環球健康 (UHS) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Universal Health Services fourth quarter and full year-end earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Filton, you may begin your conference.

Good morning. I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning from Las Vegas.

Good morning.

Welcome to this review of Universal Health Services' results for the full year and fourth quarter ended December 31, 2003. As discussed in our press release last night, the Company had another strong year, recording earnings per diluted share of $3.20 for the year and 75 cents for the quarter. This marks our 11th consecutive year of rising EPS.

During this conference call, Alan and I will be using words such as believes, expects, anticipates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on page 16 of our Form 10-Q for the quarterly period ended September 30, 2003.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenue increases have been strong despite no growth in admissions. Excluding the effect of the additional revenues recorded during the fourth quarter of 2003 to convert the Company's France subsidiary to a December 31st year end, UHS recorded revenue growth of approximately 11 percent during the full year and the fourth quarter ended December 31, 2003, as compared to the comparable prior-year periods. Admissions to our acute care hospitals owned for more than a year decreased one-half of 1 percent for the full year and 2.5 percent in the fourth quarter

Previously, the Company has discussed a number of dynamics that have negatively affected the same-store acute admission comparisons in 2003. These have included the conversion of one of our Puerto Rico hospitals to pediatric services and the elimination of two uneconomic services at another hospital. These changes impacted acute admissions by about 100 basis points in the fourth quarter. Additionally, the opening of Spring Valley Hospital in Las Vegas on October 1 adversely affected same-store comparisons in that market.

Although it's not possible to precisely quantify the admissions that Spring Valley cannibalized from our existing hospitals, we estimate the impact to be another 100 basis points in the fourth quarter. Lastly, admissions to the Company's acute care hospitals were very strong during the fourth quarter of 2002, increasing 7.9 percent on a same facility basis over the 2001 fourth quarter, which created a difficult quarter-to-quarter comparison during this year's fourth quarter. Generally, we are finding that acute admissions remain soft and will continue to be so for the near-term, at least. We do believe that the long-term drivers of acute care volume growth, especially favorable demographic trends, remain intact. Admissions to our behavioral health hospitals owned for more than a year increased 2.9 percent for all of 2003 and 5.5 percent in the fourth quarter.

Pricing trends remain strong, with our acute care hospitals receiving a 6.6 percent increase in revenue per adjusted patient day for the full year and 4.4 percent increase in revenue per adjusted patient day in the fourth quarter. Our behavioral health facilities experienced a 3.3 percent increase in revenue per adjusted patient day for the full year, and an increase of 4.5 percent in the fourth quarter.

Excluding nonrecurring items, earnings before depreciation and amortization, interest and tax, or EBITDA, was 491 million for the full year and 121 million for the fourth quarter ended December 31, 2003. Comparisons to last year's EBITDA and earnings results are made difficult by the couple of not (ph) unusual or nonrecurring charges recorded this year to recognize the reversal of accrued liability resulting from a favorable court decisions, gains on the sale of various assets and businesses, and the write-down of the carrying value of one of our Puerto Rico hospitals. We included three and twelve-month schedules of supplemental consolidated income statement information with the press release last night that helps reconcile these items and will help make the comparisons easier. When we make these comparisons, we calculate that EBITDA increased 13 percent for the year and 10 percent for the fourth quarter.

As also calculated on the schedules of consolidated income statement information, adjusted net income for the full year increased 11 percent to 194 million, and adjusted earnings per diluted share increased 14 percent to $3.11. During the fourth quarter of 2003 as compared to prior year's fourth quarter, adjusted net income increased 6 percent to 45 million and adjusted earnings per diluted share increased 9 percent to 73 cents. Cash flow from operations for the year was 374 million, an increase of 13 percent from the prior year. With this cash flow, we made $224 million of capital expenditures and purchased 1.36 million UHS shares for $54 million. We also spent 278 million on hospital acquisitions, including 230 million spent on December 31, 2003 to purchase four acute care hospitals acquired effective January 1, 2004.

At year-end, the Company's ratio of debt to total capital net of cash was 43.6 percent, and the ratio of debt to EBITDA was 1.72. Obviously UHS's strong earnings and cash flow continue to improve the financial strength of the Company and allowed us to repurchase approximately 2.3 percent of the shares we had outstanding at the beginning of 2003. The Company also implemented its first cash dividend payment in the fourth quarter of 2003, reflecting management's confidence in the continuation of a strong cash flow from the business.

