Community Health Systems Inc (CYH) 2005 Q4 法說會逐字稿

Good morning. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2005 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 session. (Operator Instructions). At this time, I would like to time the conference over to Mr. Wayne Smith, Chairman, President and CEO of Community Health Systems. Please go ahead, sir.

Thank you Angela. Good morning and thank you for joining us for Community Health Systems' quarterly conference call. Larry Cash, Executive Vice President and Chief Financial Officer, is with me on the call this morning.

We're very pleased to report that Community Health Systems has delivered yet another outstanding performance for the fourth quarter and for the year of 2005. The purpose of this call is to review our financial and operating results for the quarter and the year ended December 31, 2005. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast on this conference call on our Web site, a slide presentation accompanies our prepared remarks.

I'd like to begin the call with some comments about the quarter, then turn it over to Larry, who will follow with a more detailed account of our financial results. Before I begin, I would like to read the following statements.

Statements contained in this conference call regarding expected operating results, acquisitions, transactions and other events are forward-looking statements that involve 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 on management's current expectations or beliefs as well as assumptions made and information currently available to management. You are referred to the documents filed by Community Health Systems with the Securities and Exchange Commission, including the Company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that cause actual results to differ from those contained in the forward-looking statements.

We have once again demonstrated our ability to successfully meet our financial targets while selectively acquiring new hospitals and building a solid foundation for the future. Our strong same-store metrics are a key indicator that our operating strategy is working well. We have also met or exceeded street expectations for 23 consecutive quarters. A combination of organic market share opportunities and acquisitions will enable us to continue to deliver value to the committees that we serve as well as our shareholders.

Net operating revenues for the fourth quarter ended December 31, 2005, totaled 982 million, an increase of almost 17% compared with 841 million for the same period of the last year. EBITDA for the quarter of 2005 was 152 million compared with 131 million for the same period last year, a 16% increase. Income from continuing operations increased approximately 20%, or 51 million, or $0.54 per share compared to $0.46 per share for the fourth quarter last year, an increase of 17%.

Net operating revenues for the year ended December 31, 2005 totaled 3.7 billion, compared to 3.2 billion for the same period last year, a 17% increase. EBITDA for the year ended December 31, 2005 was 573 million compared to 494 million for the same period last year, a 16% increase. Income from continuing operations for the year ended December 31, 2005 was 190 million, or $2.02 per share compared to 162 million for the same period, or $1.62, an increase of almost 25%.

With that, I'd like to review some of the key operating accomplishments for the quarter. Same-store trends were up again for the fourth quarter with volume at 1.5% compared to a relatively easy comp of a negative 3.4% for the same period a year ago. Our same-store admissions were up 0.5% for the quarter and same-store revenue was up -- I'm sorry -- same-store adjusted admissions were up 0.5% for the quarter and same-store revenue was up a strong 9.2. Our same-store margin for the quarter improved 50 basis points. The solid year-over-year operating metrics reflect our ability to enhance the level and the scope of services and consistently improve the financial and operating performance of our hospitals.

We recruited 534 new physicians for the year compared to 507 for the same period a year ago. Our physician recruitment target for 2006 is 550. Turnover remains less than 6%, or approximately 250 physicians. Our standardized and centralized approach to physician recruiting increases utilization and reduces the need for patients to travel outside of their communities to get their health services.

We also believe that our physician recruiting has generated positive volumes as well as increased intensity in a challenging environment.

We acquired a total of five hospitals during 2005, bringing us to seven hospitals in 22 states. Chestnut Hill Hospital and Bedford County Hospital were acquired in the first half of the year. We also acquired three hospitals in three separate transactions during the fourth quarter -- Newport hospital and Clinic in Newport, Arkansas; Bradley Memorial Hospital in Cleveland, Tennessee and Sunbury Community Hospital in Sunbury, Pennsylvania. We have announced the execution of three definitive agreements to acquire two hospitals -- to acquire two hospitals in Waukegan, Illinois; one an acute care with 336 beds and the other nonacute care with 71 beds, an acute care hospital in [Ponka] City, Oklahoma with 148 beds. Trailing revenue is approximately 140 million with a margin in the low-single digits for the Illinois transactions and about 45 million with the mid-single digit margins for the Oklahoma transaction. And late last night, we signed a definitive agreement on two hospitals with revenue of about 65 million in Alabama with a lo-single digit margin.

We currently have one letter of intent outstanding and we continue to have a very active acquisition pipeline.

We would also like to note that letters of intent do not always turn into acquisitions. However, this last one that we had, we're very close and should close early in the second quarter. Acquisition guidance for 2006 is three to five hospitals. Our company continues to lead the industry in selectively acquiring nonurban, not-for-profit hospitals in attractive growth markets.

Our guidance for 2006 is as follows. Revenue of 4.175 to 4.25 billion, an increase of 12 and 13%; EBITDA 615 million to 640 million, an increase to 11 to 15% and projected EPS for 2006 after equity-based compensation will range from $2.14 to $2.19, a 12 to 15% increase. Our same-store volumes remain at 1.5 to 3% and our bad debt guidance for the year is 10.2 to 10.5.

So with that at this point, I would like to turn the call over to Larry who will provide you a summary of our financial results.

Thank you Wayne. We were very pleased with the financial and operating results we achieved both for the quarter and the year. Our consolidated admissions relative to the fourth quarter was 9.1% compared to the same period last year. Adjusted admissions had an 8.5% growth rate over the fourth quarter to last year. Our same-store admissions increased 1.5% and adjusted admissions increased 0.5%.

Inpatient admissions grew faster than adjusted admissions because inpatient gross revenue grew faster than outpatient gross revenue. Same-store self-pay admissions as a percent of total admissions decreased approximately 20 basis points year-over-year and decreased 1% on an absolute basis. The fourth quarter 2005 volume continued to be affected by service closures and selected one-day stay declassification changes, but in addition to outpatient that we discussed previously. Adjusted for these items, same-store admissions for the fourth quarter would have been up an additional 130 basis points (MULTIPLE SPEAKERS). Net revenues in the fourth quarter increased 16.8% compared to the same period last year, or 982 million versus 841. On a same-store basis, net revenue increased 9.2% with inpatient revenue up a strong 10.6% and outpatient revenue up 8.3%.

