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Community Health Systems, Inc. (NYSE:CYH)

Q4 2008 Earnings Call

February 20, 2009, 11:30 am ET

Executives

Wayne Smith - Chairman, President and CEO

Larry Cash - EVP and CFO

Analysts

Ralph Giacobbe - Credit Suisse

Shelley Gnall - Goldman Sachs

Adam Feinstein - Barclays Capital

Jason Gurda - Leerink Swann

A.J. Rice - Soleil Securities

Robert Hawkins - Stifel Nicolaus

David Common - JP Morgan

Wi Romaldo - Stone Harbor

David Bachman - Longbow Research

Erin Blum - Goldman Sachs

Gary Taylor - Citigroup

Operator

Good morning. My name is Rachel, and I will be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter and Year Ended December, 31st Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

And now I would now like to turn the call over to Mr. Smith, Chairman, President, and Chief Executive Officer of Community Health Systems. Please go ahead, sir.

Wayne Smith

Thank you, Rachel. We are very pleased with our solid financial and operating results for the fourth quarter and the year ended December 31, 2008. As a reminder, I have to go back and read the statement here.

Before I begin, I would like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisitions, transactions and other events are forward-looking statements that involve risk and uncertainties.

Actual future events or results may differ materially from those statements such forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are made on the management's current expectations or beliefs as well as assumptions made by and information currently available to management.

You will refer to the documents filed by Community Health Systems Inc. with the Securities and Exchange Commission including the company's annual reports on Form 10-K quarterly reports Form 10-Q and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that cause actual results to differ from those contained in the forward-looking statements.

With that, we are pleased with our solid financial and operating results for the fourth quarter and the year ended December 31, 2008. As a reminder, in our reported consolidated results the prior year fourth quarter 2007 includes Triad's performance while the year end 2007 results represents the year's performance for CHS and includes Triad's as of July 25th.

Our same-store results reflect combined performance of both 2008 and 2007. EBITDA for the third quarter of 2008 was $392 million, and income from continuing operations was $0.61 compared with $0.36 per share for the same period in 2007 excluding the change in estimates made in the fourth quarter of 2007. This represents an increase of almost 70%.

For 2008, same-store admissions were up a strong 2%. This represents the best annual same-store growth since 2005. As reported net operating revenues for the year ended December 31, 2008 totaled $10.8 billion, EBITDA was $1.525 billion and income from continuing operations was $206.7 million, or $2.19 per share for the year ended December 31, 2008 versus EPS of 2007 of $1.72 excluding the change in estimates and including the Triad operations since July 2007, an increase of 27%. We also had very strong cash flow from operations of over $1 billion in 2008.

With that, I would like to review some of the key operating accomplishments for the quarter. We had a very strong physician recruiting year in 2008. The company recruited 1,472 new physicians for 2008 compared to 769 recruited for 2007.

Our standardized and centralized approached to physician recruiting and practice development to identify physician's needs in the communities, increase utilization and also agent generating additional volume.

We continue to have a turnover rate of approximately 6%, our new target for 2009 will be 1,500 physicians. We have reached to agreement to settle litigation with Texas Health Resources to sell our 80% ownership Presbyterian Hospital in Denton Stadium.

So as based on their exercise of the right related to Triad's change control. We would anticipate this closing sometime in early 2009. Bank debt will be paid down by the net proceeds of approximately 100 million.

We acquired a small hospital in Siloam Springs Arkansas on February 1 for essentially no cash. This hospital is strategically located near the Oklahoma border with three of our Arkansas hospitals near by. Trailing revenue is approximately $35 million with a high single-digit margin.

As disclosed by a local press, we have one Letter of Intent in Wilkes-Barre, Pennsylvania. This facility has trailing revenue of $295 million in a single-digit margin. Purchase price is less than 50% of revenue. This transaction could close in the second quarter. We are also updating our previous issued guidance for 2009 to reflect the sale of Denton, Texas.

Annual same-store volume growth is expected to range from 1% to 2%. Our projected revenue range is expected to be from $11.650 billion to $11.950 billion. EBITDA is expected to be $1.625 billion to $1.665 billion. Projected EPS for 2009 is expected to be in the range of 245 to 265, an increase of 12% to 20%.

We have included the hospitals we recently acquired in Siloam Springs, Arkansas as well as hospital in Wilkes-Barre, Pennsylvania in our 2009 guidance. Our primary focus during 2009 will continue to be on the improvement of our operations.

Our integration of Triad continues to be successful. For the year ended December 31 2008, we have achieved our synergy goal of a $145 million. For 2009, we are targeting approximately $100 million in improvements for the company.

Now I would like to take a few minutes to update you on the government investigation in New Mexico. As we previously disclosed, we were notified in 2006 federal government was investigating the way in which three of our New Mexico hospitals have participated in the state plan program for funding and medicate Siloam community to provide a program.

The state of New Mexico provides these to us directly to hospitals to pay for the hospital services provided the images. The state relies on intergovernmental transfers from the counties which have a state statutory funding obligation to apply for federal matching funds.

And this investigation, the Department of Justice takes issue with the way in which our hospitals provide funding for local services and made donations to counties in which they operate.

We have cooperated with the government’s investigation, but it appears that our efforts to resolve this matter have not been successful as the government recently advised us that it intends to file suit New Mexico against our three hospitals for violating the Civil False Claims Act.

And as correspondence to us in January of 2008, the government calculated that our hospitals had received $27.5 million of ineligible federal participation payments from 2000 to 2006. They also advised that they would seek troubled damages and other penalties if this went to the litigation.

Let me be clear, this is nothing more than a funding dispute between government agencies. It’s not a dispute over the level of quality of care provided to our patients or clients for care and the government has never alleged that in the next few hospitals receive reimbursement under the Siloam community provider program for services that hospitals did not provide.

