環球健康 (UHS) 2009 Q1 法說會逐字稿

Good morning, my name is [Camikel] and I will be your conference operate -- operator today. At this time I would like to welcome everyone to the first quarter conference call. All lines have been placed on mute to prevent any background noise. (Operator instructions)

Thank you, Mr. Filton, you may begin your conference.

Thank you very much. Good morning, I'm Steve Filton, Alan Miller, our CEO is also joining us this morning. Welcome to this review of Universal Health Services Results for the first quarter ended March 31, 2009. As discussed in our press release last night the company recorded net income per diluted share of $1.37 for the quarter. During this conference call Alan and I will be using words such as believe, expects, anticipates, estimates, and similar words that represent forecast projections and forward looking statements. I recommend a careful reading of the section on risk factors and forward-looking statements in risk factors in our form 10-K for the year ended December 31, 2008.

We'd like to highlight just a couple of developments and business trends before opening the call up to questions. On a same facility basis in our acute division, revenues increased 0.9% during the first quarter of 2009. Adjusted admissions to our hospitals owned for more than a year were flat compared to the prior year quarter. We remind you, that for the first time, our Centennial Hills Hospital in Las Vegas is included in our same store comparisons and while we believe -- while we continue to believe that it cannibalized some of its volume from our existing facilities, overall admissions in the Las Vegas market are up 3% in the quarter. On a same facility basis revenue per adjusted admission rose 0.9% during the first quarter of 2009. We define operating margins as operating income or net revenue, less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues.

On a same-facility basis operating margins for our acute care hospitals increased to 17.5% during the first quarter of 2009 from 16.2% during the first quarter of 2008. The margin improvement results from the significant turn around Centennial Hills performance from its opening quarter a year ago, the continued rebound of the the McAllen Texas market, significant cost controls and only very modest increases in uncompensated care expense. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $158 million and $154 million during the three-month periods ended March 31, 2009, and 2008 respectively. We note that during the past two years we experienced our lowest levels of uncompensated measured as a percentage of net revenue during the first quarter of each of those years. On a same-facility basis revenues in our behavioral health division increased 2.8% during the first quarter of 2009. Adjusted admissions to our behavioral health facilities owned for more than a year increase 0.5% during the first quarter and revenue per adjusted admission rose 2.3% over the comparable prior-year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 25.0% during the quarter ended March 31, 2009, as compared to 23.7% during the comparable prior-year period. Our cash flow from operating activities was approximately $152 million during the first quarter of 2009, as compared to $132 million in the first quarter of 2008.

At March 31, 2009, our ratio of debt to total capitalization was 37%, and the ratio of debt to EBITDA was 1.6 times. We spent $78 million on capital expenditures during the first quarter, included in our capital expenditures were the construction costs related to a new 171 bed hospital in Palmdale, California, and the 220 bed [Texoma] replacement hospital, both of which are scheduled to be completed and opened ether late in 2009 or early in 2010. In California we're also underway with a major expansion of emergency room imaging in womens services to our Southwest Healthcare campuses in Riverside county California. And our new behavioral facility in Fayetteville, Arkansas is also scheduled to open in the third quarter. We also have multiple additional projects to add capacity to add capacity to our busiest behavioral facilities. We opened a total of 96 new behavioral health beds during the first quarter and anticipate opening a total of approximately 375 new beds in the behavioral division in 2009.

During the first quarter of 2009, we repurchased approximately 435,000 shares of our class B common stock at an average price of $33.75 per share. We currently have 1.9 million shares remaining under the previous authorized share repurchase program. We would be pleased to answer your questions at this time.

Thank you. (Operator Instructions) Your first question is from Shelley Gnall.

Hi, thanks very much for taking my question. Steve, going back to a year ago on the first quarter 2008 conference call. You had said that the economic metric that was -- that most affected hospitals, was unemployment rates, and I believe you indicated that if unemployment rates pick up in your markets dramatically, you may not feel the pinch for at least a couple of quarters. So, fast forward, unemployment in your key markets has increased pretty dramatically, its over 10% now. Your bad debt trends have shown actually some improvement. So, can you remind us what our expectations were at the time and are you still expecting a lagged effect?

You know, Shelley two months ago when we reported our 2008 earnings and gave our 2009 guidance. We said at the time that our -- that guidance presumed that uncompensated care expense would increase in 2009 by approximately 50 to 75 basis points over our 2008 whole-year experience. We did better than that in the first quarter, but that's still our expectation. We believe -- we read the same reports that you do. Most economists believe that the economy is going to continue to worsen in 2009, that unemployment will continue to get worse, and we continue to believe that our uncompensated care expense will wind up in 2009 being 50 or 75 basis points higher than it was in 2008.

So -- so far to date, what are the effects of unemployment? What affects have you seen in your markets from the high unemployment? Especially in Las Vegas?

