Community Health Systems Inc (CYH) 2004 Q4 法說會逐字稿

Good morning, my name is Michelle and I will be your conference facilitator today. At this time I would like to welcome everyone to the Community Health Systems fourth quarter 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I would like to turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to the 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 ending December 31, 2004. 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 website, a slide presentation accompanies our prepared marks.

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'd like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisition transactions, and other events or 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 based on management's current expectations or beliefs, as well as assumptions made by and 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 statements on S-3 and form S-4, on 10-K for the year ended December 3 1, 2003, for -- form 10-Q for the quarter ended -- quarters ended March 31, 2004, June 30, 2004, and September 30, 2004.

And form 8-K filed February 24, 2005. These filings identify important risk factors and other uncertainties that could cause certain actual results to differ from those contained in the forward-looking statements. We are very pleased with Community Health Systems's strong financial performance for the quarter. This is our 19th straight quarter to meet or beat street expectations. Our performance in the fourth quarter is better than expected when compared with our impressive finish in 2003, in light of the fact that the flu season failed to materialize at the end of 2004.

Our successful expense management in tandem with our focus on our effective standardized operating platform, a proven acquisition strategy, successful physician recruiting, and our favorable reputation in the market, all worked together to allow us to surpass earnings per share, our earnings per share objectives. Net operating revenues for the quarter ended December 31, 2004, totaled 872 million, 11 % increase over the prior year, compared with 786 million for the same period last year.

Adjusted EBITDA was 130 million, a 10 % increase over the same period a year ago. Adjusted EBITDA is EBITDA adjusted to exclude discontinued operations, loss from early extinguishment of debt and minority interest in earnings. Further references to EBITDA during the call will be based on adjusted EBITDA. Income from continuing operations, is 40.6 million, an increase of 13 % or $0.44 per share. Compared with 35.9 million, or $0.35 per share for the quart -- fourth quarter last year. Net operating revenues for the year just ended totaled 3.3 billion, a 19.2 % increase over the prior year. EBITDA was 497.1 million, a 14.6 % increase.

Increase -- income from continuing operations for the year ended December 31, 2004 was 158.2 million, or $1.58 per share, a 21.5 % increase compared to 132 million, or $1.30 per share last year. With that, I would like to review some of the key accomplishments for the quarter. First, our same store admissions were down 3.4 % for the quarter. As you recall, this is up against a difficult comp of 4.2 % generated by the unusually high flu and respiratory volume in the fourth quarter last year. Same store adjusted admissions were down 1.3 %for the quarter. Same store net revenues increased 5.3 %. We continue to demonstrate strong leadership in the acquisition arena.

Our Galesburg, Illinois and Phoenixville, Pennsylvania acquisitions have been smoothly integrated into our network of nonurban hospitals and we expect them to provide additional growth opportunities for the company, as we expand our coverage into new markets. We also announced the execution of a definitive agreement to acquire Chestnut Hill, and 183-bed acute care general hospital with trailing revenues of approximately 115 million, and EBI -- EBITDA margin in the low single digits. Chestnut Hill was an attractively priced property, with solid upside potential.

This facility also enhances our, the network of our four hospitals in Pennsylvania that are within 20 to 40 miles. The company recruited 525 new physicians for 2004. With over 60 % specialists. This compares to 508 physicians for the prior year. The company expected to recruit 550 physicians for 2005, weave have had excellent physician retention, with turnover approximately 5 % in 2004. We also updated EPS guidance for 2005 in our 8-K filing last night with the SEC. To reiterate, our 2005 projected revenue will be 3.625 billion, to 3.6 -- 3.675 billion, an increase of 13 to 14 %. EBITDA will be 555 million to 575, a 13 to 17 % increase. And EPS for 2005 range from $1.78 to $1.88, a 13 to 19 % increase.

We also expect to acquire 2 to 4 hospitals during the year. Same store admission guidance will be 1.5 to 3 % for the year. At this point, I would like to turn the call other to Larry Cash to provide you with a summary of our financial results.

Thank you, Wayne. We are very pleased with the financial and operating results for the quarter and for 2004. Our consolidated emissions growth in the fourth quarter was 1% compared to the same period last year. Adjusted emissions which factors in outpatient business had a 3.9 % growth rate over the fourth quarter of last year. Our same store emissions decreased 3.4 % across a strong comp of 4.2 % in the fourth quarter of 2003. Same store Medicare emissions decreased 4.7 %. Same store adjusted visits were down 1.3 %. In reviewing our fourth quarter admission volume, the following specifics contributed to the decline. The lack of the flu diagnosis in the fourth quarter represented a decline of approximately 2,000 admissions compared to the fourth quarter of 2003.

Respiratory admissions recorded also declined 1300 admissions year-over-year. We have a continued negative hurricane impact from two hospitals with a loss of approximately 200 admissions. Our OB admissions were off approximately 150 admissions due to a combination of unit flows versus malpractice issues. This represents a total of 3,650 admissions, and with these adjustments, admissions would have increased 1.8 % for the quarter. And considering our volume trend, it should be noted the fourth quarter flu and respiratory volume was 30 % below a strong 2003, but also 8 % below the fourth quarter of 2002. Additionally, we did see a 0.4 % or 40 basis points decrease in our same store admissions in the fourth quarter. Excluding flu and respiratory admissions in the fourth quarter of 2003, and 2004, our same store admissions would have increased 1.7 %.

Net revenues in the fourth quarter increased 10.9 %, from 786 million to 872 million, on a same store basis. Net revenue increased 5.3 % for the quarter. Same store inpatient revenue increased 4.6 %, and outpatient revenue increased 5.8 %. Same store surgeries increased 4.5 % with an increase in outpatient surgery volume of 5.8 %. Same store inpatient revenue per admission increased 8.3%, a significant increase over the fir nine months of 2004. Same store net revenue per adjusted admission increased 6.7 %. Our same store net revenue on a sequential basis increased 3.7 %. Our consolidated Medicare case mix increased 0.4 %. We had a small decrease in same store case mix and our all pair case mix increased 0.7 % for the quarter. We have continued to deliver EBITDA growth with a 9.6 % increase to 11 million from 119 million to 130 million.

On a same store basis, EBITDA increased 7 million or 4. -- or 5.9 % from 117 million to 124 million. EBITDA was reduced by approximately 1 million or .8 %, for the fourth quarter, due to the effects of the lingering effects of the third quarter hurricanes. Consolidated income from operations was 88 million versus 79 million, an increase of 10.9 %. Same store income from operations increased 7.5 %. For the fourth quarter, EBITDA margin on a consolidated basis was 14.9 % down 20 basis points in a year ago, due to the low single digit margins of acquired hospitals. On an sequential basis, consolidated margin increased 60 basis points. The same store EBITDA margin was flat at 15 % compared to the quarter ended December 31, 2003. Same store margin would've improved 10 basis points had it not been for the hurricane lingering effects.

For the fourth quarter, our non same store margin was 12.7 %. The trailing margin before acquisition of the non-same store hospitals was approximately 7 %. For the quarter, our consolidated income from operations as a percent of revenue was 10.1 unchanged from the period a year ago, on a same store basis, was 10.1 to 9.9. In the fourth quarter, consolidated operating expenses, the percentage of net revenue, were up 20 basis points, payroll and benefits decreased 10 basis points and supplies increased 20 basis points. Due to the non -- same store acquisitions. Bad debt increased 10 basis points to 10.3 %. Flat when compared to the first nine months of 2004, and 20 basis points down from the third quarter. Other operating expenses were flat. On a same store basis, total operating expenses remain flat.

The decreases in payroll and supplies of 10 basis points offset the increases in bad debt and other operating expenses of 10 basis points. The company did an outstanding job managing all same store expenses with only 5.2 % increase during the quarter, with the volume changes we had compared with 7 % increase for the first nine months of 2004. For the year just ended admissions are up 11.5 % and adjusted admissions are up 13.1 %. Same store admissions decreased .2% and adjusted admissions were up 1.3 %.

Same store self pay admissions in absolute terms were down year-over-year about 20 basis points, and down 10 basis points as a percentage of total admissions. 2004 same store admissions for items discussed in third or fourth quarter, once you adjust for that, would have been up 1.8%. Our annual guidance for the calendar 2005, for same store admissions remains 1.5 or 3 %. Net revenues for the year just ended increased a strong 19.2 %, or 536 million, from 2.8 billion to 3.3 billion this year. On a same store basis, net revenue increased 6.6 %. Inpatient revenue increased 5 %, and outpatient revenue increased a strong 8.3 %. Same store revenue per adjusted admission increased 5.3 %. Last year, same store revenue per adjusted admission increased 9 %.

Our same store surgery guidance was up 5.3 % for the year. Medicare case mix for the year ended December 3 1, 2004, increased 1 % consolidated and 0.2% on a same store basis. For the year, we continued delivery of EBITDA growth with an increase of 14.6 % from 434 million to 497. EBITDA would increase to approximately 4.7 million more or 1 % after adjusting for the hurricane affect for the third and fourth quarters and expenses incurred in connection with the registration and offer of common stock and repurchase of common stock.

On a same store basis, EBITDA increased 6.9 % for the same period, the consolidated margin was 14.9 % for 2004, versus 15.5 % for 2003, with the decrease due to the low margin acquired hospitals. And the marg wouldn't have been 10 basis points higher due to the hurricane effect and the operating expenses. non-same store margin was 9.8 % versus the trailing 7 % for acquired hospitals. Same store margin improved 10 basis points, and was held back by 10 basis point effect of the hurricane and operating expenses.

A 30 basis point increase of bad debt offset by improvements in payroll and other operating. Consolidated income from operations increased 16.3 % from 339 million to 291 million. Same store income from operations had an increase of 9.5 %. Same store income from operations as a percentage of revenue was 10.4 % versus 10.4 % the last year. For the year, consolidated operating expenses, as a percentage of net revenues, were up 60 basis points from the prior year, because of the high operating expenses at our recently acquired hospitals.

Consolidated payroll benefits were flat, bad debts increased 60 basis points, and supplies increased 40 basis points, and other operating expenses decreased or improved 40 basis points. The improvement in other operating expenses was due to the 40 basis point decrease in contract labor and a 10 basis point decrease in malpractice. On a same store basis, total operating expenses improved 10 basis points, due to a 10 basis points improvement in salaries and benefits.

And a 30 basis point improvement in other operating expenses. Offset by 30 basis points in recent bad debts. Contract labor and malpractice expense contributed to the decrease in other operating expenses. Combining payroll and contract labor with the same core prisms was 50 basis points. Additionally, we've continue to improve our productivity by 1 % for the year, adjusted on a same store basis, even with the less volume (indiscernible). All of our hospitals have a charity policy. We also have an administrative self pay discount. Practiced on a selected basis.

For the year just ended, same store self pay admissions as a percentage of total admissions were down 10 basis points in an absolute term down by 300 admissions. Same store self pay revenue decreased 40 basis points from 2003 to 2004. Consolidated bad debt's 10.3 %, for the year, versus 9.7 for 2003. A bad debt does appear to be stabilizing in the mid 10 % range. The rate of increase have slowed from the first six months of the year to the last six months. Consolidated bad debt increased 80 basis points for the first six months versus 40 basis points for the last six months.

non-same store bad -- bad debt is running higher than same store and our consolidated bad debt, charity, and administrator discounts are up 10 basis points for the quarter, 16.3 % and 190 basis points for the year. Representing a 60 basis point increase in bad debts, 110 in charity, and 20 basis point for administrative self P&H pay discounts. Our 2005 guidance for bad debt is 10.3 to 10.5 %. Consolidated cash receipts of collectible net revenue for the year just ended was 103 % and will the same number for 2003. Total AR days were 63, at December 31, 2004. This is a decrease from December 31, 2003, to and unchanged from September 30 of 2004. The allowance for doubtful accounts was 286 million or 32.4 % at December 31, 2004.

We continue to have a favorable payer index for the quarter ended December 31, 2004, consolidated debt revenue by payroll source was as follow, Medicare 32 %, Medicaid, 10.8%, managed care, 23.2 %, self pay, 12 % and private / other 22 % of net revenue. For year ended December 31, 2004, the consolidated payer mix was Medicare, 31.9, Medicaid 10.5, managed care 21.8, self pay 13 %, and private /other 22.8 %. We had excellent cash flow from operations for the quarter of 63 million versus 45 million for the quarter of 2000 -- fourth quarter of 2003, an increase of 43 -- 46 %.

Cash flow from operations for the year ended December 31 was 326 million, versus 244 million for the same period a year ago an increase of 34 %. Our percentage of cash from operating activities to EBITDA was approximately 66 % for 2004, and 56 % for 2003. We provided 2005 guidance or cash provided by operating activities of 325 to 340 million, approximately 60 % of our guided EBITDA. Total capital expenditures for the quarter just ended were 39 million. For the year just ended we spend 164 million or 14.5 million for replacement hospitals, or 4.9 % on revenue. We did complete the Las Vegas, New Mexico replacement hospital in the second quarter, with 54 beds. .

Our capital expenditure guidance for 2005 will be 170 to 180 million. Or approximately 4.7 % of net revenue. We completed in December of 2004, an offering of 300 million of principal debt of 6.5 %, senior subordinating notes due from 2002. The company used the net proceeds from offering, repaid the bonds from the revolver, with senior secured credit facility and for general corporate purposes. At the end of of the year we had 82 million in cash and last year we had 16.3 million. At the end of the year, the company had available credit of 400 million from it's revolving credit line. In addition, we have a $400 million -- (indiscernible) -- within our term loans. We believe we have sufficient availability to fulfill our acquisition plans.

Looking at the balance sheet at the December 31, 2004, we had 453 million working capital and 3.6 billion in total assets. Our debt to capitalization at year end was 59 % and our fixed rate debt is 70 %. Total stockholder's equity is 1.24 billion at the end of the fourth quarter. For the year, earnings per share from continuing operations increased 21.5 %. As reported, income from continuing operations for the year ended December 31, 2004, was reduced by approximately $0.03 per share, as a result of the stock offerings to common stock but also from the early extinguishment of debt and result from the third quarter hurricanes.

The company terminated its lease for Scott County Hospital, Oneida, Texas, on January 31, 2005, and in the first quarter of 2005, the company entered into two definitive agreements to sell four smaller hospitals. These transactions should close at the end of the first quarter, early second quarter. We have adjusted our annual 2005 guidance to reflect these divestitures. Included in our 2005 guidance was quarterly information and again on an annual basis, EPS will be from $1.78 to $1.88. Wayne will now provide a brief recap.

Thanks, Larry. The company was included in the Forbes Magazine Plant 400 list of best big companies in America published on January 10, 2005, for the second year in a row. We're greatly honored that Community Health Systems has been included in this impressive list of leading companies across the country, and also, we want to acknowledge and we're very pleased and proud that Larry Cash was named Health Facilities CFO of the year, in the January 2005 issue of Institutional Investor. As you can see, we've had an excellent year in 2004.

We expect our growth to continue as we improve hospital operations, add enhanced services, and recruit physicians to reduce out-migration. Our acquisition strategy will continue to be a strong component of our success, enabling us to grow our operating base and extend services into new communities, while delivering greater value to our shareholders. With that, I'd now open the call for questions and answer period and if you'd like to talk to us after the call, you can reach us at area code 615-373-9600. Michelle, we're ready to take questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lori Price with J.P. Morgan.

HI. Two questions if I could, one is you saw very good surgery growth in the quarter and I'm wondering if that growth has been concentrated in any particular markets or any particular kinds of procedures, or whether it was broad-based?

Yeah, it is generally across the board and it is fairly broad based. And some of it may be a little heavier in the northeast where we have a little bit larger facility but by and large it's pretty much across the country.

And any particular kind of procedures?

We, I guess we're seeing a little more orthopedics, and -- but nothing, nothing significant enough to, you know make the case that we have a significant growth in a particular area.

Okay. And then the other question, relative to your guidance as it relates to bad debt ratio, given that your self pay revenues have been trending down in the last couple of quarters and your uninsured admissions are moderating, what assumption in trend, under lies that 10.3 to 10.5 guidance for the year?

And what I'm getting at is, are you assuming that your uninsured admits and self pay revenues as a percentage of totals are comparable to '05 to '05 overall -- to '04 overall or are you assuming that you're carrying through the more recent 4 Q trend into 5 Q? Thanks.

Well, you know, we were down just slightly for the year and a little bit down in the fourth quarter. We generally capture most of our self pay business, you know, in our markets, where 85 % is [inaudible] hospitals. So we would expect to be a similar trend of admission, although as our other admissions improve the percent would get a little bit better. The other thing we are -- we've got some assumptions on is, our self pay point of service collections have been improving quite a bit this year over last year, and we're like collecting maybe 6 % versus 3 % a year ago, and we expect that to continue and maybe get a little bit better going forward.

The other thing about bad debt, is you know, generally the charges that go -- that the bad debts are considering, go up a little faster than net revenue, and we're trying to consider that also and we think from what we're seeing we should be within the 10.3 to 10.5 %, but no big reduction in self pay admissions.

Lori I remind you we have also had less volatility in our bad debt, than other people in the industry primarily because we started out with higher bad debt because we als -- you know, 85% aren't sold as we're the only hospital and we take all comers. So, ours is a, we -- we think that's a, you know, at least it tells us that at least it is moderating, but within the same range as it was last year.

Okay. Great. Thank you.

Your next question comes from Oksanna Butler with Smith Barney.

Thank you, good morning. My first question is just on pricing. You can tell us, please, what your net revenue per adjusted admission would have been if you strip out the -- the discontinued operations? And in addition, how much growth did you see from the Medicare pricing, what can we expect to see going forward given your increase in surgery growth?

The Medicare, you know, we had about a 4 to 5 % increase, on October 1, as a result of all the changes, we expect that to continue, we're getting a little benefit from the dish, for at least one more quarter, after this one, without the wage index adjust and a smaller benefit for outlyers. The discontinued operations are out of the -- of course, the preceding quarters, the two hospitals we sold in August of 2004, and one we put in discontinued operations, the ones that we have planned or signed a definitive agreement on we'll start providing data on that after they close.

Clearly, third row from per revenue for adjusted admission is last in the company average but we've not restated 2004 for those transactions, the ones that are closed, but when they are restated they would probably give us a little bit higher growth in revenue per adjusted admission because there's less intensity involved and so we had a little less success of physician recruitment in those markets.

Okay. And in terms of the supply costs, I'm assuming that the increase in supply costs partly reflected the growth in surgery. Can you give us a sense as to what we can expect going forward? Are we now at a new run rate in terms of supply costs? Are there different contractual arrangements that you can see providing some benefit going forward?

Just before Larry answers the detail on that, keep in mind we have changed GPOs, which we think we have a good opportunity in terms of reducing our supply cost going forward. But we are very compliant company, over 90 % in terms of contract purchasing, so we think theres a good opportunity there, and none of that's built into our guidance but we do think there's an opportunity.

On the supplies, one of the reasons they were, what they were is the same store actually improved 10 basis points in the quarter, but it was up 20 basis points consolidated, that's because one of the hospitals -- well the non-same store supply expenses, in the high teens, much higher than the 12 %, which is just an opportunity for us, although one of those non same store hospitals, does have some oncology services which will be a little bit higher.

Where we saw some opportunity, on -- on same store suppliers they were up about 10 basis points for implants and drugs and as Wayne said that's one of the benefits we will get from the GPO, we think, from outside. I would think we're probably going to be around a 12 % going forward. We have got factored in a 10 to 20 basis points improvement in our same store performance for 2005, improving supplies.

Thank you, very much.

Thank you.

Your next question comes from Gary Lieberman with Morgan Stanley.

Thanks, good morning. Will some of you talk a little bit more about the bad debt trend? It looks like when you look at the self insured admissions the trends look positive. Looking at the numbers overall, adding up total uncompensated care, I was looking at the charity and the discounts that you disclosed, it looks like it was up a little bit sequentially. So, I just want to understand and reconcile how we should think about that in light of the fact that some of the self pray trends seem somewhat favorable.

Yes, there is a little bit of a misunderstanding in the charity bad debts and discounts we've had done. We were actually 16.3 % for the fourth quarter and 16.2 % for the third quarter. Some of the hospitals that we sold in the third quarter of 2004 and one we had in discontinued operations, have not been restated from the prior numbers, but really, sequentially at 16.2, went to 16.3 %, so it is basically flat from quarter to quarter. Last year, in this quarter it was 16.2 when you look at bad debts, charity, and our administrative discounts. We are up on a year to date basis, from 16.4 to 14.5 %. But there has not been a sequential increase in our bad debts, charity, administrative discounts. It has to do with the handling of discontinued and the sales.

And so in aggregate, would you expect that to maintain relatively steady going into -- going into '05?

I think we'll be somewhere in the 16 to 16.5 % range. You know, the charity in the last quarter was about 3.9 % versus 4 %. And it has been up to year to date. So our thoughts it would be somewhere in that -- charity could be go up a little bit because there has been a couple of situations where some Medicaid enrollment has come out, but I would think it'd be somewhere in the 16.5 % range. And as it was pretty flat from third quarter to fourth quarter.

Okay. And just one follow-up. Could you comment on the acquisition environment, what you're seeing, it sounded like through part of '04, there had been some, you know, new private money that was looking at acquisitions? Is the -- incrementally, is the environment more competitive, less competitive, or unchanged?

Yeah, I don't think it has changed too dramatically, you know, we did two acquisitions in '04, we did 10 in '03, and we currently have a definitive agreement on Chestnut Hill as we mentioned which we'll close very soon and then we have a letter of intent on another facility, so we basically are already about where we've given guidance for in terms of revenue for the year. And then the pipeline for us looks very good, we have a two or three very good projects that we're working on. So hopefully, we will do more than two for the year.

Having said that, I think the competition is about the same. I think it's the same people that we've seen in the past. We have seen, not necessarily private equity money but we have seen a couple of not-for-profits re-enter the market and participate in a couple of acquisitions, primarily, though, those were in one state. We haven't seen that generally across the board. Pricing continues to be about the same. You know, we've been paying, you know, 75 % of net revenue over the last three year, when you put last year and the prior two years into that.

With a relatively low margin hospitals, you know, go back a couple year, they were about 2%, last year they were about 6% or so. So I don't think that's changed dramatically. The opportunities -- there continues to be a number of opportunities for us in the marketplace, so we're encouraged about acquisitions. As a matter of fact, we think we should have a good, strong year.

Great. Thanks a lot.

Thank you.

Your next question comes from AJ Rice with Merrill Lynch.

Hi, everybody. A couple of thing, if I could, maybe. Larry, you talked about the fact that you've had a pickup in your divestiture activity, really hadn't done much of that until recently. And you said you factored that into the updated guidance.

I know first of all you didn't change the bottom line estimates, are we to assume that those four divestitures don't have a bottom line impact, or at least not a negative one or is there something that is offsetting it? And can you maybe then more broadly expand on your criteria for getting rid of properties, and whether there is likely to be more of that activity in the coming months?

Yeah, AJ, let me take the last half of that question and then I'll put the rest of it back to Larry.

In terms of divestitures, we have thought for a good period of time that we had hospitals that were either under performing or that required a fair amount of capital, capital improvements are replacement in the future, and the market may or may not have the demographics, primarily do not have the demographics to support those -- that kind of capital investment, so these are relatively small hospitals, some of which have been around for a long time, and as we acquire these great hospitals, and great opportunities that we have, in the last number of year, putting these good hospitals on top, we will take the other ones off the bottom.

I think we're just about through with that process, currently there may be one other or two others over the next couple of years that we look at, but I think we're making good progress and sort of rationalizing the portfolio now so that we can move forward. With that, let me -- Larry?

Yeah, these were smaller hospitals and we reduced our guidance by 75 million for the three hospitals, one was already in discontinued results, and we'd already taken the lease in Scott county out of the guidance from there. And they've got dollar smaller margins and consider the proceeds which we think we will be able to reinvest and be able to keep our earnings in the $1.78 to $1.88 range and so we didn't see it the necessity to lower the EPS guidance, although we did lower slightly the revenue EBITDA. And as Wayne said, the acquisitions are looking pretty good and there's maybe there is a chance as the year goes on we'll be able to run that back up.

Okay, maybe just quickly as well, some of the other comments you're saying that they've seen, the flu season, it wasn't there in the fourth quarter, impact them in the first quarter, favorably, and that volumes maybe even beyond, that are showing some improvement. Maybe, I'll ask if you have you any comments on? And you also talked about getting into the HCA or HPG, rather, buying group. One of the things that's sort of a hot topic now is this idea of looking at cardiology and orthopedic devices for gain sharing opportunities. I know you probably don't have as much in rural markets as you do you in the big urban markets, of that activity, but is that something you might look at?

First, on the -- we are see -- beginning to see some flu. I think the flu is strong in like 29 states currently. Obviously, it's, it's a different time of the year than it was last year. It didn't hit fourth quarter. If you go back a couple of years, March of about 2002 or so was a very, very strong flu season. It is a little early to tell what the impact of that would be. But we are beginning to see some flu.

HPG for us, you know, in terms of moving from one GPO to the other, and caused by contract compliance and the way that we -- as a matter of fact, one of the things that we were interested in, is how we acquire orthopedic appliances, we have about 30, $40 million spend in orthopedic appliances and this will give us an opportunity to sort of concentrate that on a few vendors.

Having said that, I'm not sure the gain sharing is all that beneficial to us, because of the numbers of doctors that we have in our facilities and our ability to get contract compliance, where as in large urban competitive markets, it's much more difficult to do that, and so that may be helpful there, but for us, I don't think it will have very much impact. As you know, we don't have a huge amount of cardiology in terms of implantable defibrillators and all those kinds of things which would be another far target for all of this.

Okay. Thanks a lot.

Thank you.

Thanks, AJ.

Your next question comes from Tim Leahy with Goldman Sachs.

Good morning. First question, if I might, on the -- on the weak flu season in Q4, does that have any implications from a payer mix standpoint on bad debt from just a year over year comparison? And then -- then secondarily, if I could ask a question on the divestitures or the rationalization of the portfolio. Could you perhaps provide a return on investment that communities derive from those asset sales from when the company first acquired the assets or an internal rate of return or something along those lines? Thanks.

I will take the latter one first. One of the hospitals, you know, we paid a 5 to 6 million for, it's going to be sold for more than that, and one, we paid also -- well, we paid about 5 to 6 times and we're selling for about the same thing, on the exit strategy. Another one, we also paid about 4 and 5 times, we're selling it for about 6 times, so we got a pretty good similar volatile, maybe a little bit better volatile one or two. And we're going to be able to take the money and put it back into other situation, is really the purpose of doing that, for us. This'll answer your first answer your first question about bad debts. It won't have a big effect.

Clearly the Medicare payer mix, percentage of payer mix would be a little bit lower as a result of the flu, but we had really strong managed care business, I think our managed care business was up for us a reasonable amount in this quarter, I think our same store admissions remains up about 4 % and the mix improved about 90 basis points. And because of self pay business, they went down slightly. I wouldn't think it would have that big effect on our bad debt.

Thanks.

Your next question comes from Neil Goldner with State Street Global.

I had, thank you. Wayne, if you don't mind, if we can kind of back off talking about the quarter and every single basis point, bad debt and charity care and stuff like that.

Thank you.

A bigger picture. The acquisitions you've made in the last three to six month, the divestitures that you've made in the last couple of months or announced, is clearly a picture of stepping away a little bit from the smaller, more rural hospitals, and buying bigger, more suburban hospitals. And that is clearly a change in strategy versus say 3, 4 years ago when we bought the stock, anyway. Just give me a sense of what the strategy of this company is going forward with respect to the type of properties you want to be and the type of communities you want to be in?

Yeah, we have not really adjusted our strategy very dramatically. For whatever reasons, there seems to be properties that are in let's say $30 million range to the $100 million range that are available that work within our portfolio.

The only sort of outlyer is Chestnut Hill which we're buying which is, you know, is on the very edge of Philadelphia, but that facility has great opportunity for growth, kind of to the Northwest and it is synergistic with our other facilities that are in, four other facilities that are in the area for managed care, it also is very attractively priced so, if you kind of look at the facilities that we've acquired, most all of which generally kind of meet our test but you're right, the size of the facilities have moved up.

Some of which is that we have not seen, you know, the -- and nor have we worked very hard on the 15 to $20 million revenue facilities because there's a little greater upside on the ones that are larger, that we've acquired, but if you go back, you know, to 2003, a number of the facilities that were acquired in 2003 are -- were smaller facilities, in the [inaudible].

So we still think the strategy is essentially the same, that we can take a smaller facility, smaller to us now is about 20 million, I guess, and a larger facility, something upwards of, you know, 70 to $100 million, and be very successful on both ends of the spectrum in terms of moving those up and margins up over 20 % over a 4-year period. So there has not been a real shift in strategy. I think there's been a little bit of a shift in the market, in that the availability of properties that we see just happened to be larger now.

Thank you.

Thank you.

Your next question comes from Robert Mains with Ryan Beck.

Good morning. A couple of questions. First of all, Scott County, that is not currently disc ops, is that correct?

It would be Chestnut Hill -- it will be --

But in the fourth quarter, it wasn't?

No, it was not.

Okay. What is the annual rent payment or on that facility, roughly?

It was -- prob -- it's under a million bucks.

Okay. Fine. And then, Larry, could you comment a little bit on the new store margins, which were ,I think, kind of an historical high for you? Is that just kind of timing issues or is there something going on with those hospitals or more broadly in the market.

That's just two hospitals. One of them being still, it looks like a $100 million hospital, and it's slow, so will create about 100 % of revenue for that facility. It had a higher margin and it's the higher of the two hospitals. That almost 50 million, so, the fact that Phoenix, you know, had a -- lower double digit margin, that brought up the average.

Okay. And then based on the comments that Wayne said, assuming that this is a more active acquisition year, it sort of sounds like we wouldn't necessarily see though, the kind of really low new store margins that you had maybe a year and a half or so ago just because what's out there in the market now?

Well Chestnut Hill is a low single digit margin and another one we worked on. It's got a better margin than we usually by, and we're seeing some of both, it just depends on which ones we do, but Chestnut Hill is going to have a smaller margin, back to what you would normally see in the low single digits.

Okay, so, so go back a little bit on that question one.

On that one, yes.

Okay. Good enough. That's all I have. Thanks, a lot.

Thank you.

Thank you.

Your next question comes from Gary Taylor with Banc of America.

Good morning, gentlemen.

Good morning, Gary.

A couple of questions for you. I don't know if you've historically given case mix or not, but can you give us a sense of that year over year, with the surgeries up and the respiratory down?

Year over year, case mix is probably 1.17 versus around 1.16. On a same store basis, and it's probably 1.18 on a consolidated basis.

All right.

Also, Gary, just, you know, we believe that because our case mix is relatively low, compared to some of our competitors, not only do we have organic growth opportunities in our market from cutting off out-migration, but we also have a really strong opportunity in terms of the improvement in our case mix which will improve our revenue primarily by recruiting physicians and adding additional services.

Right. And I don't think this has been asked, but stop me if it had, I just want to look at sort of same store margin and over the last couple of years there's been some obstacles to some of the growth there, the bad debt, the med-mal, for a while, supply cost, has been an issue. As you kind of look forward, particularly into '05, but also into '06, what's your outlook, and do you see any other obstacles kind of coming up that are going to keep a -- keep a break on the same store margins?

Well, first of all, if you go back to 2000, our malpractice were like 60 basis points now, it is 160 basis points, it actually came down from last year, so that is heading in the right direction. Contract labor is probably gone up for us about 100 basis points. It is starting to come back down. Supplies have generally -- four of the last years, three of them we've had improvements in same store supplies. This year, I think we're about flat on same store supplies, about 11.8 %, this is the first year, but we think, well this Wayne talked about , is there should be some benefit from the HPG movement plus we're working hard to keep or do a better job on supplies so we think it'll be a 10 to 20 basis points improvement.

You know, bad debts which for us go back to 2000, was around 9.1 % and now it's 10.3 %. It's starting to stabilize, at least the last 6 months are a little better than the first 6 months of the year. So there is -- we believe that the volume comes, it will get about a -- I think our guidance is about a 50 basis point improvement in same store margin for 2005.

Great. And then last question is, in a more normalized patient volume environment, along the lines of the 1.5 to 3 % that is in your guidance, what do you think your labor trend looks like? However you look at it. Whether it is on a per patient day basis, or percent of revenue, or however you look at it? What do you think your costs per unit on the labor side will look like in '05?

Well, we've been spending 4.5 % average wages, we think that will probably continue. If you look at it, on a -- and we've been getting about 1 % productivity improvement, we have got as much as 2 % productivity man hours per adjusted admission when admissions have been about 3 %. I would think in 2005, if we get within the range of our guidance, for admissions, which we think we will, it will be something more like a 20 basis points improvement.

As -- on a percentage of revenue. We look at it different ways but most important is the percentage of revenue and I think we will probably see probably a 10, probably a 20 basis point improvement. Based on the volume we think we'll hit.

Okay. Thanks.

Sure.

Thank you.

Your next question comes from Adam Feinstein with Lehman Brothers.

Okay. Thank you. I just want to say congrats to both Wayne and Larry for being recognized in both II polls for both the CEO and CFO, so I just wanted to say that. I guess, my question, is back to just the margins, in the past you've given out the margins by acquisition class. Do you have those numbers handy, Larry?

Yeah, give me just a second. And thanks for your thoughts. 2001, which started out around 2 %, it is about 15. -- or almost 16 % right now. Or high 15s. The class of 2002 is about 1 % trailing, it's about 10 %, in the class of 2003, it's about 12 %, it was in the 5 to 6 % range when we bought it, and of course, the class of 2004 is about 12 % revenue.

And if you look at it over the last couple of years, I think what was about a 5 % margin for 2001 through 2003 is close to 13 % now and there's a lot of opportunity. We -- our models have us getting up in the high teens, around 20 %, so there is a lot of built-in growth opportunity in 2001 for 2003 going forward.

Okay. Great. And then just a follow-up question, if I may. I just wanted to talk a little bit about Medicare managed care. Just with the shift in the Medicare program, that will likely take place in the future. Just want to get a sense of how you guys think that is going to impact you and just, if there's a -- also a sense of just what the difference in reimbursement is for a Medicare managed care patient relative to a more traditional fee for service Medicare patient? So any thoughts there?

Yeah, I don't think we have the same issues that you find to be in urban markets. One of the difficulties in nonurban markets is the size of the Medicare population. Managed Medicare is a lot more difficult in our markets actuarially because it is easily -- it is easy to get adversely selected. There's just not enough for someone to make that work historically.

I do think, you know, from a Republican point of view, that government is moving towards competitive models, and we're going to see more and more managed Medicare. A lot of it which I think will happen -- and it relates to drugs as much as anything else. I don't actually know the difference in the payment rate, Larry. You might know.

Well, what we've been negotiating so far is about the same as Medicare. We've signed up some of the Medicare PPO, advantage products that we're getting launch here in the next 12 or 18 months and so far the ones we've done have been about the same rate we would have expect to have gotten from the Medicare Plus, the supplemental policies.

I would add, we've only got, I believe, about 1 % of our total company revenue with Medicare Advantage right now or Medicare HMOs, if you want to call them that, so I wouldn't think it would grow a lot but we have helped sign a couple of contracts in advance, if someone started the custom managed care companies needed it in some places, and we did agreed to have [inaudible] those contracts.

Okay, and just one more question. And then just with Ten Care, I know you factored in some potential negative impact from that, included in your guidance but just wanted to get just any additional commentary about that, and just I know you guys are very plugged into what is going on down there, so any updated thoughts in terms of how things will play out with Ten Care? Thank you.

No, not really. It is still -- it is still tied up in courts and you know, actually think that the governor who most of you all know, Phil Bredeson is a past managed care guy himself, he started Coventry, so he knows a lot about this, and he had a good plan, but unfortunately it is going to take a while to work through this.

It is still, in my view of the world, a little early to determine what might happen with this when it is all said and done. So, you know, we'll continue to work on, if you talk to the legislators, they say they're going to will find a solution to this, that is not quite as problematic as what the governor has proposed, but who knows. It's still too early to tell, I think.

Okay. Great. Thank you.

Thank you.

Your next question comes from Ken Weakley with UBS.

Thanks. A couple of questions, I guess to follow up on Adam's question, how many of your markets, or what percentage of your hospitals are in markets where the population base, is say, over 50,000?

Well, we have 6 million people in total and I believe probably about 30 % of our markets are service areas that's greater than 50,000 but that's a -- I think that's part of the right answer about 30 %.

And do you think -- I would think in addition to the pricing issue, perhaps days per thousand for the senior population, if they do start to get better managed care coverage, and better drug coverage, more broadly, that there could be some risk there. Is that --

That can happen because generally, Medicare -- managed Medicare will run probably 12 to 1500 admissions per 1,000. -- excuse me, patient days per 1,000, probably quite a bit more than that. But we'll generally negotiate or attempt to negotiate on an admission basis so that the change in length of stay would not affect us and that would be our intent to get a DRG payment not a per day payment.

And Ken, maybe you and I had this discussion once before, but as you know the admissions per thousand are about 150 admissions per thousand for the 55 to 65-year-olds, that number jumps up to 240 per thousand when you go over 65, and even if you bring a lot of managed Medicare in, it's still a big job to drop the admission rate from 240 dramatically down to, you know, closer to 150 or something.

So -- and then you also have, you know, sooner or later, whenever that might start taking effect, the baby boomers which also adds another element to it, in terms of volume.

And just a --

While not clear to me, I'm sorry, Larry, it's not clear to me yet how all that's going, how all that factors through and what the impact will be.

And of course, our Medicare length of stay is only 4 right now. So, you know, clearly most of the improvement in Medicare managed care would make would probably be the length of stay, not necessarily the admissions decrease.

Okay. Jumping to another topic, surgery growth, I was curious why given the spread between your surgery growth and your admission growth, that inpatient revenues were not increasing as a percent of the total, that would seem to imply that either the revenue per, you know, surgery is not that great, or maybe even declining, or that the outpatient pricing is quite strong. Could you, maybe, walk us through on what's happening on that?

Yeah, the revenue per admission is up about 8.3 %, so per unit on an inpatient admission is up and of course year to date it's 5 %. We had pretty good with managed care business. The Medicare surgeries were not as strong as they were on the non-Medicare side of the business. We have had pretty good outpatient growth. Not quite as good in this quarter as we had primarily because a lot of the emergency business and the testing for the flu, also we're going to start revenue so that's the comments I have this there.

That surgery growth, is that inpatient and outpatient or just inpatient?

That was total 5.4 %. The inpatient growth was lower than the outpatient growth. I think the outpatient growth per surgery was about 6 %. Inpatient was about 3 %.

Okay.

But we did have real good net inpatient revenue per admission. That's one of the things that helped this quarter. That was both surgery, even though it was lower, and we had good mix.

Okay. And in terms of physician recruitment, can you just give me a sense of your '05 guidance in that respect? Maybe also break it out between specialists and give us a sense of what's happening to the guarantees that are being offered, is that increasing or flat or what is going on there?

Yeah, our targets for '05, is 550, we recruited 524 in '04, about 60 % of those are specialists. Physician recruiting for us has not, again lass not changed dramatically, we still seem to be doing extremely well in terms of recruiting. Actually retention seems to be better now, our turnover rate's a little less than it has been, I don't know if that is a function of malpractice or what it might be, but it seems to be going pretty well, and you know, we think the prospects are good for recruiting the types of physicians we need for 2005. I don't know that the guarantees have changed dramatically.

They're really not changed much, we're seeing about the same amount per doctor. We are employing just a few more doctors than we have historically done which is something we're always -- we will do when we have to do. But it's not always our preference. We are employing a few more doctors.

It is clearly not our main strategy to employ physicians.

One last question. In terms of working capital management, your DSOs, you've managed them very well but they're still a little high compared to some of your peers. Are then any barriers on getting that even lower, say to the mid to low 50s or what's the -- what's the color -- ?

Our mix might be a little bit different, in that, you know, what we have out there, and the other thing we do, we have some third -- cost report liabilities which some people put in accounts payable, we probably got it two or three days, that we put -- excuse me, we put them in accounts payable. Other people make a debt against receivables but we have those classified there which is two or three days.

