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Edited Transcript of QHC earnings conference call or presentation 10-May-18 3:00pm GMT

Q1 2018 Quorum Health Corp Earnings Call

BRENTWOOD May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Quorum Health Corp earnings conference call or presentation Thursday, May 10, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred Lumsdaine

Quorum Health Corporation - Executive VP & CFO

* Thomas D. Miller

Quorum Health Corporation - President, CEO & Director

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Conference Call Participants

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* Elie Radinsky

Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits

* Frank George Morgan

RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research

* Jonathan Michael Jenson

Imperial Capital, LLC, Research Division - Associate Analyst

* Zachary William Sopcak

Morgan Stanley, Research Division - VP on the Healthcare Services and Distribution Team

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Presentation

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Operator [1]

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Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Health Corporation First Quarter 2018 Earnings Conference Call. (Operator Instructions)

Thank you. Alfred Lumsdaine, Executive Vice President and CFO, you may begin your conference.

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [2]

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Thank you, Heidi. Good morning, and welcome to Quorum Health's first quarter conference call. Joining me this morning is Tom Miller, President and CEO; Marty Smith, Executive Vice President of Operations; and Dr. Shaheed Koury, Senior Vice President and Chief Medical Officer. Tom and I will begin the call by providing commentary on our first quarter results then we'll open the call up for your questions.

Before we begin the call, I'd like to read the following disclosure statement. This conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our Form 10-K filing, our current Form 10-Q and other reports filed 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.

We issued a press release yesterday afternoon with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EBITDA adjusted for divestitures, including reconciliations to U.S. GAAP measurements. We've included a slide presentation on our website to supplement today's discussions.

Our results consolidate the results of our 28 owned or leased hospitals and the results of Quorum Health Resources. Our same-facility information excludes the results of the 10 facilities we've divested or closed since the spin-off through March 31, 2018.

In addition, we also filed our quarterly report for the first quarter on Form 10-Q yesterday. All of our discussions today are supplemented by the press release, the earnings presentation on our website and the Form 10-Q. All non-GAAP calculations we'll be discussing exclude certain legal, professional and settlement costs, charges relating to the impairment of long-lived assets and goodwill, the net gain or loss on sale of hospitals, the net loss on the closure of hospitals, cost associated with the transition of the -- transition services agreement, or TSAs, severance cost for headcount reductions and executive changes as well as any changes in estimates related to the collectability of patient accounts receivable. Please refer to the earnings presentation for a further description and calculation of adjusted EBITDA and adjusted EBITDA, adjusted for divestitures.

With that, I'd like to turn the call over to Tom.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [3]

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Thank you, and welcome again, Alfred. Good morning, everyone. As you saw on yesterday's press release, we reported same-facility net operating revenues of $465.6 million. Consolidated adjusted EBITDA for the quarter was $18.4 million, significantly affected by the closure of Affinity and the sale of Clearview. And adjusted EBITDA, adjusted for divestitures for the quarter, was $26.8 million.

These earnings results were below our expectations. And as we progress through our prepared remarks, you will see that we have identified key areas for improvement and have implemented a comprehensive plan to get our bottom line back on track.

Same-facility volumes during the quarter was positive, with admissions and adjusted admissions up 0.4% and 1.1%, even after the closure of certain product lines and then we closed 2 skilled nursing facilities, 1 rehab facility and terminated 2 managed care contracts in Illinois that would have affected our admissions by 229 or about an additional 1%.

Same-facility Medicare case mix increased 2.9% while same-facility all-payer case mix increased by 4.4%. Alfred will get into the nuances later, but suffice it to say that our first quarter revenues grew as a result of higher year-over-year volumes and higher acuity, but were offset by higher expenses.

On Slide 4, you will see a list of new -- of our key initiatives. Our focus remains on improving our operations and adding value for our shareholders. We will go into more detail on each of these as we progress through the call. These initiatives focus on the following: refining our portfolio and reducing our debt through expended divestiture strategies. Second, improving our EBITDA margin by reducing cost, increasing productivity, improving our revenue cycle management and growing profitable revenues. Third, actively working to take control of our revenue cycle by setting up in-house patient billing and collections. Four, increasing our case mix index and the intensity of patients that we serve. Five, excelling in quality and patient experience.

