Community Health Systems Inc (CYH) 2003 Q4 法說會逐字稿

Good morning, my name is Casey and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Community Health Systems fourth quarter earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Wayne T. Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Sir, you may begin your conference.

Thank you, Casey. Good morning and welcome to Community Health Systems' quarterly conference call. With me on the call today is Larry Cash, our Executive Vice President and Chief Financial Officer.

The purpose of this call is to review our financial and operating results for the fourth quarter and the year ended December 31, 2003. We issued a press release after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast of this conference call on our web site, a slide presentation accompanies our prepared remarks.

I would like to begin the call with some comments about the quarter and the year and then turn the call over to Larry, who will follow with a more detailed account of our financial results.

But, before I begin, I would like to read the following statement. Statements contained in his conference call regarding expected operating results, acquisition transactions, and other events are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made based on management's current expectations or beliefs, as well as assumptions made by information currently available to management. These are summarized under the caption -- information currently available to management -- these are summarized under the caption -- risk factors -- in the documents filed by Community Health Systems Inc. with the Securities and Exchange Commission, including the company's registration statement on S-3, Form 10-K for the year ended December 31st, 2002, Form 10-Q for the quarter ended March 31st, 2003 and June 30th, 2003 and September 30th, 2003 and form 8-K filed February 25th, 2003. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

The fourth quarter of 2003 marked a strong finish to another outstanding year for Community Health Systems. The measure of our success is demonstrated by our strong year-over-year revenue growth, adjusted EBITDA, net income -- particularly in a difficult environment for the health care companies. Our ability to focus and consistently execute on the key areas for success in our business and effective standardize operating platform, a proven acquisition strategy, successful physician recruitment, and a favorable reputation in the marketplace, allowed us to achieve our objectives. More importantly, we believe these results confirm that our hospitals are successful in improving the level of health care services in their respective communities.

Two of our hospitals were included in the 2003 annual listing of the nation's 100 top hospitals, which demonstrates both high-quality care and outstanding financial results. This is also our 15th consecutive quarter that we have met or exceeded street EPS consensus since becoming a public company.

We believe we are well-positioned execute our strategy for future growth through a combination of market share opportunities and acquisitions. Net revenue for the quarter ended December 31st, 2003 totaled 795 million, a 36.3 percent increase over the prior year. Adjusted EBITDA was 119 million, a 25.5 percent increase over the same period a year ago. The adjusted EBITDA is EBITDA adjusted to exclude the minority interest in earnings for the quarter, and a 2002 loss from the early extinguishment of debt in the annual numbers.

Further references to EBITDA during this call will be based on adjusted EBITDA.

Income was 35.6 million, or 35 cents per share, compared to 28 million or 28 cents per share for the fourth quarter last year. Same-store net revenues increased 9.3 percent with admissions up 4.2 percent versus the fourth quarter last year. Same-store adjusted admissions were up 2.4 percent. Net revenues for the year just ended totaled 2.8 billion, or 28.8 percent over the same period a year-ago period EBITDA was 436.5 million, a 20.6 percent increase. Net income was 131.5 million, or $1.30 per share compared with 100 million or $1 per share last year. The extraordinary loss from the early extinguishment of debt reported in 2002 has been reclassified to operating income to conform to the requirements of SFAS 145.

Income per share before extraordinary items would have been $1.05 for 2002, for increase of 28.-- 23.8 percent. For the year, same-store admissions increased 1 percent, adjusted admissions decreased .4 percent, and we improved our margin by 10 basis points from 16.5 percent to 16.6.

Our same-store hospitals continue to perform well, as the financial results will demonstrate. With that, I would like to reduce in the key accomplishments for the quarter. First, our same-store facilities had a 4.2 percent growth in admissions. Same-store net revenue also increased 9.3 percent. Our standardized and centralized approach increases utilization and reduces the need for patients to travel outside their communities to get health care services. By adding and enhancing services in our facilities and recruiting qualified physicians. The company recruited 508 new physicians for 2003, with over 60 percent specialists. This compares to 447 physicians for the prior year. The company expects to recruit 525 physicians for 2004. We also had good physician retention, with a turnover rate of 8 percent in 2003.

Our acquisition strategy has been very successful, as we again led the nonurban hospital industry with the completion of 10 acquisitions in 2003. We acquired seven West Tennessee hospitals in January, a hospital in Pottstown, Pennsylvania in July; Petersburg, Virginia in August; and Laredo, Texas in October.

All the hospitals we acquired 2003 fit the Company's strategy for nonurban markets. This brings our total hospitals to 72 and number of states to 22, and represents our best acquisition year since this management team took over, in 1997.

