Good day and welcome to the HCA first quarter 2017 earnings conference call. Please note that today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Amelia, thank you. Good morning everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome everyone on today's call, and those of you listening on the webcast. With us here this morning, our Chairman and CEO, Milton Johnson; Sam Hazen, President and Chief Operating Officer; and Bill Rutherford, our Chief Financial Officer. Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in today's press release and in our various SEC filings. Several of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings Inc. excluding losses/gains on sales of facilities, losses on retirement of debt and legal claims costs, which are non-GAAP financial measures. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Holdings Inc. to adjusted EBITDA is included in the first quarter earnings release. This morning's call is being recorded and a replay will be available later today. With that, I'll turn the call over to Milton.

Morning, thank you, Vic, and good morning to everyone. We appreciate your interest in HCA, and as you saw from our release this morning, our first quarter earnings results were consistent with the preview we issued on April 17. I'll make a few comments on the quarter and recent acquisition activity and then turn the call over to Bill and to Sam to provide more detail on the quarter. Revenues for the first quarter increased 3.5% to $10.6 billion. Net income totaled $659 million or $1.74 per diluted share and adjusted EBITDA was $2.005 billion. While these results were modestly below our internal expectations, we remain optimistic about 2017, and as you saw in our release, we are maintaining our previously issued earnings guidance for full year 2017. During the first quarter, we achieved or exceeded our internal growth expectations for adjusted EBITDA over prior year for January and March. However, it was largely offset by February's underperformance as planned. Looking at volumes in the quarter, same-facility admissions increased 1.2% and equivalent admissions increased 1.6%. This represents the 12th consecutive quarter of equivalent admission growth for HCA. As we noticed in our preview, the quarter's results were impacted by unfavorable changes in payer mix and the loss of one day when compared to the first quarter of 2016. On the payer mix, our same-facility Medicare admissions comprised a larger percentage of the company's overall admissions at 48.1% compared to 47% last year, while our same-facility managed care and HIX admissions were 27.4% of admissions compared to 28.6% in the prior year's first quarter. Clearly, this had an unfavorable impact on our net revenue per adjusted admission in the quarter, and I'll let Bill and Sam address all of this in more detail in just a moment. Cash flows from operations…

Great. Thank you, Milton, and good morning everyone. I will give you some more detail on our performance and the results for the quarter. As we reported in the first quarter, our same-facility admissions increased 1.2% over the prior year. Same-facility equivalent admissions increased 1.6%. Sam will provide more color on the drivers of this volume in a moment, and I will give you some trends by payer class. During the first quarter, same-facility Medicare admissions and equivalent admissions increased 3.5% and 4.3% respectively. This includes both traditional and managed Medicare. Managed Medicare admissions increased 7.3% on a same-facility basis and represent 34.1% of our total Medicare admissions. Same-facility Medicaid admissions and equivalent admissions increased 0.9% and 1.3% respectively in the quarter. Same-facility self-pay and charity admissions increased 3.2% in the quarter, while equivalent admissions increased 3.5%. These represent 7% of our total admissions compared to 6.9% last year. Texas and Florida still represent about 70% of our total uninsured admissions. Managed care other and exchange admissions declined 3.2%, and equivalent admissions declined 1.9% on a same-facility basis in the first quarter compared to the prior year. Same-facility emergency room visits increased 1.1% in the quarter compared to the prior year. Same-facility self-pay and charity ER visits represented 18.7% of our total ER visits in the first quarter of 2017 compared to 18.6% in the prior year. Intensity of service or acuity increased in the quarter, with our same-facility case mix increasing 3% compared to the prior-year period. Same-facility surgeries were flat in the quarter, with same-facility inpatient surgeries increasing 0.9% and outpatient surgeries declining 0.5% from the prior year. Same-facility revenue per equivalent admission increased 1.7% in the quarter. Our international division negatively impacted this stat in the quarter, mostly due to currency conversion. Same-facility revenue per equivalent admission…