For the first nine months of 2005, same-store (technical difficulty) increased 10% and outpatient revenue increased 8%. Same-store surgeries were up 2.3% for the quarter, same-store inpatient revenue per inpatient admission was up 9% and same-store net outpatient revenue for adjusted admission increased 7.7%. Same store net revenue for adjusted admission for the fourth quarter 2005 versus the fourth quarter of 2004 increased 8.6%. These revenue increases are driven by increased inpatient volume as well as increased (technical difficulty) and outpatient with strong inpatient and outpatient surgical growth.

We had a very strong increase in Medicare -- same-store Medicare case mix at 3.1% for the quarter and all payors at 2.3% versus last year. Additionally, Medicare case mix increased 1% and all payors increased 1.8% sequentially for the third quarter. For non-Medicare, surgical admissions increased 60 basis points to percentage of admissions, or 2.5%.

We continue to deliver EBITDA growth with a 16.2% increase this quarter compared to last year, 152 million versus 131 million. On a same-store basis, EBITDA increased a strong 17 million, or 13.2% for the quarter. Consolidated income from operations was 108 million versus 90 million, an increase of 20%. Same-store income from operations increased 17.5%.

For the fourth quarter, EBITDA margin on a consolidated basis was 15.5%, unchanged from a year ago even though the acquired hospitals have low-single digit margins. Same-store enterprise margin was 16.1% compared to 15.6% some for the quarter ended December 31, 2004, an increase of 50 basis points. For the fourth quarter, our non-same-store margin was 5.7%. The trailing margin before acquisitions that are non-same-store hospitals was approximately 2%. For the quarter just ended, our consolidated income from operations as a percentage of revenue was 11% versus 10.7% for the same period a year ago, and on a same-store basis, 11.6 versus 10.7.

In the fourth quarter, consolidated operating expenses as a percentage of net revenues were unchanged from the prior year. Margin would have improved except for the high expense levels of the acquired hospitals. Payroll [and] benefits decreased a consolidated 10 basis points, supplies decreased 50 basis points, bad debt increased 10 basis points and other operating expenses increased 50 basis points as a percentage of revenue. As expected, utilities increased over 20 basis points. (indiscernible) increases in contract labor and business taxes offset by decrease in malpractice. Contract labor increased to approximately 30 basis points, primarily (indiscernible) we had strong volume. On a same-store basis, operating expenses improved 50 basis points with decreases in payroll and benefits, supplies offset increases in bad debt and other operating expenses.

On a year-to-date basis, admissions were up 9.1%, adjusted admissions were up 9%. Same store admissions are up 2.1% solidly within our 1.5 to 3% guidance for the year. Adjusted admissions were up 1.8%, same-store self-pay admissions are down approximately 10 basis points on a year-to-date basis as a percentage of total admissions and up only 70 basis points on an absolute basis. Our same-store admission guidance for 2006 will range from 1.5 to 3%.

Net revenue year-to-date increased at 16.7% to 3.7 billion compared with the same period last year. On a same-store basis, net revenue increased 9% for the year, same-store inpatient revenue was up 10.2% and outpatient revenue was up 8.1%. Non-same-store revenue was 250 million. On a same-store basis, net revenue per adjusted admission increased 7.1%.

On a same-store surgery volume was up 2.2%. Our strong -- our same-store Medicare case mix for the year-end December 31, 2005 increased a strong 1%, demonstrating improved intensity. The strong flu season experienced during the first quarter (indiscernible) growth intensity for the year.

We have continued to have strong EBITDA growth, a 16% increase for 2005 compared to 2004, 573 million versus 494. On a same-store basis, EBITDA increased an impressive 12%. Consolidated EBITDA margin for the year ended December 31, 2005 was 15.3% versus 15.4 for the same period a year ago due to the low margins of acquired hospitals. The non-same-store margin for the year was 8% and the (indiscernible) margin for the acquired hospitals was approximately 5%. Same-store margin improved 50 basis points and consolidated income from operations was 10.8% of net revenue compared to 10.7 for 2004.

For the year, consolidated operating expenses as a percentage of net revenue increased 10 basis points from the prior year. This is due to low margins for acquired hospitals. Payroll and benefits decreased 10 basis points, supplies decreased 20 basis points and bad debt was flat. Other operating expenses increased 40 basis points with the increases in business, taxes and utilities offset by decreased and malpractice. Other operating expenses on a same-store basis improved 50 basis points with improvements in payroll and benefits of 60 basis points and supplies 30 basis points, offset by an increase in bad debt and other operating expenses.

All of our hospitals have a charity care policy that generally ranges from 100% to 200% with the federal property level. We've also provided administrators a paid discount on a selected basis. For the year ended December 31, 2005, same-store self-pay admissions as a percentage of total admissions are down 10 basis points, but up 70 basis points in absolute admissions. Our consolidated self-pay revenue was down 140 basis points.

For the fourth quarter, consolidated bad debt increased 10 basis points from 10.1 to 10.2%, charity increased to 150 basis points and administrative discount also increased 20 basis points. For the year, consolidated bad debt is 10.1%, unchanged from a year ago. Our combined consolidated bad debt charity and administrative [or] self-pay discounts are up 100 basis points on a year-to-date basis 17.1% versus 16.1%, representing a 60 basis point increase in charity and a 30 basis point increase in administrative or self-pay discounts with bad debt unchanged. Sequentially, we were up about 50 basis points in this consolidated arrangement. Our 2006 bad debt guidance range is 10.2% to 10.5%.

Total AR days were 61 at December 31, 2005, down 2 from December 31, 2004. The allowance for doubtful accounts was 346 million, or 34.5% at December 31, 2005. Point of service collections increased 320 basis points from 2004 to 2005, up to about almost 8% from a little over 4% last year.

Community Health Systems continues to have a favorable payor mix. For the quarter ended December 31, 2005, debt revenue by payroll source on a consolidated basis was as follows -- Medicare 31.8%, Medicaid 12%, managed care 23.5, self-pay 10.9 and private and other 21.8. For the year just ended, the breakdown was as follows -- Medicare 32%, Medicaid 11.2, managed care 23.7, self-pay 11.5 and private and other 21.6. We had good cash flow from operations for the quarter of 75 million versus 63 million in the same quarter a year ago. Cash flow from operations for the year was 411 million compared to 326 million for 2004, an increase of 26%. Our percentage of cash from operating activities to EBITDA for the year was approximately 72% versus 66% for the prior year. Our cash flow from operations guidance for 2006 ranges from 430 million to 450 million.