In Las Vegas, and I think we said this in our fourth quarter call, and I think this is true in California as well. I think the weakening economy has been manifested in somewhat of a deterioration in our payer mix. A higher level of uncompensated patients in those markets, although volumes have held up relatively well in those markets. In some other markets we've seen the effect of a weaker economy in slightly lower volumes, certainly with volumes in the negative range over the last couple of quarters, that's the first time that we've been -- had same-store acute care volume growth in the negative range for -- certainly in my recollection and I think that's a direct result of a softer economy.

Okay. Great. And then just one last sort of high-level question. EBITDA margins were very strong in this quarter, and I'm wondering if you can speak to the favorable developments in the operating environment that we're seeing. EBITDA margins, on a consolidated basis, haven't been this strong, really, since back in 2003. But at that time, the company was growing the top line, you know, in the high single low double-digit range. So, can you compare the operating environment now to the last time you were able to sort of produce this kind of margin?

I mean, it's a broad question, Shelley. I'll try and highlight, I think, what are a couple of significant changes. I think from an industry-wide perspective -- and it strikes me that four or five companies have now reported and we see similar trends. I mean, I think we're all experiencing an environment, if it's not a deflationary environment, it's certainly an environment where the acceleration of our cost increases is as low as certainly we can remember in some time. Wage rate inflation is lower than it has been in some time. Supply cost inflation is lower than it has been in some time, those are our two single biggest costs. But even at the level of utility expense, and insurance expense, and marketing expenses, we've seen our costs from virtually all of our vendors increasing at a slower rate than we have expected. On top of that, we have been very focused on proactively getting our cost structure in line with what we anticipated to be a lower-volume business model, and a lower-revenue business model, and I think we've been successful at that as well. From a UHS-specific perspective, you know, one of the major and maybe the single-most significant intervening event between 2003 and today was the demunition and profitability in the South Texas or McAllen market, and one of the phenomenon that we spoke about in our 2008 call and it certainly has continued into the first quarter 2009, is the rebound of that McAllen or South Texas market. And so, that market which used to be among our most profitable, has -- it recaptured a lot of lost profitability over the last three or four years based on a whole series of initiatives that we've taken in the market to combat the physician owned competition that we've talked about at great lengths on these calls. And then finally, back in 2003, we had three hospitals in Las Vegas. We've built new two ones since then. That's our single-most profitable market and despite the recent economic weakness in the market, we continue to run above average -- above our divisional average margins in that market and we obviously have a lot more revenue in that market today than we did back in 2003, so I think that our strategic decisions over that time period have really reinforced our positive performance compared to four or five years ago.

Really appreciate the color. Thanks, Steve.

Your next question is from Adam Feinstein.

Yes, hello, good morning, everyone. A very strong number here. Just wanted to maybe start with Vegas. Maybe if you could just talk a little bit about the profitability there. So, you said earlier volumes were up 3%, but just some deterioration in the payer mix, but it sounds like profitability was up. So, just wanted to get some confirmation in terms of profitability for Vegas.

Yes, no, that's fine, Adam. As people can generally do from our financial statements, although Vegas is not the only or the single-line item on our minority interest line, it makes up the majority of that. So, you can see that our profits are up in that market, and a lot of that has to do with turn around at Centennial Hills which obviously had its opening quarter in the first quarter 2008. We've disclosed at the time that that was a dilutive result, a loss back in the first quarter of 2008. They have clearly moved in to a much more profitable situation, so we have that level of turn around. We also have discussed in the back half of 2008, that even though Vegas in general has seen some impact from a weakening economy, and certainly the local economy has been under some significant stress. That our business has held up pretty well, volumes, as I indicated in my opening remarks, remain fairly strong, actually stronger than our average volume results in the division and we've made up for a slightly weaker payor mix with a lot of efficiencies. We run our hospitals in Las Vegas at higher occupancy rates, again, than our average occupancy rates and so we tend to run them more efficiently, and that certainly helps us offset some of the overarching weakness thats being felt in the market.

Okay. And just a housekeeping item, Steve. Just, Centennial Hills, you opened it, if I remember correctly at end of January 2008, so did it move in to same-store on February 1?

No, we have it in same-store for the entire quarter. It opened actually Martin Luther King's birthday weekend in middle of January last year.

Okay, got you, just wanted to make sure I was following that. Okay, great. And then just on the -- the McAllen turn around, you've been talking about that its been an ongoing turn around there in terms of the profitability, but just once again wanted to get some more color just in terms of the magnitude the improvement there on the margins for the quarter.

