美國醫院公司 (HCA) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the HCA fourth quarter 2006 earnings release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Vic Campbell.

Please go ahead, sir.

Kim, thank you very much.

Good morning to all of you on the call and to those of you who are listening to our web cast.

With me this morning for our year-end conference call our CEO, Jack Bovender; our President and Chief Operating Officer, Richard Bracken;

Chief Financial Officer, Milton Johnson;

Senior VP of Finance and Treasurer, David Anderson; and our Investor Relations Officer, Mark Kimbrough.

We also have some other operators within the Company here as well that will be available during the Q&A.

Let me remind you that today's call will contain some forward-looking statements based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those expressed in these forward-looking statements.

Many of these factors are listed in our press release, which I hope you got this morning, and in our various SEC filings.

Many of the factors that will determine our future results are beyond the ability of the Company to control or predict, and in light of significant uncertainties inherent in our forward-looking statements, you should not place undue reliance on those statements.

The Company undertakes no obligation to revise or update forward-looking statements, whether as a result of new information or future events.

As you heard, the call is being recorded and replayed, and the call will be available later in the day.

Last point that I would make is that we may make reference to some nonGAAP terms during today's call.

I direct you, in particular, to pages 7 and 8 of today's press release, which are entitled, "Supplemental nonGAAP Disclosures."

They provide a quarterly and year-to-date comparison of reported GAAP results to some of the operating data adjusted for the impact of our discount policy for the uninsured, which we began in January 2005.

You may see us refer to various costs as a percent of revenues coming from those schedules.

With that introduction, I'll now turn the call over to Jack Bovender.

Thank you, and good morning to each of you participating in today's call.

HCA today announced its fourth quarter and year-end 2006 results.

This is our first quarter as a nonlisted Company.

Milton Johnson, our Company's Chief Financial Officer, will comment on these results in more detail in a moment.

David Anderson, our Treasurer, will then discuss balance sheet and cash flow items, and also Richard Bracken, our Chief Operating Officer, is here with me to answer any questions you may have regarding operations in the fourth quarter.

I do want to say we were pleased with the results of the fourth quarter, including solid revenue growth of 5%, and adjusted EBITDA growth of approximately 27%.

I, as well as many of the Company's senior management team had a chance to meet many of you during our debt road shows last fall, and we look forward to continued dialogue with each of you in the coming year.

With that, I'll now turn the call over to Milton to discuss our fourth-quarter results.

Milton?

Thank you, Jack, and good morning.

As Jack mentioned, we're certainly pleased with our fourth-quarter results.

While overall volume trends were inconsistent across our market, we did achieve solid pricing growth, increased security, and good expense management, resulting in a significant improvement in our adjusted EBITDA margins for the quarter.

Adjusted EBITDA defined and reconciled in the Company's release, which was issued this morning.

Revenues increased 5% in the fourth quarter to $6.5 billion.

For the full year 2006, revenues increased 4.2% to $25.5 billion.

Adjusted EBITDA for the fourth quarter increased 27% to $1.276 billion.

Adjusted EBITDA for the year totaled $4.469 billion, up from $4.278 billion last year.

HCA's adjusted EBITDA margin increased to 19.7% of revenue for the fourth quarter of 2006, compared to 16.3% of revenues in the fourth quarter of 2005.

Gains and investments represented 160 basis points of the overall improvement.

In the fourth quarter of 2006, all expense categories decreased as a percent of net revenue on a year -over-year basis, with the exception of bad debt, which increased 80 basis points to 10.9% of revenue, compared to 10.1% in the previous year's fourth quarter.

Same facility revenue per equivalent admissions increased 7.5% in the fourth quarter, up 8.3% when adjusted for uninsured discounts and the best net revenue -- excuse me, growth rate we've had this year.

Same facility uninsured discounts totaled $296 million in the fourth quarter of 2006, compared to $226 million in the same period of 2005.

As a reminder, our Medicare revenue and approximately one-third of our commercial managed care revenue was repriced during the fourth quarter.