Good morning. Let me begin by giving you some of the volume stats that I normally provide on these calls, and then I will give you an overview of our commercial volumes. It is important to note that the prior year presented a difficult comparison in many areas. For the quarter, and for domestic operations on a same-facilities basis, 9 of 14 divisions had growth in admissions, 11 divisions had growth in adjusted admissions, 10 divisions had Emergency Room visits growth, freestanding Emergency Room visits grew 16% and accounted for all of our overall ER growth, hospital-based Emergency Room visits were down 0.4%. Normalized for the leap year effect, ER visit growth was approximately 2.2%. Inpatient surgeries grew 0.8%. Surgical admissions were 27% of total admissions in the quarter. Inpatient surgical volumes were particularly strong again this quarter in cardiovascular, orthopedics and neurosurgery categories. Nine divisions had growth in inpatient surgeries. Outpatient surgeries were slightly down by 0.6%. Hospital-based outpatient surgical volumes declined 0.5%, and volumes declined by 0.7% in our freestanding ambulatory surgery division. Five divisions in the quarter had growth in outpatient surgery volumes. Behavioral health admissions grew 0.5%. We had solid growth in approximately 85% of our 63 units, but we continue to struggle with a few of our larger units and they are driving most of this slow growth. We anticipate many of these programs will improve the performance over the course of the year. Rehab admissions grew 6.2% in the quarter. Deliveries were down 3.6% in the quarter, which drove a decline in neonatal admissions of 1.6%. Cardiology procedure volumes continued to be strong and grew over 5%. Trauma volumes grew 15% in the quarter. Now let me transition to commercial volumes, which I'm defining as our managed care and HIX volumes. For the quarter,…

All right, Sam, thank you. Amelia, if you come back on, we'll take questions. Again, I'd encourage everyone to limit your questions to one so we can give everyone an opportunity.

Absolutely, thank you. All right, and we will go first to Whit Mayo from Robert W. Baird. Please go ahead. Whit Mayo - Robert W. Baird & Co., Inc.: Hey, thanks. Maybe just can we first talk about the Houston transactions and maybe how you see the pieces of the puzzle coming together in that market, maybe how the assets strengthen and complement one another? Just kind of want to hear more about the playbook and opportunity that you see there.

All right, thank you, Whit. Sam, you want that?

I do. We have 10 hospitals in Houston, Texas today. Our market share is roughly 18% or so, but most of our hospitals are in a region of the community where it's in the southeast and in the northeast. It's not in the northwest. Tenet's hospitals in Tomball are more in the northwest quadrant of the Houston metropolitan area, so this is a new market for us, effectively, in Houston. It adds roughly 4% market share to our 18% and brings us up close to Memorial Health, which also has about 22% to 23% market. So we see this particular segment of the community as growing faster than the rest of the community. It gives us a new market, as I mentioned. We have significant infrastructure in Houston already given the size of our system, and we think that infrastructure can be leveraged to add value to these institutions, and we look forward to getting more information on them as we develop our strategies for integrating them into the system. Houston is in a bit of a general economic challenge right now, as most people know, but we believe this segment of the city is growing, like I said, faster than the community as a whole. But over the long run, we see Houston as a very important market to HCA, and a market with a great deal of resiliency, and will provide good prospects for us in the future.

All right, thanks, Whit.

And we'll take our next question from Mike Newshel from Evercore ISI. Please go ahead.

Thanks. Good morning. Apologies if you already mentioned this, but you gave us some details on the revenue run rate of the acquisitions. Can you tell us anything about what the EBITDA run rate is, and what you think the potential is to ramp the margins closer to the company level?

All right, thank you. Milton, do you want to...

Sure, yeah. So looking at the seven hospitals in total, as I mentioned in my comments, it will – annualized revenues will be about $1.5 billion, and the price we paid was basically just slightly over $1.4 billion, so we paid about – a revenue multiple of around 0.9 to 0.95. And so that implies the margin here is probably somewhere in the low to mid single digits in the aggregate on the group of seven, and we believe that over the next two to three years, we have opportunity to make significant improvements in the margins with, like I said, bringing both our scale and operational tactics and strategies to these new markets and these facilities. We think we can improve the margins over the next two or three years to hopefully in the mid teens.

