criteria for a closure or a sale for that matter, we do a top-to-bottom competitive assessment of each hospital in each market; make sure that for us to drive improved competitive position and margin expansion in the future. We're in a position with reasonable capital investments to generate a stronger return on that capital and drive margin at the same time, and increase the market share. For the most part, where the answers come up as no to that question, we've been able to either through inbound interest find a strategic buyer to acquire that facility and set that facility off. I think for a stronger path into the future with a strategic buyer. And then the rare occasion where we could not find a buyer, it's not a real long list of facilities, but we would reevaluate whether closure makes more sense than maintaining the operations and investing in its future build.

So, just to be clear, this has nothing to do with the individuals over there or the physicians there, they're all good solid citizens doing a great job, doing great work, taking good care of those patients. It's just the economics of making that work in a particular area or town. So, it really is about the demographics and the economics of it, not about the individual - and we're appreciative for all those people.

Thank you, Wayne.

And, Ralph, leading up to the - you asked about the economics of when we close a hospital. So we do have a process we go through. A lot of that is out of playbook from the divestitures as far as we adjust services. And with a closure, we are, where we have equipment, especially newer equipment that we can use, we're very active in moving that. As Tim mentioned, the ones that we've gone through so far, we have other facilities nearby in those markets, so there's been a coordination of services. In one of the markets in East Tennessee we actually left physicians in that marketplace. But however, there are costs to close that down, and so those are included in our results for the fourth quarter, especially the two hospitals this year. And then with respect to the property, the two in East Tennessee that we're still in those markets and very competitive in those markets, so we're likely not going to sell that to a competitor, we'll look for alternative uses. We think we've got a non-healthcare provider that's interested in our large campus in Knoxville, and we should have some news on that throughout the year as we progress. And in some cases we can raise the facility and sell the land. So we have, I guess, different options depending on the situation there and whether we're still in those markets.

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

Great, thanks. Just wanted to see what your view was on the actual kind of free cash flow that you expect to generate, I guess this year and to next year, obviously given the cash flow CapEx guidance, but I think that that excludes like minority interest payments. And that's usually other investments that you guys are making that aren't included in the CapEx number, like we're going to net all that out. Are you able to kind of self-fund the growth that you're looking for this year? And then, you mentioned some of the growth initiatives you have in these replacement hospitals next year. Do you feel like you're going to be able to sell fund kind of all that over the next two years, I guess.

Yes. So Kevin just looking at, if I look quarterly and at a very high level, we've had negative free cash flow, we feel like we're very close to what I call a bounce in that and to the point where net in 2019 will be free cash flow positive and in trending in the right direction after that, and that does include investments in some of the projects that we're talking about. So we feel comfortable with that, with the initiatives we haven't placed some of the things that are beyond this that were cash flow drains, but going forward, we like the direction that we're going that includes some very good projects for us that we're working on them pretty hard now, one in Fort Wayne and Laporte and a few other locations in Venice where we're thinking about replacement facilities kind of going out, so we're excited about those off duties and we clearly think we can fund those.

Last thing, I would add there. We know that if we continue to improve our operations in our margins, if that's going to be in a position to refinance it with better interest rates, and where we are right now, we do have a slight pickup on that with just on the interest rate front with the 2024. So I think definitely have a step down, which is going to be about 20 million per year in interest.

Your next question comes from Sarah James from Piper Jaffray.

Thank you. You've talked about mid-teens EBITDA margins is the goal, so about another 200 basis points further step-up from the '19 full-year average. First, given the savings ramp through the year, do you think - where do you think margins will be exiting '19? And second, can you talk about how you get to mid-teens, where the big buckets are for further cost savings or if this is more just mix and high equity growth?

Well, I think that, so we've talked about two buckets once operating performance. And the second is through divestitures. And these are the divestitures as a portfolio we are going to be lower margin hospitals, those coming out of the portfolio will give us lift to our EBITDA margins. The second piece, I think all of the things there that we've talked about on the one the core hospitals have a history of adjusted mission growth, better rates. And so, we think with that, that can get us to the point where we get beyond the 3%, we're talking about. And if we get above 3% rate, we know we can grow margin off of that, if with just static expense management. If we start to make the improvements, we anticipate especially on the supply side and purchase services. On the expense and that's going to be another source margin and you put those together and that's what's getting us to where we intend to be.

Your next question comes from Gary Taylor from JPMorgan.

Hi. Good morning. One question and two clarifications, so, hopefully I'll get under the technicality on that. The question is, so when we look at the 2019 guidance, you've given a fair amount of detail, but what is the same-store margin improvement that, that's reflected in the guidance, is there a range?

So Gary, we have not given the components of that of what's going to be left over on the same-store. And like I said, we do think - I tell you what why don't you go through your other two clarifications and then I'll try to hit them all.

Okay. I want to clarify you said free cash flow positive in 2019. I wanted to see if that included, what's been this recurring investment and other assets and cash distribution to MCI?

Okay. And are those the only two clarifications?

The other -

What is that Gary? You have lot of questions.

Well, that was clarified in terms of - I've now. Oh, the other clarification was you said, that the 2019 guidance, It includes the divestitures for what's been under definitive agreement. But we don't of that remaining 900 million of revenue to sell. We don't know how much is included under those for the definitive agreement. So I guess I'm just clarifying that there still is some EBITDA on the guidance from assets that you anticipate selling over the course of the year?

Okay. Got it, all right. So the first one on the guidance, we have not given a breakout. It's like, this is going to be a combination of the divestitures, we've seen this in the 2018 and 2017 divestitures or we are selling lower or negative EBITDA hospital so that's giving us some lift there and as I mentioned, some of you have done some math already and show - shared with us, which I think you're on the right track there if you're pulling out a certain level of mid-single digit EBITDA at certain 900 plus million I mean do some math and see how much you're going to get lift out of that and then the rest from that operating metrics we talked about your question Gary on the free cash flow on 2019 and not controlling if interest in other investments that is when I'm speaking of positive by the end of '19 and through '19 that is considering those and the last piece on the on the guidance, so just to make sure we're on the same page here we've got one definitive agreement right now, it involves four hospitals in South Carolina that in addition to the two hospital sale we had first year will that's all of our hospitals in South Carolina. That one should be closing sometime the next several months here that is the only one under definitive agreement, we've got letters of intent and advanced discussions on the rest of the portfolio that we're counting in our 2019 divestitures.

I might just comment that we've continued to have strong interest in the portfolio that we have interested in selling. We still have strong interest in, if you go through, and you look back historically, we've done really well, in terms of our divestitures. We had seen no reason why we shouldn't be able to complete our program with 2019.

Your next question comes from Whit Mayo from UBS.

Hey, thanks. Just wanted to go back to Kevin's question for a second, and I'm just trying to think through the cadence of cash flow this year. And historically, you've had, fairly large drain in the first-half for all the reasons you cited, payroll taxes, bond payments, et cetera. What percent of the cash flow from ops do you see in the first quarter or maybe in the first-half and if you don't get proceeds in from divestitures? Do you see the need to draw on the revolver ABL to find any working capital in the first-half? Thanks.

Thanks, Whitt. So we are I think generally what you'll see with the refinancing that we did last year, we have a pretty strong interesting interest paid in second and fourth quarter that is going to be a little bit different cadence than what we had before that refinancing and the so that will be something that will change slightly there the - as far as the other items I think the I did mention when I was talking about guidance that first quarter is typically a slower quarter from a cash flow standpoint and the couple things the resets that we talked about on employee benefits and then also with the our patients and then reset of their co pays deductibles has an impact that changes the payer mix a little bit the interest that I talked about. And then the last thing I'd mentioned is just with respect to some of the initiatives Tim mentioned of position to we start up quite a bit more in the fourth quarter, they will be ramping up as we go on through the year, the especially the supply costs initiatives that we have, we are making progress on those, but we anticipate that will make them further progress later into 2019 with the rollout of the technology and that that will go into 2020. We're pretty certain about that.

Your next question comes from Patrick Feeley from Barclays.

Hey, good morning. My questions on accounts receivable, you mentioned uncompensated care is picked up DSOs has also been up throughout '18 up a few days, I guess I imagine the divestiture they are having some impact on that number. So is there any way to provide DSOs for the recurring hospitals excluding the 2018 divestitures maybe just apples-to-apples for Q '18 versus '17 for the 112 same-store hospitals. And finally, was there any retained AR from those 2018 divested assets on the books at quarter ends that will be collected in 2019? Thanks.

Okay. Thanks, Patrick. When we look at our days in AR without divestitures on those because that gets really choppy depending on when we sell those but excluding the divestitures. It's been steady throughout the year and it's been steady when we even with the revenue recognition adjustment good looking back to 2017 and we push that backwards it's been pretty steady there. We do keep our receivables and we pursue those and so I would say yes, we definitely have receivables out there for our 208 divestitures and we continue to work those down. And again, just a reminder as we do the divestitures. The first 30 days after we close the divestiture, we tend to pay off all the accounts payable. We receive some of the receivables that we received most of the receivables and the second month and third month after divestitures and then we continue to pursue those, although you know after several months that nets down to a smaller amount and it becomes more of rather than the third-party payers. It becomes more of the South Bay payers on the receivables.

Your next question comes from Josh Raskin from Nephron.

Good morning. This is Mary on for Josh. I was just wondering if you could provide some more color on the other operating expense increases 80 basis points this quarter and kind of which buckets within this metric are the largest near-term opportunities in 2019 for margin expansion and what types of services are you converting from outsourced in-house and are these investments primarily made in the first-half of the year?