First, I want to provide an update on the divestiture program, which you'll see on Slide 5. As you are all aware, this is a major focus for us and we believe we're making good progress. Through the end of the first quarter, we have sold or closed a total of 10 hospitals worth total of $85 million. The vast majority of these proceeds from these divestitures have been utilized to pay down term loan facility.

Secondly, I'd like to talk a bit about our divestiture strategy as it has evolved. Since the spinoff, we have targeted the divestiture of certain noncore underperforming facilities as part of our strategy to reduce our debt and refine our portfolio. This is certainly still the case, however, we're no longer viewing potential divestitures as a static group of hospitals that we wish to sell. Instead, we have opened our process to evaluate the sales of facilities based on valuations and proceeds needed to delever and refinance of our long-term debt. You'll notice this change impacts how we talk about our continuing business and how we think about guidance, which Alfred will discuss later.

We believe this change in strategy is already providing successful as we have already signed nonbonding letters of intent covering 7 facilities. While these LOIs are not definitive and do not always result in sales, if the current LOIs were to become to definitive purchase agreements, we estimate that the potential net proceeds for these 7 facilities will do well in excess of $100 million.

Overall, we remain committed to our divestiture program and target a total of $165 million to $250 million of net proceeds for divestitures in the end of 2019.

While we are pleased with the early indications of expanding our divestiture pipeline, we recognized that delevering efforts can only be fruitful if divestitures are paired with operational excellence at our hospitals.

As is evidenced by our first quarter results, our average margins have declined as a consequence of cost growth exceeding revenue growth. On Slide 6, we show a high-level overview of our cost reduction program.

As you are aware -- all aware, one of the growth strategies has been considerable investment in recruiting physicians to our markets in order to better serve our communities. These efforts are necessary to create volume growth and increase acuity.

As evidenced by our volume and acuity trends, our physician recruitment efforts have been successful in achieving these goals. But with this growth has come higher cost and we must prudently manage these costs to improve our profitability. As such, we've identified a strategy that focuses on managing productivity, minimizing excess supply costs, discontinuing underperforming service lines, improving our revenue cycle and, of course, enhancing volumes.

We've already begun implementing various facets for the strategy at our facilities, and we're currently anticipating seeing tangible benefits from these initiatives, starting later this year and ramping into next year.

For 2018, we expect at least $20 million to $25 million positive impact from these initiatives. As we noted in our earnings release, management is in the process of engaging an outside consulting firm that has worked with the company in the past and is familiar with our revenue cycle process in order to support and enhance the company's margin improvement plans.

On the topic of quality of care and patient safety, see Slide 7. Here you will see an overview of the efforts on this front. Importantly, we're very proud of the 90% reduction in serious safety events at our facilities through the fourth quarter of 2017 relative to the 2013 baseline. Again, our success as a company depends on providing safe and high-quality care in our communities and we are proud we're continuing improvements in these patient-centered endeavors.

If you turn to Slide 8, one last topic I'd like to address before turning it over to Alfred is recent developments regarding our TSAs with our former parent. As previously disclosed on March 19, 2018, we received notice from CHS as CHS was seeking to terminate effective September 30, 2018, 2 of the transitional service agreements, the shared service center TSA and the computer and data processing, or IT TSA.

The notice from CHS also provided an indication of CHS' preference to terminate the remaining TSAs as well. We continue to believe that the termination of all the TSAs is in our best long-term interest and we will assure that the transition are undertaken in a manner that minimizes the associated risk inherent in such a migration.

The effectiveness of CHS' reported notice of termination will be litigated during the course of arbitrations scheduled in June. Our migration from the TSAs will be a tedious process and one that is substantially dependent on CHS' cooperation.

Once we have fully brought these services in-house, we expect to see significant annual cost savings. We also believe that by bringing these services associated with the shared service center TSA in-house will have the ability to improve our revenues once this migration is complete.

I'm also glad to announce that on April 2, 2018, QHC's Counsel was informed by the U.S. Attorneys Office of the Northern District of Illinois that the United States was declined to intervene in false claims at -- complaint filed against MetroSouth Medical Center.

On April 9, 2018, the Federal District Court dismissed the qui tam lawsuit against the hospital.