For the fourth quarter, same facility Medicare revenue per adjusted admission grew by 4.1%, and managed care revenue per adjusted admission grew 7.6% over the fourth quarter of 2005.

For the year, same facility Medicare revenue per adjusted admission grew 4.9%, and managed care revenue per adjusted admission grew 6.5% over 2005.

Although overall volume was basically flat during the quarter, certain high revenue per admission services saw good to reasonable growth in the fourth quarter.

For example, ICU/CCU admissions increased 2.7%, and NICU admissions increased 2.4% on a same facility basis.

Relative to patient volume, we experienced an overall increase in same facility admissions of 0.3% in the fourth quarter of 2006, and same facility equivalent admissions increased 0.2%.

The equivalent admissions reflect both inpatient and outpatient activity.

These fourth quarter volume trends are fairly consistent with our experience for much of 2006.

Notwithstanding overall patient volume varied from market to market during the quarter, it's important to understand that we have many markets with meaningful growth.

In fact, six of our ten largest markets had same facility admissions growth of 1.4% to 6.6%.

For example, Nashville, Austin, Houston, Tampa, and Dallas-Fort Worth experienced growth during the quarter.

This growth was largely offset, however, by the cloudy admissions in Miami, Kansas City, and Richmond.

In the case of Kansas City, although admissions were off 6.8% during the fourth quarter, primarily due to the closure of a hospital in the market, EBITDA was up 48% over the fourth quarter last year.

For the year, the Kansas City market EBITDA is up 19.7%.

On an outpatient basis, our growth agenda is well underway.

In 2006, we had 13 ASCs, or Ambulatory Surgery Centers, and 9 imaging or diagnostic centers.

We are particularly pleased with our cost management during the fourth quarter.

Labor costs as a percent of revenue adjusted for uninsured discounts totaled 38.2% for the quarter.

Our supply costs improved 20 basis points to 16.8% of adjusted revenues.

Other expenses improved by 190 basis points to 14.5% of adjusted net revenues.

Other operating expenses benefited from reductions in insurance costs, non-income taxes, as well as marketing and travel costs.

Our marketing and advertising expense run rate in December was approximately 35% below our year-to-date November, 2006 run rates.

With respect to bad debts, we continued to see increasing growth in uninsured admissions.

Our uninsured same facility admissions grew 8.7% in the fourth quarter, while three previous quarters grew at rates between 10% and 13%.

We continue to focus on implementation of the QMP program, managing the cost to treat the uninsured, and increasing the amount of point of service cash collections.

With respect to gains on investments during the quarter, the Company realized $103 million of gains from the sell of all the equity securities held by our insurance subsidiary HCI.

The proceeds of the sale will be reinvested into fixed income securities over time.

In the fourth quarter, the Company's equity and earnings ability decreased by $25 million.

Primarily this decrease was attributable to the Denver market, which is not consolidated in our financials.

About 50% of the decrease is attributed to the United Managed Care contract dispute that was resolved in November.

Now I'll turn the call over to David Anderson to discuss the balance sheet and cash flow.

Thank you, Milton, and good morning.

Let's first turn to the balance sheet.

As you can see, total current assets increased approximately $800 million from the end of '05 to '06.

A lot of that is attributable to the increase in accounts receivable of about $370 million, and also the increase in cash of $300 million.

Let me take a moment to reconcile cash for you for just a minute.

On a pre-release call, we reported we had close to $1.1 billion in cash, including approximately $750 million in cash and cash equivalents in HCI, our malpractice captive insurance company, which is not available for general corporate purposes or to service the debt.

There's approximately $400 million at that point in time that was general purpose cash.

That is still true.

After that call, the accountants decided to reclass only that portion of cash and cash equivalents attributable to the amount that's currently payable, and that was approximately $250 million.

So the remainder is still on HCI's balance sheet, and that accounts for the difference.

The $400 million that is available for general corporate purposes is comprised of about $100 million in overseas cash, translated at rates at 1231, $170 million in short term investments, and then approximately $120 million, which represented deposits in transit.

Turning to current liabilities, they're slightly decreased from year-end '05.