Capital expenditures for the quarter just ended were 67.3 million. For the year just ended, we spent about 200.2 million, or 5.3% of revenue. The capital expenditure guidance for 2006 ranges from 240 to 260 million, a proportionate increase related to the construction of replacement facilities, some diagnostic surgery centers and the construction of a corporate office.

Balance sheet cash at December 31, 2005 was 104 million. At the end of the quarter, the Company had available credit of almost 400 million. In addition, we have a $400 million recording feature (indiscernible) the term loan. We believe that we have sufficient availability to fulfill our acquisition plans.

Looking at the balance sheet as to December 31, 2005, we had 447 [days] of working capital and 3.9 billion in total assets. Our total debt decreased to 164 million from 1.832 billion to, 1.1668 billion. Our debt to capitalization at the quarter ended was 52%. Total stockholders equity was 1.6 million at the en of the quarter. The fixed portion of our debt ended the quarter was 1.32 billion, or 79%. The Company structured a two-step call for our 4.25% convertible debt issue to remain in compliance with our senior notes. [Half a call] was completed at the end of December 2005, the balance was completed by the end of January. Our pro forma debt to cap is 47% with the balance of a convertible issue now called.

The number of shares needed to fully satisfy the noteholder's conversion option has been included in our fully diluted shares, so there's no impact on earning per share from the issuance of the shares. We will save about 12.5 million in cash interest payments in 2006.

As Wayne stated earlier, our [net income per share diluted] (indiscernible) 212 [or] 219. This does include an addition of pretax equity-based compensation expense of 15 to 18 million for the adoption of number 123 R, [or] $0.10 to $0.12 reduction in 2006 EPS. The 2006 projection range also includes an estimate for anticipated 2006 equity-based rewards on new restricted shares as well as stock options. Wayne will now provide a brief recap.

[Currently] continues to lead the industry with its strong volume, revenue and earnings growth, Community Health Systems was recently recognized by the Forbes Platinum 400, the best [big] companies in America for the third year in a row. This award recognizes our ability to consistently meet our financial and operating objectives.

Additionally, two of our facilities were designated as distinguished hospitals for clinical excellence by [Health Grades]' fourth annual hospital quality and clinical excellence study for the second year in a row.

I will now open the call for the question-and-answer period. And if you would like to talk to us after the call, you can reach us at our new telephone number -- 615-465-7000.

(Operator Instructions). Glen Santangelo, Credit Suisse.

Hi, guys. Just a couple of quick questions. It seems like in your updated guidance, you increased the revenue estimates, but yet you lowered the EBITDA. Could you just give us a sense for what you see differently? Is it a function of some of the recent acquisitions? And if so, what expense categories should we expect to see higher expenses? And then I just have a quick follow-up.

Glenn, there's a little confusion. The way we presented the guidance for this year, we went ahead and took out the stock option expense from last year. If you go back to what we put out in October, it was 635 to 655. That was before stock option expense. So if you back out the say $18 million, you're around 615, 617, down to 637. So really the guidance is pretty consistent once you adjust for the stock option expense being reflected in our guidance.

We did it a little differently. We went ahead and reflected in the EBITDA the stock option expense (indiscernible) that's how we're going to report it beginning the fiscal year. You are correct, we raised the revenue a little bit because there is a little bit of a more activity going forward, so the margin would be a little bit coming down as a result of some of the acquisitions we have coming forward in 2006.

Larry, thanks for that. My second question was on the payor mix. The Company continues to hold its bad debt expense kind of flat as a percentage of revenues, but just kind of looking at your payor mix, your self-pay number is down a pretty significant amount '05 versus '04. Could you comment on that trend and what you're seeing?

Yes, there's a couple of reasons. It's very good for us, if you go back over the last eight quarters, our acute self-pay admissions have been flat up or down a little bit during the quarter, but for eight quarters, we've held it flat. If you think about bad debts, one of the drivers of bad debts is the growth in charges, gross charges, which were simply growing faster than net revenue. And even though we have a little bit less [pay], our flat self-pay admissions, but the percentage of revenues is coming down, we would expect to see bad debts to go up a little bit just because of the (indiscernible) charges and there are some rate increases that are put into effect.

And you also have some situations looking in 2006, we know that the [TennCare] change took place in August of 2005 and [we'll probably have a little effect] of growing bad debts next year.

Larry, my last question was on your revenue per adjusted admission was up 8.6%. I'm sure you're going to suggest it was to some extent mix and faster inpatient growth. Is that in fact what is happening there? And then the question is -- should we expect those trends that we saw this quarter to kind of continue?

The Medicare case mix was up about 3.1% when you take it out to four decimal points for the quarter and all payors up 2.3%. Also, it was subsequentially 1% and all payors was up 1.8%. I think we also commented our surgical admissions for non-Medicare increased 60 basis points, or 2.5%. So that's what sort of helped drive it. We would not guide people to think that our Medicare case mix would continue to increase at 3%. We would probably think more in line of 1%. We clearly try to improve as much as we can, but a more appropriate thought process would be about 1%.

Thank you very much.

Darren Lehrich, Deutsche Bank.

Thank you, good morning everyone. I knew your guidance for acquisitions is 3 to 5 obviously with everything you have announced and I think the letter of intent I believe is in Arkansas, but you're obviously right on the high end of that guidance. I just want to understand what you're seeing here, or are you just being yourselves. Do you think the second half piece will be slower than the first half? Just a little bit more thought around that.

We are off to a good start. The year really hasn't gotten started yet. We have five hospital deals done as we announced last might the Alabama transaction. We have one more letter of intent in Forest City, Arkansas. I think we are off to a good start obviously. I think there's plenty of opportunities for us. Our pipeline is just as active as it has been.

We were very busy in the fourth quarter, which is a little unusual. We saw more activity in the fourth quarter than we normally see. But I wouldn't be surprised to see us do a few more this year before it's over with. We are currently working on a couple more, so I think we're in a pretty good position obviously for 2006. These all look like good properties. They have mid-single-digit margins and look like they will fit into our model fairly well.