Sure, well, you know, Adam, you've obviously followed the story for a long time, and you know that we suffered a significant demunition in profitability in the McAllen market in the '03, '04 time frame, things kind of leveled out in '05 and '06, and we started to regain, some of that profitability in -- in '08, and more in '09. We've always said when people asked us about the market, you know, why we were sticking with it, and sticking to it, we like the market. There's much to like about the McAllen market. It has been one of the fastest-growing markets in the country for many years. It is not an over-bedded market. All of the hospitals including ours have always run fairly high occupancy rates. It's not a heavily managed care penetrated market. Its a relatively low wage-rate market. So, there's just a lot of things about the market that we liked and we always felt that if we could at least at some level counter the dynamic of physician ownership, you know, particularly with our competitor physician-owned hospital, we could start to recapture some of that lost profitability, and I think over the course of the last five or six quarters, we've been fairly successful in doing that and regaining some of that, better paying, better-margin business that has been lost over the last few years.

So, is the -- so, is the margin -- are the margins back to the prior levels, I guess, you know, back above the 2004 levels?

You know, I think we said at the end of the year or maybe we said in our presentation that McAllen in '08 was back to 2004 profitability levels. I'm not sure at its absolute height or absolute best margins and we probably won't get there as long as the physician-owned hospital continues to compete, but it has certainly recaptured a good portion of that loss profitability.

Great, okay. And then just my final question, on the psych side, top line was a little bit lighter than what we were looking for, I know there is some impact from leap year in the quarter, but just curious just to get some additional clarity in terms of revenue growth in the psychiatric business.

Yes, well, you know, you expect a lot from us Adam, because I think our behavioral revenues were sort of spot on with our expectations in the quarter. We certainly acknowledged it again in the end of '08 that the behavioral business is subject to some of the same economic pressures as the acute business, and we felt that the overall revenue growth in the quarter was pretty much within our expectations and having that sort of margin expansion in a difficult environment like this, was a pretty impressive result from our point of view.

Sure, no, definitely, the margins were great. I was just trying to reconcile the top line there. But your comment -- I mean obviously you had difficult comp with this 9.2% last year. But your commitment on the economic pressures have you guys seen that intensify or is that just similar to what -- to the comments last quarter?

No, I think its similar to the comments last quarter. I think particularly in the residential business, which is the smaller part of our behavioral business, but in that residential business we're seeing some pressure on admission activity, and we're seeing -- you know, you see a small compression of length of stay in the quarter, and I think almost all of that is focused in the residential business as well. So, I think on the residential business, mostly from Medicaid, and Medicaid-like entities, we're seeing some pressure to reduce utilization.

Okay. Great. Thank you. Strong quarter.

Your next question is from Ralph Giacobbe.

Thanks. Good morning. I saw there's -- obviously no raise to guidance this (inaudible) pretty significant (inaudible). You know, I guess just what are your thoughts there, Steve. And I know you don't give quarterly guidance, but maybe you can talk about 1Q performance in the context of your internal projections.

Sure, I think our internal projections Ralph, where somewhere sort of between the street and our actual performance. So, we beat our own expectations but not by as much as the streets, which is part of the reason why we're not raising our guidance. I think part of that dynamic is while people are focused and understood that there'd be a significant turn around at Centennial Hills in '09 I'm not sure they are entirely focused on how much of that would be front-end loaded. Obviously with the start-up costs and the opening costs at Centennial, we lost a fair amount of money in the first quarter of last year, so that swing in the quarter is fairly significant and that gap will narrow as the year goes on. And then the other piece of it, going back to Shelley's question is we had better than expected uncompensated care performance in the first quarter, but are still of the mind -- and as I noted in my remarks at the outset -- the past two years have seen our best uncompensated care performance in the first quarter. So, we're still of the mind that those uncompensated care numbers are going to get to be more challenging as the year goes on. So, probably those three factors together influence our decision to leave our guidance, which we issued just two months ago, and at the time we had a number of questions about why our guidance was well above our consensus at that time. I think we're happy to leave our guidance where it is at the moment.

Okay. Fair enough. And then, pricing on the acute care side a little soft. You know, anything beyond a tough comp? And then, I guess maybe what should we expect going forward from that item?

Well, I think the tough comp is an important thing to note. I think our acute care pricing in the first quarter of last quarter was over a 5% increase. A lot of that had to do with a very favorable payer mix in the first quarter last year. We had better than expected, particularly commercial utilization in the first quarter of last year, some of that was commercial flu utilization. We know that we didn't see a replication of that level of flu utilization overall, and certainly not the commercial piece of it. We also, definitely -- as we talked about in the back half of '08, have seen Medicaid cuts in a number of important states in which we operate, Florida, Nevada, California have all had Medicaid cuts and so the first quarter comparison will reflect those cuts since they didn't occur until later in '08. And I would say lastly, we're seeing a continuing trend towards a migration of traditional Medicare and Medicaid patients to managed Medicare and Medicaid patients, which probably have a slightly lower reimbursement associated with them. So, I think the comparison certainly gets easier as the year goes on, and therefore, we would expect some improvement in those numbers, but otherwise for the most part, I think most of those trends continue. And again, I think we projected relatively modest growth in acute care revenue in '09, and I think that's still our expectations, you know, within some of the positives that we've already enumerated.