I think obviously, if you look in the long term debt section, that clearly reflects the LBO transaction, the debt is up from almost $10 billion to over $28 billion, and obviously, we have a stockholders deficit due to using pre-GAAP accounting as opposed to purchase accounting.

Also on the pre-release call, we did the math, and the EBITDA was 6.36 times.

That remains true.

Turning to the cash flow statement, you can obviously see all the components of that cash flow statement.

We were, for the year negative by $1.1 billion on net cash provided by operating activities.

You can do the changes, of course, but certainly net income was down primarily to LBO costs in excess of about $440 million, and also an increase in interest expense.

Turning to property and equipment purchase from cash flows from investing activities, that's basically what we believed we would do for year-end '06.

Acquisitions were -- was mainly the purchase of 13 surgery centers during the year, and also a hospital near Nashville called Tennessee Christian, the disposable hospitals is the Fort Myers -- two Fort Myers facilities disposed of in the fourth quarter, and the sale of primarily West Virginia hospitals, the LifePoint affective July 1st of this past year.

I won't go through the cash flows for financing activities.

Obviously, that reflects the LBO transaction.

And with that, I'll turn it over for Q&A.

All right.

David, thank you very much.

And, Kim, would you like to come back and hold for questions.

Thank you. [OPERATOR INSTRUCTIONS].

Our first question is from Sheryl Skolnick from CRT Capital Group.

Good morning, and congratulations on all of our transactions, and I wish you the best.

Thanks, Sheryl.

And thanks for having this call.

My questions are related to, or is related to both the cash and the cash flow.

I'm having trouble reconciling the $1.1 billion to what you just said.

The $1.1 billion released in the pre-release, and the minus $1.1 billion that David just gave us on cash flow from operations as a negative.

I'm seeing cash flow for the year of $1.845 billion.

So are those numbers you gave for the cash flow correct?

And can you just go through the numbers again for reconciling $1.1 billion of cash to $634 million of cash?

Milton or David?

I can do that again.

Thank you.

The $634 million is comprised of about $257 million in a reclass from HCI, our malpractice captive insurance company, representing the amount of currently payable claims in HCI.

This is not cash, however, that's available for general corporate purposes.

The remainder of the cash is about $100 million in international cash, $170 million in short term invested cash, and then the difference should be about $120 million, representing what's called deposits in transit, i.e., the amounts of cash deposited on a day and not currently swept into the concentration account.

Okay.

But from the $1.1 billion to the $634?

Okay.

So now if you add the difference between the $634 and the $1.1 billion, you will find an amount of cash and cash equivalents that is in HCI that in the pre-release was classified as cash --

Got it.

-- but has now -- the accountants have taken the position that, since it is available only for the insurance companies and represents cash that we believe ultimately over time will be invested in longer-term securities, they would not reclassify that -- that cash and cash equivalents.

So that's an investment of insurance subsidiary?

That's right.

All right.

Okay.

I got that.

So now I found that.

And then your comment about the minus $1.1 billion in cash flow from operations?

Yes.

Compared to cash flow from ops in '05.

Oh, the Delta.

Yes.

Okay.

I thought you -- I missed that.

All right.

And I failed -- my fault -- to mention that one of the big drivers of that number was the difference between taxes in '05 and '06, which is about -- a little over $700 million.

In '05 we had substantial deductions for stock options, for example, that led to a reduction in pay income tax payments in '05, as opposed to '06, which we were essentially a full tax payer.

And you expect it be going forward, I would imagine, as well?

Yes.

Thanks so much.

Thank you, Sheryl.

Moving on, we have a question from Lawrence Weiss from Citigroup.

Hi, guys, and congratulations on a nice quarter.

You were talking about the 7.5% of same facility revenue per adjusted admissions, and you commented that a third of your commercial payers have rolled over into the new year.

If you look back at the fourth quarter of '05, there was a 4.1% number, and that kind of grew over the quarters of '06.

Should we be looking at the 7.5% that just went up in going through the quarters of '07?

I would not make that assumption.

One thing that we enjoyed in the fourth quarter of this year was a very good service mix.

