Good day, and welcome to the Community Health Systems Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Anton Hie, Vice President of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, everyone, and welcome to Community Health Systems' Third Quarter 2025 Conference Call. Joining me today on the call are Kevin Hammons, President and Interim Chief Executive Officer; and Jason Johnson, Senior Vice President, Chief Accounting Officer, and Interim Chief Financial Officer. Before we begin, I'll remind everyone 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 as described in headings such as Risk Factors in our annual report on Form 10-K, and other reports filed with or furnished to the SEC. 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. We've also posted a supplemental slide presentation on our website. All calculations we will discuss today exclude gains or losses from early extinguishment of debt, and impairment gains or losses on the sale of businesses. With that said, I'll turn the call over to Kevin Hammons, President and Interim Chief Executive Officer. Kevin?

Thank you, Anton. Good morning, everyone, and thank you for joining our third quarter 2025 conference call. Before we jump into discussing the quarter, I want to take a moment to thank the team here at CHS for the support they've shown me and others through the recent transition of senior leadership. It is gratifying to see our team's confidence in the work we are doing here at CHS and their commitment to our future success. Over the past 90 days or so, since stepping into my new role as interim CEO, I've had the opportunity to visit several of our markets and speak with many of our hospital leadership teams, including operational, financial, clinical and service line leaders. It is always inspiring to see the folks who are providing high-quality care for our patients, and helps put into perspective how important our hospitals are to the people and communities they serve. At CHS, we will remain focused on supporting our caregivers, physician partners and support teams to help ensure an exceptional health care experience for our patients. Next month, approximately 150 CEOs and CFOs from across the CHS network will gather for a leadership conference where we will discuss our vision for the future of the company and our ongoing commitment to investments in quality, improving both physician and patient experience, improving employee satisfaction, and achieving sustainable positive free cash flow. As I've shared with many on our team already, I'm very optimistic about the future of CHS and our opportunities to continuously improve the health care experience. To continue to improve our operational and financial performance and to create value for our investors through disciplined and proactive management of our business. Now turning to the third quarter operating results. Our operating performance was in line with our updated expectations. And our reported results were further enhanced by the recognition of a $28 million gain from the settlement with some prior litigation, which reimbursed us for previously incurred expenses. Same-store net revenue for the third quarter improved 6% year-over-year. We were encouraged to see some improvement in payer mix on both a sequential and year-over-year basis as well, realizing the incremental state-directed payments from New Mexico and Tennessee when compared to the prior year. As we have done all year, we continue to grow our inpatient volume. However, similar to last quarter, the overall business mix remains more heavily skewed towards medical versus surgical cases. And inpatient admissions were flat ahead of outpatient elective procedures. However, solid expense management across most categories helped drive slight margin expansion year-over-year, even when excluding the benefit from the legal settlement. We continue to make targeted investments to advance our competitive position in many key markets during the quarter, including capacity and service line expansions, such as the acquisition of a vascular surgery practice and the relocation of a large OB/GYN practice onto our campus, both in Birmingham, Alabama. The addition of a new urology service line in Las Cruces, New Mexico, the addition of a new neurosurgery and spine program in Laredo, Texas and new robotic surgery programs in two of our New Mexico markets. We are successfully recruiting physicians and advanced practice providers to our markets. At September 30, 2025, we had approximately 160 more employee physicians and APPs in our clinics than in the prior year. With the recent recruits and planned commencements in the fourth quarter and early next year, we should be favorably positioned as we enter 2026. In addition, we continue to improve our capital structure, further reducing our leverage to 6.7x, down from 7.4x at year-end 2024. Also as a reminder, during the quarter, we refinanced $1.743 billion of our Senior Secured Notes due 2027, through the offering of $1.79 billion of 2034 notes, thereby pushing out our nearest significant maturity to 2029. At this point, I want to introduce Jason Johnson, our Interim Chief Financial Officer. And I'll turn the call over to Jason to review the financial results in greater detail and discuss our updated guidance.