All right, thank you.

And we'll take our next question from Kevin Fischbeck from Bank of America. Please go ahead, sir.

Great, thanks. I wanted to dig into the commentary around the volume softness in the quarter. I think last quarter, the tone that I was getting was that really the softness was driven by some capacity constraints on your end. It seems to me like the tone this quarter is more about general market softness in your markets, and I just wanted to see. I guess do you view this as a blip? And how do you think about 2% to 3% long-term volume growth over the next couple of years (25:02) the next couple of years?

All right, Kevin, thanks. Sam, do you want to take a shot first?

We continue to believe that HCA's markets in total are going to grow in that 2% to 2.5% from an adjusted admissions standpoint with respect to demand. And so if we can maintain market share, we should be in that particular zone for volume growth. There are ups and downs from one quarter to the other, just like any other business would have for us, and this was a difficult quarter from a comparison standpoint because we lost a day. And losing a day clearly means we lose outpatient activity and we lose certain inpatient activities as well, so it presents some comparison challenges. But when we pull up from that and look at what we'll call the normalized effect, we felt it was a reasonable volume quarter. It's not necessarily as strong in some areas as we would have hoped, and we need to make some adjustments and we are making adjustments where we can to address that. As far as capacity constraints go, that probably affected some of our facilities, but when I pull it all the way up to the company level, I don't think on a composite level it necessarily affected our volume performance in the quarter. There are, like I said, certain institutions that really have to manage their utilization and capacity very effectively to create growth prospects for them in the short run. We're addressing that in the long run with a number of our capital projects, so that can periodically present some individual facility challenges. But I don't see that as driving all the way to the company and explaining the company's measures. Our growth strategies I think are very comprehensive. They are resourced very timely and I think sufficiently, and our execution has been good. But we do compete against some very formidable systems, and we have to continually look for ways to up our game, detail our business better, and provide some advantage for the company. And we're doing that in a lot of areas, and I think we'll continue to find ways to improve upon that. So we remain very optimistic with our overall volume picture, with a few challenges here and there in the short run.

Milt, did you want to add something?

Yes, let me just add one other thought to that to Sam's comments, too. I think when you look at the rest of the year, our volume comps get somewhat easier. As Sam mentioned, based on the market share information we had and looking at market demand, we had strong market demand starting in 2014, really through the first quarter of 2016. The demand's rate of growth slowed starting in the second quarter of 2016. So I think as we think about our growth for the rest of the year relative to volume, we will be comping to periods where the volume growth was lower than the first quarter of 2016. So I think too we've got to take that into consideration as we think about the outlook for the rest of the year.

All right. Thanks, Kevin.

And we'll go next to Joshua Raskin from Barclays. Please go ahead.

Hi, thanks. Good morning. I appreciate the color you guys gave, Sam, on the commercial volume changes. The two things I didn't hear were flu. I'm curious if that has an impact on your payer mix; and then secondarily, a movement to outpatient. Do you tend to see more commercial patients moving to outpatient as opposed to seniors? I'm just curious if those two factors are having any impact.

All right. Our flu volume was up in 2017 as compared to 2016, and most of that was concentrated, I'll say, in the Medicare book, so that did produce some growth in Medicare. I don't think it affected our commercial book in any significant way. The movement from inpatient to outpatient typically is in surgical areas more than it is anywhere else. And our surgery growth on the inpatient was up 0.9%, and we were down a little bit on the outpatient. I think most of the outpatient decline is centered around two things; one, the calendar being a little bit of that. And then secondly, it's a fairly competitive field when you get into outpatient surgeries with other centers, other hospitals, other physicians in their own clinics and so forth. So again, we are adding capabilities in our outpatient surgery platform, and we're working with our physicians to find ways to leverage that further. But I don't think there was much transition in this cycle from inpatient to outpatient creating any unique pressure.

All right, Josh, thank you.

Thank you.

And we'll go next to Ralph Giacobbe from Citi. Please go ahead.