Over the last three years, we have completed 21 acquisitions with trailing revenue of approximately $1 billion and trailing EBITDA margin of less than 5 percent. This success in acquisitions will set the stage for continued revenue and earnings growth for the future.

We recently completed construction of an 80 bed facility for a 1999 acquisition of Emporia (ph) Virginia. The new facility provides a major improvement in plant and quality of services for the community.

We also provided update guidance for 2004 in our 8-K filing last night with the SEC -- revenue guidance is from 3.3 to 3.35 billion, EBITDA is from 504 to 512 million and EPS is $1.49 to $1.52. The revenue guidance includes two to four acquisitions. Additionally, same-store admission growth is projected at 1.1 to 3 percent.

At this point, I would like to turn the call over to Larry to provide you with more detailed financial results.

Thank you, Wayne. We are pleased with the financial and reported results for the quarter and for 2003. We had very strong consolidated volume in the fourth quarter as evidenced by the 32.3 percent growth in admissions compared with the same period last year. Adjusted admissions, which factors in outpatient business had a 30.5 percent growth over the fourth quarter last year. On a same-store basis, admissions improved 4.2 percent versus a strong comp of 3.7 percent in the fourth quarter of 2002. Same-store adjusted admissions were up 2.4 percent this quarter. Of the 4.2 percent increase same-store admissions, 2.2 percent came from flu and pneumonia-related admissions.

Net revenues in the fourth quarter increased 36 percent from 583 million last year to 795 million. On a same-store basis, net revenue increased a consist 9.3 percent for the quarter, same-store net inpatient revenue increased 6.4 percent, and outpatient revenue increased 13.1 percent. Net revenue per adjusted admission increased a strong 6.8 percent, or $6,339 versus $5,935.

For the same period last year, this increased 6.1 percent.

Net inpatient revenue per admission increased 2 percent. We had increases in same-store Medicare case mix of 1.6 percent for the quarter and an all-player case mix increase of 1.1 percent.

We have continued to deliver strong EBITDA growth of 25.5 percent increase of 24 million -- from 95 million to 119 million improved from the 18.8 percent increase from the first nine months of 2003. On a same-store basis, EBITDA increased 9 million or 9.2 percent from 95 million to 104 million for the quarter. We've also had income from operations in the selected operating data portion of our 8-K. Consolidated income from operations is 78.8 million versus 62.6 million -- increased of 26 percent. Same-store income from operations increased 12.2 percent -- 70.8 million versus 63.1 million. Same-store EBITDA with the same-store income operations plus depreciation and amortization plus minority interest.

For the fourth-quarter EBITDA margin on a consolidated basis was 15 percent. Down 100 basis points from a year ago, due to low single-digit margins at acquired hospitals. Same-store EBITDA margin was flat at 16.3 percent compared to quarter ended December 31st, 2002.

The flat margin reflects 140 basis point increase in bad debts over the roughly low-level for the fourth quarter of 2002, which offsets some of our same-store improvements. For the fourth quarter our nonsame-store margin was 9.5 percent. The trailing margin for acquisitions in our nonsame-store hospitals this quarter was approximately 6 percent.

As noted earlier, we are also disclosing our same-store income from operations. For the quarter just ended our same-store income from operations as a percentage of revenue was 11.1 percent versus 10.8 percent.

In the fourth quarter, consolidated operating expenses as a percentage of net revenues were 120 basis points, up from the prior year because of higher expense at the acquired hospitals. Payroll benefits decreased 10 basis points, supplies increased 70 basis points, bad debt increased 140 basis points to 10.2 percent. Again, I would like to make the point that in the fourth quarter last year, we had strong collections, as bad debts were 8.8 percent of revenue. Other operating expenses decreased 80 basis points, even will the increase in contract labor of 60 basis points -- this increase in contract labor is partially due to the residual effects of Easton's (indiscernible) late September 2003. On a same-store basis, total operating expenses remained flat with the decrease in payroll of 130 basis points and other operating expenses of 20 basis points, offset by increases in bad debts of 140 basis points and supplies of 10 basis points.

We still had an improvement of 50 basis points at contract labor, which we classify as other operating expenses -- is including with payroll and benefits on a same-store basis. Our use of contract labor -- primarily for nursing -- fulfilled our temporary needs.

On a year-to-date basis, admissions were up 21 percent. Same-store admissions increased 1 percent at the high end of our revised guidance. Adjusted admissions declined four-tenths of a percent. We estimate that our admissions growth for 2003 was affected by higher COBRA utilization in 2002. Admissions following of 2001 and 2002 increases (indiscernible) markets. Additionally (indiscernible) and severe weather and physicians called up for military service, selected services closures and other events affected our admissions for 2003. We estimate that our same-store admissions would have been up 1.7 percent -- adjusted for the events I just noted. Again, this is still below our four-year historical growth trends, due to the unemployment economic conditions.