So the competition in the marketplace, everybody always asks about the competition, has not changed dramatically. It's about this time. Some people are in, some people are out. That changes periodically. We just continue to do what we have been doing. We're only buying not-for-profits -- keep that in mind -- and we can talk about that sometime in terms of what the opportunities for growth are there. But as you can see, it's consistency.

Sure. As far as -- just one more thing as it relates to mix. In the interplay with your supply costs, we saw good benefit from the GPO over the course of '05. I'm just wanting to get your thoughts around supply costs, whether we should continue to see that improve. Your mix increasing as it has, do you expect that to actually start to push up a little bit?

We had a good year and obviously we made the right decision to change GPOs. We think there's still some more to go in terms of improving our supply cost. I don't think it's a huge amount, but we do think there's still opportunity for us. And one of the good things for us is that, as we've said all along, one of the opportunities for this company is not only volume, but it's case mix and we're beginning to see case mix improvement, so with our supply costs down. It really has more to do that we're very disciplined in terms of our contract compliance more than anything else, and that helps us a great deal. Larry, you want to add anything to that?

I'll just add, I think we've told people we hope to try to achieve a 30 basis point improvement in same-store supplies. [As] we achieve that this year, we probably wouldn't see that come down a little bit next year because I think the contract started in the second quarter so we probably had a full two quarters and a partial of the second quarter last year, so we don't have quite as much opportunity in 2006 to get the 30 basis point improvements, which will probably come down but they're still, as Wayne said, a chance for us to improve it, even with the case mix moving up a little bit.

Thanks a lot. Nice job.

Ken Weakley, UBS.

Thanks and good morning. I guess one more question on case mix if I could. Larry, I was wondering if you could put it in context the increase in the (indiscernible). Obviously, I know it's part of your strategy, and I just don't remember how often you've been able to experience the kind gains you're seeing now. And I guess as a follow-on to that, I'm surprised that the length of stay didn't go up, given that. Obviously, you want to manage your Medicare (indiscernible). So can you maybe spend a little time on those topics?

Before Larry starts into detail Ken, just sort of go back and reiterate the fact that we have over and over again said publicly, as we recruit more specialists, and one of the opportunities that we have in our markets is for specialists is that we recruit more specialists, we should begin to see our case mix improve and I think we're just beginning to see that. So I think we are pretty encouraged by the trend (technical difficulty).

I agree. What's interesting is you're seeing this in other hospital companies as well and I'm just wondering the lag is interesting and it appears just as specialist recruitment's driving it. But again, the length of stay issue is interesting as well.

One other thing I would point out is, if you kind of look at our strategy overall in terms of what we do, we buy hospitals that don't -- have not have much capital, not had specialists, they've not had new equipment. They have been unable to retain employees. All of the above, and that is the value of buying the not-for-profits because there's such a huge opportunity for upside improvement. So that has made a big difference both in volume and intensity for us.

If you look at our, take Medicare, we finished [at] [1.2, 2.3] for the quarter. The year, it's 1.18, and which would say there's an opportunity to continue to move up. But last year, the quarter was 1.763 or the 3% increase. That's the best increase we've had all year and I believe the best increase we've had all of '04 on a same-store basis. So it's starting to (indiscernible) some ground. We would not want to (indiscernible) continue at 3%.

I know. If you were to take your top five hospitals in terms of case mix, and number one, how high is that case mix level? Number two, what proportion of your hospitals can get to that because of your physician recruitment strategy? And then what does that imply for revenue per admission growth in margins and that kind of thing?

First of all, let me take care of your length of stay question. Medicare was basically flat. Medicaid came down a little, which clearly oftentimes are paid on a per diem -- excuse me -- on a [DRG] on Medicaid. Managed care, which I think mentioned that surgical admissions for non-Medicare was up as a percentage. Managed care length of stay did go up. So if you start (indiscernible) underneath it, Medicaid, which we don't make as high a payment on (MULTIPLE SPEAKERS) managed care is up, which is good.

Back to your question. The top five hospitals are probably 1.35 to 1.4, in that range. And probably if we get to say from a companywide perspective 1.18, we could see us someday being in the mid-1.25 range, not (indiscernible) all the way to 1.30, but continuing (MULTIPLE SPEAKERS) pretty nicely. It's a very, very good opportunity if you take the Company margin for a hospital that's been around here four years. It's probably 17 to 18%. If we achieve that kind of growth, it's [probably] move up in the even higher teens, and possibly 20% because it has helped our margin (indiscernible) consistently over the next several years and we're able to achieve that.

Is a proportional increase in revenue per admission growth? In other words, if the index itself goes up 10%, does your revenue per admission go up 10%, or is it nonlinear?

It would go up pretty much close to linear for the Medicare portion of the business for the Medicare. Not all managed care players are paid under a [center] type basis. We have some under DRGs and some that are per diem, so that would factor in how that would work. But Medicare would probably go up pretty much [later], for the portion that is inpatients paid under DRG.

Okay. And I guess Wayne one more question if I could on acquisition pricing. Any comments on what you're seeing out there for average pricing and average quality of assets?

No, our pricing for 2005 is in the 75 to 80% of net revenue. That's where it has been for a long period of time. We will pay a little more for a particular facility if we think it has huge upside opportunity. But there has been a trend over the last year to 18 months, some people are willing to pay a lot more than we have. One of the reasons obviously that we continue to be successful is that we're very disciplined about our acquisitions and what we buy. So I don't think that has changed that much. The good thing for us is that our reputation really helps us a lot in the marketplace by doing what we say we're going to do.

And the average quality of the assets (indiscernible) is there more work to do when you buy them, or are they basically the same (MULTIPLE SPEAKERS)?

It's about the same. I suppose this year, the mid-single digit margins is on average pretty good. If you go back a few years, we were buying some fairly low margin -- lower margin or no margin hospitals. And so I would say it has moved up just a little bit, but not a great deal.

Great. Thanks so much.

Oksanna Butler, Citigroup.

Can you just give us a little bit more background on the market for your (technical difficulty) deal in (indiscernible) Alabama and what opportunities you see there?