Thank you, Kevin, and good morning, everyone. For the third quarter, CHS delivered results generally consistent with expectations. The overall volume growth was in line with our updated guidance, and with continued solid execution on controllable aspects of our business, the company achieved expansion in adjusted EBITDA margins and remains on track for the full year. Adjusted EBITDA for the third quarter was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year-over-year. Results included $28 million from the receipt of a settlement of a legal matter recognized as nonpatient revenue. When excluding this amount, adjusted EBITDA was $348 million and margin was approximately 11.4%, up 20 basis points from the prior year period. Please note that the nonpatient revenue related to the legal settlement is excluded from the same-store metrics provided in our earnings release and supplemental materials. Same-store net revenue for the third quarter increased 6.0% year-over-year, again, driven primarily by rate growth as net revenue per adjusted admission was up 5.6% year-over-year. Same-store inpatient admissions increased 1.3% year-over-year, and adjusted admissions were up 0.3%. Same-store surgeries declined 2.2%, and ED visits were down 1.3%. We were encouraged by the sequential volume performance coming out of the second quarter, which was better than our typical seasonal experience in the third quarter. However, as Kevin previously noted, we again experienced a divergence in inpatient surgeries, which were flat year-over-year, and outpatient surgeries, which were down, reflecting continued pressure on consumer demand for elective procedures in our markets. Despite this environment, the company continued to perform well on cost controls, including labor costs. The year-over-year increase in average hourly rate was in line with our expectations, and contract labor expense was down slightly on a year-over-year basis. We also performed well again on supplies expense, which were down year-over-year and as a percentage of net revenue fell 20 basis points to 15.0% when excluding the $28 million legal settlement. While we acknowledge ongoing inflationary pressures and potential incremental upward pressure from tariffs on imported products and raw materials in future periods, we believe that opportunities remain as we stabilize and mature workflows under our ERP. Medical specialist fees were $165 million in the third quarter, up approximately 4% year-over-year on a same-store basis, and representing 5.4% of net revenue, when excluding the legal settlement, which is generally consistent with recent quarters. We expect continued upward pressure on medical specialist fees in the fourth quarter and into next year, especially in radiology, while increased use of emerging or developing technology, including AI tools, should eventually help on this front. Cash flows from operations were $70 million for the third quarter, and $277 million for the year-to-date. Cash flows from operations for the year-to-date as reported includes $126 million in outflows for taxes on gains on sales of hospitals, which are paid out of divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $403 million for the year-to-date, and adjusted free cash flows were slightly negative for the year-to-date. Based on our historical performance, in which the fourth quarter operating cash flows are typically the strongest of the year, we remain confident in our ability to achieve positive free cash flow for the full year of 2025 after adjusting for cash taxes paid on divestiture gains. In August, we refinanced substantially all of our 2027 maturities, using proceeds from an offering of $1.79 billion and 9.75% Senior Secured Notes due 2034, to redeem via a tender offer $1.743 billion, or 99%, of our outstanding 2027 Senior Secured Notes. As Kevin previously noted, leverage at quarter end was 6.7x, down from 7.4x at year-end 2024, and our next significant maturity is in 2029, providing ample runway to continue executing our strategic initiatives. As expected, in October, we received $91 million in contingent cash consideration related to last year's divestiture of Tennova Cleveland. We also continue to expect the divestiture of our outreach lab asset to close later this quarter with proceeds of approximately $195 million, which will provide additional liquidity to fund growth investments or further reduce our leverage. Now moving on to our updated 2025 financial guidance. Based on our operating results through the first 9 months, along with the benefit from the legal settlement that was not contemplated in the previous guidance, we are tightening our adjusted EBITDA range for the full year 2025 to $1.50 billion to $1.55 billion. Consistent with our prior approach, this guidance does not contemplate any further divestitures beyond those announced, nor does it assume contribution from any new or pending supplemental payment programs. This concludes our prepared remarks. So at this time, we will turn the call back over to the operator for Q&A.

The first question today comes from Brian Tanquilut with Jefferies.