Net revenues for the year just ended were up a strong 28.8 percent or 634 million from 2.2 billion last year to 2.834 billion this year. On a same-store basis, net revenue increased 187 million, or 8.5 percent for the year just ended.

Inpatient revenue increased 6.4 percent and outpatient revenue increased 11.1 percent. Same-store revenue per adjusted admission increased 9 percent. Last year's same-store revenue per adjusted admission increased 4.3 percent.

Also our same-store revenue per inpatient admission increased 5.2 percent.

For the year, we have continued to deliver strong EBITDA growth, with an increase of 20.6 percent or 74.5 million from the 362 million last year, to 436.5 million this year. On a same-store basis, EBITDA increased 9 percent for the same period. The consolidated EBITDA margin was 15.4 percent for 2003, versus 16.4 for 2002, due to the low margins of the acquired hospitals. Non same-store margin was 9.3 percent versus a trailing margin of about 5 percent for the acquired hospitals.

Same-store margin improved 10 basis points and was held back by the 50 basis point increase in bad debt and the 50 basis point increase in contract labor and a 20 basis point increase in malpractice.

Consolidated income from operations increased 20.4 percent from 290.8 million versus 241.5 million for the prior year. Same-store income from operations was 267.8 million versus 242 million -- increase of 11 percent. Same-store income from operations as a percentage revenue was 11.2 percent versus 11 percent last year.

For the year, consolidated operating expenses as a percentage of net revenues were up 100 basis points from the prior year, because of high operating expenses -- percentages at our recently acquired hospitals. Consolidated payroll and benefits decreased 10 basis points. Bad debts increased 70 basis points and supplies increased 10 basis points.

Other operating expenses increased 30 basis points.

The increase in other operating expenses was again due to an increase of malpractice insurance of 30 basis points and a current rec (ph) labor of 50 basis points. On a same-store basis, total operating expenses improved 10 basis points for a 110 basis point improvement in salaries and benefits, a 20 basis point improvement in supplies, offset by a 50 basis point increase in bad debts and a 70 basis point increase in other operating expenses, which is from contract labor 50 basis points and malpractice up 20 basis points.

Additionally, we have continued to improve our productivity by about 1 percent for the year just ended from a same-store basis.

Net income for the year was 131.5 million compared to 100 million for 2002, an increase of 30.5 million and 31.5 percent. Of the year, we had diluted earnings per share of $1.30 compared to $1 per share last year for 2002.

To conform to requirements of SFAS 145, the extraordinary loss and early extinguishment of debt reported in 2002. It's no longer classified as an extraordinary item. This loss here in 2002, net of taxes, was approximately 5.3 million or 5 cents per share. Adjusted for this item, during 2002, net income for the year would have been -- for 2003 would have increased 24.9 percent and diluted earnings per share would have increased 23.8 percent.

Total AR days (ph) were 65 at December 31st, 2003. This is an increase of two days from December 31st, 2002. Accounts receivable days were up, due to a slowdown in claims processing, resulted in a changeover of a HIPAA EDI transaction standards, which became effective October 16, 2003. Additionally, Mutual of Omaha, our fiscal intermediary, initiated various systems conversions during the third quarter, which have created some various backlogs.

Our last three acquisitions also increased our AR days. AR days without these recent acquisitions would have been 64 at the end of the year.

Strong volume in December also contributed to the year-end increase in AR days.

The allowance for doubtful accounts is 103.7 million, or 15.6 percent at December 31st, 2003 compared to 73.1 million, or 15.4 percent at December 31st, 2002.

We have a very favorable payer mix for the quarter ended December 31st, 2003. Consolidated net revenue by payer source is broken down as follows -- Medicare, 33.8 percent; Medicaid, 12.1 percent; managed care, 20.5 percent; and third party insurance, self-pay, and other, 33.6 percent of net revenue.

For the year ended 2003, consolidated payer mix was broken down as follows -- Medicare, 33 percent; Medicaid, 10.8 percent; managed care, 19.2 percent; third party insurance, self-pay, and other, 37 percent.

Net cash provided by operating activities for the quarter was 45 million, versus 89 million for the fourth quarter of 2002. We did not purchase accounts receivables for the Laredo and Pottstown acquisitions. Our current accounts receivable billed up in this quarter is approximately $37 million which reduced our net cash provided by operating activities in the quarter. Additionally, we made an early payment to our employee benefit trust of approximately 11 million. Adjusted for these accounts receivable billed up, an early benefit trust, our cash flow from operations would have been 93 million versus 89 million -- or approximately a 5 percent increase.