In Alabama specifically, or just in general in terms of --?

The markets where you just recently announced acquisitions.

Okay. If you take Waukegan, Illinois, which is about 40 miles north of Chicago, it's the only hospital in the city, but more importantly there is a huge diagnostic center that goes with it, diagnostic surgery center that's out in another area that's Northwest, which is a great development area for us. And we're kind of hoping that what will develop out of that will be a new hospital. Waukegan is a community that has struggled in terms of having two large hospitals. They closed one and consolidated. So we think we can clearly make improvements in the current operation, but we also think we have a pretty dynamic market for growth. We think there's a little bit -- it looks a little bit like some of the areas in Pennsylvania that we have seen in the past, so that one looks pretty strong.

I guess as far as cities, the one we have a letter of intent, it's one that is a little community that has struggled but it's a great little hospital. It doesn't require a lot of capital, so that one works pretty well for us. Alabama, we already had about five or six hospitals in Alabama, so this is just additive. And one of the things that helps in Alabama in terms of Blue Cross is our ability to negotiate collectively for our hospitals throughout the state. So we think that works pretty well. Both of these hospitals are nice hospitals that don't require a lot of capital (indiscernible) both are in good markets that have growth potential.

The markets around these particular hospitals have done extremely well. Some of our competitors are in those markets and have done really well. We're real excited about Ponka City, Oklahoma, which is a community of about 50,000 plus. This is 150-bed hospital. Again, it's one of these hospitals that has been owned by a large faith-based group and has not put much capital, it has not recruited any physicians. They have not acquired any sophisticated technology and new equipment. So it is a good opportunity for us and it looks like it's a good growth market as far as we can tell. The cap to income is pretty good in Ponka City.

So all of these sort of fit our category of our discipline in terms of how we go about doing this. It has worked now about 45, 46 times, so we're pretty confident that it will continue to work unless something dramatically changes. But we hedge our bets by buying not-for-profits that have all these upside opportunity and I think that is one of the things that differentiates us as from a lot of other people who do acquisitions.

Okay, great. And just a quick follow-up on the bad debt front. In terms of the decline in self-pay, I know you've mentioned previously that the unemployment rates were down in some of your markets and you're also seeing better Medicaid placement. So I guess going forward, is it fair to assume that those types of trends should continue?

I'm sorry (inaudible).

(MULTIPLE SPEAKERS) decline in self-pay?

: I would say probably our self-pay -- self-pay admissions have been flat. Our markets are generally the sole provider. We don't expect our self-pay percent of our admissions (technical difficulty) get much different from there. We will probably see some growth as a result of TennCare. We've seen a little bit so far this year, I think since July maybe about 100 admissions, which is not a big increase. And that will carry over into next year and probably expecting our bad debt's going up a little bit. The only thing I'd just add, our uninsured populations actually (indiscernible) some of our peers who have had higher bad debts, and then we also don't have quite the presence from a growth perspective in Pennsylvania. One of our (indiscernible) [we required] a lot of hospitals, we don't have a big growth in bad debts there. And so that has helped us.

So our guidance is (technical difficulty) 10.6. And TennCare is probably what's creating our guidance to go up from 10.2 to 10.5 for 2006. We have to take all comers. 75% of our self-pay admissions come through the emergency room, so it probably will continue at a similar level than what's there now, other than (technical difficulty).

Okay, great. Thank you.

Gary Lieberman, Morgan Stanley.

Thanks, good morning. You have in the slide here a reference to impact of some service closures on admissions, and also a shift in one-day stays into outpatient. I was hoping you could provide a little bit more detail around that.

Yes, I can. If you look at our one-day stays, there was three hospitals that affected that. It was about 500 admissions from the [closure's perspective]. There was three places we closed, either nursing homes or skilled nursing, about 230 admissions, and then we closed OB services in four hospitals, OB about 70 admissions. And so that is pretty much what drives that activity. Now there has been movements around the observation in hospitals, we've picked the ones that were material to the issue.

Okay. I guess just on the OB side in thinking about it, it would seem if you are sort of the sole community provider, how much alternative is there on the OB side to move that around, I guess maybe if there is some considering the shift you saw? But could you just talk about that a little to?

What we do they are is do that very carefully. We are generally the sole provider, and sometimes we just determine that our payor mix and difficulty sometimes in recruiting an OB position in a market, (indiscernible) might be a malpractice issue or other activities, it's just in our best interest and we (indiscernible) and our Boards understand that and we work carefully through that. And where it's appropriate, we will discontinue a service like that. We have not done it a lot, but we have done it some.

And if we have a service, an OB service, that does not have the volume or does not have the quality physicians, then we clearly will close it. We made it clear throughout our company, throughout our markets that if there's an issue around that, we're not going to take the risk. The community is better served in us not providing that service unless we can provide it very high-quality.

Thanks a lot.

Rob Mains, Ryan Beck & Company.

Hi, good morning, good afternoon. I just have three quickies. Larry, did I hear you right, the interest number you gave, was that cash interest for the year?

: Yes, the 12.5 million is what we generally pay for our converts, so we will say that going forward so the after-tax effect is like 8.4 million.

Right, okay. The definitive agreement you have, just for modeling purposes, when do you expect that those would all close?

Well, probably sometime in the second quarter. A couple of them may be late and a couple of them may be early. Clearly, if they all close in the second quarter, our guidance was built off the fact of [requiring] about 200 million of acquired revenue mid-year [convention]. If they all close in the second quarter as the year progresses, we'll update our guidance to reflect the fact that these closed maybe a little sooner than we had originally anticipated.

Okay. My last question is, you mentioned that contract labor was up in markets where you have high volumes. Is that temporarily high volumes, or is that high volumes in general? Because what I'm trying get to is, are you guys feeling that we're on the verge of giving stronger volumes in other nurse shortage (indiscernible) crisis situation?

Most of the contract labor is up in six or seven hospitals, and it's up one on a consolidated basis because of an acquisition that we had. Those hospitals generally are up because of volumes, so we had six or seven hospitals that had stronger volume than we had before. And that is a good thing and we use contract labor when we have to do that and over time, we'll try to work it back down. It's about around 2% of revenue or 1.9% of revenue is what we're running right now.