With that, I'll turn the call over to Alfred to discuss our financial results and our outlook for the remainder of the year. Alfred?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [4]

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Thanks, Tom. Before diving into a financial review of the quarter, I'd like to first touch on a matter, which impacts our financial reporting starting this quarter. On January 1 of this year, we adopted the new revenue recognition standard. The adoption of this standard results in a change in the presentation of the provision for bad debt line item in our reported financial statements.

Beginning January 1, 2018, what had previously been presented as the provision for bad debts is now considered an implicit price concession and is a direct reduction of our net operating revenues. Therefore, the revenue comparisons discussed include net operating revenues after the implicit price concessions.

That said, please turn to Slide 9, which shows our net patient revenues from our hospital operations for the first quarter. On a same-facility basis, total net patient revenues were approximately $444 million or an increase of 5.4% year-over-year. When factoring out the California HQAF and the Medicare low volume extenders adjustment relating to the fourth quarter of 2017, total net patient revenues would have increased 2.9% year-over-year.

Next I'd like to turn to Slide 10. As Tom touched on earlier, our same-facility admissions, adjusted admissions, surgeries and ER visits were up 0.4%, 0.1% -- 1.1% -- 0.1% and 2.3% respectively, compared to the first quarter of 2017.

These positive volume trends are a continuation of the growth that we have seen in the past 4 quarters. These overall positive volume trends were impacted by a number of puts and takes on a year-over-year basis.

During the quarter, we closed a handful of service lines in select markets, which negatively impacted our admissions as Tom mentioned. Additionally, our surgical volumes were negatively impacted due to the termination of certain managed Medicaid contracts, where we were receiving an unacceptable level of reimbursement.

We also saw a 4.5% decline in births. Importantly, we did see continued growth in major hip and knee joint replacements, which were up 5.9% as a result of our recruiting efforts in this specialty.

In terms of payer mix, on a same-facility basis, our managed care and commercial payer mix in Q1 of 2018 improved to 38.1% of revenues from 37.3% of revenues a year ago. This year-over-year improvement was somewhat muted by the impact of the California HQAF Program revenues of almost $8 million, which increased Medicaid revenues relative to the first quarter of 2017.

So overall, in this area of same-facility net operating revenues, it was a story of stronger volumes, higher acuity and improved payer mix relative to the first quarter of 2017.

Now turning to expenses, please refer to Slide 12. As Tom mentioned earlier, we're seeing our overall operating expenses increase as a percent of net revenue. Further details can be obtained in our Form 10-Q, but I'll briefly review a couple of the major items that impacted us this quarter.

Overall, salaries, wages and benefits increased $13 million year-over-year on a same-facility basis. This increase is largely driven by the following items: approximately $4 million in increases related to more employed physicians, a $3 million increase relating to merit increases at our facilities, almost $2 million in severance costs for headcount reductions and executive severance at the corporate office and $3 million from increased health benefit costs.

Same-facility supplies expense increased $4 million year-over-year. This increase was predominantly due to higher volumes, particularly higher implant costs, as a result of the increase in orthopedic surgeries we discussed earlier.

Same-facility other operating expenses increased approximately $7 million year-over-year. This increase was primarily the result of $2.6 million in provider tax expenses related to the California HQAF Program revenues as well as a new Oregon sales tax, a $1.4 million increase in medical specialist fees and, in aggregate, a $3 million increase across a broad range of purchase services and other operating expense categories.

In addition to the previously mentioned expense items, our margins were also impacted in the quarter by the following: a decrease in same-facility HITECH reimbursements of approximately $2 million and an impairment charge of almost $40 million, which relates to the fair value of hospitals intended for divestiture.

As we continue to pursue divestitures in conjunction with our divestiture program, we certainly could see additional impairment charges in 2018 as a consequence of our expanded efforts.

While not included in our same-facility operating results, our consolidated operating results also include approximately $22 million in costs associated with the divestiture of hospitals, particularly costs associated with the closure of Affinity. These costs were added back to adjusted EBITDA, but did materially impact our cash flow for the quarter and I'll discuss that in just a moment.

So overall, on the topic of expenses. While we are seeing some expense growth as a function of our higher volumes, we did see cost outpacing associated revenue growth in Q1 and, therefore, have undertaken the comprehensive effort to review and manage our costs as well as improve our margins that Tom previously referenced.