For the year just ended, net cash provided to operating activities totaled 244 million, versus 285 million for 2002, a decrease of 14.6 percent. Again, we did not purchase accounts receivable for the West Tennessee, Pottstown, or Laredo acquisitions. This build up is approximately 81 million and reduced our net cash provided by operating activities for the year. We also made the early payment as mentioned earlier to our benefit trust of 11 million adjusted for the AR build up and early benefit trust payment, our cash flow from operations would have been 336 million or an increase of 17.9 percent. Our cash flow from operations has had a compound annual growth rate of 25.6 percent since 2000, while EBITDA has increased 18.9 percent.

We'll provide a 2004 guidance -- net cash provided by operating activities of 300 to 310 million or approximately 60 percent of our EBITDA guidance, an increase of approximately 24 percent in the guidance.

Total capital expenditures for the quarter just ended were 45.5 million, of which 12.1 million were for replacement hospitals. For the year just ended, we spent 105.2 million remain or 3.7 percent on renovation and equipment and an additional 43.1 million on the replacement hospitals, for a total of 148.3 million or 5.2 percent of revenue. We opened a replacement facility in Virginia in December and should also open a Las Vegas, New Mexico facility middle of second quarter 2004.

The 2004 guidance for capital expenditures, excluding replacement facilities, will be 133 to 136 million and replacement hospital spending will be 13 to 14 million for a total of 146 to 150 million. This amount is almost flat with the 2003 capital expenditure total.

Looking at the balance sheet, as of December 31st, 2003 -- we had 298 million working capital, and approximately 3.4 billion in total assets. We have debt availability on our revolver of approximately 235 million. Our debt to capitalization at the end of the year was 52 percent. As you know, we're completing an additional swap in 2003, in advance of interest rate pressure, to keep the bulk of our debt fixed. Our fixed-rate debt is at 67 percent -- our floating rate debt being 33 percent.

Total stockholders' equity was 1.35 billion at the end of the fourth quarter.

As Wayne mentioned, we have updated our guidance for 2004. This guidance reflects the fact that a Medicare prescription drug improvement and modernization act and also reflects two to four acquisitions for the year. Our revenue guidance will be from 3.3 billion to 3.35 billion. EPS will be from $1.49 to $1.52. We believe that we are well-positioned for continued successful growth. Wayne will now provide a brief recap.

Thanks, Larry. The company was recently included in the Forbes magazine list of the best managed companies in America, published January 12, 2004. So we are greatly honored that Community Health Systems has been included in this impressive list of leading companies across the country. As you can see, we had an excellent year, with continued same-store growth in revenue. I'm very pleased with our results for 2003, especially given the tough healthcare environment we are in. We met our 2003 guidance, issued at the beginning of the year. We completed 10 acquisitions in strong markets and are very well-positioned to be capitalizing on those acquisitions in 2004. We expect our growth to continue as we improve hospital operations, and enhance services and recruit physicians to reduce (indiscernible) migration.

With that, I will now open the call for questions-and-answer period. And if you would like to talk to us after the call, you can reach us at area code 615-373-9600.

(OPERATOR INSTRUCTIONS). Adam Feinstein, Lehman Brothers.

Good morning, everyone. I wanted to ask two questions. First, just on the cash flows Larry, can you talk about the HIPAA issue? We've heard a few companies talk about that so far during the quarter. But, I just wanted to get some more details -- and will that issue clear up in the first quarter? And secondly, you know you guys acquired 10 hospitals. So, obviously that's a drag on margins new term. But, what is your outlook for same-store margins for 2004? Thank you.

Yes, HIPAA we processed about 80 to 85 percent of our claims electronically and working off our various institutions we work with are about halfway into the HIPAA activity. Our clearinghouse had some balance issues. Also there were some new zip code edits. Also, there's a lot of local codes that the intermediaries -- our claim processors and our hire (indiscernible) -- which they don't have eliminated at 331, so we've got another issue to go through there. We had some Medicaid issues in Alabama, Georgia, Illinois, Virginia, and Texas. These are all basically situations which will be fixed. For instance, our AR days, which are up two -- almost the entire increased relates to Medicare increasing about 20 million or 2.3 days since last year. And, I think it will all clear up. We were out at Mutual's offices this quarter -- this last week -- to talk about it, go a little bit faster. We've been down in our clearinghouse. But, I think we'll see some other payers have some HIPAA processing issues in the first quarter and also into the second quarter.

If you are going to look at our guidance -- if you asked a question about same-store margins for next year, we would expect to go up about 50 to 60 basis points next year. Finishing out this year at 15.4 percent, so we should see an increase of 50 to 60 basis points. I think the one thing that was noted is to go back a couple of years -- our malpractice was up 78 basis points -- 2001 over 2000, 2002 over 2001, and last year was up 30 basis points. We think that will moderate (indiscernible) 60 basis points increases having a (indiscernible) a little bit of an increase we got in our projections and guidance for bad debts to go up.