So you're seeing more on the new stores than on the same stores?

Some of the growth between same store and consolidated is an acquisition required under contract labor, which we've been working our way down. The growth in same store is predominantly just some places where we've had strong volume, and we expect that to sort of continue temporarily on those markets.

Okay, great. Thanks a lot.

Christopher McFadden, Goldman Sachs.

Thank you and good afternoon. Two questions. One, obviously the acquisition pipeline sounds very attractive and robust. Where is sort of the top end of the debt to cap level that you would feel comfortable moving toward given the portfolio of opportunities that you're looking at? And then secondarily, one of your national competitors recently announced a major new IT initiative trying to make some bigger investments there. Are you as an organization spending time thinking about the need to augment or change what you currently provide to your facilities? And are you finding in any of the perhaps competitive situations that you have been looking at that perhaps capabilities there is one of the factors that local boards or local decisionmakers might be considering when they think about a potential partner? Thanks.

Let's take the last one first in terms of our IT capability and what we're doing. As you might expect in the markets that we operate in, we don't have to be as competitive as you find in the big urban markets. Every time in the big urban markets when somebody mentions change, everybody in the community has to make those kinds of changes is one of the advantages (technical difficulty) of where we operate hospitals. So our consistency in terms of building our platform has been good. It works well. We continue to work on clinical systems, innovations and there are things that are going to happen in the future in terms of automating medical record and those kinds of things that we will do. But we would probably be behind the curve a bit in terms of everybody else's -- or everybody else being the big urbans because we don't necessarily have to move that fast.

So we're not having any issues, and it has not been an issue. In any competition for a hospital, that has not been an issue at all for us. So we're pretty comfortable with where we are and where we're headed in terms of our IT systems.

The other question that you had about debt to cap, our debt to cap is coming down. It's about as good a position as it has been in a long time. Some of you all remember early on when we first became a public company, it was (indiscernible) little it was huge. So we're pretty comfortable in the 50, 60% range for the future. I don't see it changing too much from there. And the good news for us is that our cash flow is very strong and we're pretty much able now to cover our CapEx and our acquisitions with a relatively small amount of borrowing if we buy a lot different -- if we buy a number of facilities this year. So I think the balance sheet is in really good shape.

And as I said earlier, we have plenty of availability (indiscernible) revolver (indiscernible).

Finally, are there any markets or regions that you feel you're not in today that you think would be well-suited to the traditional strength, in terms of less urban and more single market providers? Are there places that your development team is particularly focused on?

You know, this is a little more opportunistic than able to drive acquisition candidates. But for example, Oklahoma is a good one for us. It's a new state for us. Generally speaking when we get into a new state like this, Pennsylvania, we have a lot of opportunities once your people get to know us within the state. I think the Midwest continues to be opportunistic for us. So we're always looking for a new state. That's very helpful to us because it is a place where we can work hard. But by and large, I would say these are much more opportunistic than us being able to go develop properties in some of these states.

Very good, thank you.

Gary Taylor, Banc of America.

Good morning. A couple of questions. One, I know you talked about the growth in your Medicare acuity. Do you have handy what your Medicare revenue per admission looks like on I guess ex the acuity or maybe you just look at what you're total Medicare net revenue per admission is up at the 3%? I guess what I'm trying to get at is, did you experience kind of the sequential stepdown as you anniversaried last year's very nice Medicare provisions?

If you look at the quarter, the Medicare per adjusted admission is up in the high-single digits as a result of both the price increase. There was a little bit of a drop-off in the fourth quarter as a result of the transfer policy, but it was up nicely, both inpatient and outpatient. So it was not up as much in the quarter on a per-adjusted admission basis as it was up year-to-date on a same-store basis, which is what you would expect because of the drop-off.

Right. My second question goes to working capital. I know you've provided cash flow guidance for '06 and I was just looking back, you've brought 17 days from peak out of your DSO over the last five years. You've continued to build your payables a bit. You've had this really great working capital tailwind the last few years, and then also we're seeing a lot less volatility in your cash flow as you acquire hospitals. And I think that is probably primarily because you have gotten larger. But it does look like your cash flow guidance assumes perhaps that you continue to see a little bit of movement at least on the DSO side. Is that correct or not?

We anticipate, we're in the 61, I don't think we'll see our range, we just tell people, 60 to 65 for our company. So it will be pretty close to that. There is some benefit in this year on our cash flow. The accrued payroll was up some, which helped us 14 days accrued (indiscernible) last year, (indiscernible) probably (indiscernible) us and everybody else. But we feel that the range we put out there of 430 to 450 at the high end of the range, it would be 70% of EBITDA and it would work its way down a little bit below that. But I think the way we're operating it and managing (indiscernible) we're having a little savings on taxes as a result of some projects we've done and some tax savings which helped us a little bit as we're doing a lot of good due diligence on our acquisitions to make sure we know what (indiscernible) and if there's any questions about the AR, we may put it back to the seller and (indiscernible) not (indiscernible) work at this price. And I think this past year, we did not by the AR in one of the facilities, at the other places we did. When we don't buy AR, it affects our cash flow from operations.

Last question, your CapEx guidance, I wrote down 240 to 260, so I think that's the right number that was in your release. That's a pretty fair step up from the prior year, which generally has gone up 20 to 25 million a year. So I expect there's maybe some replacement spending in there. What is driving that number higher?

A couple of things. One, we're going to do a few more ERs in 2006, probably $10 million of ER. We have a few facility renovations where we're going to get started. Replacement hospital [is a part of the] $5 to $10 million and there is some spending we'll be doing on a corporate headquarters (indiscernible) will be open sometime in 2007. And the final thing that is probably the most operationally important (indiscernible) spending some money on some ASCs and diagnostic centers. And we think it's important in our markets, a few of our markets, to go out and where we see an opportunity to do a surgery center generally in a joint venture arrangement, we'll do that before someone else would do it. Not that many. We've got four or five markets we're considering doing that, and that's built into the guidance for 2006.

Okay, great. Thank you.

I might add, we do spend a lot less than everybody else, even though we're coming up to about around 6%, we're still less than what other people are spending.

Gotcha.

John Ransom, Raymond James.