Okay, great. And then Steve, did you give a number for sort of normalized volume if you exclude leap and tough flu comps? Do you have sort of a projection what the number would have been?

You know, Ralph, I think, you know, we guided for the year to say that our acute care volumes would be flat to down 1%. Our behavioral volumes would be flat to up 1%. Both our first quarter numbers were within those ranges, and I think we continue to believe those are the ranges. You know, all of the things that you mentioned are true, but on the other hand, last year, you know, Easter fell in March, and this year it fell in April, and I think at the end of the day that all comes out in the wash.

Okay, fair enough and then just my last one. You know, whats the average market share in your markets, if you can give that number? And then, I guess are you seeing any examples of this environment hampering your competition and maybe sort of, you know, giving you an opportunity to take some share?

I don't have market share information in front of me, but I would say that the vast majority of our markets in which we operate, we have market share on average in the 30% to 35% range at least. And frankly, I think overtime, for the most part, where there are a few notable exceptions, we have essentially tried to exit those markets where we can't get to those levels of market share. I think that the major, sort of competitive dynamic that we see at the moment is that many of our peer hospitals, many of whom are not for profit are reducing their capital spending. They've been spending money on capital over the last few years at record rates, and you know, in the last six or nine months they've dramatically reduced their capital spending, and I think over time, this is not necessarily an immediate issue, but over time, I think we view that as a significant competitive advantage, because number 1, I don't think we will have to spend as much capital just to stay even, which has been the position we've been in over the last three or four years, and in some cases where we do spend capital, I think we will be able to gain a competitive advantage, where, again, in the past I think we were mostly spending just to stay even with our peers.

Okay. Great. Thank you.

Your next question is from Darren Lehrich.

Thanks, good morning, everyone. I have a couple of questions, I'll start first on just the expense side. Steve one thing you didn't mention in response to, you know, some of the expense management, it relates to the GPO, and I guess what I've noted is some continued incremental benefit even since you signed up with HPG, so can you just comment a little bit about, you know, what's changed as you've gotten, further in to the GPO over the last several quarters, and where you think the supply cost will ultimately settle out as a percent of revenue?

Sure, Dan, and I actually I appreciate you bringing that up. Because its absolutely a valid point. We switched GPOs in April of '08, and so the first quarter of '09 is the last quarter where we get a favorable comparison from the switch. We switched frankly for one simple reason and that was because we thought we would get measurably better pricing under the HPG GPO. I think we felt like that has occurred, and I think it has occurred in a growing amount as each quarter we brought more and more product under the new GPO, I think we've had a more significant impact, so, you know, you see supply expenses actually down in the quarter, and I think a good portion of that is a direct result of that GPO change. Now, beginning with the second quarter of '09, the comparison gets to be much more of an apples-to-apples comparison, so the benefit will not be as great, you know, prospectively from here on out.

Okay. But this would be a good -- a reasonable run rate in terms of the percentage?

I think so.

Okay. And then if I could just get -- just some spot numbers on your patient mix, and if you have that, and maybe just some commentary about your Medicare advantage and your managed Medicaid piece, you know, this quarter, you know, and as compared to last year, just to get a sense for how those two pieces of business discretely are moving?

Yes, I think I have alluded to most of this, but -- so, if our overall acute admissions were down roughly 1%. Our self-pay admissions pretty much mirrored that, they were down about 1%. Our commercial admissions were actually down a little bit more, maybe 3% or 4% compared to last year, and I think Medicare and Medicaid admissions were down slightly, mostly because of a migration to manage Medicare and Medicaid as I alluded to before.

Okay. We'll wait for the Q to get the spot numbers then. And then if Allen is in the room, or maybe, Steve, if you could just give us a brief update on the two projects -- I guess in Palmdale, and Texoma. And then specifically in Palmdale, is there any hard opening date that you have at this point? Where is that project tracking, and, you know, do you anticipate the start-up losses to be any bigger if you were to open in 2009, just given the economic backdrop?

Well, the two projects, Texoma, which is a hospital north of Dallas, they are both replacement hospitals, I think thats an important point worth noting. Texoma, at the moment, is scheduled to open in sort of the December '09 time frame, Palmdale is scheduled to open in the February 2010 time frame. Again, they are both replacement facilities, which means from our perspective that the startup expenses are relatively minimal. They really involve expenses in relocating staff and some amount of equipment from the old hospital to the new. We don't really anticipate start-up losses because, again, we have an existing operating hospital. This is not like opening Centennial Hills in a brand new location from scratch. So, there might be relatively minimal drag of, again, relocation costs and some amount of sort of duplicative staffing in the first few weeks of opening of both hospitals, but we don't view them as terribly significant.

Okay. And maybe I lost track of one California project, perhaps. But there was a de novo I think that was pushed out or maybe moth balled, can you just refresh my memory on that?

Yes, I mean, we still have plans on the shelf to build a hospital in the Riverside County market. We are not currently pursuing those plans with any active efforts and so if we were to resurrect that, its certainly years away from actual development.

Great. Okay. Thanks very much.

Your next question is from Christine Arnold.

Good morning. Couple of questions here. Inpatient prospective payment role are due out, I think tomorrow. Whats embedded in your expectations there?

Well, obviously, Christine, those rates won't take effect until October, but beginning with -- with the October in the fourth quarter period, I think we have somewhere between 0.5% and 1% of a Medicare increase that's embedded in our guidance.

Okay. And then as you think about what's happening in McAllen, has there been anything in terms of kind of a response from the other hospital there that would change the McAllen positive trajectory that you've seen?

Yes, and, you know, I certainly want to be clear, I mean, we are not, you know, devastating our physician-owned competitor. They're doing just fine and continue to do fine, but, you know, again, I mean think we're just regaining some of the loss business that we've experienced over the last few years. They've continued to expand. They've expanded a number of times. In late October -- late 2007, they -- they entered the OB business. We've disclosed that. I think frankly in retrospect, the loss of OB business that we suffered as a result of that has helped improve our margins as those of you who follow the industry know, OB tends to be one of the lower margin services particularly in a market like McAllen where, for us, most of our OB business was Medicaid. So, that actually has been helpful. Its been helpful in the sense -- particularly because we replaced it with clearly better-paying, better-margin business like cardiology business. But, the physicians continue to expand. They opened new emergency-room facilities and some new beds just at the end of the first quarter, so we may see some bouncing around of our business or some volatility, but I think that the -- the dramatic market-share losses that we experienced three or four years ago are certainly unlikely to repeat. But it's still a very competitive market, and we'll have good quarters and up quarters and down quarters in the market, but I think we just feel like we're on a much better competitive footing or certainly on the best competitive fooing we've been on since the physician hospital opened.

Okay. And then finally could you think about mental health parity and whether that might be a help or isn't a help, or how are you kind of putting parameters around that?

Well, we've always taken the position that mental health parity can only be a positive for us. That it will -- it should result in both greater demand and potentially better pricing for us, although we've had a difficult time, you know, quantifying that in a meaningful way. I know that you've attempted to do that and I've read your analysis, and it seemed like a perfectly good and logical analysis, and I hope you are absolutely right. We've taken the position that we're not going to make guesstimates as to how much of an impact and how much of a benefit mental health parity will be to us, we'll certainly take advantage to whatever degree we can, and we're looking forward to it. And like I said, it can only be a positive for us, and in a business that is, you know, already on sound fundamental footing, you know, it can only help us expand our franchise.

Thank you.

Your next question is from Frank Morgan.

Good morning. I know you have addressed this, but I'm going to come at it from a different angle here. You talked about Las Vegas volumes being up about 3%. I'm curious on the uninsured side -- the uncompensated care side, was there a commensurate increase in that business? Or what was the relationship between the growth your overall volumes in Vegas and the growth in the uninsured admits?

And, you know, Frank I don't have the Vegas numbers in front of me at the moment, but I think, you know, for sure, and, you know, I sort of said this before, definitely over the back half of '08 and into 2009, we've seen a growth in uninsured business that probably exceeds our overall admission growth in that market as -- you know, as you know, it has higher unemployment than the national average et cetera, and we're seeing that reflected in the quality of our payer mix in the market.

Okay. And then just two more here quickly. On the margin expansion opportunities, from here in light of this softened volume environment that we're in today, really, how much upside do you see in margins? And then finally use of free cash flow, any updates on what you're thinking there is in light of how your stock is performing? Thanks.

You know, from a cost perspective, you know, I think we're going to obviously continue to manage our cost structure very, very closely. We don't anticipate a significant improvement in the economy, certainly through the balance of 2009, so we will be as vigilant as ever. I don't necessarily think we anticipate real pressures on wages coming up or appearing over the course of the year, but, you know, we'll deal with those. You know, as I indicated to Darren, some of the supply expense comparisons are going to get more difficult, but I think, you know, probably the biggest risk again -- I'll repeat a comment that I've made, I think already, multiple times, I think the biggest risks to margins at these levels are an increase in uncompensated care. I think we've all been pleasantly surprised by our own uncompensated care results. The industry has reported similar trends, but, again, it's a very difficult environment with growing unemployment, so we remain very cautious about that. As far as use of free cash, Frank, I don't know that our outlook has changed dramatically since the last time we spoke with the group two months ago. There don't seem to be a plethora of M&A opportunities out there. We continue to look for them. We continue to explore them, but at the moment, most sellers -- at least in our minds -- continue to have an inflated notion of the value of their EBITDA streams, particularly given the public, you know, capital markets, and so, we probably look to share repurchase as one of the more compelling uses of our own cash. We didn't buy a lot of shares back in the first quarter mostly because the first quarter window for buying back shares in a non-quiet period is only a couple of weeks, but, you know, we'll continue to look seriously at that into the second quarter and as the year progresses. And we'll continue to evaluate other opportunities as they may arise, and I think, you know, the pace of opportunities may pick up, as I think, particularly the not-for-profit hospitals are under greater financial stress, but at least at the moment we're not seeing a ton of those opportunities.