On the next slide, I'd like to briefly discuss our adjusted EBITDA results for the quarter. Consolidated adjusted EBITDA for the first quarter was $18.4 million compared to $26.1 million in the first quarter of 2017. As we discussed, this decrease is primarily due to the deteriorating performance of the hospitals, which were divested or closed during the quarter, particularly Affinity. These hospitals lost an aggregate $8 million in the quarter.

In addition, our margins were impacted by lower margins associated with higher cost at certain facilities that we mentioned.

Adjusted EBITDA, adjusted for divestitures, which we view as the best metric for our operating results, was $26.8 million for the first quarter of 2018 or a decline of just over $4 million relative to the first quarter of 2017.

Now I'd like to make some comments as it relates to our cash flows for the first quarter. Please refer to Slide 14. Operating cash flow for the quarter was a negative approximately $3 million, primarily due to the decline in the year-over-year profitability and closure cost at Affinity, of which approximately $8 million were cash costs.

We also saw cash interest expense increased $2 million compared to the first quarter of last year, primarily due to higher interest rates on our floating rate debt.

CapEx, including software capital expenditures, fell by nearly $10 million relative to the first period of 2017. This decline is primarily related to divestitures, lower spending on our Springfield, Oregon Tower project, which is nearing completion as well as overall enterprise efforts to manage CapEx effectively.

Continuing on the topic of cash flows, see Slide 15 for an overview of the California HQAF Program. As you may recall, the 2017 to 2019 program had yet to be approved during the first quarter of 2017. So our financial results do not include any benefit from this program in the 2017 period. We expect our 2018 financial results to fully include the benefit of this program throughout the year, which isn't set to expire until the middle of 2019.

In connection with this program, we collected approximately $2 million cash during the first quarter. Looking forward, we expect to collect a total of approximately $25 million during the second quarter of 2018 and a total of approximately $39 million in calendar 2018 relating to both current and prior HQAF programs.

Moving to Slide 16. Our DSOs increased slightly to 64 days at the end of the first quarter of 2018 versus the 63 days at December 31, 2017. We certainly remain highly focused on improving our collection efforts. Ultimately, we're very dependent on our third-party collections vendor.

As we've discussed in the past, we've hired an additional third-party vendor who is assisting us with our efforts to improving collections. We believe that our collections can improve after we're able to move away from our current TSA agreements.

Turning to Slide 17, you'll see that our net secured leverage ratio on a trailing 12-month basis at March 31, 2018, is just under 4x using the calculations specified in our recent credit agreement amendment.

Our consolidated EBITDA cushion is approximately $35 million and our secured debt cushion is approximately $167 million.

Finally, please turn to Slide 18 for a discussion of our updated 2018 guidance. We continued to expect net operating revenues for the year ended December 31, 2018, to range between $1.925 billion to $1.975 billion. We expect adjusted EBITDA, adjusted for divestitures, to be in a range of $145 million to $165 million.

I would emphasize that this updated guidance for adjusted EBITDA, adjusted for divestitures, is providing using an updated methodology relative to what we've done in the past in that it includes $6 million of losses from 4 potential divestitures, which were excluded from our original guidance range.

Given the recent expansion of our divestiture strategy, we believe it isn't particularly useful to provide guidance that projects which potential future divestitures will happen. Instead, we believe that this updated approach to guidance represents the best view of our operations for the full year as we know it today.

As a result, we've added back to our guidance the $6 million of projected losses associated with these 4 hospitals. If we used this methodology at the start of the year, our original guidance for adjusted EBITDA, adjusted for divestitures for 2018, would have been in a range of $154 million to $174 million.

In addition to the update in our methodology regarding adjusted EBITDA, adjusted for divestitures, we've also removed our guidance for consolidated adjusted EBITDA. We believe and we've certainly seen this quarter that consolidated adjusted EBITDA can be heavily impacted by the declining performance of divestitures of closures. And that makes our ability to forecast this metric very difficult, especially in a period where we're likely to have a significant number of divestitures.