We're solid and continue to seeking an appropriate resolution in this matter, but without resolution we will vigorously defend this case. With that, I would like to turn this call over to Larry to provide you more detailed summary of our financial results.

Larry Cash

Thank you, Wayne. Our consolidated admissions were 163,664 in the fourth quarter of 2008; adjusted admissions were 296,329 for the same period. Our same-store admissions decreased nine-tenths of a percent when adjusted for service closures, primarily obese, weather-related issues in several markets and a lack of risk for the business.

And some increased new infrastructure hospital competitions in three of our markets admissions were increased one-tenth of a percent. Most important, our same-store managed care and other admissions had a positive increase for the quarter. Same-store adjusted admissions decreased to two-tenths of a percent.

Net revenues in the fourth quarter were $2.762 billion, an increase of 10.9%, adjusted for all conforming and change in estimates net revenue increased 6.8% on the same-store basis net revenue increased 7.4% or 3.4% excluding all the conforming adjustments.

Some of these adjustments would apply to fourth quarter 2007, which were increased to 3.4%. Also revenues reduced 50 basis points due to the drop in the deferred compensation investments and classified in other revenue.

As reported same-store net revenue for adjusted admissions increased 7.6% year-over-year due to good out-patient growth and adjusted for all conforming and change in investment. Same store net revenue for adjusted admission increased 3.6%. Same store surgery volume increased two-thirds of a percent for the fourth quarter out-patient growth.

Our same store Medicare case mix increased two-tenth of a percent for the quarter.

As was the first three quarters, same store revenue growth continues to be affected by the implementation of the discount policy in our legacy hospitals in the first quarter this year. The impact of this implementation was approximately 80 basis points on both revenue and revenue for adjusted admission for the fourth quarter.

Same store revenue would have increased 4.2% and same store net revenue for adjusted admission would have increase 4.4% excluding discount policy implementation.

Consolidated EBITDA growth was $392 million for the fourth quarter versus $181 million for same period excluding the change in the estimated pro-forma adjustments made in the fourth quarter of 2007 of $166 million.

EBITDA increased $44 million or 12.7% on a same store basis. EBITDA was $385 million for fourth quarter, a 10% increase as clean adjustments made in fourth quarter 2007.

EBITDA margin for the fourth quarter on a consolidated basis was 14.2%, an improvement of 80 basis points excluding change in estimate and pro-forma adjustments.

The same store EBITDA margin was 14.4% a 90 basis point improvement again excluding the adjustments.

On a sequential basis same store margin improved 20 basis points for the fourth quarter and our same store margin was approximately 7.8%.

Consolidated operating expenses decreased 80 basis points excluding change in estimate and pro-forma adjustment for fourth quarter. Bad debt and supplies increases were offset by decreases of 100 basis points and payroll benefits and decreases in our operating expenses.

Again excluding the change in estimate same store operating expenses improved 90 basis points from decreases in payroll benefits and other operating and an increase in bad debt.

Our expense management during the fourth quarter has been exceptional for improvements in purchase services for malpractice.

Our same store operating cost increased only 2.3% in the quarter or 3.4% increase in same store revenue again demonstrating our strong expense control.

Adjusted for change in estimate same store revenue minus bad debt was 2.6% in the quarter while operating expenses minus bad debt was up only 1.2% for quarter.

Financial statements reported reflect the pending sale of Denton, Texas of approximately $150 million of revenue and double digit margin. It's financial results have been moved to discontinued operations guidance for 2009 has been adjusted. The EPS for first three quarters for 2008 have been reduced as a result of Denton operations being reclassified and discontinued.

For 2008 consolidated admissions were 653,000 and adjusted admissions were 1,197,000. Same store admissions increased 2% and adjusted admission increased 2.2%.

Adjusted for the flu, lead day services closures in other items. As previously discussed same store admissions would have been up 1.7%. Managed care and other same store volume increased order in the company average for the year.

Our volume guidance for 2009 for adjusted admissions is from 1% to 2%. And please remember the 2009 did have an extra day in February and thus far flu volumes did not materialize in the first quarter.

Net revenues for 2008 were $10.8 billion an increase of 54% on a same store basis net revenue increased 6.6%. Same store inpatient revenue was up 8.1% and outpatient revenue 6.1% reported revenue numbers.

On a same store basis, net revenue per adjusted admission increased 4.3%. On a same store surgery volume was up solid [0.3%]. Same-store Medicare case mix was down ninth tenth of a percent.

As we previously discussed, same-store revenue growth has been impacted by the implementation of the discount policies in our Tennessee hospitals in the third quarter of '07 and remaining Legacy hospitals in the first quarter of 2008.

The impact of this implementation was approximately 100 basis points on both revenue and revenue per adjusted admission. Same-store revenue would have been up 6.7%. Same-store revenue per adjusted admission would have increased 4.4%, excluding discount policy.

Consolidated EBITDA for the year was $1.525 billion. Same-store EBITDA was $1.511 billion. Same-store EBITDA increased 17.7%. Adjusted for change in estimated consolidated EBITDA increased to 53%.

Consolidated EBITDA margin for the year at December 31, 2008 was 14.1%. Adjusted per change in estimates of same-store margin improved 140 basis points. Non-same-store margin was up 6.2%.

For calendar 2008, we had the highest percentage of our same-store hospitals achieving growth. In the last two years and all the metrics including adjusted admissions, surgeries, ER visits, net revenue EBITDA and EBITDA margin.

For 2008, consolidated operating expenses pursuant to revenue improved 260 basis points from the prior year, excluding the change in the estimate for 2007. Consolidated operating expenses improved 40 basis points. The improvements all items for suppliers. Same-store operating expenses, excluding the change in the estimate improved 140 basis points, from 2007 decreases in payroll and benefits, suppliers and other operating expenses.

Our same-store man hours per adjusted admission improved 200 basis points for a year. Excluding a change in estimate for our same-store operating cost for adjusted admission increased only 1.6% for a year where net rev for adjusted admissions increased 3.3%.