Thank you.

Your next question is from A.J. Rice. Hello, everybody.

Couple of quick questions, you know, you got McAllen, you've got Laredo, and a couple of other facilities down there near the Texas border, with the discussion right now about swine flu and possibility I guess the results of that might be a further tightening of the border crossings. Does that whole dynamic -- is that a favorable dynamic for you, or an unfavorable dynamic for you in those markets?

I'm not sure I can say that with certainly, A.J. Certainly over the last couple of years, there's been a greater level of border security, and I would say at the end of the day that probably has had a net positive result, I mean in those South Texas markets we have not seen the sort of significant increase in -- you know, in uncompensated care population that you might have expected in this sort of an environment and so if there is further tightening of the border security, I suspect that might have some net benefit to us, although -- and again, there's also speculation that there are a number of undocumented aliens who are, because of the soft economy, in a number of states, are returning back to Mexico. Again, I don't know that there's any great data out there to support that. By definition I don't think that data can be very precise. But our uncompensated care experience in that markets has actually been pretty good. So, I don't think we are concerned that a tightening of the boarder would have a negative impact on us, it probably only would have a positive impact.

Okay. On the -- you mentioned the Medicaid reductions that you saw in a couple of markets -- Florida, Nevada, in the second half of last year. Obviously the stimulus bill came in with an idea of spurring up Medicare this year and next year. Has there been any specific developments in any of your key markets that have changed as a result of that stimulus bill at this point?

The amount of sort of actual tangible results I think is pretty limited. We have had a number of states that had sort of been contemplating some cuts or benefit reductions or something like that, sort of back off of that, because they were anticipating the receipt of -- of those stimulus moneys, but I don't know that in any of the states that we operate -- none of the states in which we operate have had further Medicaid cuts since the stimulus money was passed. But in fairness none of them have restored any cuts either. So, we've been in sort of a status quo since the stimulus package was passed. And I think we're also getting a benefit also from the stimulus package, although its difficult to quantify from those COBRA moneys that were in there that subsidized peoples COBRA benefits, but there have been questions about how we've been able to keep uncompensated care expense relatively flat as an industry, and I assume that those -- that help on COBRA is at least part of the answer, although, again, it's difficult for us to sort of quantify that in anyway.

Okay, and then just lastly, I've got another, relatively big-picture question. Your leading competitor in the whole behavioral health area has been subject to some scrutiny in some of their key markets and I guess there's a study that just came out in the last month that sort of rekindled all that again. Is that -- give us some perspective on that relative to the psych industry overall and whether you are seeing the level of scrutiny rising for all players or just seem to be specific to them? And second, I know you all overlay in some specific markets, not a lot, but a few, is it accruing to your benefit in any of those markets in any meaningful way?

Well, you are right, A.J., we do not complete with psych solutions facilities in too many markets. There's maybe a handful of markets in which we overlap. We've mentioned before on these calls that we certainly have benefited in the Chicago market, which is maybe one of the most visible markets where there's been some problems for them. We definitely have benefited from that market. I think our facility has run full, you know, essentially since they began to have problems. You know, all I can say is that our facilities have been focused long before these issues ever arose on quality of care. It's really been a bedrock of our success in that business. It doesn't mean that we have an unblemished record, but I think we have one of the best records in the industry and we work very hard to keep it that way and we are going to continue to work hard. Because I think, frankly, sort of to your question, you know, once scrutiny increases, it can increase for other providers. I think certainly in Illinois that will be the case. I think all behavioral providers in Illinois will be subject to some sort of review at this point. But we're prepared for that and we -- our business strategy and our business model is just to continue to stress quality and do it in all of our markets and take care of our own knitting, and if a competitor stumbles, regardless of who it is, we will take advantage of that. Almost just by definition, by the level of reputation and level of quality at our facilities.

A.J., I think that --

Yes.

-- all businesses have a choice whether they want to put the financials first or the quality first. Our view is that you do the quality first. You develop a reputation for reliability, and it's been our experience that good financials follow from that.

Right. Well, your results this quarter demonstrate that. Thanks, guys.

Your next question is from Justin Lake.

Thanks, just a couple of questions here. First on Vegas, Steve, I think you've membered that Centennial is going to generate a swing of about $14 million or $15 million of EBITDA, is that correct for this year?