Thanks, good morning. Is there any way to roughly split out – or how you see the payer mix pressures between sort of exchange-related issues versus core commercial? And then you'd mentioned economic issues in your markets as well as, or in some markets, as well as HIX payer dynamics. Just hoping you could flesh that out for us. Thanks.

All right, Sam or Bill?

Go ahead on the commercial piece.

HIX was down what...

So our HIX volume was down 5%. And as Milton – sorry, Sam mentioned, we did have a couple of dynamics in our Texas markets. But overall, our HIX volume is kind of tracking with what we see enrollment in our states with some pluses and minuses going on, so we'll see how that tracks for the remainder of the year.

And the payer dynamics in Texas that I was alluding to are centered around the fact that we didn't know exactly where the lives in a couple of markets were going to land. And so it took us until the first quarter to see that. And so in Houston, San Antonio and Austin, we did see some pressure on our HIX volumes as a result of the lives landing in certain payers' lap, if you will, that weren't contracted for us because we did not think the rates were sufficient. So we had those dynamics affecting us in those three markets. That was really isolated mostly to those markets. We do have access to HIX lives, but the payer relationships that we have in those markets did not gain some of the business that we anticipated, and so that created a little bit of pressure for us.

And can I just add on to that? As you know, for the past couple years in health reform, the first quarter has been where we've seen significant growth in HIX volume. It just didn't happen this year. If you look at first quarter of 2016, we had HIX volume growth of 27% that just wasn't present in this quarter due to the enrollment activity as well.

Yeah, and this is Milton. I'll just add that, Ralph, to deconstruct the payer mix shift between commercial and HIX is complicated further by here in 2017 that there's a lot of movement in lives between HIX and commercial. And so it makes really understanding that deconstructing a little more complicated, too, and harder to understand, but I think we've given you our best view of it.

Good. Thank you, Ralph.

Thanks.

And we'll go next to Gary Lieberman from Wells Fargo.

Good morning. Thanks for taking the question. Maybe just a follow-up there. Three of the markets that you mentioned as seeing disproportionate weakness were Orlando, South Florida and Vegas. Anything specific in those markets that you could call out for us?

Yes, in Las Vegas, that's the market that I was referring to where we had both UHS and Dignity get back into two payer contracts that in the past few years they weren't in, and that's resulted in some commercial market share pressures in that particular market. In Orlando, we've seen our competitor systems make some significant investments in a couple of areas that has impacted our business there. Both South Florida and West Florida were particularly impacted by softer tourism, number one, and a little bit softer Emergency Room volume than we had seen in the past. Those were the primary drivers in those markets.

Thanks, Gary.

And we'll take our next question from A.J. Rice from UBS. Please go ahead.

Hi, thanks everyone. On the – obviously you got the Texas deals, but you also have the two you've mentioned now in Georgia as well. Would you say that you're seeing a pickup in activity level out there? Is your posture towards transactions that have been there before maybe becoming more committed to doing acquisitions? And can you give us a sense of how this affects your ongoing buyback activity?

Yeah, all right. That's one for Milton.

Yeah, A.J, so I think I mentioned over the last – one of the last calls we talked about the pipeline being a little more active, but not just with number of maybe opportunities, but the possibility that some of these opportunities could actually come to closure. And I think over the last couple days, and last week, we certainly have been able to deliver that. So the pipeline remains active, so we will see if we can continue to achieve some opportunities for growth through acquisitions. So from that front, yes, it is more active than, say, over the past couple years. Relative to how it affects our buyback, the transactions, the roughly $1.4 billion that these transactions would – in terms of purchase price, it's not going to affect our share buyback approach. We intend to continue to buy back our stock throughout the rest of this year, with the authorization that we have. That was our intention when the authorization was approved by the board back in 2016. So we're continuing that plan undisturbed by these acquisitions. And we've been clear to indicate, too, I think, over the past couple of years with our strengthening balance sheet, free cash flow that we have the ability to both be an active buyer of hospitals that make sense for us and also an active buyer of our stock and so we intend to continue to do both.

A.J., thank you.

Thanks.

And we'll take our next question from Brian Tanquilut from Jefferies. Please go ahead, sir.

