Community Health Systems Inc (CYH) 2005 Q1 法說會逐字稿

Good morning, my name is Michele and I will be your conference facilitator today. At this time I would like to welcome everyone to the Community Health Systems first quarter 2005 conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Please go ahead, sir.

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 first quarter ended March 31, 2005. 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 remarks. I would like to begin the call with some comments about the quarter 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 this conference call regarding expected operating results, acquisition transactions and other events are forward-looking statements that involved risk 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 in management's current expectations or beliefs, as well as assumptions made by and the 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, Form 10-K for the year ended December 31, 2004, and Form 8-K filed April 27, 2005. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

We're very pleased with Community Health Systems' solid and consistent financial performance for the first quarter 2005. Strong volume and successful expense management, in tandem with our focus on our effective standardized operating platform, our proven acquisition strategy, successful physician recruiting and our favorable reputation in the marketplace, all work together to allow us to surpass our earnings per share objective.

Net operating revenues for the quarter ending March 31, 2005 totaled 914 million, a 16.1% increase over the prior year, compared to 787 million for the same period last year. Adjusted EBITDA was 142 million, a 15% over the same period year ago. Adjusted EBITDA is EBITDA adjusted to exclude discontinued operations and minority interest in earnings. Further references to EBITDA during the call will be based on adjusted EBITDA.

Income from continuing operations was 48 million versus 42 million for the fourth quarter last year, an increase of 14.7%. Earnings per share from continuing operations increased 27.5%, $0.51 per share versus $0.40 per share for the same period. With that, I would like to review some key accomplishments for the quarter.

First, our same-store admissions were up 4% for the quarter. Same-store adjusted admissions were up 2.8%. Same-store net revenue increased 8.4%.

Our ability to identify and selectively acquire hospitals has consistently been the strategy (ph) (technical difficulty) to Community Health Systems' strong leadership in the acquisition arena. We closed on Chestnut Hill Hospital, a 183-bed acute care general hospital, as well as a freestanding 39-bed rehab hospital with trailing revenues of approximately 115 million and EBITDA in the low single digits. This hospital was attractively priced, with solid upside potential and will enhance our network of four hospitals within a 20 to 40 mile radius. Additionally, we acquired the majority interest of the Surgery center outside of Coatesville, Pennsylvania. Our pipeline remains robust.

The Company recruited 107 physicians for the first quarter, slightly behind the 128 recruited in the same period a year ago. However, the first quarter of 2004 was our strongest first quarter of physician recruitment in the last five years. Our outlook is good for 2005 with a target of 550 physicians. We continue to have excellent physician retention, with turnover of approximately 5% in 2004 and thus far in 2005.

The Company is reaffirming its previous guidance except for EPS. Income from continuing operations for the full year of 2005 will now range from $1.82 to $1.92 per share, up from $1.78 to $1.88 per share. This reflects the solid performance above guidance for the first quarter.

At this point, I would like to turn the call over to Larry Cash to provide you with a summary of our financial results.

We're very pleased with the financial and operating results for the first quarter. Our consolidated admissions growth in the first quarter was 10.5% compared to the same period last year. Adjusted admissions, which factors in outpatient business, had a 9.6% growth rate over the first quarter of last year.

Our same-store admissions increased 4% against the comp of 1.9% in the first quarter 2004, with one extra day to due to the leap year. Normalizing for leap year, same-store admissions increased 5.2%. Same-store adjusted admissions were up 2.8% for the quarter.

In reviewing our first quarter admission volume, the following specifics contributed to the increase. The flu represented approximately 1200 admissions of the increase. Additionally, respiratory-related illnesses represented roughly 900 additional admissions.

We have a negative impact of approximately 800 admissions, because 2005 was not a leap year. Considering these three items, volume would have increased approximately 2.1% in 2005 over 2004. Same-store self-pay admissions in the quarter were up only 70 basis points and decreased 20 basis points as a percentage of admissions.

Net revenues in the first quarter increased 16.1% from 787 million last year, to 914 million. On a same-store basis, net revenue increased 8.4% for the quarter. Same-store net inpatient revenue increased at 9.9%, and outpatient revenue increased 7.6%. Total same-store surgeries increased 0.006%, with an increase in outpatient surgery volume of 2.8% offset by a decrease of inpatient surgeries of 4.4%. If you just adjust our same-store surgeries for leap year, the surgeries would have been up 2%.

Same-store net revenue per adjusted admission increased 5.5%. Same-store net revenue on a sequential basis increased 1.5%.

Our consolidated Medicare case mix decreased 0.005%. And on a same-store, Medicare case mix declined 1.6% and all payer mix declined 1.3%.

We have continued to deliver good EBITDA growth with a 15% increase of 18 million, from 124 million to 142 million. On a same-store basis, EBITDA increased 13 million or 10.9%, from 122 million to 135 million for the quarter. Consolidated income from operations was 101 million versus 87 million, an increase of 16.4%.

For the first quarter EBITDA margin on a consolidated basis was 15.5%, down 20 basis points from a year ago due to the low single digit margins of acquired hospitals. On a sequential basis, consolidated margins improved 60 basis points. The same-store EBITDA margin improved 30 basis points to 15.9% compared to the quarter ended March 31, 2004.

For the first quarter, our non-same-store margin was 10.5%. The trailing margin before acquisition of these non-same-store hospitals with approximately 6%. For the quarter, our consolidated income from operations as a percent of revenue was 11%, unchanged from the same period a year ago. In the first quarter, consolidated operating expenses as a percentage of net revenues were up 20 basis points due to the non-same-store acquisitions.

Payroll and benefits decreased 20 basis points. Combining payroll benefits and contract labor, there was a decrease of 70 basis points from a year ago. Bad debt was flat at 10.3%. It is flat when compared to 2004 at the low end of our guidance. Supplies and other operating expenses both increased 20 basis points. The supply increase was due to the recent acquisitions.

On a same-store basis, total operating expenses improved 30 basis points, from a 30 basis point reduction in payroll and benefits, assisted by a 3% improvement in productivity. Supply expense improved 10 basis points, offset by an increase in other operating expense of 10 basis points.

Each hospital has a charity care administrator self-pay discount policy which is done on a selected basis. It is a register discount. For the quarter, same-store self-pay admissions as a percentage of total admissions decreased 20 basis points. Consolidated self-pay revenue was flat at 12.8% for the quarter. Average same-store self-pay revenue increased 20 basis points year-over-year.

Consolidated bad debt, just 10.3% for the quarter, unchanged from a year ago. Bad debt does appear to be stabilizing in the mid-10% range. Our combined consolidated bad debt, charity and administrator self-pay discounts were up 10 basis points for the quarter, 16.5% versus 16.4%, representing a 20 basis point decrease in charity care and a 30 basis point increase in administrator self-pay discounts. Again, bad debts were flat year-over-year. Our bad debt guidance for 2005 remains from 10.3% to 10.5%.

Consolidated cash received (technical difficulty) to 104% of collectible net revenue for the last 12 months ended March 31, 2005. Total AR days were 59 at March 31, 2004. This is a decrease of 4 days from December 31, 2004, and represents the first time since 2003 that AR days have been falling below 60. The allowance for doubtful accounts was 269 million or 32.8% of receivables at March 31, 2005.

Community Health Systems continues to have a favorable payer mix. For the quarter ended March 31, 2005, consolidated net revenue by payer source was as follows -- Medicare at 33.6%; Medicaid, 9%; managed care, 23.2%; self-pay, 12.8%; and private and other, 21.4% of net revenue.

We had an excellent cash flow from operations for the quarter 149 million versus 62 million for the first quarter of 2004, an increase of over 140%. Our percentage of cash from operating activities due to the (indiscernible) (technical difficulty) approximately 105% for the quarter, 66% for calendar 2004 and 56% for calendar 2003.

I would like to note three items which were part of the cash flow operations. We had a small tax payment, only 5 million in the first quarter, which will increased as the year goes on. Cash flow lives was aided by a four-day reduction in accounts receivable, and we did experience an increase in accrued payroll and benefits from the end of the prior quarter, which helped the cash flow.

Our earlier 2005 guidance for net cash provided by operating activities is 325 to (ph) 340 million, or approximately 60% of our guided EBITDA.

Total capital expenditures for the quarter just ending were 33 million. Our capital expenditure guidance for 2005 is 170 to 180 million, or approximately 4.7% of net revenue.

Balance sheet cash at March 31, 2005 was 218 million. Again in the quarter, the Company had available credit of about $400 million in its revolver, and additionally about $400 million accordion feature with -- in a term loan available to us. We believe we have sufficient availability to fill our acquisition and strategic plans.

Looking at the balance sheet, as of March 31, 2005, we had 533 million working capital and approximately 3.8 million in total assets. Our debt to capitalization at quarter end was 58%, and our fixed-rate to debt was 70%. Total stockholders' equity is 1.3 billion at the end of the first quarter.

As Wayne said, for the quarter, earnings per share from continuing operations increased 27.5% to $0.51, versus $0.40 on income from continuing operations of 47.7 million versus 41.6 million for the same period a year ago.

During the quarter, the Company terminated its lease for a hospital in Tennessee on January 31, 2005. Also, on March 31, 2005 the Company sold for four smaller hospitals in two separate transactions. These four hospitals had 2004 revenue of approximately 115 million.

We did realize a loss of 11.7 million or $0.12 a share on these transactions. The loss was attributable to certain working capital adjustments included in the loss from operations and a $7.6 million loss on the sale which relates to the write-off of 16 million in goodwill allocated lease hospitals as part of this transaction. Our previously provided annual 2005 continuing operations guidance excluded these five divestitures. Wayne will now provide a brief recap.

This almost never has happened, but I heard Larry transpose one number that I need to correct in this. The allowance for doubtful accounts was 296. Larry actually transposed it to 269 in case someone was wondering about that.

We're very pleased with the solid first quarter results for Community Health Systems. Our strong focus on expense management and our effective standardized and centralized operating platform has positioned us for another successful year. We expect our growth to continue as we improve hospital operations, add and enhance services, and recruit physicians to stem 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.

With that, I will now open the call for a question-and-answer period. If you would like to talk to us after the calling you can reach us at 615-373-9600. Michele?

(OPERATOR INSTRUCTIONS). A.J. Rice with Merrill Lynch.

Just a couple of quick questions if I could ask. First of all, on the improvement in the DSOs, in getting below 60 days, is there anything specific behind that that is driving that, and maybe a comment on whether you think that is a sustainable level?

The improvements were primarily in the non-government and self-pay days that we achieved and the Medicare stayed premiums (ph) (multiple speakers).

Medicare and Medicaid stayed pretty much the same. We do benefit from pretty strong revenue in the first quarter, and I would think our guidance throughout has generally been 60 to 65 days. I would think we would stay somewhere and the low 60s. We will work to keep it below 60, but it is a challenge based in our (indiscernible) (technical difficulty) to do that. But we were quite pleased it was more in the non-government and self-pay in this quarter.

I just wanted to ask on your supply spends, I think you said same-store you picked up 10 basis points of margin there. I know you're making the switch on your buying group to HPG, and I think one of the things you have highlighted as a reason to do that was hope that you can get better control on the orthopedic side. I wondered A, if we see any benefit from HPG yet, and I think that may still be in front of you, and how might that impact those numbers? And B, is there anything new on the orthopedic initiative that may be worth talking about?

From accounting perspective, I think that is in front of us. We started the process in the first quarter. Ashley (ph) left, went to HPG contractually on the -- or left the other GPO March 15. We would expect to see most of that benefit in the third and fourth quarter. We're in the midst of working now. Most contracts have all been loaded. And it is not that much of it in the first quarter. But we will expect to see some benefit from the orthopedics maybe a little bit in the second quarter, but in the last half of the year. Most of that is ahead of us.

A.J., most of our time in this first quarter has been spent on transition and contracts. So clearly the benefit from that should be in the latter part of the year.

Are you doing anything particular on the orthopedic side? Obviously there is talk of gain sharing and (technical difficulty) working with the physicians more closely. Anything --?

Yes, we're working on a strategy because of our hospitals being so compliant in terms of contract compliance. We're over 90% in terms of compliance. That is one of the reasons we are so attractive to GPOs. But to narrow down the number of vendors, we don't really -- we're not doing anything as it relates to gain sharing.

Christopher McFadden with Goldman Sachs.

It is actually Tim Leahy. Just a question, Wayne, if you could compare the current acquisition environment to perhaps two years ago or five years ago from your expectations of return on capital when you engage in transaction, if you have changed your expectations, your hurdle return rate, or if there has been a meaningful change in the market? Thanks.

Let me just strategically tell you that I don't think the market has substantially changed. Our pipeline continues to be very strong. We have acquired one facility this year so far. We have another letter of intent. I don't really see things that much different than we have the past, that we were beginning to see the reemergence of the not-for-profits a little bit in some selected areas in the country. But the competition is about the same, with of course the one being absent now is Providence in terms of not being in the marketplace, and they were a good competitor.

So I don't see the environment changing that much today, and I don't think anytime in the relative near future. And the pricing has been fairly consistent for us. We have not had an issue in terms of overpricing, we will walk away. And I will let Larry talk about return on capital.

We're still doing a very good due diligence and we do the model, and the returns are still expected to be -- internal rate of return over 20%. And we're still achieving that or better on the acquisitions. And the most recent one we did in Chestnut Hill should be a very good return for us for the amount of money we paid for that versus the revenue (technical difficulty) what we expect to achieve there.

And just one follow-up question, if you have any reaction to the Draft Proposed CMS inpatient schedule for 2006 including the transfer payments?

This is -- it is a little early for us in all of this of course, in terms of making a determination. As you probably know, CMS has administrative authority on transfer policy. But it is a long way before all that comes out the other end of the hopper. I would think we will know more about that towards the end of the summer. But even said (ph) all that, it still looks relatively positive. If you all heard me say over the last 28 years, we have been getting about average 2% from Medicare, so anything north of that would be very good.

Ken Weakley with UBS.

I guess I have a question asset efficiency. I know you are still the best growth story in the hospital space. But as your size, given your portfolio size, and some recent divestitures has made me think that maximizing the efficiency of your asset base is going to become as at least as important as growing the Company.

So within that context, Larry, maybe you can spend some time on what variables you tend to track the most carefully. What is happening within this context, and how much should we expect going forward in terms of further asset management to maximize the quality of the portfolio?

Let me just sort of -- the historical perspective here is that when they got to this Company back in '97, this Company was buying groups of hospitals that were for-profits. We've only bought not-for-profit since then. So part of what we have done is sort of rationalize the portfolio and go on back, and taken out the ones that were underperformers and ones that required large capital commitments that we couldn't get a return on. So that is kind of where we are today, and I think we're just about finished with that process. And I will let Larry --

Yes, I think from analytical perspective, we looked pretty much at EBITDA margin versus the location of the market. Is it growing, the ability to recruit physicians, and amount of capital you've got to put into it and age of the facility. And one of the fortune things with the number of acquisitions done recently, there is a lot of tremendous good opportunities for us to spend capital to get good improvements on. And some of the markets that have been here for a bit longer may not have the same opportunity.

And so (ph) we will do. But we will look at that. But if the EBITDA margin is not up to what we think it would be, early (ph) performance from year-to-year and the growth opportunity is not there, it would be one that we might consider doing something different with.

Let me ask one follow-up. If I could. Over time, you developed actually a couple of clusters of facilities in Pennsylvania and Tennessee. Have you found either margins or returns to be enhanced by a closer network of rural hospitals, or is that not the case?

There is some advantages there from a physician recruitment perspective. We would think more than likely it would be a little bit better for clustered hospitals than individual, although several of our hospitals are one-off (ph) but are above 25% margin. So from an overall perspective, we have got some advantages there from managed care contracting or recruiting physicians. But we've got several that are -- like I said, very good margins that are sole providers out by themselves.

And keep in mind we're still only getting about half of the available admissions that are in our markets, and we still have a lot of opportunity in terms of intensity. So we think there's a lot of productivity coming out of our facilities in the future.

What was your case mix in the quarter?

I think it is 1.18 consolidated.

(OPERATOR INSTRUCTIONS). Adam Feinstein with Lehman Brothers.

My first question is do you have a self-pay number for the prior period on a restated basis? I guess you said 12.8 for this quarter, but with the asset sales wanted to see what that would be on a comparable basis in the first quarter of 2004?

12.8. I thought I had said it would remain flat. But it is 12.8%, 2005 first quarter on a restated basis it is 12.8% on a consolidated basis from a year ago.

And then just a follow-up question here. Could you just provide -- you guys have done a good job in the past in terms of providing me margins for the acquired hospitals by year. Do you have those numbers handy, Larry?

Yes, I do. For the first quarter -- and generally like to do year-to-date, but we have got one quarter here. 2001, it is between 15% to 16%. Again that was 265 (indiscernible) -- revenues started off with 2%. 2002 started off with 1%. It is about 11% today. And 2003 it is between 13% and 14%. It was started out at 6%. But the class of 2004 is around 11%. It started around 7 or 8% there, a little bit higher, and it is pretty early into 2005. So it is only about 5%.

We only had that hospital for about one month.

And then just my final question here, one of the trends I noticed have been on several conference calls here today, but everyone seems to be showing some benefit from a reduction in labor cost growth. I wanted to see if you had any point of view there. Is this something you think we'll continue to see throughout the next couple of years here? And is this a function from lower wage cost growth or is this a function from just utilizing your staffing better? Any thoughts, Wayne? Larry?

I would say just an early comment. We were up -- improved 30 basis points on salaries and benefits. If you look at contract labor, which is another line on a same-store basis, is about 50. So we had 80 basis points total improvement. Our improvement and productivity, man-hours for adjusted admissions, was about 3%, so we did a good job as to volume growth being about 3%, on adjusted admissions basis -- 2.8.

And I think our wages were around 4%, and I think we in the rest of the industry have done every good job knowing there was less volume in the last half of 2004 of adjusted (technical difficulty). And I think we'll continue to work on that, trying to make sure there is good productivity and good control over salaries and wages.

I think the trend is probably coming all through the year that had relatively low volume. We have all done a good job of managing our expenses down. Having volume in the first quarter clearly helped us. So I think you'll see moderation in terms of that going forward.

Joseph Chiarelli with Oppenheimer & Co.

I was wondering if maybe you could clarify a little bit on the sale of assets. I am curious as to -- on the assets that you sold, was it a function of the growth of those markets versus other potential opportunities that you have, or was it a function of the capital investment versus other investments, or is it a combination thereof?

It is a combination of both in terms of margins in those facilities -- capital requirements to replace a facility, for example, that didn't have sustainable growth in the economy in the market -- in terms of a market that is having a lot of difficulty. Some of these are relatively small facilities that just don't quite fit our model today in terms of the resources we bring to our hospitals. So it is kind of a combination of all of those, when it is all said and done.

At this time there are no further questions. Do you have any closing remarks?

Yes. Thank you for spending time with us this morning. Our strategic objective is clear -- deliver consistent results, ensure that our hospitals achieve a position as the dominant health care provider in their respective markets. We are excited about our prospects for 2005 and we continue to balance our operating strategy with our objective to build value for both our shareholders and the communities we serve.

We want to specifically in thank our management team and staff, hospital chief executive officers, Chief Financial Officers, and chief nursing officers and group operators for their excellent operating performance for the quarter. We remain focused on our business strategy and improving results. Once again, if you have any questions you can reach us at 615-373-9600.

Thank you, ladies and gentlemen. This concludes today's Community Health Systems first quarter 2005 conference call. You may now disconnect.