I mentioned the growth in NICU and ICU admission.

That helps contribute to the rates.

Our managed care net revenue per adjusted admission grossed in the fourth quarter was 7.6%.

For the year, we ran about 6.5%.

So the service mix certainly helps push that.

Certainly some of the repricing helps push that.

But I would not assume you were modeling the Company, that that 7.5% would continue to go up.

Thanks.

Thanks, Milton.

Thanks, Lawrence.

And our next question comes from Reeve Rinaldo from Stone Harbor.

Such an improvement on the cost reduction.

You mentioned on the advertising cost was down 35%, and insurance -- liability insurance is down.

Can you break them up?

How much it contributed on year-over-year basis as a percentage of revenue, your operating expense was down quite a bit, and also salary as a percentage of sales also down.

Can you elaborate on that?

Milton, do you want to do that?

Sure.

Let me just give you some of the other operating expenses.

I'll give you the dollar amounts I have handy, and obviously, you can divert that to a percent of net revenue.

Sure.

Contract services down about $18 million over the prior year fourth quarter.

The insurance decrease of $19 million primarily sets a property insurance decrease.

Marketing is about $14 million.

Non-income taxes about $9 million.

Travel and entertainment down about $10 million.

Now, we did see in other operating expenses a substantial increase, however, in professional fees, and those went up about $22 million over the prior year, it offset some of the benefits we have in those other discretionary expenses.

With respect to labor costs, certainly I think our labor management, labor performance was the best we've had this year.

Our SW&B per adjusted admission growth rate on the same facility basis are 5.5%.

Again, the lowest growth rate in that metric we've had all year.

And then we did have good productivity improvement, man hours per adjusted admission down 1.5%, and again, to achieve that with relatively flat volumes, I think, is a real plus for us.

So a combination of good revenue growth and good expense management really drove the quarter.

Okay.

Thank you.

Thank you very much.

Moving on, we'll hear from miles Highsmith from Wachovia.

Hey, guys.

How are you?

First one, there's a decent amount of variability in profit amongst the facilities.

I'm just wondering if you could maybe talk about some of the successes you had with Kansas City in the last year or two, and maybe how many other markets you might have some more opportunities with?

Richard, do you want to address that?

Well, just quickly on Kansas City, we're obviously very, very pleased with our overall performance in Kansas City since we acquired the system.

Last year, we had obviously the best year in the history of the acquisition.

And we really don't have all our capital fully deployed yet.

So to your point about future successes, we clearly count Kansas City as a whole lot more to come.

We will be opening our new Independence hospital and our Lee Summit hospital, which really, should really improve our position in that market.

I think Kansas City also benefited not only from some capital deployment, but some improved revenue per unit in our managed care contracting, and, of course, expense improvement as we systematically deployed our various systems across various hospitals.

So we're very pleased with Kansas City, where it is now, and what it prospects.

Really when you think about -- and I have some of my group team here, they can maybe talk in more detail about some of their markets, but we are very optimistic about many of our markets.

As you know, we have had a very disciplined operating agenda over the last several years, both in terms of pricing and capital expenditure, combined with a very robust patient service and safety agenda.

So I think we're well positioned in our market.

Our outpatient strategies are continuing to deploy across these various markets.

So we're very, very pleased.

We like our markets.

We're in large cities, fast-growing population centers, suburban locations.

So there's a lot of, what we think, upside to these markets.

Sam, any thoughts from the Western Group, or Don from the Eastern Group.

Well, I think if you think about differences in performances -- this is Sam Hazen from the Western Group -- the market in our group that sticks out as being sub par is Las Vegas, and as you may be aware, we have recently terminated our relationship with the Sierra Health Plan in Las Vegas, which was about 25% of our business in that market.

And we think that will free up our facilities to backfill with more appropriately reimbursed patients, and that will help sort of right size that market, similar to maybe the right sizing that's gone on in Kansas City.

And so that transition is in play.

We actually ended our relationship at the end of the year, and we're seeing a pretty good start to the year with our plan, and I'm optimistic that the plan we have in that market will yield positive results for us.