Hey, good morning guys. Bill, just a question on salaries and benefits, that's obviously up year over year and sequentially. Is there anything you would call out, any trends? And also, just an update on nurse hiring and nurse wages.

All right, I'll start with the trends and let Sam talk about nurse. I've characterized our labor environment, really, for the past several quarters at pretty stable. When we look at labor combined with productivity, wage rates, it's been very stable for us. The labor costs per adjusted admission at a little north of 2% is a pretty good number for HCA. And again, I think it's pretty stable. Contract labor has stabilized on us. We've got a lot of initiatives in the HR around nurse retention and recruitment, and I think those continue to provide benefit for the company.

Yeah, this is Sam. The only thing I would add to that is our RN turnover, nursing turnover, has actually improved 110 basis points from where it was last year at this particular point in time. So we are seeing some improvement from some of the initiatives that we have implemented. Our nursing contract labor was only up 5.7% in the quarter on a year-over-year basis. We have some other areas where we're investing in contract labor. That's why you see roughly 10% in our year-over-year growth. But that's due to some outsourced departments in certain ancillary areas. So we believe that our nursing initiatives, our HR initiatives and so forth are poised to continue to support this effort and deliver some value to the company in this area.

Thank you, Brian.

Thanks guys.

And we'll go next to Chris Rigg from Deutsche Bank. Please go ahead.

Hi, good morning. I know you've talked a lot about the commercial volumes and the details behind what happened in the first quarter, but I guess I'm still trying to get a better sense for what is assumed in guidance for the rest of the year in terms of, Sam, you highlighted a bunch of factors here, what you think will actually get better as you move through the year, and what will serve as a pressure point throughout 2017? Thanks.

All right, Bill or Sam?

Let me kind of give you the broad brush on guidance first, and then let Sam and Milton add in. So obviously, we know we've reaffirmed our guidance going through the balance of the year. We've got variables that I think give us comfort in that. We look at the low end of our guidance for the balance of the year basically implies a 3% growth in the last three quarters to the high end at 7%, midpoint just around 5%. So as we look at the balance of the year, as Sam mentioned, we look at our volume portfolio, comps get better in the second half of the year. We still believe that 2% to 3% volume guidance is achievable for the company, coupled with our 2% to 3% pricing going forward. Our teams continue to manage our costs pretty well. You look at specifically in the commercial book, as Milton mentioned earlier, you saw those commercial trends start to decline in the last half of the year, so the first quarter still gave us a pretty good comp as our commercial grew just under 3% in the first quarter of 2016. So we think as we go through the year, that gives us confidence that we can stand behind our guidance at this point.

All right. Thanks, Chris.

And we'll go next to Scott Fidel from Credit Suisse. Please go ahead. Scott Fidel - Credit Suisse Securities (USA) LLC: Thanks. Just interested in an update on where you expect leverage will end the year, just in the context of the acquisitions that you're doing. And then I just had a separate follow-up question just around supply costs, and if you could give us an update there. It looks like they had ticked up a bit over the last couple of quarters, so just wondering if that's on the drug side or anything else that's going on there. Thanks.

Yeah, hi, Scott. I think Bill...

I'll take that. On the leverage, as we stated, we're 3.83 times basically right now. Clearly, we've got the balance sheet capacity going forward. It will go up slightly, maybe 10 basis points by the end of the year if we get all these transactions completed. But again, as Milton said, we are optimistic in the earnings performance that that will continue to go back to current levels, well within our range to 3.5 to 4.5 times right now. So again, I think the balance sheet remains pretty strong. On the supply cost side, you're right. I did mention it was mainly due to some increase in device costs, mainly for some high-acuity volume. Overall, we're very pleased with our supply cost trends. If you look over a longer-term trend, we've been able to manage our supply costs on a per-adjusted admission basis at that 1.5% to 2%. Obviously, continued strong performance by our GPO HealthTrust Purchasing Group, a lot of initiatives in the supply chain operations as well as partnering with our clinical teams in certain clinical initiatives. So the device cost that we saw this quarter was really entirely due to volume growth in some of these high-acuity procedures, such as TAVR cases. We've seen our TAVR cases increase approximately 70% versus last year. You know this is a high supply cost area with the cost of new valves. We've also seen an increase in certain neurological cases, which include some implantable stimulator devices. So overall, given the volume growth, the supply cost trends don't surprise us, and we're pretty confident with our supply chain processes today.