With that, I'll turn the call back over to Tom.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [5]

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Thank you, Alfred. Our consistent success in expanding our services in our markets as well as our focus on quality enhancements is evident in our results and we're pleased by the improvements we're seeing in our portfolio, particularly with volume growth against an industry backdrop of unit growth. At the same time, our Board of Directors has appropriately expressed disappointment in our most recent financial results to the company's senior management team. The management and our board are focused on management's plan to improve the company's margins, operations and financial performance and would like to reemphasize that we expect to realize between $20 million and $25 million impact in 2018 from this plan. And while we're pleased with the efforts that we've made in reducing our debt, we acknowledge that plenty of work remains. We believe the most recent change in our divestiture strategy will help us to continue our success in this initiative and look forward to updating you on the progress as we continue through the year.

In closing, I'd little thank our physicians, our hospital leadership teams and nurses and other teams at Quorum Health resources and the corporate office for their dedication and hard work. We also thank all of our shareholders for your support.

With that, Heidi, we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question in the queue from the line of Frank Morgan with RBC Capital.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [2]

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I was hoping we could start on the TSA agreements. I think the number I'd always heard was like $40 million to $45 million in cost savings. And now I'm hearing the $15 million to $20 million. So I'm just hoping you can sort of maybe reconcile that, walk me through the math on how that works? And what you're were seeing now that may cause that difference?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [3]

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Sure, Frank. Happy to do that. Really, there is no difference from the previous conversations that we have and hopefully I can clarify. There is really 2 separate elements that we believe and work that we've done internally and with some external consultants around the opportunity as we come out of those TSAs, you can put it into 2 distinct buckets. First, we think that we can achieve cost savings just on the underlying cost of delivering or obtaining those services out in the market. And we believe that, that number is a $15 million to $20 million range. In addition, we've quantified, I'll call it, a revenue cycle enhancement opportunity that is separate and distinct from cost savings by simply improving our throughput as it relates to the revenue cycle. And we think of that range as $20 million to $25 million. So if you just do the math, you end up with a $35 million to $45 million range. And I believe that's what we've consistently spoken to.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [4]

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Okay. I guess, I maybe missed that in the past. I just thought the $40 million to $45 million was just cost. I had not heard that break out. But that's okay. And I think Tom, you had mentioned, the -- as you do this transition through the year that I think you used the term potentially tenuous and needing the help with -- for a smooth transition over. Can you maybe elaborate on that a little bit kind of what the -- how that process will work? And what are the sort of the things that you're watching closely and most concerned about to make sure that process goes off seamlessly?

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [5]

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Well, as you know, Frank, it's a very complicated structure. But as we previously disclosed in March. We received notice from CHS that CHS was thinking to terminate effective September 30 to the transitional service agreements. And that was the shared services TSA and a computer and data process in TSA. The notice from CHS also brought an indication of their preference to terminate their remaining TSAs. Under the computer and data process in TSA, CHS has been -- based on our information technology better for the company, we continue to believe that the termination of all of TSAs in our long-term -- is in our long-term risk system. We desire to undertake the termination of -- minimize associated risk inherent with such a termination, while we continue to work toward a September 30 termination date for the termination of the shared service center TSA and the 3-revenue cycle TSAs. After a comprehensive review by our transitional team and our TSA Project Manager, we now believe that terminating the computer and data processing TSA, which covers our information technology systems and all of our hospitals on our arbitrary September 30 time frame present significant risk. And we believe an orderly transition period, which could be staggered over time, is necessary to ensure patient safety and then minimize associated risk in our transition. For example, while with respect to the termination of the IT TSA an arbitrary transition schedule could force all of our hospitals to a new IT platform simultaneously as opposed to an orderly conversion. Therefore, we're disputing an arbitration the September 30 termination date with respect to the IT TSA. We believe an orderly transition of our information technology systems will help to minimize the risk to our hospitals and our patients during the transition period. Hope that makes sense to you.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [6]

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Okay. That sounds like you were prepared for that question. So does that computer and data processing -- is that part of the $15 million to $20 million of cost savings? Or would that be on the $20 million to $25 million of enhanced revenue opportunity, where would that fall?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [7]

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It falls more on the -- it falls specifically on the cost savings. And it's probably a minority of that cost savings range.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [8]

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Obviously...