On a same-store and adjusted basis net revenue minus bad debts increased 5.6% compared to that of 3.5% increase in operating expenses minus bad debts demonstrating our strong expense management for 2008.

For the year consolidated bad debt increased a 130 basis points, decreased 130 basis points excluding all the confirming and changing estimated adjustments, consolidated bad debt for year decreased 20 basis points. Same-store admissions decreased, same store admissions increased, 4% over year and increased only 10 basis points as percentage of admissions of 6.4%.

Our fourth quarter self-pay revenue trend as a percent of total revenue decreased on sequential basis. Our combined and consolidated bad debt charity and administrative self-pay discounts, divided by adjusted net revenue of 17.7% for the quarter and 17.5% for 2008.

Our combined and consolidated bad debt charity and administrative discounts as percentage of adjusted revenue were up 60 basis points for the quarter and down 10 basis points for the year related to Triad having lower compensating care.

As we previously said the real cost of treating the self-insured represented by an incremental cost of care and good to change estimates. Performing adjustments of our same store operating costs for adjusted admissions increased only 1.6% for 2008.

Consolidated cash receipts were over 102% of collectible net revenue for year end December 31, 2008. Our 2009 guidance for bad debt ranges from 11.8% to 12.5% of net revenue compared to an actual 11.2%.

Total AR days were 53, December 31, 2008 a decrease one day from 2007, a same-store AR days were 53 at the end of the year. The allowance for doubtful accounts was 1.103 billion at the end of the quarter or 40.7% of receivables.

The allowance for doubtful accounts related contractuals for self-pay was approximately 80% of the hospital segment self-pay receivables at December 31, 2008.

Community Health System has a favorable payer mix recorded in December 31, 2008 net revenue by payer source on a consolidated basis was as follows. Medicare 27.4%, Medicaid 10.1%, managed care and other 52.4%, and self-pay 11.1% on that revenue. On a year-to-date basis the breakdown was Medicare 27.5%; Medicaid 9.1%; managed care and other 52.7%, and self-pay 10.7%.

Cash flow from operations for the fourth quarter was $372 million versus $283 million same quarter a year ago. Cash flow from operations is $1.57 billion compared to $688 million for the same period in 2007 it $369 million reflected greater net income of $188 million as well as an increase in our assets of $29 million.

Debt increase in non-cash expense of $350 million of which $174 million would be related in depreciation and approximately $200 million related to change in the deferred income taxes. These increases were offset by decreases in cash flow from suppliers for paid and other current assets of $3 million accounts receivable $189 million, and accounts payable and accrued liabilities and other income taxes are $6 million.

The decrease in income taxes was primarily result of prior year pertain tax position to use offset taxes during the current year. Our 2009 guidance for net cash provided by operating to additional range from $900 million to $1 billion, an increase from October guidance of $850 million to $900 million. This is somewhat lower in 2008 due to an increase in estimated cash taxes.

Capital expenditures for quarter just ended were $221 million versus $240 last year. Year-to-date we spent $684 million, or 6.3% of that revenue. This amount includes $123 million or 1.1% of revenue for replacement facilities or new facility.

Our 2008 actual capital expenditures team ended 13% to 17% lower than our original guidance of $775 million to $825 million. We lowered our previous 2009 guidance for approximately $100 million to $650 million, or 5.2% to 5.5% of net revenue which is below our 2008 capital spending.

Balance sheet cash as of December 31, 2008 was $221 million. As of December 31, 2008 the company had available credit from its revolver $650 million after outstanding letters of credit. We did take the $100 million of low cost in late December and grew additional $200 million priority in January 2009.

Looking to the balance sheet as of December 31 with $1.7 billion of working capital. The $2.8 billion total assets total outstanding debt at December 31, 2008 was $8.967 billion of which approximately 93% was fixed. Our debt to capitalization at the end of quarter is 84%.

During 2008 we purchased $9 million or 4.8 billion shares of our stock. With also bought 110 million of our 8.78 coupons bonds back in the open market during the year. Our credit agreement allow $200 million of stocks and bonds that can be repurchased. This is basically accomplished during 2008. We are working to update our writings to allow for additional $200 million purchase opportunity with the focus being on debt repurchases.

At the end of December, we are a party to $5.3 billion in interest rate swap agreements, an increase of $500 million. And end of September these agreements limit the effect of changes in to rates on a portion of our long-term borrowings. As of December 31 2008, approximately 93% of our debt is fixed.

As Wayne stated earlier, we updated our 2009 guidance, I would like to review some of the changes to updated guidance that again excludes taxes. The guidance includes two acquisitions one of which has been completed. The 2000 interest expense will range from 5.5% or 5.8% of revenues since the borrowing under senior credit facility remain relatively stable for the year.

Cash from operating activities is $900 million to $1 billion and were decreased in 2000 level does some changes in cash tax payments the capital expenditures guidance has been reduced for 2009 and range from $600 million to $650, which is down $100 million from our estimates in late October and represents 5.2% to 5.4% of that revenue.

Bad debt guidance has been increased on the high end from 12.4% to 12.5% to reflect recent economic changes, depreciation, amortization are projected to be 4.5% or 4.8% of that revenue in 2009. And the 2009 projection does assume the accounting change for the $0.02 to $0.03 for expense in the acquisition cost due to new business combination rules.

Our EPS guidance is 245 to 265 based on outstanding weighted share of 92 million and 94 million and no significant share repurchases have been assumed for 2009.

Wayne will now provide a brief recap.

Wayne Smith

Thanks Larry, as you can see 2008 was a very successful year at all levels. Strong volume trends coupled with good revenue growth, strong expense management has enabled us to solidly improve our same-store margins.

While the macroeconomic trends indicate further pressure on hospital volumes, we believe that our continued success in enhancing healthcare services and recruiting and retaining qualified physicians in our markets will support our growth in 2009 and a foreseeable future.

As we look at 2009, we will continue to leverage our considerable assets. We have a proven ability to deliver favorable operating results through our standardized business platform and the use of best practices throughout the company.

With that I will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Ralph Giacobbe of Credit Suisse. Your line is open sir.

Ralph Giacobbe - Credit Suisse

Great, thanks. I just want to clarify when you talked about, you said you got the $145 million in synergies from Triad, did you also say you expected another $100 million improvement in synergy, is that right?

Larry Cash

That's correct. That $100 million is to the company, of which most of that is related to Triad that we wanted to quantify some improvements we can make on a consolidated company.

Ralph Giacobbe - Credit Suisse

So $100 million consolidated for the company and you haven't released that before that, have you?

Larry Cash

Now we have not.

Ralph Giacobbe - Credit Suisse

That's okay. All right, that’s helpful. And then in terms of your bad debt guidance, is there anyway for you to either from the low-end to the high-end, or maybe just the midpoint, talk about what the unemployment rate assumed would be?

Wayne Smith

Well the unemployment rate had moved up from 4.8% to 6.8% at the end of December. It looked like we had not a lot of hospitals that have gone on above 10%, they were below 10% in the year like we have had 8% or 9% in most of those are smaller hospitals, but it has moved up. So what we had originally anticipated was over 100 basis points increase in the unemployment rate, but part of it was 20 to 30 basis points increase in same-store self-pay admissions likewise bad debt.

So we have taken that information into other project. We give a broader range, because of that was moved up, we increased to 10 basis points, because it moved up little faster and we would anticipate, when we put the guidance out in October, 2005.

Ralph Giacobbe - Credit Suisse

Okay.

Wayne Smith

Just quickly on bad debt in general, it seems to me that as you kind of look at where we are today and what is happening, the uninsured population is down about a million people because about a million of those in illegal immigrants have gone back across border because of the lack of work in the US.

I suspect that trend will continue, we just have a stimulus package, which really is support for the Medicaid programs across the country. I don’t think that will -- may or may not increase the eligibility, but it certainly will support the current programs that you will not have people that might be disembroiled for whatever kinds of reasons.

You also have COBRA; this $30 billion was the COBRA, that's in the stimulus package which should be helpful to those people who were laid off. So I think, I don’t know if we have stability or not in terms of bad debt currently, but we do have rise in unemployment. Our markets are about 7% nearly they were up above 2% from last year. I think our unemployment is growing a little slower than the national average, and we don’t have that many lot markets that are over 10%, it's only a handful and all said and done. So I think we are going to runaway bad debt, I think it looks a little more stable to me.

Ralph Giacobbe - Credit Suisse

Okay, and then just my last one payor mix, you kind of gave us the 4Q numbers and then just comparing the 4Q to the full year big jump in the Medicaid components. Just wondering if there's some sort of seasonal variation that we need to consider or if that’s kind of a run rate, you think kind of going forward?

Wayne Smith

Well, I think what we done is, we have done a really good job of qualifying people for Medicaid and our efforts with the prior hospitals improved a lot and we also continue to do our improved our sales that's where you contract of Medicaid has been proud to pay screening vendors, so have you done that within job of getting more people qualified this year. I think our actual payment percentage on our work up to 100 basis points that's one of the reason to be up in the special attended year with a lot of focus to get that done.

Ralph Giacobbe - Credit Suisse

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Shelley Gnall of Goldman Sachs. Your line is open.

Shelley Gnall - Goldman Sachs

Hi. Thanks, just a question on the same-store guidance that was retained by 1% to 2%. A Few questions like first of all you have seen a little acceleration in the unemployment trend in that that caused you to rate behind that day guidance but no adjustment to same-store guidance. That's little bit encountered of what we are hearing from some of your competitors.

I guess so my first question is, are you expecting to see the unemployment impact your volumes more so now then before? The next piece of the same-store question is, are you expecting any benefit from COBRA and can you clarify the extra day impact and how that's going to offset the test new comp, that's it.

Larry Cash

Let me kind of start in terms of our view where we are in terms of same-store we had a very strong year our same-store volume grew up 2%. I think it's clearly high than anybody else in the industry. We had weak fourth quarter for number of reasons and we think the first quarter is a difficult quarter because of the fact that we had flu last year and we had leap year.

But having said that, we are pretty confident about our 1% to 2% increase in same-store volume going forward for the year, and primarily around the fact that this is a sort of the basics that we continue to talk about.

We only have about 50% market share so we have a lot of opportunity in terms of growing our markets going forward. Our case mix index is still relative low, so we have opportunity for not only volume growth but we have opportunity in terms of intensity growth.

Then if you look at our physician recruiting for this year, where we have recruited 1,472 physicians that in itself it should help us in terms of not only volume retention but volume growth as we go forward. We think all of those things are helpful to us and as I mentioned earlier it looks like unemployment is growing a little bit less than it has in the past. And our markets still lives on a national average. So, to your last part of your question, I do think Cobra can be helpful to us. The problem is that all these things you can no longer, I don’t think, correlate unemployment and volume because of Cobra and Cobra layer zone over a period of time in terms of lay off.

So, the other thing I think, all of that is helpful is support from the Medicaid programs. I think that helps us well. So, all of those things I think, this is different for us than it is for other people. And I can only speak for us in our markets. But I think we have very good opportunity going forward to continue to have volume growth.

Wayne Smith

And just to add to that, Shelley, I believe it's probably for the quarter last year it's been 120 basis point help in flu was similar 120 to 130 points. So, for the year it's 30 basis points of headwind going the other way. But the only other thing in 2008 or 2009, we had three replacement hospitals, one new one opened up, that will help us in volume. We also had 15 large projects over $10 million are completed. Just sort of look at our understanding of the volume we are going to get that for 2009. That’s probably be going to be around 1% increase of those capital spending which are completed and done for most part.

Shelley Gnall - Goldman Sachs

Okay. Just a quick follow-up, though. Thank you for the color, but just because we have seen further deterioration since the first time guidance was put out on an employment trend, and assuming there will be some impact on volumes little bit of slow down. Are there any specific efforts to extend market share, you talked about on improving ET at mid rate and going after share? Are there specific initiatives that either have been accelerated or new initiatives in place to help offset some of the slowdown?

Wayne Smith

Yes, I think our physician recruiting is probably the best thing we can do to increase market share. We have all kinds of imitative. We look at our markets. We do look at our cost as well as markets and how we develop those markets every thing from inpatient services, outpatient services, but having said that when it's all said, physician recruiting is probably the driving component of that, that we get the most out of in every instance. And I think its clear that we have excelled in physician recruitment every year, year-in, year-out and I think we will continue to do that.

Larry Cash

Just a little bit on color on employment, at least in November, my understanding a large percentage of that was on the 18 to 34 age group which is usually a lower utilization of healthcare versus the older population. And again Medicare and Medicaid are 60% of our missions and to some extent unemployment should not have that big effect on a Medicare and Medicaid. And a lot of our business to emergency rooms, 60% of our mission almost come to there. We don't like a significant fact and that be affected by the employment.

Wayne Smith

I guess a long story, we think we are about as well positioned as anybody is to manage through this challenging environment.

Shelley Gnall - Goldman Sachs

Great, thank you.

Operator

Thank you. Our next question is from the line of Adam Feinstein of Barclays Capital. Your line is open sir.

Adam Feinstein - Barclays Capital

Okay, thank you. It will be a quick question here, just to talk about the states a little bit. I just wanted to talk a little bit about Indiana and Alabama Medicaid. Andy updates or any things ongoing on there, if you guys are thinking about 2009?

Larry Cash

Yes, it relates to Indiana. I think it has stabilized, we did have the challenge in the second quarter of 2008 and currently one of those programs it's gone, when we allocated disproportionate share. We are still working on the issue that we didn’t get reimburse for in Indiana and still got some opportunity there although I am not going to report specifically.

Alabama, lot of states has been a lot of dialog and a similar slowdown in most of the states as a result of the stimulus package that Wayne talked about. So, there is no specific resolution on those states, but most states dialog and election slightly has gotten, quite a bit less intense than it was three-four months ago.

Adam Feinstein - Barclays Capital

Okay, great. And just a follow-up, I want to question so far about the economic environment and obviously you guys have lot different states not depended upon one, but just wanted to talk about the Indiana market. I am just curious in terms of you guys have a very strong presence there in the Fort Wayne market. Any anecdotes in terms of how that market has been doing, and exchange comments specifically about the hospital just about the economy in general?

Larry Cash

Yes, for 2008 Indiana markets had a very good year, very good volume growth and we have had very good success out there. The unemployment is not grown any faster there than it has for our other markets collectively and I think we have had a very good success and done a very good job operating that state.

Wayne Smith

The few markets Adam, that we have that I mentioned earlier, we are tracking it have a little higher in employment a relatively small markets we haven't seen any of our large markets.

Adam Feinstein - Barclays Capital

Great, okay. Good. And then Wayne, which Triad, you guys guide your synergy target and did a great job there. So clearly you have some history with it now. As you look at that transaction, I guess what are the biggest items that you would still like to do in terms of integrating the former Triad hospitals are there any additional things, I remember a year ago you were talking about some of the clinics they owned and trying to reduce some of the losses there. Just any major initiatives outside of the synergies you talked about earlier?

Wayne Smith

Yes, I said this a couple of times. The two things, I suppose that we didn’t absolutely realize, we did this transaction. We needed that margin improvement when there is opportunity to expense control which we have demonstrated. We didn’t realize that there was a bigger opportunity than we thought in terms of physician recruiting, that’s one of the reason you are seeing acceleration. And our physician recruiting this year is because continually filling those gaps and there's continues to be opportunity there going forward.

The other thing that I think we have accomplished and now we are really beginning to focus on in terms of improvement, is how we made our emergency service. We talk about this a lot in terms of our 55%, 60% our admission to emergency room. So we are very focused on that. We have got in our system that we always talk about Pro-Med system and virtually everyone at the Triad Hospital there's two or three to have a McKesson system it's very similar but generally speaking we got that system in every place.

So, we are really now over the last three, four, five months, we are really focused on operations in those markets. So, we have continues improvement opportunities not only in terms on the top line and revenue but we have a lot of continues opportunities in terms of expense improvement, supply expenses for example.

The other thing that we have been able to accomplish is we are making great progress on some of the clinic opportunities that I have talked about in the past in terms of improving the losses in those clinics. So, all of that is moving forward. As I continue to say we have made really good progress and we not had any catastrophic events among those, we don't have any doctors to leave us, any of those kinds of things. So, this is going about as well as we could expect. And there continues to be because of the market share opportunity being only about 50%. And a lot of Triad Hospital were in pretty high growth markets in Arizona, the Mexico and other fast growing areas. We have a lot of opportunity there to the future.

So we continue to be pretty excited about the opportunities.

Larry Cash

Let me give one comment here, the margin probably of hospitals prior to 2007 was 11% to 12% that class is now over 13%. So we have actually done a pretty good job improving the margin in that class.

Adam Feinstein - Barclays Capital

Excellent, sounds good, thank you.

Operator

Thank you. Our next question comes from the line of Jason Gurda of Leerink Swann. Your line is open sir.

Jason Gurda - Leerink Swann

Thank you. Good morning, guys. I just wanted to check in on the same-store revenue growth of 7.5% despite volumes being negative that's been really strong for two quarters now. I was curious what you were attributing that to and how long that can continue?

Larry Cash

Well, let me just clarify a little bit. That is for reported number, but I think we disclosed on slides, if you exclude all of the confirming adjustments its like 3.4% and clearly that excludes all the adjustments. But we had good revenue growth throughout the year and I think results are good, our impairments is good, we commented that our managed care admissions have done better than overall growth of 2%. So, unlike other people still got good growth in that area. I think we had a pretty good job of the managed care getting the rates in the 5% or 7%. And we have done a good job, but case mix has been relatively stable and moved up but it’s an opportunity in the future.

Jason Gurda - Leerink Swann

You just mentioned, your payor mix has been holding up well, any additional color on that particularly related to commercial admissions.

Larry Cash

Well I think that, as a percentage of revenue it's up over a year-ago and we will expect this continue to do well, in fact, overall increases of 5% to 7%. Some of our improvements in 2009 will be in that area and we will continue to get good increases above what we expected. And I think that we have not lost any contracts, we got 80% to 80% plus of our 2009 and 40% to 50% of our 2010 it’s one of areas that has standardized, centralized it has worked very well for us. Ad I think we have historically commented that maybe to try and focus on five largest payors our group folks and all of the 4500 contractors got I think that’s after good increases and keep the volume without any loss of volume due to negotiation issues.

Jason Gurda - Leerink Swann

I am sorry Larry I might have not been clear, actually I was asking about the commercial volumes?

Larry Cash

Yes, commercial volumes, we don’t give that, the absolute number is it’s just both for the quarter and the year-to-date, it’s above the company average.

Jason Gurda - Leerink Swann

Okay. And then just the last question is in the release you mentioned that TRICARE is considering to change the out-patient system which could have a negative impact on revenue. Any thoughts on the timing on when that might come out?

Larry Cash

If anything happens, it would be sometime like second quarter or third quarter, and it's been proposed for several years and continue to delay, we just thought its important to let that be known out there, there was some (inaudible) something that would be done in the this year there would have been a change for reimbursement, but it has been put off.

Wayne Smith

Larry opened it for comment, so we will have an opportunity to make comments and federation, and HA and everybody else will have an opportunity to make comments on it now. So, it may change from where they continued to be in February. And the comment period is open till May.

Jason Gurda - Leerink Swann

Okay, great. Thanks

Operator

Thank you. Our next question comes from the line of A.J. Rice with Soleil Securities. Your line is open.

A.J. Rice - Soleil Securities

Hi everybody. Couple of questions, real quick, first of all Larry, on the $200 million of additional bonds, I guess you are trying to buy, and back of the envelope says that if you are successful at doing that, that’s about $0.10 in EPS. A. How confident are you that you will get approval and B, what would be the timeframe of being able to do that?

Larry Cash

Well we visit with the various rating agencies; we expect to hear in the next 30 days about that. We would expect to have that approval and then we will pick the proper time in the market to do that and try to determine as we did in the fourth quarter and it's good for us.

A.J. Rice - Soleil Securities

Have you factored that into the current guidance that’s out there or?

Wayne Smith

There is a wide range of interest expense and other activities which all would be considered in the probably the high end of the range

A.J. Rice - Soleil Securities

Okay. Obviously with the stimulus package just passed, there is a provision there for healthcare, IT. And we are at the early stages of figuring out what those standards and all are going to be, but do you guys have any thoughts about whether that impacts your CapEx budgets in any way for IT and how you might think about that? And I don’t know if you have any broader comments about the benefits of the stimulus package and the S-chip legislation, how that’s factored into your guidance?

Larry Cash

Yes, I think it's too early to tell about the IT piece of it, I think there is money on the way. I am not sure yet what the definition is of electronic medical record, there's a lot of those kinds of questions. So, I think to caution here would be for the industry, is that, we have some definition about what we are trying to accomplish, otherwise IT can always be a black hole if it's not well defined. So, I think that has to happen before and I think that will take a while. Surely the government is not going to put this money out without some clear definition of what they are trying to accomplish.

A.J. Rice - Soleil Securities

Do you guys delay any purchases?

Larry Cash

No, it hasn’t changed what we are doing. Look we are fundamental operators, our systems are operating systems. We are doing clinical improvements in clinical systems and all of those things. And we have and like I said the definition of electronic medical record is different to different people, but we are making good progress. We will not have a complete electronic medical record and have a facility in the next number of years for sure to consist expensive proposition. But we gauge our development based on the size of our facilities.

Having said that, sort of a second half of your question in terms of stimulus package, I think there is probably more money today and reimbursement was in healthcare than it has been a long time. When you take the $87 billion in terms of support in the Medicaid the expansion of it's S-chip, the IT piece, the Cobra piece and we are getting market basket rates from commercial 5% to 7%. I think there is more money today than it has been in goodwill.

A.J. Rice - Soleil Securities

Okay. And just last question real quick on your physician recruitment. Obviously you got another big goal for the year ahead. Is there anything about what's happening in the economy either change in the term you are willing to offer or the specialty that you are going to go far and has the weak economy in anyway affected the availability of supply?

Wayne Smith

Not so far, as you can see we had a booming year and we don’t. Our prospects have not changed all that much in terms of 2009. So, we haven’t seen any change in mix or changes in specialty or change in people reluctant to move because of house price, any of those, numerous things have adversely affects us. Now, as we go through the next year there is always that possibility, but keep in mind we are recruiting about 60% of the people we recruit are from new program, so they are finishing their program and so they are looking for place to move, so that's very help. The rest are transitory. But its sort of the offset of that, people are looking for stability and one of the things that we think we offer is stability in our markets.

A.J. Rice - Soleil Securities

Right. Okay. Thanks a lot.

Larry Cash

A.J. just one comment. On the S-chip I think it would be something we do not understand. I think we had about $100 million of (inaudible) revenue in 2008. So that gives you level of opportunities that it works correctly. It's all of that, gets qualified for Medicaid that will help eliminate $100 million in bad debts.

A.J. Rice - Soleil Securities

Okay. That’s good. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Robert Hawkins of Stifel Nicolaus. Your line is open.

Robert Hawkins - Stifel Nicolaus

Thank you. Would you mind expanding on the New Mexico investigation, just exactly what the disputes are between the two agencies? I know it's fairly minor but I still kind of like to understand a little bit better?

Wayne Smith

Yes. Well, I think I have said about all Larry has to say about that today. We will wait and see when the government files their case and we will just see where we are at the end. As I said, this is a very straight forward issue. It’s a dispute about funding inter-government agencies and I think I have said everything I can say today without, you know, there is nothing there. That’s all we know.

Robert Hawkins - Stifel Nicolaus

Okay. Fair enough. Then quickly, you got on your guidance, it looks like free cash flow is about $300 million to $400 million this year and everybody talked about, that you might, you will try to be able to buy another $200 million in stock or bonds. What do you guys think you will do with the other $100 million to $200 million? Are you guys going to try to stock pile cash, like we are seeing a lot of folks do or where would that money go?

Larry Cash

One of the things as you can see, we sort of converted in terms of trying to figure out ways that we can accelerate our deleveraging. I am pulling back on our CapEx and fortunately our operations are good so we are improving our cash flow. So we are moving in that direction more than anything else we clearly will not have enough cash on hand and we got availability if we need additional cash but our direction is not doing acquisitions, pulling back on CapEx and looking for other ways that we can de-leverage over the next couple of years.

Wayne Smith

And there is a couple of ideas we have got in mind but we will wait till we pursue those before we talk about.

Robert Hawkins - Stifel Nicolaus

Okay thanks. I will jump back in the queue.

Operator

Thank you our next question comes from the line of David Common of JP Morgan. your line is open sir.

David Common - JP Morgan

I am sorry, I apologize my questions have been answered, thank you.

Wayne Smith

Thank you, David.

Operator

Alright our next question comes from the line of [Wi Romaldo of Stone Harbor], your line is open.

Wi Romaldo - Stone Harbor

Yeah I just need a clarification in the cash flow statement. There is a use of a $192 million for the 2008 classified on other operating, increases in other operating assets for what is that?

Larry Cash

Yeah couple that’s about one is its deals with NMIS but not equipment purchases which would be software purchases because we are in amidst of approaches. There we also got some NMIS deferred cost physician improvement some what a moderate investment will made for now outside vendor and also our capital will be funding money in our capital that's where capital from our prices coming that's what it does.

Wi Romaldo - Stone Harbor

Okay out of these few that you named is there a significant category?

Larry Cash

For the larger one would be related to the software NMIS conversions that be the larger component and there is also some money enforcing escrow and we had some land sales as per and some money back earlier set and there are some.

Wi Romaldo - Stone Harbor

Okay and then question on the minority interest, minority investment into joint venture not also is the case consuming, is that ongoing, I have thought maybe at least you would offset the charges the net income statement but --

Larry Cash

Watching out there is that we do get dividends and sometimes, dividends, there are into the company reinvested their stock and while we participate for our board member such stock dictate the cash flow coming. So there is some, I think we have never gotten a dividend from one of our investors until we got involved and got one last year and that just there is timing difference.

Wi Romaldo - Stone Harbor

Okay. But the minority these JVs are not are you putting in additional investment into this JVs because at least for 2008 there was additional $60 million pullback if you add back --

Larry Cash

That’s why minority investors that $60 million dose, we bought out some minority investors and --

Wi Romaldo - Stone Harbor

Okay, got you, okay and the last question I have is on what you are talking about leading getting approval for additional $200 million of bonds buyback and then later I had another question you are talking about visiting rating agencies, I think I am little confused, who are you seeking approval from?

Larry Cash

Credit agreement allowed us $400 million for first 200 we could do, second $200 million needed to held by reaffirmation of the rating agencies with the effect as a result of that and we expect that to happen.

Wi Romaldo - Stone Harbor

Okay, and so this is one time sort of basket or is it annual allowance.

Larry Cash

One-time basket.

Wi Romaldo - Stone Harbor

Okay, is there annual basket?

Larry Cash

One time basket.

Wi Romaldo - Stone Harbor

Okay, no annual basket beyond that one time that.

Larry Cash

Absolutely one time interest.

Wi Romaldo - Stone Harbor

Okay. All right, thank you.

Larry Cash

Thank you.

Operator

Thank you, our next question comes from the line of David Bachman of Longbow Research. Your line is open.

David Bachman - Longbow Research

Hi, good afternoon. Most of the questions have been answered here. But can you just clarify what your pricing expectation is for 2009 on the adjusted admission basis?

Wayne Smith

Well, I think if you look at our overall perspection may be somewhere in 4.5% to 5.5% or 6% same-store revenue growth, and then volume mid of 1% at least somewhere in the 4% range. And somewhat the volume subsidies probably in the range of 4%.

David Bachman - Longbow Research

Okay, right, I saw backing up the volume there I just want to clarify though, so okay. And then your net physician adds for the year were you said turnover rate was steady but what was the net add then on physicians?

Wayne Smith

It was about 12,500 physicians about 6% turnover, so that gives you the net number possible.

David Bachman - Longbow Research

Got it, okay, and then how many employee physicians do you currently have and any change on that front?

Wayne Smith

It's a little over 10% in the total population. And it's moving up a little bit but not substantially.

David Bachman - Longbow Research

Okay. That’s great. Thanks.

Wayne Smith

Thank you.

Operator

Thank you. Our next question comes from the line of Erin Blum of Goldman Sachs. Your line is open.

Erin Blum - Goldman Sachs

Hi. Thank you. I was just trying to understand why it looks like the net income guidance is down a little bit but cash flow from operation that is up. So is that changing working capital or is it relates to?

Larry Cash

The net capital would be down from previously amount of that because of the debt exclusion.

Erin Blum - Goldman Sachs

Right, so then cash flow from operations guidance is up from last year?