During the past few years, UHS has invested heavily in its existing communities and in acquisitions. While not all of these investments are yet mature, we are pleased to continue to record an increasing return on capital invested. There are many ways to measure return on capital. In this context, I am using adjusted net income divided by the sum of debt and shareholders' equity, excluding from debt the 230 million spent at year-end to acquire four acute care hospitals. Based on this calculation, our return on total capital increased to 11.1 percent as of December 31, 2003, from 10.8 percent as of year-end 2002.

The operating margins of our acute care hospitals were pressured in the fourth quarter by the softer admissions and by an increase in the volume of uninsured patients being treated at our hospitals. We define operating margins as operating income or (ph) net revenue, less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. The operating margins for our acute care hospitals were 17.2 percent for the full year 2003 as compared to 17.3 percent during 2002, and 14.7 percent for the fourth quarter of 2003 as compared to 17.1 percent during the prior year's fourth quarter. The operating margins for the Company's acute care hospitals were relatively stable for the full year, but declined significantly during this year's fourth quarter as compared to the fourth quarter of 2002, due primarily to an increase in the provision for doubtful accounts at these facilities, which increased to 10.6 percent of net revenues during the fourth quarter of 2003 as compared to 8.3 percent during the fourth quarter of 2002. We do not think it likely that volumes will markedly improve or that the level of uninsureds will decline until there is a more notable strengthening of the labor market.

Buoyed by stronger admissions, operating margins in the behavioral health business improved for both the full year and the fourth quarter to 23.5 percent for the year ended December 31, 2003, and 25.4 percent during the fourth quarter as compared to 20.3 percent during the full year of 2002 and 20.4 percent during the fourth quarter of 2002. A reduction in bad debt expense favorably impacted behavioral margins in the fourth quarter and full year of 2003, due to the reversal of $4 million of previously established bad debt reserves, which were reversed as a result of Magellan Health Services recent emergence from Chapter 11 bankruptcy protection.

Prior to the fourth quarter of 2003, the Company's France subsidiary was included on the basis of the year ended November 30th. During the fourth quarter of 2003, the Company recorded an additional month of financial results for its France subsidiary to convert the subsidiary to a December 31st year end. The additional month of financial results increased net revenues by approximately 18 million, or 1.9 percent of the Company's net revenues for the three-month period, and half a percent for the twelve-month period ended December 31, 2003. The effect on the Company's consolidated net income resulting from this adjustment was less than $500,000 in each of the three- and twelve-month periods ended December 31, 2003. Alan will now discuss some of our recent activities and our outlook.

Thank you, Steve. We are pleased with the results recorded in 2003 despite the challenges. Let me bring you up-to-date on a few recent projects. As you probably know, in early October we successfully opened the 176-bed Spring Valley Hospital in Las Vegas, our fourth hospital in the market. We have been very satisfied with the patient volumes and revenues in its first months of operation, although, as expected, its results had a dilutive impact on the Company's fourth-quarter earnings. Also in early October, we opened a 90-bed addition to our Northwest Texas hospital in Amarillo, Texas. This expansion has helped secure and improve position for the hospital in the cardiac care and pediatric markets. UHS has spent approximately 224 million on capital expenditures in 2003, and we plan to spend a similar amount in 2004. The new 120-bed Lakewood Ranch Hospital in Manatee County, Florida should open in the summer of 2004. Additionally, there are number of smaller projects designed to add capacity in our existing markets.

Our behavioral hospitals, in particular, have operated at a very efficient 78 percent available occupancy for the year, and we've undertaken several projects to add capacity at our busiest facilities. In the legislative area, we believe that a final rule on psychiatric PPS will be forthcoming shortly, and believe our hospitals will begin to see the benefit starting in 2005. We continue to look selectively for acquisitions where we think our skills and knowledge can improve the quality of care and financial viability of the hospitals. So far in 2004, for instance, we've acquired a 90 percent interest in Methodist Hospital, as well as Lakeland Medical Center in Louisiana, strengthening our competitive position in East New Orleans market, where we've successfully operated our existing Chalmette Medical Center for many years.

In California, we have acquired three hospitals. One in particular is in the Riverside County market, where we already have a successful existing presence with two other hospitals. While we are bullish on the long-term prospects of these development projects and acquisitions, we acknowledge the near-term likelihood that there will be some dilutive effect to our earnings in 2004. We are currently reviewing additional opportunities in our acute care, behavioral health and French operations.

We will face some challenges in achieving our goals this year, including the continued admissions softness, the pressure from increasing flow of uninsured patients, and the integration of the newly-acquired and developed facilities. However, UHS has highly regarded hospitals in growing communities and benefits from the efforts of our over 38,000 dedicated, trained personnel across the country. By anticipating and supporting the needs of our patients and their physicians, we hope to meet these challenges in 2004. Steve and I would be pleased to answer questions at this time.

(OPERATOR INSTRUCTIONS) Lori Price of J.P. Morgan.

I have two questions. The first is, I was wondering if you could maybe elaborate, Alan, on the comments that you made on Las Vegas, and maybe give us some sense as to what has happened to your core facility volumes since opening Spring Valley in October and what has happened to overall profitability in the market when you include Spring Valley since October?

Since October? Steve, do you want to give her some of those numbers?

I think, Lori, that the decline in the minority interest in the quarter reflects the fact that profitability in Vegas suffered some in the fourth quarter, I think for two reasons. As you allude to, obviously, as expected, the opening of Spring Valley, while it's gotten off to a nice start obviously still suffers the expected inefficiencies of a new hospital, and to some degree has cannibalized business from our existing hospitals and has the impact of in essence shifting business from higher margin, more efficient hospitals to a lesser margin, less efficient hospital.

And then the other factor at play, I think, in the quarter in Las Vegas is probably our Las Vegas hospitals have felt a disproportionate share of the impact of the rising bad debt expense in the fourth quarter. That is a market where we have clearly seen a rise in uninsured patients coming to our hospitals. And again, that is reflected in -- that is all reflected in the minority interest in the quarter.

Lori, our hospitals are well-positioned. There is a greater understanding, I think, by the managed care people that we are playing a larger part. And given what Steve has said and what the results have been from Spring Valley, we are very pleased. It's an opening, and the volumes have been much more than -- or a lot more than we had anticipated. So I think it may take a little bit for the financial results to come around and reflect what is actually happening.

Right, and I am not suggesting that ultimately, given the growth dynamics in that market, that you won't end up filling those facilities, including Spring Valley and Summerlin. One other follow-up for you, Alan. On your commentary on psych PPS, do you have any idea at this point whether the final rule is going to allow psych hospitals to bypass the three-year phase-in and jump directly onto the Federal rate?

No. Actually, right now what they've done is they extended the original period, which was a 60-day comment period to a 90-day comment period. And we are absolutely right in the middle now of seeing what the comments will be and what CMS will come out with. So I really wouldn't want to say anything at this point. But it will be out shortly, and we will have to see where we stand. I think there is a very strong chance that it will just come to a short phase and (indiscernible) just put it in.

Okay, great. Thank you.

Adam Feinstein of Lehman Brothers.

Just a quick question, maybe just on the competitive landscape in Vegas. There has been some press recently about new hospitals being built. Obviously a great market and market that others want to get bigger in, as well. Maybe if you have any color -- it sounds like you are out there, Alan, so whatever you are hearing, that would be very helpful. And secondly, Steve, can you comment just on the Medicare give-backs? You guys haven't publicly commented just on the benefit there, and I just wanted to see what's incorporated the guidance for 2004. Thank you.

Well, the market itself continues

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(joined in progress) McAllen, Texas, the whole south Texas area, the Las Vegas. We really did not have -- Puerto Rico -- any significant flu in those markets. So we certainly didn't have any flu impact in the quarter. Other than that, A.J., the thing that we see is we do see continued soft admissions in Puerto Rico, just generally, in addition to the conversion of the hospital. That probably is the market that we are in that has suffered most economically, just generally, and that is, I think, reflective in our admissions. And I think the only other dynamic that I would point out is that for probably the past five or six quarters, we are getting a lot of juice out of the GW market. As we prepared to and ultimately opened the new hospital, we were getting double-digit admission increases there for many quarters. GW is still doing well, but it has largely plateaued out. So whereas that was offsetting some of the other softness for a period of time, we're not really seeing that right now.

Maybe just ask on Puerto Rico a little more. I understand the service adjustments that you are making and the conversion of the one facility to more of an outpatient focus and the dynamics that that is having on the volumes. In terms of the earnings coming out of that market and how that is affecting the overall picture, do these changes somehow improve the earnings prospects for that business, or is it sort of treading water at this point in that market?

Well, the conversion of the pediatric hospital -- we'll put it this way -- the elimination of that hospital as a hospital providing services to very aged Medicare patients clearly will help us, because that facility lost money on an EBITDA basis last year. And in sort of worst case, the pediatric facility will break even or we will choose to do something else with the facility. But we will not continue to incur EBITDA losses at that facility. So in that sense, it will certainly be a turnaround.

The challenge in Puerto Rico, and it's been that way for us really since we bought the place, is the reimbursement down in Puerto Rico tends to be much lower than it is anywhere in the States, and while we are getting a little bit of relief on the Medicare side, that just continues to remain a significant challenge down there. Along with, as I said, an economy that right now is suffering quite a bit.

Okay, thanks a lot.

Gary Lieberman of Morgan Stanley.

Steve, if you could just briefly review your bad debt methodology and then discuss any changes that you've made or perhaps any changes that you foresee making to maybe get in front of what looks like it could be a trend that continues to deteriorate for the industry.

Our historic bad debt methodology, Gary, has been one that I think people refer to as a cliff methodology. And that is we reserve for all accounts after a certain amount of time, regardless of what financial class they are or whatever. The average of that works out to be about 150 days across the Company. What we have started to see in the second half of 2003 is an increase in uninsured patients and just as sort of a double check on the cliff methodology, what we have started to do is say that we are going to make sure that there is a large percentage -- almost all of our self-pay or non-pay accounts are reserved for regardless of age and adjust our cliff upward -- not downward, but upward if that's not the case. And that to some degree is what we did in the fourth quarter.

And in the fourth quarter, the other thing we did, just to try and anticipate some of this increased self-pay is lower the cliff in a couple of hospitals -- bring it down, let's say, from 180 days to 150 days, just to try and make sure we are recognizing on as current a basis any deterioration in payor mix.

Just as a quick follow-up on cash flow. Cash flow from operations about 60 million in the quarter, which is down from a year ago -- I guess it was about 86 million, sequentially it was about 130 (ph) million. Is there anything in particular, any type of payment or deferred liability that's in there?

Yes, I think that the couple things -- I looked at it more sequentially than I did compared to last year, Gary. There are a couple of things in the quarter the stood out were we had about $20 million more tax payments in the quarter than we did -- in the fourth quarter than we did in the fourth quarter. That is really just a timing issue. We had about 80 million for the year, so it is in line with what our annual payments were. And the other thing is probably just another 5 million or so of working capital that we invested in the Spring Valley Hospital opening. That's about a $25 million decline from the third quarter. I think for the year, obviously, the cash flow looks like it is very much in line with our EBITDA, etc., and we are relatively pleased with the cash flow for the year, although it is admittedly a little choppy.

Thanks a lot.

Frank Morgan of Jefferies & Co.

I have two questions. I was wondering if you could give us another update on the dish (ph) outlook. I know last quarter you mentioned that it looked like Texas might come in flat -- just an update there on Texas and South Carolina. And then secondly, on the bad debt issue in the Las Vegas market, could you give us some real live numbers on what those numbers run in that market relative to your company-wide averages? Thank you.

Frank, the dish situation in Texas is as you alluded to. The program has been renewed for the state's fiscal year, which began in September of '03 at amounts that are comparable to if not a little bit higher than what we received last year. South Carolina is a different story. The South Carolina Department of Health is struggling right now in terms of getting its program approved by the federal government. And therefore, we have not been recording -- the South Carolina fiscal year began in July of '03. We have not been recording any disproportionate share since July. And we will not until there is more visibility from the state in terms of what the new program is going to look like and what our share of it would be.

Thank you. And then on the bad debt.