Hi, good morning. Just, there is certainly over the last two quarters a trend in the industry toward much higher acuity. We even saw that at [Symbeon] today. Do you think, is it that with higher co-pays and deductibles, people are doing less discretionary, but when they go, they really need to go? Or is there something else going on, or is this just an actuarial blip, in your opinion?

Well, if you think about it, John, most of the acuity easily measured is Medicare. And there's very little deductibles and copayments that would affect the Medicare use. And then again, we get 55% of our (technical difficulty) admissions versus urban areas, probably 40% through the emergency room. I ours is, as Wayne has said is, we only have seven physicians for every 10,000 people in our markets. It's 20 to 25 per 10,000 everywhere else. We're recruiting over 534 doctors. Ours I think is driven by the fact that by recruiting specialists, we are cutting off that migration and growing our intensity. But there maybe some of the fact that there's a little less intense business coming through there, but I think ours is more driven by the strategy.

Okay. And just going back to your insured -- I know you have been an outlier obviously in your trends on bad debt. Do you see any -- has in your markets, can you tell us that consumer directed has gotten any traction, and do you see any structural insurance changes in your markets positive or negative that will continue throughout '06?

We've not seen the growth in the consumer benefit-driven plan there as of yet. We're going to have to take a look after the open enrollments that take place in early 2006 to see if it's done. We do get every year in mid-year what all the plans are in our marketplace because we sort of tailor our own plan or control our own health insurance costs based on what other people have. We didn't see any large consumer benefit-driven plan, not as of yet. Our deductibles and co-insurance are still not a high percentage of our business. They're probably I think last year 11.2% of all of our major payors to 11.6% this yea, so we haven't seen a big movement there.

Three or four years out, there probably will be some movement of markets, but we think it will be sort of slow to adopt that.

John, one other thing I think is important, we continue to see steady pricing in our markets the 5 to 7% range that we've had over the last number of years and I think some of that has to do with the nature of our markets that we're not that big, we're not on anybody's radar screen. Our employers in our end markets are not that large, so we don't see dramatic change as it takes much longer for changes to occur in the marketplace. I think one of the things that differentiated us in the past, the nonurbans from the urbans, is the fact that we got consistency in pricing and I think that may very well be something that we see kind of going forward as well.

Okay. It's just remarkable the relative outperformance at your company compared to some of your peers. So I know that is the result of a lot of good decisions made over the years, so it's certainly apparent now.

Thank you.

Thank you.

(Operator Instructions). A.J. Rice, Merrill Lynch.

Hello everybody. A couple of questions if I could ask. You talk about acquisitions quite a bit, but do you -- obviously, you guys are pursuing a pipeline all the time and sometimes deals hit, sometimes they don't. But there's been a couple of macro events, such as [Providence] being acquired and obviously [LifePoint] has a tangible now, so they presumably aren't as aggressive. And also, just the ebb and flow of the willingness of nonprofits to talk. Do you sense that either one of those things are changing, and that's behind the fact that you have these four deals in Q4 and Q1? Or, is it just the long-term pipeline, sometimes you have deals hit and sometimes you don't?

A.J., I think a couple of things. One is, [Providence] was pretty competitive in the marketplace. LifePoint has really not been all that competitive and all that aggressive in the marketplace for a number of years. They clearly are out currently, but they will be back of course. HMA has always been a good competitor in terms of acquisitions. We have not seen, except in very specific locations, large not-for-profits. Our group of facilities and what we're looking for obviously is totally different than some other people because we are always looking for not-for-profits.

Interestingly enough, I think the only thing that you can probably say about what is currently happening, it's clear in terms of our definitive agreement and our letter of intent, is that we are buying more facilities from faith-based organizations. And I think that has to do with the fact that they are trying to concentrate their capital on their urban facility as opposed to their peripheral facilities. So that is the only trend that I have seen and we have had very good experience with that. We have gotten a couple of deals with Catholic organizations this year as well as Baptists. So that's the only thing that we have seen that's a little different.

The other people, like Triad and every now and then we see Triad in the market, but other people, there's not that many other people in the marketplace. So it's a really good -- for us, it's a really good time because our balance sheet is strong and we have lots of opportunities and our model works.

Good. How about on the divestiture and pruning of the portfolio last year, I think there was four facilities that you look at. Are you pretty much done with that, or is that sort of an ongoing process where we'll see some more of that this year?

I think we're pretty much finished with that. But you know as always, we continually evaluate our facilities and if something systemically changes in a particular market, or if in fact there's -- we've said this all along -- if there's an issue with a group of doctors that we don't want to fight with for a long period of time, we will consider those things. But I think we're in pretty good shape now in terms of moving forward with our current facilities.

And then, I don't think you have commented much on the commercial or managed care contracting dynamics that you're seeing. Obviously it's different for you than say for a big urban provider. But can you comment on the pricing for the year or two ahead and what you're seeing? And is there any pressure or change in terms of contract that you're seeing?

We have about 2400 managed care contracts and probably about 7% are multi-year, I'd say. We may have said six months ago it was 6%, so seeing a little bit more of that. We're actually -- this year, we actually termed a few less contracts than we have in the past, so we're getting contracts that we can live with, we've pruned it quite a bit. We've probably got about 70% of our 2006 revenue locked up now. We only have about 2% of our overall net revenues Medicare Advantage, which is different than someone else. I think we will continue to be able to see 5 and 7% in '06 and probably into '07 and then we we'll just have to think about '08 forward.

Again, and I said this earlier, I think one of the things that has differentiated us from the urbans in the past is consistency in pricing. And it looks like to us from my perspective that that will continue.

My last question maybe, since no one else I don't think has asked, just comment on the Washington scene and President's budget, sort of how you see all that unfolding over the course of the year if we could.

I think there's clearly a lot of rhetoric now and generally speaking during mid-term elections, you don't find a lot of cuts in Medicare, even though there's a lot of discussion about it. I think the President's budget will get through probably the House, but then will probably be D.O.A. when it gets to the Senate. I don't think people like Grasslee, they think they've already done whatever they're going to do in terms of Medicare. I think that will put that to bed for awhile (technical difficulty) continue to hear a lot of conversation and rhetoric around Medicare going forward because of that suspending. But again, with the 2008 election coming, I don't think you're going to see any major cuts in terms of Medicare.