Okay. Thank you.

A.J. Rice, Merrill Lynch.

Two questions. One fairly specific and then a broader one. First, Larry, you mentioned you guys pre-funded or early-paid on the benefit trust. Can you just tell us a little bit more about what is going on with that? And what would be the rationale for paying early on -- what does that do for you?

We generally make payments throughout the year -- we made some, starting January 2003 and we have the right to pre-fund some of our employee benefit trusts for health insurance and we did that. And that gives us an tax deduction, because that's on a cash basis. Since we are self-insured, we funded that early, but (indiscernible) taxes going forward -- 34 percent of that.

Does that payment run through the income statement, or is it --?

No, that's run through the reserves.

Okay, and then I just wanted to more broadly ask you about bad debts. Can you just comment on what you are seeing, in terms of the self-pay trend from quarter-to-quarter? And, maybe what are some of -- you have not had this big change in recent history that some of the other guys have had, although you have experienced some of the same pressure. What are some things you are looking at that would tell you that that is starting to stabilize or turn around -- if I could ask?

Sure. First or all, our consolidated revenue of self-pay is about 13 percent, which is about what it was last year. That's identified pretty much a discharge. Our same-store admits for self-pay are actually flat '03 to '02 and our same-store patient days are actually down 8.6 percent because we are working on the length-of-stay on that.

What is increasing fast is outpatient revenues are going just a little bit faster than impatient. A couple of good things about us are our cash receipts which is a good way to see if we are doing well -- 102 percent this year on a consolidated basis and 103 percent. And, I think, that the charity has moved up also, which is another form of bad debts -- is up 3.2 percent, versus 2.5 percent. Our mix has not changed quite as much. It may be because we are in nonurban markets and have always been taking care of eaters of bad debt or charity, because over 85 percent of our markets were only in hospitals there. But, I would think we would expect at least for the first couple of quarters of 2004 to probably see bad debts continue to go up a little bit.

Okay. All right. Thanks a lot.

David Gempsey, Avondale Partners.

Good morning, guys. In the past Larry, you have given us detail on the acquisition experience, in terms of the classes in the recent and how those multiples have moved over the years. Can you update (multiple speakers) information?

Sure. 2001 which is about 2 percent when we bought it -- 262 million. Now that margin is up to 13 percent -- about what it was at 10.25 -- that's the whole year. Class of 2001 is around 215 million of borrowed revenue was 1 to 2 percent. It's up about 8 percent at the end of 2002. The class of 2003 -- 545 million -- Wayne talk about earlier -- was about a 6 percent margin 5 to 6 percent margin trailing, is now up to 10 percent and we had really good success in our West Tennessee transaction 2003, because we had a good start there and they had a real good year.

Very good. That is helpful. Thank you very much.

Sure.

Robert Mains, Advest Inc..

Good morning. Wayne, the guidance I understand two to four hospitals -- as you said in your comments, you've done 21 over the last three years. Is there anything you are seeing in the acquisition market that's different markedly -- either supply, pricing, etc. -- that, you know, would make you kind of back away a little bit?

Well, we have not seen anything to dramatic -- we've seen a couple of transactions that kind of got out of our range and -- you know -- we've been very disciplined about this all along. So we just back out when things don't work for us. Primarily, because of the fact that there just continues to be a lot of opportunities. We will add one letter of intent. Our pipeline still looks very good. We have been disciplined about the pricing side of it. And one of the things that has helped us and continues to help us a lot, is our reputation in the marketplace. We have not had to do anything extraordinary in pricing. So for us, it has not been an issue at all. But, you know, we have seen a few unusual transactions, I would say. But I don't think that necessarily is a trend. I think that has to do more with individual companies needing to make an acquisition.

Right. And, supply -- could you comment on that?

Are you talking about supply of hospitals?

Yeah.

There are 365 out there now. We've lowered one-tenth and there are 20 -- on top of that, there's probably somewhere around 120 or faith-based (ph) we could probably go after. So, I think there is plenty and at least for the next many, many years.

The only trend, probably, that we've seen is that we seem to see larger hospitals now, than we have seen in the past. One of the strengths that we have is the fact that we can acquire a smaller hospital and are able to get those margins up over 20 percent, as well as a larger one. So, it does give us a lot of flexibility in terms of targets. But, I would say if there is anything that is changed over the last couple of years, it is the size of those facilities that we have opportunities in.

Okay. Great. Larry, one number question to clarify -- the 4.2 percent admission growth, you said 2.2 of that was flu-related?

Yes.

Okay. I got that right.

Just a little bit above half.

Thank you.