Yes, so the larger increases, there are one will be provider of taxes and that that's a good thing when those increase, that's why the biggest increase for the quarter in the year. Those are the payment that we make to various states in the return on the monies is very positive. So from a cash flow standpoint, typically the taxes precede the monies that we receive on those. So provider taxes are our insurance costs, which includes our professional liability has been up for the quarter and for the year. We've had in the prior years, we've had really outstanding results on our older accident years and the results on those and that's kind of flattened, having better than expected results maybe just as expected results. So relative to prior years that the insurance costs have been higher, we historically have been talking about medical specialist fees, we've been doing a lot better. Tim, I'll let you talk about that maybe contract labors and there as well.

Sure, on medical specialist fees that has been a category 50 on local spend out that escalated in 2018, we saw that moderate from the third quarter into the fourth quarter part and part to the strong position recruitment results that we've been referencing when we bring in a permanent position. The good news is we have a pipeline of patients from that service line that we can then more firmly grow, what we hope is a more reasonable cost structure for the long run, so reducing welcome spend and we saw that moderate in the fourth quarter and as well as on other physician expenses. In terms of what we are insourcing to outsourcing and outsourcing to insourcing hospital-based service contracts are in that category, we call that out a few times in 2018 in certain markets where and outsource vendor may be putting into demand for something that we believe is more costly than what we could do it for ourselves. We've converted those services to an in-house function. Same with some housekeeping services dietary, the typical purchase services from a hospital operation standpoint.

And then the last thing I would add to that our IT platforms, we're slowly migrating from platforms where we own the software, we maintain it to, we're looking at a lot more and going to a lot more cloud-based where it's a subscription and that, so that kind of goes out of our CapEx and depreciation it goes more into purchase services is another factor there will that caused the increase. The last piece I may just the broad purchase services Tim mentioned. That's all coming under the new organization and some of the technology that we mentioned on the supply side. And so, we - that's going to be really the mechanism to help us be better as we manage that.

Your next question comes from Zack Sopcak from Morgan Stanley.

Hi, good morning. Thanks for the question. I'm sorry to ask about on your ER visit, same-store trends. And I think you had mentioned that you've been investing in urgent care. You are seeing of the volume go there. I just wonder if you could remind us of the scale of your urgent care business and maybe how much of that decline, you're able to capture right now. Thank you.

Thanks for the question. I'll go ahead and feel that and I mentioned this briefly in my comments earlier, as far as the decline in the outpatient, lower acuity ED visits, we believe we've captured all if not more, with our access point expansion strategies on the urgent care center, walk-in Care Center and the new primary care locations I believe, we are up year-over-year in primary care. Traditional primary care practices by more than 25 new locations. So if we add all that together, we're up over 30, 35 on primary care locations across our markets. We've seen good growth on our urgent care and walk-in care center visits in the fourth quarter, for instance of 4% even without the flu that we had in December prior year, we're just under 100 total urgent care and walk-in care centers across the company. We should eclipse that hundred number next year. Primary care visits, again, absent flu in December of last year we saw a 2% growth in our primary care visits in the month; I'm sorry, in the month of December, but throughout the fourth quarter.

And due to time, our last question will be from Steve Tanal of Goldman Sachs.

Good morning, guys. Thanks for the detail. I guess just one from me, just on the revenue per adjusted dive in Q4, a little bit of slowing sequentially, kind of excluding that the client and the value of employee deferred comp plan called out the deck. So just wondering what sort of change versus the first nine months of the year to drive that and how you see these components of the rate sort of playing out in '19 where the guidance seems to imply some potential slowing, I guess it's the two to three range but pretty stable. So just wanted to sort of parse through that a little bit.

Sure, Steve. So, if you go back the company's history and a lot of this is due to significant decreases and supplemental payments that we had in 2016, 2017. We average about right around 2% - 1.9% to 2.1% for several years on net revenue for adjusted admission. We start a lot of initiatives in 2017, where we got traction and some of the bigger ones. We started driving improved case mix in the fourth quarter of 2017. And that drove fourth quarter 2017 was net revenue for adjusted mission of 2.7%. So versus the prior quarters in 2017, we're probably 1.9% to 2.1%. So I think we had a tougher comp in this quarter. And you're right. We think these initiatives we have, they're still going to be impactful, but maybe not to the degree they were in the first three quarters of 2018, the fourth quarter of 2017, but we do like the kind of discipline that we have now on that to continue growing that especially with our focus on specific service lines.

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

Thanks again for joining the call today. As we outline on today's call, we are encouraged with all the progress we've made in 2018. We're pleased with a strong finish to the year in the fourth quarter. Moving forward, we're focused on strategies we discussed on today's call, looking forward to a strong 2019. We specifically want to thank our medical staff physician's clinic, clinicians across the company, our management teams, hospital Chief Executive Officers, hospital Chief Financial Officers, the Chief Nursing Officers, division, and regional operators for continued focus on quality and operating performance. This concludes our call today. We look forward to updating you on all 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.

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