Yes and I think we discussed that number in our February call.

Right. So, how much came in the first quarter?

A good portion of it came in the first quarter. We tend not to -- to try not to highlight individual facility's results, but I think as I indicated before, it was always sort of our plan and expectation that a good portion of that turn around would occur in the first quarter, because of the start up losses at Centennial and we continue to frankly exceed our own expectations at Centennial. We did in '08 and we did in the first quarter of '09 as well, so, the gap was even a little bit bigger than we an anticipated.

Got it. So, maybe we should be thinking about like 0.5 to 0.6 in the first quarter and maybe even that $14 million to $15 million even getting bigger.

I think those are both fair comments.

Okay and then is -- can you give us an idea of how Vegas looked in the first quarter ex-Centennial? Is it up, down -- year-over-year?

Yes -- no, I mean look we said in '08 and it continues into '09, it's a little bit hard to do, because there's no question, that, you know, we see very directly, that some of the Centennial business comes from Summerlin some of it comes from Valley.

Right.

So, (inaudible) clearly some of that admissions growth is cannibalized from our facilities, which is why, I think now that Centennial is in the same-store numbers, you're getting a better look at how the overall market is doing. And some of the Centennial profitability, quite frankly, comes from our existing facilities. But, I made the comment that overall the market profitability is up modestly in the first quarter and I think that that's generally very good news for a market that is obviously experiencing some local economic stresses that are, you know, probably as great as any market that we operate in.

That's helpful, thanks. And then just a broader question on cash flow. First, can you just give us an update on your cash flow and CapEx numbers for the year? Any changes there?

No, I mean we spent $78 million on CapEx in the first quarter, that's at a rate a little bit slower than our guidance for the year which is 350 to 400, but, you know, I think when we get to then end of 2009, when we begin equipping both of the new hospitals, Palmdale, Texoma and actually we'll also begin equipping this big, new tower at Summerlin in Las Vegas and these new OR's at Valley, I think the pace of our spending will pick up in the back half of the year. And I think, therefore, our capital spending guidance of 350 to 400 is still, from out perspective, still accurate. In large part because so much of that 350 to 400 really is centered on these four or five large-committed projects.

Right, can you remind us how much of that is?

I don't have the number right in from of me Justin, but I would say that, you know, well over 0.5 of the capital spend for '09 is those four or five projects that I have enumerated.

Okay. And the cash flow is still the same for the full year?

Yes, I mean I think that's right. I mean, by definition, if our EPS guidance hasn't changed, I don't think our cash flow guidance has changed.

Got it. And so, what I was trying to get to here, Steve is just, one, obviously you've got a lot of free cash flow this year and then it would appear that next year is going to generate even further. I mean, that CapEx number -- sounds like it's going to get to cut in half. I mean you don't -- I think, from what you've said, you don't have a ton of big projects in the pipe for next year, like you had this year. Is that the way to kind of think about a cash flow -- free cash flow going from maybe $150 million to maybe $300 million next year?

Yes, I think if you go back and you look -- before we started building Centennial -- so, maybe go back to '04, '05, we were spending capital at the rate of about -- on an average $250 million a year. So, I think once you get all of these kind of big hospital projects behind you, and you kind index that number forward for inflation. I think if you think about an ongoing capital spend in the 275 to 300 range , that seems

Okay, and just last question on the cash deployment in the quarter, you bought back a little bit of stock but actually paid down $50 million of debt. Just given how low your leverage levels are right now, I'm curious as to why you're paying down debt versus repurchasing shares and how you see that kind of moving through the year.

You know, as I alluded do in response to somebody 's question before, part of the mechanics of the first quarter is that the actual window for repurchasing shares is pretty narrow, really, constituting just the first couple of weeks in March. And we bought back a fair amount of shares during a short period. Other than that, the choice is either to accommodate cash, which doesn't make any sense in this environment, or to pay down debt, which is what we did. We obviously have a lot of borrowing capacity under our existing debt facilities, and can use that money either -- as I think I said in response to Frank Morgan's question, either to continue to repurchase shares, which we find to be a compelling investment at this point, or compelling use of cash, or to take advantage of M&A opportunities or capacity-expansion opportunities in either of our businesses, so I think we find ourselves in an enviable position at this point, and we're happy to be here, and we're going to evaluate all of those opportunities very carefully.

Great, and the share purchase is not in the guidance right, Steve?

We don't have any, other than what we repurchased in '08, we don't have any '09 repurchases, other than what might have been done before we gave our guidance embedded in the number.

Thanks a lot, guys.

Your next question is from Gary Taylor.

Hello, good morning, thanks for all the detail, just a few questions here. On Centennial Hills, which I'm sure has moved well in to our past EBITDA break even. When do you think, just from a margin perspective that would match, kind of your overall Vegas margin? Is that something that can happen towards the end of the year, or is that still too soon?