Across the rest of our group, our markets generally performed pretty consistently and comparably to each other, so there's not a great deal of variation, whether it's California or Texas markets, as far as profitability goes.

I think when we look at '07, Las Vegas is clearly the market that has the most upside for us, we think, in sort of repositioning itself from a profitability standpoint.

All right.

Sam, thanks.

This is Don Stinnett in the Eastern Group, and in the state of Florida, we've seen our volume stabilize in the recent quarter post the United termination, which affected both our Miami and Tampa markets.

Volume has returned, and we saw actually a little bit of early respiratory volume in the month of December, and at this point, feel like it's the reduction -- some of the volume reductions we saw this past year in the state of Florida are somewhat behind us, and we're pretty optimistic about it as we look forward.

Sam, thank you.

Thanks, Miles.

Thanks, guys.

Our next question is from Doug Dieter from Bank of New York.

Good morning.

Good morning.

Had two quick questions for you.

First would be, if you could disclose gross revenues charity care discounts, and the second one, I'm actually glad you addressed the Sierra open-ended negotiations issue.

What is -- were there any other markets where you had similar situations, and particularly with the Blues, one of the larger insurers.

On gross revenues charity, Milton?

Yes, we've got -- hang on.

Let me see if we have that handy.

Maybe while they're looking, let me take a shot -- [multiple speakers].

Well, just in terms of Sierra, Sierra was a unique contract.

You might recall Sierra was a long term contract that HCA had entered into, and basically over a long number of years, we saw it got out of alignment with the market, and that's why we're in the negotiating position we're in now.

But our other contracts, obviously, didn't have that kind of -- do not have that kind of a term to them, and really, if we think about our Medicare books for this year, it's virtually all done, and much of it is done -- Bev, what do we have done for next year?

Close to --

We have right at 86% completed for next year.

For '08.

So '08 is largely done as well.

So much of our book is for this year and for '08 is already buttoned down, so we're not really anticipating another Sierra-type event here in the next couple years.

Thank you.

Is it the impact of Sierra issue?

Doug, we can't hear you.

Can you speak up a little bit? .

Sure.

What is the anticipated impact?

Top line or bottom line for the Las Vegas market?

Well, our top line -- I'll give it to you in patient dates.

I don't have the -- well, yes, I do.

We had about $140 million in net revenues in Las Vegas, $150, somewhere in that zone, that came from Sierra.

We anticipate losing about 80% to 85% of that, as far as just the Sierra book.

Our anticipated backfill is somewhere between 30% and 40%, which will translate close to about 60% to 70% of the $140 million.

So consider the backfill coming back at a revenue relative value that's almost two times the Sierra business.

So we need to backfill maybe 40% or so in order to sort of break even on this, and probably actually improve our profitabilities.

Did we end up --

Yes, again, gross revenue for the year, $85.4 billion, and I'll give you the uncompensated care breakdown.

If you've seen our financials, our bad debt for the year is $2.660 billion.

We had charity care discounts of $1.296 billion, and uninsured discounts of $1.94 billion.

All right.

And, Bev, you had something you wanted to add?

Yes.

My 86% was for '07 and managed care contracts complete.

And then for '08, we're at 62% complete.

Sorry for the confusion.

Thank you very much.

Thanks, Doug.

Thank you.

We'll go next to Todd Corsair from Bear Stearns.

Hi, thanks very much.

Hi, Todd.

Could you give us an idea of what your expectations are for Cap-Ex and working capital, in terms of the source reviews there for 2007?

Well, Cap-Ex for '07 is about $1.8 billion is what we've targeted, similar amount to what we've spent this year.

Okay.

And in terms of working capital, would we expect to see much of a use there, or is there an opportunity to sort cash from the balance sheet through receivables or otherwise.

I don't think changing working capital is going to be a major impact either way.

I'm looking at David, who --

We -- correct, we have a little excess cash, not to bring up that subject again, at the end of the year.

So hopefully you'll see that go down a bit in fiscal year '07.

Okay.