I'm sorry. The bad debt, I do not have the Vegas numbers in front of me, Frank. But historically, our Vegas hospitals have run at a higher bad debt percentage than the acute division average. And that has certainly been true -- it was certainly true in the fourth quarter. I think part of it is we don't have necessarily -- you have in the Vegas markets more of the working uninsured; people might come into the hospital with a job but no insurance or with a job but a very significant patient portion, etc. You don't have the absolute sort of chronic uninsured that you might have in other markets. I mean, you have them, but there's also a county hospital in Las Vegas, which we don't have in markets like McAllen or whatever. So Vegas has always run as a bad debt percentage higher than the acute average and it still is running that way. And I think we would expect it to continue that way in 2004.

Is the ultimate collection rate on that working uninsured population any better than kind of what you think of as your classic uninsured?

I think if you're talking about working uninsured, I think it is pretty low. In those patients, you have a lot of these term-paid plans, et cetera, because patients can afford to pay a small amount every month or twice a month or whatever if they in fact have a job. So it's a little better than, I think, the completely unemployed. But I think the working uninsured are different than people who have co-pays or deductibles. That is a different story. But if you have somebody comes into the hospital, has a job, runs up a $25,000 bill, however, they are going to have a hard time paying that if they don't have any insurance.

Okay, thank you.

David Dempsey of Avondale Partners.

A question for you on pricing and looking into 2004 and 2005, Steve, in terms of managed care. Are you seeing any particular pressures that cause you to reflect on and change your pricing expectations going forward? How are the contract renewals going on?

I think the contract renewals have generally been positive, David. My sense is 2003 was probably the high end of the managed care pricing cycle, of the commercial pricing cycle. But I think that the diminution in rates in 2004 will be relatively modest. And again, it's probably a little bit too early to think about 2005, but I don't necessarily see that as further declining a great deal. Commercial rates, most of which were 2004 have already been renewed, seem to be pretty strong, although again not quite as high as 2003.

And then in the fourth quarter, obviously the pricing was solid. It looks like supply expense was up, which tells me there was some higher acuity. Is that what occurred in the quarter that helped both pricing and increased the supply expense?

Actually, I think the supply expense dynamic in the quarter really had to do with that extra month of France. I don't know if you recall us talking about this, but supply expense in France is extremely high. It runs about 30 percent of revenues as opposed to about half that rate here in the States. So having that extra month of France and their higher supply expense at least proportionally moved up (ph) 40 basis points on supply expense in the fourth quarter.

Okay. Thank you, Steve.

Kemp Dolliver of SG Cowen Securities.

Thanks, and good morning. A couple questions. First -- and I apologize if you covered this earlier, but with the catch-up in the fiscal year for France, what is a good revenue run rate now?

I think that I had said in the earlier comments that the extra month of revenue was worth about 18 to $20 million. So you can sort of use that as a sense of what the run rate is.

That's great. Secondly, with regard to the dilution from startups and acquisitions, is it fair to think that really most of that is the new facilities coming online versus the acquisitions?

I think that, obviously, when you are starting from zero, it is obviously harder to get going. But I think that in the case of a couple of the acquisitions, I think Methodist being most notable, these were facilities that did have very low margins, so at least from a margin perspective they will be dilutive until we can make some of the changes and rationalize some of the services in the markets. Some of the other acquisitions will start at more normalized margins.

Okay, great. And finally in the past, you've talked about expansion in your behavioral facilities. How much of that will we see in '04?

We've probably, Kemp, got about 6 projects underway right now to add capacity in existing markets. We've actually finished a couple this year, that on average, I think, add maybe 20 to 25 beds in existing hospitals. Like I said, there's another half a dozen projects underway. And essentially, Kemp, we are looking at every one of our markets to see whether, either because of our current capacity constraints or because of the advent of psych PPS, we are thinking about whether we need and evaluating whether capacity expansion is a prudent sort of response at this point.

Right. Will we see, I guess, these six projects you referenced come in in '04 in terms of completion?

I think, again, we had about three projects underway in '03 and they will clearly come on in '04. And some of the projects that are underway now will certainly be up and running within three to six months. Psych projects generally are not nearly as complicated as adding acute care capacity, so they usually can be finished much faster.

That's great. Thank you.

At this time, there are no further questions.

Okay. We thank everybody for your morning. We apologize for the technical difficulties. And we look forward to speaking with you in the future.

This does conclude today's conference call. You may now disconnect.