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [9]

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But it an element of it.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [10]

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Yes. The transition of an IT system we want to make sure it is done in a process so we can ensure patient safety. And that's always our concern associated with it. So a specific date to say and all our hospitals change at one time just doesn't make sense to us and we need to be very cautious associated with that. And -- but again, the cost associated with IT transition is less than $5 million we're in that $5 million range. That doesn't mean we won't be there in 2019. It just means that the September 30 date, we just think is an arbitrary date.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [11]

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Got you. In terms of the notion of hiring the outside consultants at the Alvarez. I mean, are there -- is there a contracting more just on all of these IT-related issues or is there something inside the hospitals you're actually looking in terms of this cost program that you're putting in place is -- how much of that's them versus what you're doing? I assume you're probably already doing all of this. But what's kind -- can you help me there really understand that?

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [12]

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Sure. As you look at our first quarter results we showed significant volume increases even after some closures and services. And we had positive revenue growth, but we saw our expenses go up and so -- and we put together plans associated with how do we get our expenses back under control because it's a great situation having revenues going up. And you should be able to control your costs but some of the physicians, recruitment and getting them started is lagging behind our expectations associated with that. And we've identified the strategy all along. If you go back to our strategies, we've identified strategy being the low-cost provider in the field -- in our field. And that's why we've gone back and identified additional cost savings that we will try to implement, and we have begun implementing at our hospitals in that $20 million to $25 million range. Our engagement with Alvarez & Marsal is to really help us look at our cost structure within our hospitals and to make sure that if our goal is to achieve to being a low-cost provider and demonstrate that in the investor home field that we're not missing any opportunities that are out there. And so the focus is specifically to try to look at our cost structure, not necessarily the IT TSAs or the central service center TSAs. We've used some other groups associate with that, but to really focus on demonstrating to you as our investors that we can maintain our cost structure while growing our volumes.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [13]

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Got you. But just -- I agree having volumes growth in this environment in rural America is actually quite impressive. But as far as just is it you had to have more temp labor cost that your cost spiked up high because you had used temporary labor? I guess, I don't understand it seem like by this point, you would have a pretty good handle on kind of the cost structure there of your hospitals. But was it just temporary labor to meet the needs in these markets or...

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [14]

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A combination.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [15]

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It just seems very notable that it popped up just right now.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [16]

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Yes, I think, we have seen a couple of incidents. We recruited the doctors -- new doctors in our community. We see some of the lag behind getting the revenues associated with that -- not in the volume standpoint, but into the expense categories where we're not -- we're seeing those growth in revenues. We also saw about $3 million increase in our salaries. Now we do have some places we have shortfalls and I would say throughout the industry there is a difficult nature in regard to making sure we are competitive. But this represents about only a 2% merit increases that we've done within our hospitals and our nursing staff. So we continue to be competitive in our strategies. But we're talking about a 2% range, which I think is probably on the lower side of what you're seeing in the industry, but it does represent $3 million of costs.

The (inaudible) specialty fees, which are doctors that are hospital-based, hospitalists, intensivists, anesthesiologists, ER doctors. We're continuing to push for the intensity of services within our hospitals so we have opened up additional cath labs, we have opened up additional ICUs associated with it. And we're just seeing a lag of the increased cost to the revenues that should be generated associated with that. And so that continues to be a struggle for us and the intent behind looking at an outside group was let's make sure as we compare ourselves against the industry that we're doing what we're saying we're doing and not missing any opportunities on cost control.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [17]

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Got you. I'll jump back in the queue. But my last question -- you maybe should go ahead and take more questions. But my last question is, I'll just ask Alfred, would you please go back through that your discussion on the change in the guidance? That was a little much for me to grab the first time through. And I've had several clients today call on that. So maybe go ahead and take questions, but and then just if you wouldn't mind go back through that discussion about the change in the guidance from the guidance assumptions at the very end?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [18]

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Happy to do that. Of course, when we came into the year, we guided on 2 earnings ranges. We guided on adjusted EBITDA that was $145 million to $165 million range. And we've discussed why we are no longer guiding to that range because of losses both that we incurred are greater than we might have expected as we came into the year because of the unpredictability as you are shutting down or divesting facilities. So that range we're no longer guiding on. So the range I think you're speaking to when we came into the year, we had a guidance range for adjusted EBITDA, adjusted for the divestitures of $160 million to $180 million. That range included both divestitures and closures that had been completed when we provided guidance as well as it included losses -- it included losses $6 million of losses from projected divestitures from 4 specific facilities were not covered inside of that range, the $160 million to $180 million. As we've opened up the divestiture strategy and as we're looking at a whole broad range of divestitures, as you've seen by the fact that we have 7 hospitals under LOI, not just the 4 that we would have excluded from that $160 million to $180 million range, we no longer are trying to predict which hospitals might be divested during the year. So that $6 million relating to those 4 specific facilities that were not covered in the $160 million to $180 million range were added back to the range. So if we were guiding again at the start of the year, including those 4 facilities in our range, our range would have been a $154 million to $174 million and which we have now updated to a $145 million to $165 million range. And just to reemphasize, that $145 million to $165 million does not project any losses from any future potential divestitures. I hope that helps?

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [19]

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Yes, I think I got it the second time.

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Operator [20]

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And your next question comes from the line of Jonathan Jenson with Imperial Capital.

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Jonathan Michael Jenson, Imperial Capital, LLC, Research Division - Associate Analyst [21]

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I'll just start off with my first question as it relates to the 7 hospitals under LOIs. Just trying to get a sense of how much EBITDA and revenue that might include just so we can estimate a pro forma number?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [22]

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Jonathan, I would -- we haven't disclosed that, but I would put it at a relatively low number. Depends on how you measure your retrospective or prospective. But I would suggest it's a plus or minus a very few million of dollars, single digits of EBITDA.

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Jonathan Michael Jenson, Imperial Capital, LLC, Research Division - Associate Analyst [23]

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Okay. That's pretty helpful. And then just moving back to the TSAs. On the shared services and computer data, what exactly, just based on those two, what do you think just ballpark the EBITDA contribution could be? And then is there -- I'm just trying to clarify how much CapEx would be related to that, that you may have to spend over the next year?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [24]

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Yes, on the CapEx question, it's still something that we're looking at I'd say extensively and looking at our options as it relates to the transition of services, some of it will depend on the timing that we have. Obviously, if it's a shorter time horizon to do a conversion you were likely to spend more near-term CapEx then I'd say much longer of the staged ratable conversion. And it even goes to which systems are we selecting and migrating to. So there is a whole lot of variables that would be difficult to land on a precise number. I think as we get further into the planning and more definition, we'll be able to give you a better indication of the CapEx cost of transition. But the good news, if you will, we believe outside of the TSA services, we actually believe that we'll be able to save OpEx once we get through the conversion and are running our own platform that there is a relatively material OpEx savings that is not included in that previous savings number.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [25]

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And so just coming back -- let me come back to the question. We get a CapEx this year about $70 million. And we anticipated some of the cost associated within that $70 million, there is a potential that we might go up on an additional $5 million associated with that. But our goal within the CapEx is to stay within our cash flow. And so that's still our goal associated with it.

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Jonathan Michael Jenson, Imperial Capital, LLC, Research Division - Associate Analyst [26]

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Great. And then just after September 30, which TSAs do you think would be easiest for you guys to take off besides the shared services and computer data?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [27]

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I think our preference would be to eventually, outside of the IT TSA, would be to migrate off of the other ones on September 30.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [28]

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Yes, to try to be a little more specific, we have an eligibility service that does our Medicare applications. We have a service called, [patsy] which is our collection services we believe will be able to offset that. And we also have a physician billing service called [pepsi] . And so those 3 along with TSA services that are provided and some HR payroll services. So we're anticipating all of those we would be able to -- without the full cooperation from CHS we would be able to move all of those of off by (inaudible)

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Jonathan Michael Jenson, Imperial Capital, LLC, Research Division - Associate Analyst [29]

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Great. And then, just lastly, some housekeeping items. Just want to get a sense after the term loan payment that subsequently happened after Q1, what's the cash on the balance sheet, the total liquidity? And if you could maybe just give us for granularity the LTM revenues of the current 28 hospital portfolio? I don't think I came across it in the presentation.

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [30]

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Yes, I'll start with the last. The revenues that contributed in Q1 from the 4 were very small. I'd say was approximately -- and I am going off memory, which is always a dangerous thing. I might -- we may want to get back to you with that, just to be sure I get it right, but it was not material.