Andrew Bhak, Goldman Sachs.

Good morning. Congratulations on the quarter and year. You know, I guess embedded in the guidance for '04 are two to four acquisitions. And I'm just wondering, obviously a lot of moving parts. That is just a general objective. How should we think about the funding for those acquisitions? The portion that you would expect, or even the range that you would expect to come from internally generated funds? And I'm also curious, Larry, from a CFO's standpoint, how you think about financial capacity to add debt? What you're comfortable with, in terms of leverage ratios -- I know you guys have a decent amount available. And I am just wondering what you believe the financial capacity of the enterprise is, under this guidance that you have laid out? Thanks.

Well, I think we also provided guidance for net cash and operating activities of 300 to 310 million and of course our CapEx guidance was about 150 million. So that gives us in the neighborhood of $150 million, maybe like 125 million in some other investment spending we do, to go towards $150 million that we've got embedded in our guidance. So, there may be a need to borrow $25 million or so if we actually pay $150 million in acquisitions. We have the $235 million availability, which is there through 2008 -- pretty good rates. We also have an AR securitization opportunity which we are looking at, up to $150 million already approved in our credit agreement. So we have plenty of availability. As it relates to where we would put it at the balance sheet goes, somewhere in the -- it's at 52 percent now and we're somewhere between 50 to 55 percent debt-to-cap.

Okay. And, if it gets too complicated, I can take this off-line. Beyond the guidance -- what you had laid out -- I guess, what I was sort of getting at is -- you have had the good fortune of exceeding your acquisition targets. So I was just trying to get a better sense of, you know, given what's embedded in the two to four, how much, effectively, incremental capacity you would have in terms of financial leverage?

Based on (indiscernible) of about 200 to $220 million of the credit availability left at the end of the year, based on those projections, plus the $150 million of the AR securitization, which we are looking at. You might keep in mind, when we bought 10 hospitals this year, our debt-to-cap went from 50 to 52 percent. So we are still in very good shape on our debt-to-cap rate. We are in very, very good shape on all of our covenants. We are also, as I said, have about 125 million in free cash flow next year built in our guidance.

Okay. Great. Very instructive. And, if I could hit one last -- could you just talk a little bit more in detail on asset -- the securitization and what your thoughts are there? That will be it for me. Thanks.

Securitization is something that was brought to us. And it's $150 million availability and it's at pretty good favorable rates and I think some people in the industry have done it -- some have not -- we are just looking -- working through that to see if it would be a good idea for us, where we would secure the non-government receivables through a bank and get advanced funding of those. It would last for a couple of years.

Interesting. Thank you very much.

Joseph Girelli, Oppenheimer & Co..

Good morning, guys. I was wondering -- the FDA has come out with a shortened rule on the bar coding -- how that affects either your expenditures or your approach to information technology in either the individual system or for the Company across the board --?

Yeah, we have about 4 or 5 different pharmacy systems. One of the things we're analyzing now is how we can combine all that, so that we can comply where the bar-coding actually is very good for the industry -- it's very good for patient safety, you know, all the right things there. So, it will take us a little while to get there. Some of the urban companies are ahead of us, in terms of making progress on that. But, I think we will make a lot of progress very quickly on that now.

Will that have any impact on your CapEx in-so-far as either maintenance replacement hospitals or acquisitions and/or do you anticipate that it will reduce your pharmaceutical costs, going forward?

It will not have much impact on it. The number is relatively small for us to convert to one system across the board -- it's less than a couple of million dollars, when it is all said and done. So, it will not very much impact in terms of CapEx. I think it is a little early yet, to determine what impact it might have on growth cost.

Okay. Thanks.

I just might add we have -- one of the things we've done very good job -- I think we've got some of the lowest supply costs as a percentage of revenue -- we've been very fortunate (indiscernible) put in as far as generic utilization -- so we don't know if that new system will help that or not, but we've done a good job with what we have now -- on keeping our supply cost low.

Okay. Thank you.

Kemp Daliver, SG Cowen Securities.

Thanks and good morning. Just quickly, with regard to your expansion plans in '04, and on the service side -- any thoughts with regard to what kind of acuity increase is likely and which service areas are getting more emphasis in '04 and '05? Thanks.

Let me just make a couple of general comments about that and then Larry can kind of give the detail. One of the things that we think we have is not only do we have volume opportunities -- organic volume opportunities -- in the markets where we operate, but we also believe that we have acuity opportunities --that our case-mix index has been relatively low, even though it is up a little bit this quarter, which I think is evidence that we're beginning to make some progress on our case mix index. But we have directed a lot of our attention in terms of improving acuity in our facilities as well as recruiting physicians which has to do with the volume side of it. So we do think we have got a lot of opportunity, organically, kind of going forward. Most of this has to do with enhanced surgical procedures and doing larger and more complex procedures. Larry, you want to kind of --?