So does that mean we shouldn't expect a mid-50s number at some point?

I think our thoughts is we'll be somewhere in the low 60s.

Okay. Thank you. Look at our mix.

Thank you.

Thanks.

Your next question comes from John Ransom with Raymond James.

Hi, good afternoon. If we step back a little bit and look out maybe two or three year, assuming we have a semi-normal cycle. You know, I guess this is for Larry, where do we think these 15% margins can go?

Not over 12 months but over -- because certainly, you know, there's still a gap between where you are and certainly HMA and Life Point, and I'd be interested in knowing where you think the structural, what structural wall you might hit, are you permanently going to be 2 or 3 or 400 basis points below those guys or do you think you can you close that gap and just curious about your thoughts there? Thanks.

Well, we can close the gap. Because I think I mentioned a while ago, the last three years of acquisition -- well from 2001 forward it's about 13%, those are modeled out and we sort of demonstrated we -- we get pretty close to our EBITDA and pretty close to our margin. Our model source is modeling out to be in the high teens or around 20 %.

We do buy not for profits which sometimes have 1 % margins, more than likely it's 2 or 3 % margins versus 10 % so we're not buying any for profits but I think absent the acquisitions that we're doing, you can see our margins end up in the high teens over the next several years, but, there is a couple of differences about us, and you know, some hospitals we have in California and we always got more acquisitions, we've got a bit more rent than other people but I think if we get up in the 18, 19 %, we'd be pretty pleased over the next several years, for getting effective acquisitions and what may happen and what we buy.

And is part of this Larry, I mean paying, as opposed to paying 140 % of revenue, like some of your peers, you might pay 75 % of revenue, or 80 % of revenue, but your terminal margin potential at that hospital might be 15 % versus maybe 140 % of revenue where you got to get that 20, 25 % hospital margin. Is that part of the kind of thinking there?

Well, our thinking is generally we can take an acquired acquisition up about 15 total percent in order to buy something around 3 or 4 %, that would be around 18 or 19 %, and generally close to 20. I think price is -- we will pay more for something with a starting in margin of say 12 % and we still would think we would get a 12 % to 22 or 23 %.

I think some people just -- they value it a little different han we do but we're willing to buy the low margin hospitals even though it has an effect on the consolidated margin, or we're buying less now as a percentage of the company, it's [indiscernible].

And just the other thing, on the supply cost side, what percentage of your supply cost do you think are implantables and stints compared to an urban hospital with the case mix index of 1.4, 1.5?

Well, ours are very, very small offices, we've only got very few open heart programs, and we're not spending near the money. We're probably spending about 1.3 % of our revenue on -- or around 1 % of our revenues probably, and I think that's much higher for an urban hospital.

Okay. Thank you.

Okay.

Again, to ask a question, please press star then the number one on your telephone key pad. Your next question comes from David Dempsey with Avondale Partners.

Good morning. A question on Chestnut Hill. I know that's a little different than what you've done recently, and that's a partnership with the hospital at the University of Pennsylvania, strong player there, are you seeing more opportunities for doing those types of transactions, and would that possibly get you to a more suburban hospital, if you had a partnership with an organization like that, in the market?

We are seeing other opportunities, some of which are based on the fact that people now know that we did this arrangement with the University of Pennsylvania. I don't know -- it could, but it also can take us out into the state in locations where there are larger communities with one hospital, the sole providers, which that -- a university might want to have a relationship. We think it's actually a terrific relationship for us. They bring the halo effect.

They help us with training programs. They can help us in terms of enhancing some of our surgery programs. We also can get help if we have to operate in the state with our other hospitals from the university. So we think it is a very good program for us to have these affiliations and partnerships and associations with the universities. And Chestnut Hill is the first one, and as you probably know, we have had a relationship with the University of Pennsylvania because we acquired our Phoenixville Hospital from them. So that's kind of started this relationship. And I think we will see more of this.

Good. I think it is a good strategy. And one last thing, I know Ten Care we talked about but you got Pennsylvania and you got Texas which are also states that are struggling with state budgets and questions about Medicaid. Overall are you concerned about Medicaid rates declining over the coming years?

I think it is yet to be determined. If you look at reimbursement, I think Medicaid is the one that I certainly have the most question about. In terms of how it's go going to shake out. As you know the Republican view of this is block grants which most people think that is just a code word for cuts. So yeah, you kind have have to see where this goes when it is all said and done.

I actually think that though, you know, one of the good things about us being in 22 states and not being too overloaded in one particular state, that as these -- as this develop, we should not get -- have too many problems at one time. Because other states seem to be doing better. I mean we're actually get be an increase from Illinois this year.

So we're seeing this through the years but I think the difference is, is the fact that if you do -- if the current administration does do block grants what does that mean? I know yesterday, there was an article in the New York Times about the Utah program which I don't think is exactly a design that most people in the country would subscribe to because it is a primary care model with very little specialty care.

I think the flip side of that is probably the way to do this in terms having more catastrophic coverage. The biggest issue is the cost of drugs and the great increase in terms of drug use. I think most states will go after that and will not go after the catastrophic coverage or the hospital side of it. Thanks a lot. Thanks.

At this time, there are no further questions. Mr. Smith, do you have any closing remarks?

I do. Thank you. Thanks for spending the time with us this morning. We believe that Community Health Systems has a proven operating model, is well positioned for continued success in acquiring hospitals and enhancing the quality of health care in the local communities we serve. A recent study by Health Grades named two of our hospitals, Laredo Medical Center and Easton Hospital, as distinguished hospitals for clinical excellence.

We want to specifically thanks for management team and staff, hospital chief executives, chief financial officers, chief nursing officers, and group operators for excellent operating performance during the year that has just contributed to our success and excellent results. We remain focused on our business strategy and improving results. Once again, if you have any questions you can reach us at area code 615-373-9600.

Thank you, ladies and gentlemen. This concludes today's Community Health Systems fourth quarter 2004 conference call. You may now disconnect.