And by and large, I think if you look at Medicaid, the states are in better shape today than they have been economically. So the Medicaids, they're up-and-down as usual, but you kind of have to fare through that all through the year. I don't think there's anything catastrophic in all of that. So I think the pricing, in terms of Medicare and Medicaid and commercial, is clearly for 2006 is pretty stable and probably for 2007 is pretty stable.

That's great. Thanks a lot.

Adam Feinstein, Lehman Brothers.

Great thank you. Hello everyone. Just wanted to get a quick update on a few things. But just in response to one of the recent questions, Larry, you had mentioned that your MA business is about 2% of your total business. Did I hear that right?

That is correct.

And I am just curious, has -- obviously a small number, but has that number frown in the past year, or has it been pretty stable?

It has been in the 1.5 to 2% range, and it was not up that much in the fourth quarter. We'll check and see after the January open enrollments that took place, see if it went up a little bit. It probably will go up a little bit because some of our strong growth markets are in Pennsylvania. Pennsylvania, while it has only 5% Medicaid, it has a little bit higher managed care, there's a little bit more Medicare business up there. But it's a very good market and only 5% Medicaid.

Okay. And another question. We have heard a lot over the past couple of years, but it seems like it's even been more pronounced (indiscernible) past year in terms of growth, in terms of surgery centers. Historically, surgery centers have just been located in the urban markets but we have heard about surgery centers in rural markets. I am just curious whether you are seeing increased competition in some of your markets and just your strategy there?

Every now and then, we will see a surgery center in one of our markets. We just had a challenge in one of our markets in [Moberly]. But by and large, what we've tried to do is to look at our markets and we have the good demographics and we try to get ahead of the curve and go to our physicians and say look, this community can support a surgery center, why don't we get together and put one together and do a joint venture on it. That does a couple of things for us. It keeps us retained in the business, as well as preventing other people from coming to our market. So because we are sole provider in 85% of our markets, we have a lot of knowledge, and by and large we're recruiting most of the doctors in these markets, so they're pretty open with us about issues.

So we're not really having the challenges that you find, but strategically we also think it is important that we get ahead of this and look at it and try to make sure that we do the things that we need to do to make sure our medical staffs get an opportunity with us to grow the market. Fortunately, that's one of the advantages of being in the non-urban markets is you don't have to deal with that much competition from surgery centers.

We did this year buy into a surgery center in one of our markets in Pennsylvania, and occasionally, we'll do that.

I think Larry said when we talked about capital earlier, we have a few on the drawing board this year. So we'll be doing a few of those. And this also has to do with just the nature that a lot of procedures, technologies are improving, a lot of things are moving, continuing to move to outpatient and surgical centers. So there's opportunity for us.

As we think about surgery centers as a retention tool, you guys have done a good job in terms of managing your doctors in terms of seeing less turnover than some of your peers. Can you talk a little bit about that, just about your process and how that process has evolved over time just in terms of any (MULTIPLE SPEAKERS)?

(indiscernible) give out any trade secrets. But seriously, what we do is when we recruit a physician, we put all of our physicians who are newly recruited, both those that we recruit in terms of outside and those who are transitory. Both the new recruits that come from new trading programs and transitories, we put them through a three-day or a four-day training program here in Nashville and we work on everything from billing and how they run their office and sensitivity training -- all the things that we think are important. So we're trying to get them off to a good start, so that's -- our first objective is when a new physician comes to the community, do everything we can to support them both from a marketing standpoint and an administrative standpoint to get them off to a good start and enter introductions with other doctors, all those kinds of things. That has been a pretty good strategy for us.

One of the things I think helps us a lot is the nature of our markets. We've been careful about where we go and what we buy. In the markets that we enter, our markets have a lot of potential. When we tell you that we're only getting half the available admissions in the markets that we operate and there is an intensity opportunity, that means there's an opportunity for doctors to work. A lot doctors like to work a lot, so they get pretty busy pretty quickly in our markets. And so success is the best way to keep a physician in place, and I think that has probably been the key to success for us.

I might add, it is one of these standardized or centralized processes that we use here, is one of the core competencies of the company. We do a lot of analytical work about our physicians and how many we have and how many we can recruit and turn over and things of that nature. So there's a lot of analytical work done about it.

The other thing I would say, just to sort of conclude this conversation, is that we do a very good job on the front end as far as credentialing is concerned. We vet these physicians pretty well before we actually bring them to our markets, so that helps us as well.

Final question for me, I know it's getting late here, but just I know you guys have a lot of great stats. One of your peers recently in one of their SEC filings provided some data about their average population growth and some of the data, such as median household income, unemployment rates. Do you have any sort of aggregated data like that for your markets in terms of just either population growth or median household income?

Population growth is about 1%, and I don't have the average household income here off the top of my head. I know our unemployment rate is about 15.1 or 15.2% -- uninsured. Our unemployment rate is about, I believe right now it's 5.5% county-specific, looking at all of our counties. That's down from 6.3%. I have statistics on the average household income, but I might quote the wrong numbers, so --.

But the point being, Adam, we do look at that and think about that as well as we think about that when we're doing acquisitions, because those are important metrics in terms of where we can clearly hospital. We are not sure we can fix the markets.

Probably the main thing we will look at is the average age over 55 and over 65. Our population over 55 is 24 to 25%; over 65, it's about 14%. Both of those statistics are better than the national average, which should help our growth going forward.

Very good. Thank you very much.

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

I do. Thank you for spending time with us this morning. Our track record of steady, consistent quarterly growth and our ability to deliver quality health care services continues to differentiate Community Health Systems in the nonurban hospital market. Our investments in physician recruiting and service expansion drive volume and pricing while excellent cost controls and integration of our acquisitions delivers further margin improvement. We believe we're well positioned for continued success in 2006. We want to specifically thank our management team and staff, hospital chief executive offices, chief financial officers, chief nursing officers and group operators. Their combined efforts have greatly contributed to our success and our results.

Again, there's a slide presentation that accompanies this conference call available on our Web site at www.CHS.net. We believe our success in the marketplace and our favorable reputation as the acquirer of choice will continue to extend our leadership in this position. Once again, if you have any questions, you can reach us at our new number, area code 615-465-7000.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.