Yeah, just to put some color on that -- Medicare case mix at the end of the year was 1.16 and on a consolidated case mix for the end of the quarter was 1.18 -- somewhat below that because of acquisitions but on a same-store basis, also. The type of projects we're looking at -- we've got two cardiac casts (ph) -- we're working on four OR improvements, three outpatient areas, three diagnostic centers and eight ERs are underway for 2004. Now, they won't all get done in 2004, but they will be worked on and finished in 2004 or early 2005. And we are very diligent about trying to make sure there is a good return on all our projects -- we go back three or four years afterwards to make sure we are hitting our models and generating and internal rate of return we are looking at is about above 20 percent and then also a mutliple EBITDA under 5 and for most part, we've done a really good job on that.

That is great. Just one question on acquisitions. What kind of progress are you making with Chester County, South Carolina?

We don't really comment on specific acquisitions. It is a highly competitive business, as you know.

All right. Thanks a lot.

Joel Ray, Wachovia Securities.

Good morning, folks. I was wondering if you could elaborate a little bit for us, what the outlook is on wage rates, as well as this issue of the contract labor in the quarter. I just want to make sure I have that accurate.

Well, wage rates for us are going up about 4.5 percent and we have done a good job -- contract labor last quarter was 3 percent of revenue and this quarter it's 2.4 percent. So, it came down. It was up over last year for the quarter -- up 60 basis points. I expect that we will continue to make some progress in that ending 2004 -- it's an opportunity for us to improve our results by continuing to reduce our contract labor.

Was there anything specific that drove that up? I think you mentioned a strike at a hospital?

Well, the strike ended in September. But there was still some usage in Easton and a few other hospitals where we have some good volume growth, that we had to use some contract labor. Contract labor avoiding -- when you've got good high volume is just something that has to happen every now-and-then in certain markets.

Finally, unrelated to this -- I know that there is a shelf registration out there for the affiliates of Forceman (ph). Is there anything that you can discuss with us, as far as where they are on that or what the objectives are -- timing or anything else?

As Larry says over-and-over again, we been very well-trained our lawyers. And we really can't discuss that all based on the fact that we're in registration.

Thanks very much.

Charles Lynch, CIBC World Markets.

Good morning. I have kind of a broad question related to the operating cash flow discussion you have. Is, I guess to start off, is it the best way to looking at, as you have kind of budget and look at a target OCF, is the best way to look at that as some kind of percentage or multiple of EBITDA?

That is how we like to look at it. We generally have had -- in 2002 -- we were like 80 percent of our EBITDA and we were probably in the 60 percent range for 2003. I think, for '04, we are anticipating being at 60 percent. If you look at, historically, I mean, way back -- like six to eight years back, it's been running 50 to 55 percent EBITDA, as everybody's gotten a little better trying to collect the money a little faster -- it's probably gotten a little bit. Some tax savings -- people put in some various taxes strategies. But I would say that's, in our opinion, the best way to look at it.

Yeah, well, I think you just hit on what I was thinking about that, you know, that's going to swing from year-to-year. But you think around that 60 percent range is -- at least for you, kind of an appropriate target and expectation?

Yes.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS). Darren Larrick (ph), Piper Jaffray.

Thanks. Good morning, everyone. Just back to the length-of-stay question. I just wanted to follow-up and understand a little bit better why that has moved up -- maybe you addressed it already. But, to the extent that that is associated with Laredo. Maybe you can just talk to us about some of the things you are doing there to bring that down and then I will have a follow-up. Thanks.

The consolidate would be due to Laredo and we are working very hard on that. We also -- and Petersburg had a long stay which we are working on and both of those -- we've got plans in place which Wayne and I just reviewed here in the last two weeks. And we're making some progress on those too. More importantly, same-store was up 9.5 percent. But, most of it was in the area of Medicare which was up 5 percent and our surgical case mix was real strong. Total case mix was up 1.6 percent and I believe are surgical case mix was up 1.8 percent, which as Wayne mentioned earlier, recruiting the surgeons that we did -- specialists in 2003 and again in 2002 has helped us grow our case mix, so our length of stay, which has always been one of the lowest, is starting to move up a little bit.

Okay. I just, I guess just a broader question, with regard to the AR buildup and, you know, it is not unusual that we are seeing you not buying AR. Maybe, Larry, if you just comment on that trend overall in the acquisition arena? And whether, you know, you are going to move to this entirely -- of just not taking up the AR when you buy hospitals?