And in terms of noncash stock base compensation, what amount is reflected in your adjusted EBITDA number for the fourth quarter and for 2006.

I assume -- are you adding that back?

And if so, what's the amount that's being added back.

The share base compensation in '06 is part of salary and wages, and for the year, it's just over $85 million -- $82 million, I believe is the number for '06.

And not much of that in the fourth quarter because of the LBO and the Nova quarter and change of control.

You know, that -- okay.

Don from $12 million in of quarter, $82 for the year.

And it's part of the expense structure in arriving at adjusted EBITDA.

All right.

So you guys -- you guys have added that back, or have not?

We have not added it back to EBITDA.

To adjusted EBITDA as you reconcile it.

That's right.

It's not added back.

It's expensed in arriving at adjusting EBITDA.

Great.

Thank you.

Sure.

And last one.

In terms of -- was there any -- what was the prior period -- what did the prior period cost reports contribute to net revenue in the fourth quarter, and in 2006?

And in each case versus the prior year period?

Anybody have that number handy, or do you want to get back --.

This is Mark.

I don't have it here in front of me.

But I can get to you after the call.

I appreciate it.

Thanks a lot, guys.

Thanks, Todd.

[OPERATOR INSTRUCTIONS].

Our next question is from Christine Arnold from Morgan Stanley.

Good morning.

I have a couple quick questions here.

Thanks again for having this call.

Boarder states, have you seen any impact from the Deficit Reduction Act in efforts to take folks that may have qualified for Medicaid off the rolls, and do you anticipate an impact from that?

Sam, do you want to --

This is Sam Hazen again.

In Texas, we haven't seen any kind of material impact on that.

Texas Medicaid continues to be an issue within the state, but it's not necessarily related to folks coming off the rolls, it's more about the reimbursement levels that they pay us.

Okay.

Do you see any states where you're seeing either an increase in the rolls because maybe there getting more state -- federal matching funds, or conversely a reductions like we've seen in Tennessee?

No.

Not materially in any of ours, I don't think, Don, in the east --

None in these.

Everybody is shaking their head no.

Okay.

And then contract labor was up in the quarter, and is that a seasonal issue?

We stock up in anticipation of maybe a flu season, or can you talk about the factors that drilled that up? .

Anybody got a handle on that one?

This is Don Stinnett.

In the east, we did, as I referenced earlier, got hit with a little bit of early respiratory or flu volume and did expend a little more in contract labor than we expected to.

But that's -- it's not been a continuing trend beyond the month of December.

So should we look at the contract labor expense ratio as something that could improve over time?

No, I don't think I'd go there.

This is Richard speaking.

We -- a couple years back, we made a very large move to bring contract labor down, and we were very successful with it.

Okay.

We've seen it inch back up a little bit, and I think it's more of what's going on in the marketplace, and we're -- obviously, as we manage our productivity very carefully, it requires that we rely on contract labor a little bit more if we have spikes and volumes.

So I could see that number kind of being where it is or inching up rather than getting better.

Okay.

Thank you.

Thank you very much.

Kim, we've got time for one more question.

Thank you.

And that question will come from Henry Reukauf from Deutsche Bank.

Yes, good morning, guys.

Just a question on your contracting.

I know in the quarter you had the 7.7% increase in your managed care contract and I guess with 82% done for the current year, you should just about know -- it looks like you've taken a pretty hard line with some of the contracts that are off market, with Sierra and United.

What is the average increase you're looking for, if 7.7% is not the right number?

Beverly, you want to address that?

Sure.

Our pure rate in our contract negotiations run between 6% and 7%.

And right now, with what we've completed in '07, we're anticipating about a 6.7% year-over-year increase.

This is Milton again.

The difference in what we have this quarter goes back to service mix primarily.

That's driving the incremental increase over really our base pricing.

Okay.

And what kind of --

Thank you, Henry.

Thank you very much.Beverly.

I want to thank everybody for being on the call.

Mark and I are around for the day, if you need us.

So thank you, and we look forward to talking to you after the next quarter and seeing you in between.

That does conclude our conference call today.

Thank you all for your participation.