Larry Cash

Well it's not up from last year; it's up from what it was previously.

Erin Blum - Goldman Sachs

From the previous guidance?

Wayne Smith

Previous guidance to $850 million, we did a better job in collecting receivables. We also had a little bit better result to some tax planning and also some activity in the and accrued pay roll came out little better than we thought it would in the previous guidance but most of us in the receivables.

Erin Blum - Goldman Sachs

Okay perfect thank you.

Wayne Smith

Thank you.

Operator

Thank you very much and our last question comes from the line of Gary Taylor of Citigroup. Your line is open.

Gary Taylor - Citigroup

Hi good morning. Couple quick ones. Are there any other Triad potentials are we, are we clear the timing of any of those?

Wayne Smith

I would say we are predominantly clear the timing of those, there's always a chance that you could have partner a facility with Triad it could have some issue but there is no puts as such.

Gary Taylor - Citigroup

It is none that you are aware of is there a point in time where those opportunities have all expired?

Wayne Smith

I think it all legally expired but we have joint venture.

Gary Taylor - Citigroup

Okay on page 23 the slide show where you show your Medicare case mix. I just hadn’t this is probably the same presentation as historic but I just hadn’t paid attention to it may be. But for example when you show quarter end case mix is 30 basis points for the quarter that would not be any different than what you experienced through the quarter right, I mean in general you would say it contributed 30 basis points till quarter.

Larry Cash

That's correct its on same tore basis.

Gary Taylor - Citigroup

And is the year-end number I think I just dialed in when Wayne was talking about which stats had which but the down 90 basis points year-over-year is that the entire base of hospitals?

Wayne Smith

That's entire base of including the Triad Hospitals. That’s probably we had from January 1 we've attempted, have same store have same store have Triad in it from January 1, 2007. One reason the 90 basis points was the strong proceeds in our first quarter of 2009 case mix down and then we've had a fair amount of success in ER management, which sometimes bring a bit lower admissions.

Gary Taylor - Citigroup

So it’s look though with your pricing mix guidance for next year, you are assuming that this case mix is relative flat, not a drag.

Wayne Smith

Relatively flat, we did some work throughout the end of the year, and tried to make sure that we properly documented and improve our case mix and thought hopefully that would be it is predominantly flat in their assumption.

Gary Taylor - Citigroup

Okay. And then Wayne, just a question for you about acquisitions I think you kind of answered it in a previous question I guess there is some good reasons to focus on the de-leveraging limits the way you can drive earnings growth. And two with your overall leverage maybe it's just something that street would like to see.

But on the other hand presumably, the old kind of core community acquisition targets and those small communities that most of us haven't heard of presumably the financial distress in some of the assets would be greater now than even it was over the last two or three years, so kind of a two-part question, one, is there a leverage level where we should anticipate your willingness to do more acquisition picks up. And two, are those old community-type acquisition targets too small to move the needle or at some point do we see you back doing some of those smaller asset acquisitions?

Wayne Smith

Strategically, we think we are better positioned today, because we are in both the non-urban, we still have 85 hospitals as a sole provider which helps in terms of risk of course and those are relatively smaller communities out there across the country, but we also had these mid-sized markets, so our targets would be both when it's all said and done.

We just think we have already done and we have announced two for 2009 and we think that is enough. The only thing is I would say, we continue to have so much opportunity since the Triad acquisition, our executives are performing extremely well, our CEOs, CFOs, CNOs and Division Presidents are making great progress on the assets that we currently have.

So I think we got time before we do anything else, and work own de-leveraging kind of going forward. But as we did Siloam Springs, I don’t know if you understand the Siloam Springs. Springs project are not, but basically it's multi-chain and is a leased for 4-5 years and we replace it.

There will be those kinds of opportunities as we look to the future as you say, there is lot of properties out there, they were having trouble and we get a lot of calls. But we have decided that we have so much opportunity now, but we would just continue to work on what we have for a while. We got these two acquisitions that we are doing in 2009 and they will really visit again some time in 2010 or next year some time.

But we are always opportunistic, but we think we have a good opportunity to bring down our CapEx and improve our cash flow and de-leverage here this year. And it's a good thing for us to focus on, particularly with the economy the way it is.

Gary Taylor - Citigroup

Do you have a thought process in terms of the balance sheet needs to be four times debt to EBITDA before we see you doing though.

Wayne Smith

If our debt to capital, whatever it is goes down, then we will be back in the market. I think it really is based on our growth and our earnings and where we are now. But I think we have got plenty of room. You are actually right, Gary though. Our model of layering on acquisitions has been a very successful model for us.

And that's what this company has built on, and we will continue to do that at some point in time. But there is not reason for us to do that right now, we have had plenty growth built in where we are. Two years from now that might be a different story, but right now we are in good shape.

Larry Cash

Gary, you might remember I think we were debt-to-EBITDA back in 1997 it was like nine times were to down to about three times in 2006, and clearly we think we work this down overtime also.

Gary Taylor - Citigroup

Yup, okay. Thanks.

Larry Cash

As you can see 2008 was a very successful year. We acknowledged the challenges of our uncertain marketplace. We are confident in our ability to perform. We believe that our ability to deliver quality healthcare services continues to differentiate Community Health Systems in the non-urban and mid-sized hospital market.

We want to specifically thank our management teams and staff of our hospital chief executive officers, chief financial officers and chief nursing operations and our division operators for their continued support in operating efficiencies during this challenging operating time.

In closing I continue to be excited about our business prospects, we are very well positioned to mange through this challenging environment. We are convinced that solid performance will propel the company to another level of success extending our leadership position in the healthcare facility sector.

Once again if you have any questions, you can reach us at area code 615-465-7000. Thank you very much.

Operator

Thank you for participation. This concludes today's conference call. You may now disconnect.

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Source: Community Health Systems, Inc., Q4 2008 Earnings Call Transcript

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