Congrats on the quarter. Maybe, Kevin, as I think about volume performance, obviously, nice to see the positive trend in inpatient. But on the outpatient side, you still saw some weakness in surgeries and ER. Just any thoughts you can share with us in terms of what you're seeing in terms of the recovery of volumes there? Or how are you guys thinking internally in terms of what that trajectory looks like? And maybe also the components of what outpatient is, and what you're seeing in those buckets?

Thanks, Brian. Absolutely. So as we called out in the second quarter, and as I believe we still saw in the third quarter, some of the economic headwinds, more the macroeconomics, the climate and consumer confidence seems to be the big headwind. And I think that continued on into the third quarter, particularly in some of our markets that are experiencing heavier or more softness economically than other markets. So we still believe that has been the primary driver of some of the softness now. As consumer confidence seems to be stabilizing, it's bounced off its lows in the second quarter a little bit and seems to be improving. We are seeing some recovery, and I think that we experienced that where we saw some improvement in payer mix into the third quarter, and we're certainly experiencing that in some of our markets. So that gives us a little more confidence as the payer mix improves and people are feeling better. They're starting to come back in for more procedures. Although we were still down on outpatient elective surgery volume year-over-year, it was improved over second quarter. I'd also point out maybe that the immigration climate probably is affecting some of our markets still if you think about markets in Arizona, across Texas, primarily, there's still probably a little bit of an overhang there where patient behavior, people are staying away from hospitals, at least on an elective basis more than we've seen in the past. Now we're also experiencing or noticing that, in our ER business. And many of those are uncompensated. So where you're seeing some lower volume and maybe why that hasn't completely been noticed in our EBITDA generation is because some of that volume that we're seeing, particularly in the ERs and uncompensated care. And so that has not had a negative EBITDA impact on it.

That's very helpful, Kevin. And then maybe just a follow-up question for me. How should we be thinking about your divestiture kind of plans or outlook for 2026?

Yes, we are still exploring some divestitures and are in early discussions, but it's too soon to tell how far they will progress. However, we are receiving some inbound interest. We are also in more advanced talks on a couple of deals that we believe might be announced later this year. No agreements have been signed yet, so there is nothing to update at this time regarding the advancement of these discussions.

The next question comes from A.J. Rice with UBS.

It seems you are optimistic about achieving positive free cash flow for the full year of 2025, provided the fourth quarter is several hundred million in the positive. As you move toward this ongoing goal, how does that influence your considerations for capital deployment, the amount of capital expenditures, or potential initiatives like smaller acquisitions in outpatient care or other areas? Any insights on this?

Thanks, A.J. Absolutely, I think that it frees us up a little bit and does allow us to think, and be a little more strategic in terms of how we think about either deploying capital. It gives us some optionality of whether we use incremental free cash flows to further delever the company, which in effect would have a virtuous cycle benefit because it reduces future cash flows. We could use it where there are opportunities for some tuck-in deals to spend capital more strategically in areas of things that we think could generate further EBITDA. So it does free stuff and should then again, create a little more of a virtuous cycle for us.

Okay. And then, I mean, it's early, I know, but when you look at '26 and you're starting your budgeting process, et cetera. Are there headwinds or tailwinds that you would call out that we should keep in mind as we try to model '26?

Yes, there are a few points I could highlight. We have completed some divestitures this year, including Lake Norman and ShorePoint at the beginning of the year, followed by Cedar Park midway through the year. We recognized some state-directed payments from Tennessee from prior years, which amount to about $15 million to $20 million this year related to the settlement gain we acknowledged this quarter. Looking ahead to 2026, we anticipate a strong Medicare rate increase. Additionally, there are potential state-directed payment programs in Georgia, Florida, and Indiana, as well as the rural health fund, although we can't quantify those at this moment. We believe these factors could have a positive impact for us. We are also continuing to invest in growth, and with positive free cash flow this year extending into next year, we may be able to further invest in additional growth capital.

I might add, Kevin, this is Jason, that you might want to include that $28 million legal settlement this quarter. Exclude that from the jump off from the 2025.

The next question comes from Ben Hendrix with RBC Capital Markets.

Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations in your roles. Kevin, you mentioned you've visited some facilities, any surprises or anything out of expectation in your review of the platform? And then any initiatives you guys are looking at? You talked a little bit already about capital deployment. But anything in operations or balance sheet management that could deviate from your prior practice?

Thanks, Ben. I appreciate your question. I'm really excited about the direction of the company and confident we have the right strategies and people in place to seize our opportunities. We've had a smooth transition of leadership, and I believe we're gaining momentum in several key areas. As I mentioned earlier, we've visited multiple local health systems and met with their leaders across almost all of our major markets. They are very enthusiastic about our progress. I'm increasingly confident that our investments, strategic priorities, and focused resources on the most important aspects of our business will pay off. We can expect to see some results soon in various areas. I'm particularly focused on quality of care, including our quality ratings, patient and physician experience, and employee satisfaction. Additionally, I remain committed to free cash flow; we've made significant progress over the last nine quarters, improving from negative to positive cash flow. This transition will provide us with more opportunities. With these five priority areas and the progress we're making in quality, our focus on the others will help accelerate our future achievements.

Brian, this is Jason. Kevin mentioned my role as CFO, so I'm now in the position of following him. Kevin has implemented a focus on adjusted free cash flow, and we are committed to maintaining that focus. Additionally, we fully implemented the ERP earlier this year, and optimizing that remains a key priority. We are also evaluating the most effective use of proceeds from any divestitures, whether that involves investing in capital or reducing debt through repurchases. Having worked alongside Kevin for several years, I am aligned with his financial vision, and we will continue moving forward together.

Great. Appreciate that. Just a quick follow-up to a prior comment. With the sequential surgical trend you saw from 2Q into 3Q, anything changing in the way we should think about typical 4Q elective seasonality?

I do feel that with the improvement in payer mix in Q3, it gives me a little more confidence that Q4 could look more like the normal seasonal recovery. There was some concern that if commercial patients did not come back in Q3, and you get late in the year and people have not met their co-pay and deductible, yes, they may put it off until early 2026. It's looking less likely that that will occur. But with the continued kind of headlines around health care and some uncertainty, we did not want to get ahead of ourselves in terms of guidance or suggesting that it could be better. But I think we're in a pretty good position coming into Q4. There's also potentially an opportunity that people who have exchange insurance are concerned about losing it. There may be some more of that coming back in Q4. It's a relatively small component of our net revenues, less than 5% of our net revenues. So I don't think it's a real material needle mover for us, but it potentially could be a slight positive.

The next question comes from Andrew Mok with Barclays.

I think I want to just follow up on some of those encouraging volume trends. Were those trends you saw exiting 3Q, or at the start of 4Q? And from a category standpoint, what are you seeing? And is the payer mix improvement generally driven more by the employer-based coverage, or the ACA?

So we saw the payer mix improvements really beginning early Q3 in July. So we saw that improvement throughout Q3. So I think our expectation would be that that will likely continue into Q4. Now from a comp perspective, Q4 of 2024 was strong and particularly kind of the post-election period, we saw consumer confidence kind of spike in Q4 of last year. So we will have that to climb over. But all in all, directionally and sequentially, I would say that we should continue or we expect that we could continue to see some improvement from Q3 to Q4. In terms of where we're seeing improvement in terms of the breakdown? It was primarily in commercially insured business, although we did see improvement in exchange as well. But again, the exchange business is a relatively small component of our overall net revenues.

Great. And on the government side of things, Indiana is one of your largest states, which I think has the largest decline in state Medicaid enrollment to date. Are you seeing the impact of tighter Medicaid eligibility in states like Indiana impact your Medicaid volume results?

We've not. We've not experienced any significant impact, specifically to Indiana from that.

The next question comes from Jason Cassorla with Guggenheim.

Can you guys hear me?

Yes, Jason.

I just wanted to quickly address your thoughts on 2026 and the favorable Medicare IPPS that's coming in. We're still waiting on the final outpatient rule, but if the outpatient proposal comes through as expected, how do you view the overall impact of both elements in relation to 2026? Do they mostly cancel each other out, or are there specific details from a Medicare rate perspective that we should consider if the OPPS is implemented as proposed?