No, Gary, I mean, I think it's close, and certainly I think by the end of '09, Centennial should be operating at average Vegas margins. You know, we've commented. I know Allen has made the comment on any number of these calls, that Centennial has just -- we expected it to do well, but it has at every turn, you know, exceeded our expectations. It was a -- very -- just well-placed, well-situated facility and therefore its ramp up has been extremely quick.

Can you update us on any external construction contracts that are both in the revenue and the expense number? Where that's running now?

We have a second construction management contract that is probably in its back half of -- of process, and should be largely done by the back half of the year. I think we've said before that the total profitability under that contract -- over the course of the contract is in sort of the $4 million to $5 million range. You know, some of that was recognized -- a little bit that in '08, so it's not a big needle mover in '09.

Okay. Is the revenue number much larger? I guess I'm just trying to think about, just the revenue impact on your total revenue as that winds down, how much of a sequential drag that is as that winds down.

Yes, so, I think that in the first quarter there were about $20 million of revenues associated with that construction management contract compared to maybe $5 million last year. In last year's first quarter, meaning.

Okay. South Carolina, Texas dish, anything on the radar, you know, heading towards midyear to be concerned about just besides kind of the overall state budgets, which I assume is probably worse in South Carolina than Texas?

Yes -- no, that's a fair statement, and obviously we've got more money tied up in Texas than we do in South Carolina. The Texas dish programs have actually been renewed on largely the same basis for the coming fiscal year, we don't expect major changes. South Carolina I think is a little more iffy, but, again, may well be helped by some of the stimulus money that's out there.

Okay, last question, just in terms of managing the labor costs, which you and others have obviously done very well, is this -- is this an issue of freezing rate increases, managing the flex staffing much more aggressively, actual FTE head-count reductions or just a combination of all of those things?

No, I think Gary, your last comment is the right one. I think it's a combination of all of those things. I think if you start with an environment where clearly, you know, we're seeing a reduction in pressure on our wage rates, and we're giving wage increases that are on average measurably lower than they've been, it affects a lot of what we are doing and as you might expect in a difficult job environment, nurses are returning to the work force, nurses who've left the workforce are returning, nurses who are working part-time are now willing to work full-time, and as a result, we've reduced our reliance on registry expense, thats clearly down in the quarter. We've deferred or delayed wage increases, scheduled wage increases. Wage increases that we've given have been lower, just because that's what the market has dictated. Then we have expected, in those hospitals that have seen a measurable decline in volume, we've made headcount reductions, so we've done all of those things. And obviously have done them fairly successfully, as you can see from the financial results.

Okay, great, thank you.

Next question is from Whit Mayo.

Thanks. You've covered a lot, just maybe one quick question. Just back to Palmdale and Texoma for a second, just curious if your -- your construction budgets have changed, better or worse, in light of some of the deflation out there, and maybe your opinion on any new capacity from competitors in any of the markets that we need to be aware of, aside from the McAllen additions with the ED and OB additions?

Yes -- no, I think we're at again -- a couple -- two very valid comments, I mean, one is we certainly have seen the cost of construction in the last couple of quarters come down, and, you know, we certainly factor that in to thoughts about where to increase capacity, and whether it makes sense to build or buy capacity in various situations. And, you know, other than the McAllen market, and I'm doing this in my head, so, I don't want to represent that it's an absolutely comprehensive answer, but I think in most of our markets, unless there has been a major capacity expansion project undertaken already by a competitor, there certainly have not been any undertaken in the last two or three or four quarters. And I can't think of any, again, other than McAllen where -- there's some building in California that was underway in our Riverside County market, maybe thats the only market where I can really think of where there's a project already underway.

Okay. Great. Thanks.

Your next is from Erin Blum.

Hello, following up on the share repurchase question, can you characterize and discussions you've been having with the rating agencies? And how much -- or how many shares do you think you could repurchase without jeopardizing the investment-grade rating?

You know, the rating agencies, I think are far less willing to be definitive about that than they used to be, based on our understanding and ongoing conversations with the agencies. I mean, I think that we have a fair amount of room and certainly could do up to a couple hundred million dollars of share repurchases without jeopardizing our rating, but if we got that point, we'd have more serious and more precise conversations with the agencies.

Okay, thanks, and then just one quick one. Someone mentioned that they're expecting IPPS to be out tomorrow. And you didn't comment on that. Is that consistent with you're expectations?

I think by statute CMS is supposed to come out by Thursday with the IPPS rule, of course, if they don't, I'm not exactly sure who gets arrested, so, I don't know. But by statute, I think Thursday is their deadline.

Okay. Thanks.

There are no further questions at this time.

Okay. We thank everybody for their time and look forward to speaking with you next quarter.

This concludes today's teleconference. You may now disconnect