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Jonathan Michael Jenson, Imperial Capital, LLC, Research Division - Associate Analyst [31]

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Okay. And then just the cash and the liquidity, just after the term loan payment?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [32]

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Yes, we probably want to update those relative because as you know we had not, we closed on the Clearview transaction on March 31. So as we closed the quarter, the cash was sitting on our balance sheet and we hadn't paid that off. Essentially, we pay down the term loan with the entire balance of the near-term proceeds, which was roughly $30 million. So I'll have to get back to you with that.

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Operator [33]

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(Operator Instructions) And your next question comes from Elie Radinsky with Cantor Fitzgerald.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [34]

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I just want to understand certain numbers here. We approximately have $1.229 billion of debt. You're expecting asset sale proceeds in the range of $165 million to $215 million by the end of 2019, is that correct?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [35]

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That is correct.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [36]

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Okay. So you now have a new range of $145 million to $165 million of EBITDA? Is that from what you view to be continuing on operations? Or is that from all hospitals that you currently have?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [37]

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That's from all hospitals that we currently have. I think as we mentioned the -- out of the 7 hospitals that we have under LOI have a very small amount of positive EBITDA.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [38]

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So in the aggregate there is a small amount of positive EBITDA from the 7 hospitals, which are currently embedded in the $145 million to $165 million number. So that number for continuing ops will be slightly less. Now the company is also expecting to get -- to reap a savings of a minimum of $35 million or in the range of $35 million to $45 million from the aggregation of the TSA and the revenue cycle, is that correct?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [39]

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That's correct.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [40]

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Now you also have a separate cost containment program where you are trying to reduce overhead in cost and staffing, et cetera, is that correct?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [41]

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That's correct.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [42]

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Do you know -- did you mention how much you expect to save with that program?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [43]

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$20 million to $25 million. I would say it's beyond just cost savings, that there are revenue enhancement opportunities embedded in there as well. But that is correct. And that's -- but to be clear, that's 2018 savings, so a full year run rate would be higher off of that $20 million to $25 million if you annualized it.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD of High Yield, Distressed & Bank Loan Credits [44]

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Okay. So one would expect that will take down that $145 million to $165 million range for the positive EBITDA of those 7 hospitals? And in 2019 hopefully get a full year benefit from the run rate of the revenue cycle in TSA savings as well as the cost-containment and revenue available revenue gains of that $20 million to $25 million, which would be annualized, which actually will be higher than that for 2019 all else being equal. Is that primarily -- am I getting my ducks in a row there? I just want to get my numbers straight.

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [45]

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Yes.

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Operator [46]

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And your next question comes from the line of Zack Sopcak with Morgan Stanley.

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Zachary William Sopcak, Morgan Stanley, Research Division - VP on the Healthcare Services and Distribution Team [47]

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I'm going to give you guys a break since I will ask you one single question. Just wanted to clarify on the new EBITDA range, and sorry to go back at this again. But if you take that $154 million to $174 million, which was, I guess, the new methodology on your original EBITDA. And to the new range, there is a $9 million delta. Can you just give an idea of how much of that was first quarter performance versus expectation for the rest of the year?

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Alfred Lumsdaine, Quorum Health Corporation - Executive VP & CFO [48]

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Yes, I think it's fair to attribute most of the decline to first quarter performance while not all, I think it's the majority of it.

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Operator [49]

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And there are no further questions in the queue. I turn the call back over to the presenters.

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Thomas D. Miller, Quorum Health Corporation - President, CEO & Director [50]

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All right. Let me thank all of you for your support of our hospital. I hope by this call, you take a couple of things away. One is, we are seeing and our strategy to continue to grow our hospitals and grow our volume. And the opportunities that we have in our markets exist and we're being successful associated with that. We continue to see improvements in regard to the quality of care as we measure it across our organizations. Our net revenues are growing, which is a positive, our expenses were growing, which we believe within the team here we have the opportunity to improve and see those improvements for the rest of the year. We still believe and we believe it's in our best interest to operate as an independent company and we're moving forward with our strategies in regard to the TSA implementations associated with that. And from a company standpoint we appreciate your support and understanding associated with how we're operating. We have a great team of people who are all working together trying to show success associated with our company. With that, appreciate your time and thank you very much.

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Operator [51]

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