I would say with the proposed outpatient, but we know an inpatient proposed outpatient, I still think it's a little net positive to 2026 over 2025.

Okay. Great. And maybe just more of a high-level question. On the ambulatory front, I know you have new access points opening up, including a few ASCs. But as you step back, can you just discuss your ambulatory strategy or remind us, help frame maybe what inning you're in in terms of building out those access points and how that's helped your market share position? And anything else along those fronts would be very helpful.

Sure. We continue to evaluate access points and have been investing in them for some time. Each market we operate in has its own unique characteristics. In markets where we faced inpatient capacity constraints, we adopted different strategies, such as investing in inpatient facilities. For instance, last year we opened new towers in Knoxville, Tennessee, adding approximately 58 beds, and we also launched a new patient tower in Foley, Alabama, addressing capacity issues in both locations. Currently, we don’t have significant construction projects for inpatient facilities underway. As we advance into 2025 and 2026, we plan to allocate more of our resources towards access points like urgent care centers, freestanding emergency departments, and ambulatory surgery centers, which are less costly and allow us to do more with the same capital. We have been opening three to four freestanding emergency departments each year and have three ambulatory surgery centers set to open in the fourth quarter of 2025. For 2026, we aim to open around six to eight additional ASCs, along with more freestanding emergency departments and potentially some urgent care centers. We are also actively acquiring clinics and bringing new doctors into our existing facilities.

The next question comes from Stephen Baxter with Wells Fargo.

This is Mitchell on for Steve. Can you please highlight what drove the 5.6% growth in same-store revenue per admission, and kind of what you see as a sustainable rate there?

Steven, this is Jason. About 1/3 of that 5.6% improvement in same-store net revenue per adjusted admission is a result of the Tennessee and New Mexico state-directed payments programs that were approved in the second quarter. The rest of the improvement is payer mix related. And there is some offset. We did have a little bit lower acuity.

I might just add in terms of kind of what's sustainable. We think a mid-single-digit net revenue growth and net revenue per growth is a sustainable number. And between your Medicare rate increases and our commercial rate increases, we expect acuity to recover going forward. Right now, there is some dilutive impact on the net revenue per adjusted admission with the softer outpatient surgeries, particularly orthopedic and cardiac surgeries, which have been areas of softness. But as those come back, we should see a lift in the net revenue per adjusted admission, just that they're higher acuity services.

The next question comes from Josh Raskin with Nephron. Josh, your line is open. You may now ask your questions. We appear to have lost connection with Josh...

I'm sorry, do you guys hear me?

We can.

Sorry. Can you speak to trends from payers around denials and underpayments, maybe just an update there and more importantly, around maybe the mitigation of those pressures? And I'm curious if you're using any external vendors? Or is it all internal services on the RCM side and maybe any changes that have been there through the year?

Sure. So we called out really the third quarter last year and in 2024, a big spike in denials. Since that time, it's stabilized. It has not really gotten any worse. But we continue to invest in our physician adviser program. We're investing in some AI tools in terms of how we handle denials with our internal revenue cycle team. We are using a combination of third-party vendors as well as internally developed products on that for purposes of our revenue cycle team. Our revenue cycle is managed internally with our own team, and they do use a combination of products. As we get better at it, I would say we've been able to kind of hold things stable, which indicates that the payers are probably also denying more claims, but we've been more efficient or better at overturning some of those denials in order to kind of keep things status quo.

Perfect. That's helpful. And maybe just a quick one. Flu season. It seems like off to a little bit of a slow start. I assume that's contemplated in guidance, and I'd be curious if you guys are seeing any updates into October as we kind of move into flu season?

Yes, it is included in our guidance, and we haven't observed any significant increase in our facilities or heavy flu activity. At this time, I'm uncertain about what we will experience for the rest of the quarter, but we have considered that in our planning.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hammons for any closing remarks.

Thank you, everyone, for joining us on the call today. I want to close by reiterating my thanks for our team members at CHS for their commitments and confidence through the leadership transition as we approach the future together. If you have any additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.