I think it will vary. If we can negotiate a price that we liked -- that we think is the right price, we will do that. And we have had some success in doing that. But at this point, it really has no effect on the operations. Because, what we've really got to make sure is we are getting the right value for it. And sometimes the sellers just don't want to get into an argument. They think they're worth more and also, we actually started to take the AR and make sure the prior earnings are correct. So, it's one of the things we do to make sure the run rate or revenue and earnings is correct going into it. I would imagine, some of our larger ones will probably not sell it to us and we generally still do the collection for them and then give it back to them to go on to a second collector. I know in the case Petersburg, we did buy it -- they had a tremendous amount of AR which has reduced our allowance a little bit -- because we bought that in August and we have been collecting that in seeing some accounts written off. I want to make one other point I forgot to about your question (indiscernible) length-of-stay actually has dropped about 7 percent this quarter which is healthy for us when that happens. But I would think that it really varies on what the seller thinks it's worth what we think it's worth. We do a lot of work on their cash receipts and their allowances and bad debts to make sure that what we buy, we can collect.

Okay. Great. And then just one quicky here. If you could just address for us. Embedded in your guidance, how much does the Medicare Drug Bill mean to you 2004?

Deep inside our guidance, we've got built-in about $8 million of extra revenue and pretax income -- the dish is about 6 million plus of that, which goes into effect April 1st, and that means it's about 8 million plus, or there-abouts, for the year. And, the wage index is worth about 1.4 (technical difficulty) of those in October. So, we'll get about $8 million of pretax benefit which is around 3 to 4 cents in 2004. And of course, next year in 2005, you get the full-year to dish and the full year wage index.

One other point -- we don't buy AR -- back to your previous question. We do put in an estimate of the AR we are not buying for working capital buildup -- we'll say we are paying six times multiple as an estimate of that costs in our understanding of what we're going to pay for the franchise.

Fair enough. Thank you.

A.J. Rice, Merrill Lynch.

Yeah, just real quick on a couple of other things. I know when you guys set up the captive insurance subsidiary for your malpractice, I think the comment was made that you would start to see some benefits from that in the early part -- or in '04, I guess. Can you just comment, maybe update us on that and whether there is anything from that that is factored into the guidance?

What we have factored into the guidance -- I think this year we're about 1.6 percent. And I think we expect our costs to maybe go up 10 basis points on the comparable type hospitals. I would also probably say that we've got some early history of what's going on with reinsurance premiums and I think premiums which have been going up substantially. We think we're a little bit lower reinsurance. Our claims experience has been relatively good this year. You know, we have actually paid out about 175 to 200 claims on average each your and the average is actually better this year than it was in preceding years -- we actually average about $36,000 a claim that -- when we make payments out. Also, our reserves, which were 23 million last year are up to 40 million on the balance sheet now. So, we've done a good job in strengthening reserves. So, I would hope that also one other point about that subject is we had some good news in the malpractice side in Texas, a little bit in Florida because they put in the cap on noneconomic. So, I would think we would better. We try to factor it into our guidance and based our claims experience, we'll see later in the year if we are correct about that.

And then, the other thing I was going to ask you about -- I know you mentioned this, but I don't know if it was fully explained, that you had growth in your same-store revenues on the outpatient side of about 13 percent but the volumes were sort of flattish, or you know, (indiscernible). What explains that big same-store revenue growth on the outpatient side?

Well, first, the volumes -- the calculation for volume is based on how gross revenue moves -- it's not a unit count on volume and basically our inpatient revenue is growing faster than our outpatient revenue in cardiology, lab, radiology, and ER. Our outpatient volume -- MRIs are up about 9 percent, lab is up about 23 percent -- probably a fair amount of that was flu-driven, imaging is up 7 percent, and our CAT scans were up 15 to 16 percent. So, we had very good unit growth calculation with adjusted admissions is more driven off the revenue. From an overall outpatient revenue, it was up about 35 percent -- probably 60 percent of that is probably due to rates and the rest is intensity mix for the quarter. We had very good Blue Cross growth, which is a pretty good outpatient payer. And, which helped our overall growth for outpatient up to the 13 percent.

Okay. Great. Thanks.

At this time, there are no further questions. Gentlemen, are there any closing remarks?

Yes, please. Thank you for your time this morning. We believe that Community Health Systems has proven operating models well-positioned for continued success in acquiring hospitals and enhancing the quality of health care in the local communities we serve. We want to specifically thank our management team and staff, our hospital Chief Executive Officer, our Chief Financial Officers and Chief Nursing Officers, and Group Operators for their excellent operating performance during the year that has contributed to our success and excellent results.

We remain focused on our consistent business strategy and improving results. Once again, if you have any questions, you can reach us at area code 615-373-9600. Thank you.

Thank you for participating in today's Community Health Systems fourth quarter earnings release conference call. You may now disconnect.