Thank you, Scott.

And we'll take our next question from Sheryl Skolnick from Mizuho.

Good morning, everyone. Two somewhat unrelated – forgive me, but the first one is just a detail. On ER visits, Sam, I think you said that they were down in the hospital-based ERs, and all of the growth was recorded in the freestandings. How did that dynamic develop? In other words, what's causing that, do you think?

I think there are a lot of alternative supply for patients to consider on the lower acuity side. Most of our declines were in lower acuity levels in our facilities, so that's what we saw. Our higher acuity visits, the top three categories were up. The lower acuity, the bottom three were down, and the net of that was slightly down in our facilities. I think the leap year effect is part of that as well. So I think we're actually up if you normalize for leap year. But nonetheless, it was much slower growth in the hospitals. We've added units in the freestanding emergency room, and they're embedded in our facilities. And so that's part of the growth that we've seen on the freestanding side as well. But even on a same-store freestanding basis, we're up more than we were up on the hospital side. The other thing I would say is we're using our freestanding emergency room strategy for two things: one for outreach; and then secondly, for quicker capacity relief where we need it. We continue to operate our hospital-based units at almost 90% of our targeted utilization per bed, and so the freestanding emergency room tactic and deployment is a quicker way to market for capacity, plus it puts us in some instances in a different geography that complements our core hospital, so that would be part of the discussion as well.

All right, thank you, Sheryl. And I think we've got time for just a couple more.

Okay, great. And we'll go next to Ana Gupte from Leerink Partners. Please go ahead.

Thanks for taking my question. On the Medicare waiver funding, where the administration is not only for the LIP [Low Income Pool] program in Florida more broadly, can you give us a sense or any color on the impact of that or the economics to you this year and in 2018?

Ana, I'll go ahead and take this. We still don't have a lot of clarity around the waiver process. We do anticipate there will be increasing waiver requests coming from the states. We have seen the Florida request come in. That one is still pending. The CMS and State of Florida are negotiating the terms and conditions of that LIP increase that's been proposed. So we have no idea at this point exactly how much would ultimately come to Florida, and then if any of that would find its way to us. And again, other states, we'll just watch and see how the year plays out, but we haven't built anything into our expectations for material changes in any waivers for the balance of the year.

Okay, thanks (45:14). Thank you.

You're welcome.

And we'll take our final question from Gary Taylor from JPMorgan.

Hi, good morning. One clarification, one question. Just clarifying, and I apologize if I missed you saying this, but the Oklahoma children's divestiture and then all these several acquisitions you announced yesterday, none of that's in the guidance that you've affirmed at this point, correct?

That is correct, Gary.

Okay, and then just my question: just trying to look through the shift in payer mix, and about 100 basis points year-over-year shift on the inpatient side to Medicare. Looking back last year, you had a similar 100 basis point shift in 2Q and 3Q, and generated EBITDA growth through that, so just trying to think about what's unique about this shift in the first quarter, outside of just the leap year. If there's anything else to add on that.

I'm not sure I could give you a specific explanation. There's a lot of pieces and parts to a quarter, as you well know, and so the puts and takes are difficult to just sit here and synthesize down to one point or two points. But there may have been something unique...

I think Sam, I look back, I think what I would call probably our surgical volume was higher overall, I think back in those periods, it resulted in higher revenue per equivalent admission. So for example, we'd reported this first quarter 1.7% growth. You go back and look at the second and third quarter which are the periods I think you were talking about, Gary, and our NREA growth was 2.1% in the second quarter and 2.7%, so 100 basis points higher in the third quarter. So certainly that is the reason for better performance, and hence it's not just for the payer mix, but the underlying service mix as well.

All right, Gary, thank you very much. And, operator, we thank you very much, as well. And we'll talk to you all soon. Have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect.