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Executives

Brent Turner – EVP, Finance and Administration

Joey Jacobs – Chairman, President and CEO

Jack Polson – CAO

Analysts

Christina Bradshaw – William Blair & Company

Adam Feinstein – Barclays Capital

Darren Lehrich – Deutsche Bank Securities

Mark Arnold – Piper Jaffray

Andreas Dirnagl – Stephens Inc.

David Bachman – Longbow Research

A.J. Rice – Soleil Securities

Jeff Englander – Standard & Poor's

Gary Taylor – Citigroup

Psychiatric Solutions, Inc. (OTCPK:PSYS) Q4 2008 Earnings Call February 26, 2009 10:00 AM ET

Brent Turner

Good morning. I’m Brent Turner, Executive Vice President, Finance and Administration, for Psychiatric Solutions, and I would like to welcome you to PSI’s Conference Call for the Fourth Quarter of 2008.

Today's call is being recorded and will be available for replay beginning today through March 13, by dialing 719-457-0820. The confirmation number for the replay is 4606679. The replay may also be accessed through March 13 at our website, which is psysolutions.com and at earnings.com.

To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the Investors link to news releases and clicking on yesterday's earnings release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Psychiatric Solutions' expected financial performance for 2009. For this purpose, any statements made during the call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, the words; believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Psychiatric Solutions’ filings with the Securities and Exchange Commission and in our fourth quarter earnings release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

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

Now for opening remarks, I would like to turn the conference over to our Chairman, President and Chief Executive Officer, Joey Jacobs.

Joey Jacobs

Thank you, Brent, good morning and welcome. It’s a pleasure to be here today to discuss our operating performance for the fourth quarter and full-year 2008. We produced in same-facility revenue of 7.8% growth for the quarter with a 6.5% increase in same-facility revenue for patient day and a 1.3% increase in patient days.

Same-facility revenue for all of 2008 grew 8% exactly in the middle of our 7% to 9% range. For the fourth quarter, we generated earnings of $0.44 per diluted share.

As discussed in our press release the fourth quarter earnings per diluted share were impacted by one of the company’s facilities in Chicago and an increase in the company reserves for general and professional liability coverage. The Chicago facility suffered a decline in operations of $0.03 relating to admissions hold and professional fees of $0.02 relating to an investigation.

As a result of our annual actuarial review, we determined that we needed to increase our self-insured, reserves for general and professional liability by $4.9 million or $0.05 per share.

Our results for all of 2008 reflect another strong year performance. PSI grew its total net revenues by 20.9% for 2008. Income from continuing operations per diluted share increased 38.1%. And as adjusted for 2007 loss on debt financing, income from continuing operations per diluted share grew 28.9%.

During 2008, we acquired five facilities opened a 120 bed de novo hospital and added 380 beds to existing facilities. We had total bed growth of over 900 beds in 2008. Our revised 2009 earnings guidance of 224 to 232 represents earnings growth of 17% to 21% before the effect of any future acquisitions.

We are lowering our guidance to reflect the financial impact of the following three issues; the current economic environment and the continued admissions hold at our Chicago facility resulted in lowering our revenue goals for 2009.

Same store revenue growth is expected to be mid-single digits for the year 2009 and lower single digits for the first quarter. As we saw a softening inpatient days that began in October. Number two, our guidance reflects the trending of general and professional liability expense that we experienced in 2008. And three, the impact of successfully amending our current revolving credit facility.

There are bright spots for 2009 we expect positive patient day growth and revenue per patient day growth. We expect to add 400 beds to existing facilities and to complete selective hospital acquisitions.

Mental Health Parity will have a positive impact when it takes effect October 2009. And PSI will be positioned well for a successful 2009. Now that I have given you an overview of our financial performance for 2008 and guidance for 2009, I want to give a similar overview covering quality initiatives.

Last year we admitted 164,670 patients generating 2.8 million patient days. During 2008 we had approximately 700 regulatory surveys, less than 1% of these surveys resulted in significant findings or deficiencies. Approximately 250 resulted in zero deficiencies.

Our corporate staff working on quality initiatives now totals 32 and more than a 100 individuals that the facility level are dedicated to quality and compliance. We implemented a quality score card with 22 indicators; we voluntarily captured the seven core measurements for Joint Commission. Please visit our website where you will find more of our efforts in continuing education and training to keep our patients safe.

Keeping our patients our safe is number one goal of PSI, our 24,000 employees work toward that goal everyday. When incidents occur it's very unfortunate and we are dedicated to learning from those incidents to improve our quality of care.

Thank you again for your time this morning and now Jack Polson, our Chief Accounting Officer, will review our financial results in more detail.

Jack Polson

Thank you, Joe and good morning. PSI’s revenue for the fourth quarter increased 12% to $446 million from $398 million for the fourth quarter of 2007. Income from continuing operations increased to 6.3% to $24.6 million from $23.2 million while income from continuing operations grew per diluted share, grows 4.8% to $0.44 from $0.42.

Our same-facility revenue increase 7.8% for the fourth quarter reflecting a 6.5% increase in revenue per patient day and a 1.3% increase in patient days. Patient days were impacted 0.9% by the admissions hold in Chicago. Same-facility EBITDA margin was 18.7% and total facility EBITDA margin was 18.5% both compared with 21.0% for the fourth quarter of 2007. While same-facility EBITDA margin for the full year was up 30 basis points to 20.8% from 20.5% last year.

Consolidated adjusted EBITDA increase 9% for the fourth quarter to $74.6 million and increase 23% to $312.9 million for the full year.

With substantial net cash provided by continuing operating activities for the quarter and the year as well as strong growth in our consolidated income from continuing operations for the year. We again improved our financial position at year end 2008 with the end of 2007.

Cash flows from continuing operations was $52.5 million for the quarter and $142.6 million for the year and days and accounts receivable at the end of 2008 was 51 down from 53 last year. Total debt-to-adjusted EBITDA improved to 4.0 at the end of 2008 from 4.4 a year earlier and 4.1 at the end of the third quarter.

Net debt to total capitalization improved to 58.7% improved 258.7% at the end of 2008 from 60% at the end of 2007.

Now, here is Brent Tuner to discuss the extension of our revolving credit facility.

Brent Turner

Thanks Jack. We are extremely pleased to announce two year extension of our revolving credit facility extending the maturity of $200 million of the facility to December 31, 2011. The remaining $100 million will mature at the end of 2009 as originally scheduled.

The revolver currently has an outstanding balance of approximately $195 million and is priced at LIBOR plus 5.25%. In a more normal lending environment, we would have extended the entire $300 million revolver. However, given the current environment the fact that we were successful on this extension is a credit to the financial performance of PSI. It is important to note that structure we utilized did not impact the terms of our $570 million in term loans that remain priced at LIBOR plus 1.75%. That was also a significant accomplishment and part of our strategy and extending only $200 million of the revolver.

I want to thanks the lenders that are now part of our new revolver for their support of PSI. With this revolver maturity put behind us we are now well positioned to fund our capital needs for 2009 and we intend to use the excess cash flow to further reduce our overall debt. Finally, we have no significant debt maturities until the end of 2011 when revolver matures once again.

This concludes our prepared remarks this morning. Cynthia, would you please open the lines for questions.

Question-and-Answer Session

Operator

Thank you Mr. Turner (Operator Instructions) We will take our first question from Ryan Daniels with William Blair. Please go ahead.

Christina Bradshaw – William Blair & Company

Good morning. It’s Christina Bradshaw for Ryan this morning. To start-off, where is the weakness that you’re seeing in the volume right now given the environment. Is it under acute-RTC side or is it more payer focused?

Joey Jacobs

It’s general across the Board. Our payer mix has stayed relatively stable over the years. It is just a general softening that occurred in October, and that was I guess when banks started to fail maybe Lehman Brothers had closed or whatever and we just the uneasiness, the lay-offs in the market, just caused a softening in the census, starting in October. Across the Board we do have several facilities that -- this is not impacted and they are growing rapidly, so but there is a general softness across the country.

Christina Bradshaw – William Blair & Company

That's helpful color. Thank you. Regarding the situation in Riveredge, can you estimate what your costs are going to be for the facility in the first quarter of 09 or I don’t know if you can provide an estimate? And then, I guess, is there a point where you get to just think about converting those beds away from DCF to maybe private pay?

Joey Jacobs

The Riveredge and the softening of the census was taking -- we took both of those things into consideration when we lowered the revenue -- same-store revenue goals to the mid-single digits. So it’s baked in those expectations there. We have starting in November began a program of diversifying the payer mix there, and so that is a part of our strategy and hopefully a successful strategy during 2009.

Christina Bradshaw – William Blair & Company

Okay, great. And then, a question on the revolver. Is there a LIBOR floor on, for the extension of the revolver or any new covenants that may be we should be aware of?

Brent Turner

There are neither. No LIBOR floor and no change in our covenants.

Christina Bradshaw – William Blair & Company

Okay. And then, I have one final question. On the M&A front, probably a bit of conundrum as there are fewer bidders and higher interest costs, but the facilities themselves are doing well and maybe, not taking lower multiples. Do you have any color on those?

Joey Jacobs

The acquisitions where we have lower intense have good facilities and our multiples for acquisitions have been lowered. So, the multiple that we are going to be paying for acquisitions going forward is slower than what we pay, say from 2005-2006, forward.

Christina Bradshaw – William Blair & Company

Okay, great. That’s all I have for now. Thank you.

Operator

We'll take our next question from Adam Feinstein with Barclays Capital. Please go ahead.

Adam Feinstein – Barclays Capital

Thank you. Good morning, everyone. I guess several moving parts here. Just want to start and just want to clarify something. So you said Riveredge impacted same-store growth by 90 basis points in the quarter, is that correct?

Joey Jacobs

Correct. Patient days, yes.

Adam Feinstein – Barclays Capital

The patient days by 90 basis, okay. Alright, and I guess, as you know, you look out in terms of the impact from the economy and what you're assuming for 2009, you know, you spoke before about the general softening. But are you also assuming some change in reimbursement with some of the state Medicaid issues?

Joey Jacobs

Adam, we've built in a little cushion there. We've not seen that yet. But we've built in a little cushion there. You know, the states are, like in Tennessee for example, the governor postponed presenting his budget until he saw what was going to happen with the stimulus package. I think a lot of the pressure on the Medicaid budget at the state level are going to be solved by the funds coming from the Federal Government to shore up Medicaid. So, we will get more clarity as closer we get to July 1. We have been a little bit more conservative in the re-projection for 2009.

Adam Feinstein – Barclays Capital

Okay. And then just on the patient day softness, I just wanted to delve into this a little bit more detail. I guess as you have seen issues there, I mean, do you believe that payers are limiting length of stay? Do you think that’s driving some of this. Just want to get your thoughts in terms of why a Medicaid beneficiary wouldn’t be getting the same treatment, I would assume that their benefit would be similar. So there hasn’t been any change in terms of co-payments and such for some of the Medicaid beneficiaries. So just curious in terms why you think the patient day softness is taking place?

Joey Jacobs

The uneasiness in the population about even buying or consuming even goes into patients days here. More than -- our number one payer now from our last payer source now is commercial HMO, PPO. We really don’t see anything really changing on the length of stay there significantly. What we do see is that population that does have deductibles in co-pays that they would be having to spend for care. So, maybe a little bit more pressure there, but it's more of a general the softness, Adam, across the board.

Adam Feinstein – Barclays Capital

Okay. Alright, and then on the professional liability costs. Maybe just walk us through -- what's going on there in terms of the increase you are seeing, I understand the impacts for the quarter was a boost in your reserves, but as we think about 2009, how should we think about the professional liability cost?

Joey Jacobs

That was the reason for lowering the guidance some for 2009 is to make sure that we have what we believe is adequate insurance reserves, expense going or 2009. And the increase came, Adam, from the thoughts or expectations that the actual claim cost per claims going to go up and has going up overtime. So, that’s where it came from. We have instituted some new procedure so we have more of a quarterly look at that number going forward, but we've trended that expense line for 2009 using the 2008 increase in reserves there. So, once again we were conservative cautious there.

Adam Feinstein – Barclays Capital

Okay. And I don’t know, Jack or Brent, I want to go through but in your K outlined there is a change in your policy there. Can you just walk us through the change you guys made in terms of your self insurance here?

Brent Turner

Yes, I think you are speaking about the fact that we increased our excess coverage from $50 million to $75 million going forward. And it's important to note from our risk management profile we were able to do that with our lower premium for the entire excess policy than we had at the $50 million level.

So, that it further validates that there is no significant change in our exposure from claims that we were able to purchase $75 million of additional coverage at premium rate lower than what we were previously paying for 50.

Adam Feinstein – Barclays Capital

Okay, great. Thank you.

Operator

We will take our next question from Darren Lehrich with Deutsche Bank. Please go ahead.

Darren Lehrich – Deutsche Bank Securities

Thanks. Good morning everyone. I wanted to just fall up a little bit more on the professional liability issue and may be if you can just kind of give us a sense for the timing of the actuarial review and when it became known to you that you would have to take reserves. I just want to sort of get a sense here for the timing of that process. And I think Brent you said that you have a new quarterly look at this so, may be can you just tell us what you are doing differently on a quarterly versus what you did annually before.

Brent Turner

Darren the timing of this is always done in the middle of fourth quarter, so that we have good results and can study it for year-end. We previously had any significant changes outside of our expectations from that. This is the first year it happened there. And so going forward what we've done is put some -- a monthly internal analysis in place to roll our experience forward. And then quarterly we'll be having our outside actuarial review study, before the end of each quarter.

Darren Lehrich – Deutsche Bank Securities

And when did you complete the actuarial review this go-round?

Brent Turner

Well the final, we got initial indications late in December the final didn't come out till January but those -- these things are they put out a number of drafts and we go through that, so it was initiated, beginning of December and so it's a process.

Darren Lehrich – Deutsche Bank Securities

I guess just a question with regard to your philosophy pre announcing, it did seem like you had some information available by January, so maybe Joey, can you just share with us your thought process with regard to that and why you didn’t want to get this information in to the marketplaces, probably the biggest miss you had since being public company. So I think your shareholders would like to hear that.

Brent Turner

Darren this -- the review of the malpractices, the general and professional insurance reserves took the whole month of January. And the audit committee and the review of the financial numbers were scheduled for mid February. I thought it would be a disservice not to able to put out one piece of information without being able to really talk about the whole quarter and in it's entirety during that and it was just $0.05 $4.9 million.

And so that was the decision and it was somewhat of unusual occurrence and that our history had not, had those sort of adjustments. And we wanted to take the time in January, may be in the in the first couple of weeks in February to review with the actuaries and make sure that we understood the details of what they were recommending to us. And it coincided it was within a few days of when we would be having this call.

Darren Lehrich – Deutsche Bank Securities

Okay and then can I just a question with regard to how your educating your referral sources obviously some bad headlines which we would all like to see avoid going forward. But in those markets where that may have had some impact in your referral sources perhaps. Can you just talk to us about how your compliance team is educating referral sources with regard to your outcomes? If there's any different process there?

Brent Turner

We know when someone's out there doing a story, and by the time the story is written, we kind of know where they are going to focus, fortunately for us they keep focusing on very old stories, very old incidents for so we do give state agencies, Joint Commission, referral sources, heads ups ahead of time so they are not surprised or read it in the paper. And I think our operations teams in conjunction with Kathy Bolmer and non of the compliance and quality department do a good job of reaching out to those sources. And providing more detail surrounding the events and that the subsequent appropriate agency has reviewed those incidents that are occurring.

And for example, the story that was written on our Taxes facilities, they talked about fines but all those fines were in none of those fines, we had no fines. We had nothing that occurred in 2008 that required a fine to be assessed to PSI. That was not in the story. Story about our Chicago facility is that they did, we did have a couple of incidents in August of last year. But let me assure you that people have read this story have assess to all the state findings and reviews, we had no more incidents like that since August. And have had none this year and then this, the main part of our story was written on something that occurred in 2007.

It's unfortunate that, that is public information and those are the worst of the incidents that occurred with PSI. And so last year we treated 2.8 million patient days and did a great job but there were some incidents. And so but we do try to be aggressive in communicating with all of the appropriate agencies and the referral sources, so I think we do pretty good there and there is always two sides to every story and we try to give our side and let them make their decisions.

Darren Lehrich – Deutsche Bank Securities

Sure, let me just one last thing here. And that's on the acquisition front and really what I would I guess like to get out is when you think about your liquidity position in the capital that's available to you. Can you just help us think about what you think you realistically would want to take down on your revolving credit facility given that a portion of it does mature this year and sort of what that gets you from an M&A standpoint. And I guess the corollary to that would just be, are there any core assets that you have that might give you some additional liquidity to do an acquisition?

Brent Turner

Yeah this is Bret. I think one, our revolver is $300 million and we are very optimistic with our liquidity position, with our cash flow that we generate is ample to fund both our internal as well as our external goals. Keep in mind we have access to other capital the revolver was just one source that was immediately addressed in the first quarter. But there are other sources of capital available to us and so we do not see our acquisition opportunities to be mitigated due to our revolver or access to any other capital.

Darren Lehrich – Deutsche Bank Securities

Okay. Thanks a lot.

Operator

We will take our next question from Mark Arnold with Piper Jaffray. Please go ahead.

Mark Arnold – Piper Jaffray

Good morning. Maybe just a follow-up on that last question, Brent, you mentioned other sources of capital -- your bonds are currently trading about with the yield of about 10% historically that might not have been a level that you guys were willing to do something at. But given multiples are coming down, I think you maybe kind of half-answered this in the last question but I mean would you guys consider going to the bond market if there were attractive acquisitions out there that you wanted to finance?

Brent Turner

I think a fair way to reference that is an attractive source of capital that's available to us.

Mark Arnold – Piper Jaffray

Okay. And then just another follow-up to the question on professional and liability reserves, Joey I think you mentioned that in your guidance that you're being conservative in what you've assumed in there as it relates to your guidance, is it fair to say then that your guidance doesn't assume any additional reserves being taken here over the rest of the year?

Joey Jacobs

I would not see any unusual adjustments to the reserve for the year. I can't guarantee that but we think we have built the reserves adequate enough and that we're going to be more timely with the review each quarter. That $0.05 that we took for the fourth quarter quite frankly that was probably build up and that probably should have been allocated one fourth across all the quarters.

Mark Arnold – Piper Jaffray

Okay.

Joey Jacobs

And so we will be more real-time, adjustment I would assume if there was an adjustment would be smaller and quite frankly it can go the other way, so it could be a positive.

Mark Arnold – Piper Jaffray

Okay and then when we are talking about the weakness that you are seeing I think you said it kind of across the facilities are you projecting that impact to be more severe on the RTC or the acute side?

Joey Jacobs

We build our budgets by facility and we have some few facilities that have seen a softness, and then we've had some RTC facilities that have had a softness. So once again it's not one specific area or service or geographic area in the country. So, but it is a general softness.

Mark Arnold – Piper Jaffray

Okay. One last question and it just relates to Riveredge, can you just give us a sense where we stand at Riveredge right now? Kind of where your census is today, maybe versus a year ago. And just kind of at least to what you can reveal, kind of what the status of the current investigation that DFS review is?

Joey Jacobs

Okay. First, it's probably costing us 50 to 70 basis points against the same-store patient day comparison. Now, that comparison will get smaller as we get into the third quarter of this year. And hopefully, in the second quarter, as we're diversifying the patient load at that facility it will get smaller. The status, we continue to work with the Department of Justice on their investigation and respond to their needs. The DCFS, they're waiting on a report from the University of Illinois, Medical Center in Chicago. And since the incidents have occurred, we've had the Joint Commission survey, which the facility did well with. We've had DCFS; we had licensing CMS in there. So, we've had many surveys and inspections since the summer of last year. And so, we are just waiting on DCFS. And they are kind of waiting on this report.

Mark Arnold – Piper Jaffray

Just one follow up to that and then I will jump back in queue. I think, you guys have put in place some additional staffing. I think you have a job posting for a new compliance officer there. Are those things that you are working along with some of the state agencies? And can we infer that you're working with to address some of the concerns that they have or are these just regular practices and things you are doing to address the, you make sure that the quality issues there, that there aren’t any in the future?

Joey Jacobs

It's a combination of both. Anytime anybody comes in and survey us and give us a report or they think we can improve care, we develop an action plan and put additional resources and we keep the regulatory party that issued the report. We keep them up-to-date on the progress we are making. So it's a combination of both that’s going on there, that we’re keeping the appropriate agencies up-to-date on what we are doing and changes that we are making. We welcome them at any time. Our CEO there has done a good job. She is not been there for a year yet, I think its amaze when she will be there for a year and Terry has done a super job there and we are very open and transparent. And so we are very much in touch with the various agencies that would be looking at this facility.

Mark Arnold – Piper Jaffray

Great, thank you.

Operator

We will take our next question Andreas Dirnagl with Stephens. Please go ahead.

Andreas Dirnagl – Stephens Inc.

Yeah, good morning, guys. Actually, Joey I am going to start with just a sort of another follow-up on where we just were. I just want to clarify, so what you are saying is that for Riveredge at the moment you haven't got to the point where you've sort of come together and done a coordinated action plan with the state yet, you are still waiting to do that or have you done that already?

Joey Jacobs

We have done that.

Andreas Dirnagl – Stephens Inc.

Okay.

Joey Jacobs

They have engaged an outside consultant to come in and do our survey. And that’s been occurring since November.

Andreas Dirnagl – Stephens Inc.

Okay.

Joey Jacobs

So we are waiting on that report but as far as all those other reports and actions we have done those.

Andreas Dirnagl – Stephens Inc.

So, in other words, I mean, let me see if I can characterize. What you are saying is that you've done everything the state has asked you to do and now you are just waiting for them to sort of make sure that you really have done those things with this outside survey and that’s what holding up process?

Joey Jacobs

Correct. We have done everything, we know to do other than continuing improvement all the time which all of our facilities, we are waiting on DCFS.

Andreas Dirnagl – Stephens Inc.

Right. Okay, great. And then my second question, I really want to sort of delve in a little bit more into this idea of you are seeing just overall weakness from the economy and people being more cautious. Can you help me marry that idea with sort of the idea that we've always previously had that you guys are really cushion from a lot of the economic environment, simply because I mean you are not a first line treatment modality you are the last line treatment modality significant portion of your patients are a danger themselves and/or their community, there really is no other choice but inpatient hospitalization. I mean where to sort of in the clinical decision making process where is sort of the point where gee a weak economy means that I am going to opt for X versus inpatient hospitalization and what is X?

Joey Jacobs

Well, hopefully X is not getting treatment, could very well be that there not getting treatment, X could be maybe a position taking more of risk about trying to do that patient through and our patient effort. Let me assure that we are going to have positive patient day growth in the company this year. We are not going to have decline inpatient days, we are going to have positive patient day growth and we have many successes. Just for example, we opened up 44 beds at Holly Hill Hospital in Raleigh, North Carolina. And the day of the dedication, it had been opened the week and it was the force 44 beds were already half full.

So we have examples of where we have strong growth, where we've expanded our beds. And hopefully these patients are not hopefully, we would hope that they are not trying to get by with not care. And then so but it just a softness and it’s a small softness. We did 1.6% patient day growth, in the fourth quarter and that was 90 basis points effected by Riveredge which would have gotten patient day growth roughly in the 2.5% range.

So, when you adjust for that 90 basis points, the fourth quarter was strong. We've had stronger quarters. The surprise to us in the fourth quarter was October. For some reason, we occasionally have a month like that were -- where it’s supposed to be a stronger quarter, I mean, stronger month and for some reason the months just wants to be soft. And at that time last year in September and October there was a lot of bad new going out in the economy. So, Andreas that’s -- we are going to have positive patient day growth.

Andreas Dirnagl – Stephens Inc.

Yeah.

Joey Jacobs

And internally, we are still shooting for 7% and 9%. But as for you all in your models, it's mid-digits for you all in your model and it's a lower single digit for the first quarter. So, but we are still internally, we are still pushing and driving towards the 7% and 9% growth.

Andreas Dirnagl – Stephens Inc.

So again, maybe just to try and characterize, in terms of the economic impact, there is likely a certain portion of the population both on the RTC as well as on the acute side, that are for lack of a better term from a clinical perspective kind of borderline maybe as to whether or not they would get inpatients versus some other type of care. And what you are saying is given the cautiousness in the current economic environment maybe some physicians are sort of leaning more towards other venues for those borderline patients?

Joey Jacobs

That could very well be true. That could very well be true.

Andreas Dirnagl – Stephens Inc.

Okay, and just to clarify then, final question on sort of the same-store revenue growth, mid single digit with lower number in the first quarter. Ignoring the first quarter, are you saying that sort of second, third and fourth quarter is going to be mid single digit period or is it mid single low single digit in the first quarter with the slightly higher number in sort of second, third and fourth that averages for the year to mid single. In other words ignoring the first quarter, if you had to give '09 same-store revenue guidance, it would be mid single digits?

Joey Jacobs

Absolutely.

Andreas Dirnagl – Stephens Inc.

Okay. Thank you very much.

Operator

We will take our next quarter from David Bachman with Longbow Research. Please go ahead.

David Bachman – Longbow Research

Hey good morning and thanks for all the detail so far that you've provided. Just a couple of more questions here. First of all, let's start with a payer mix question. Your commercial HMO private pay categories remained pretty stead here from what we’ve seen in the past at 35% of revenue. But could you perhaps provide a little bit of color to how that breaks out, especially that -- what constitutes that private pay and other places in the K you talked about individual private payers and I am just trying to get a sense of that piece of your business?

Joey Jacobs

Absolutely, Dave, the commercial category does incorporate the private pay component and that falls into that would also -- that definition would be copays deductible as well as somebody paying full charge individually. On average, that’s going to be in that 3% to 4% of our total revenue.

David Bachman – Longbow Research

So, 3% to 4% of total revenue, okay. And that’s combined, paying the whole bill and copays and deductibles and any further breakout on that or just --?

Joey Jacobs

Somebody coming in and actually paying individually, without insurance, would be very low. That would not be a big portion.

David Bachman – Longbow Research

That’s a small piece overall. And just in terms of the volume weakness, Jack is there any breakout on that piece of the business that perhaps -- it makes intuitive sense of that that piece might be a bit softer then what you saw generally?

Jack Polson

There is no more detail we can give you at this time. After first quarter is over, we will tell what the payer mix for the first quarter. We will get back to you.

David Bachman – Longbow Research

Okay, thank you. And just bad debt 2% staying kind of in that bad debt expense range?

Joey Jacobs

Yes.

David Bachman – Longbow Research

Okay. And acquisition guidance remaining unchanged to six facilities?

Joey Jacobs

Well, hopefully we can do six. We are being very selective. The economic conditions, make us do a stronger new diligence there but there are going to be some acquisitions and so we feel good about that. So, but the numbers will really be scrubbed. And so can we get six. We did over 900 beds last year and that was the equivalent on nine facilities. We bought five and built de novo. So yep, we could, we are going to be well over 400 beds for this year building and acquiring.

David Bachman – Longbow Research

Okay, and then just one final question. What’s not in same-store right now that UMC plus de novo?

Joey Jacobs

I believe that is correct. UMC and the new facility, Lincoln Prairie.

David Bachman – Longbow Research

Lincoln Prairie and that would be the same then in the first quarter numbers?

Joey Jacobs

No, UMC goes in for one month in the first quarter.

David Bachman – Longbow Research

Okay, just for most of March.

Joey Jacobs

Yeah.

David Bachman – Longbow Research

Okay, that’s it. Thanks again for all the detail, I appreciate it.

Joey Jacobs

Thanks.

Operator

We will take our next question from A.J. Rice with Soleil Securities. Please go ahead.

A.J. Rice – Soleil Securities

Hi, everybody. Just a couple of question I am going to ask. You guys have your CapEx guidance for ’09 including the development spending that you doing?

Brent Turner

I think -- A.J., this is Brent. I am going to go of the cuff here but I think we’re taking about combined 400 bed expansions plus our routine maintenance CapEx of about 2%. We are going to be in the $120 million to $140 million range.

A.J. Rice – Soleil Securities

Okay. And another sort of detailed question. I noticed on the balance sheet the prepaids and others sequentially increased from third quarter about $21 million and obviously drive the business that been stepping up, but that was certainly bigger than usual step up. Is there is anything unusual going on there?

Joey Jacobs

That's where the additional reserve for the professional liabilities is. Actually, no, that is not the case. I don't have that detail for you at this time, A.J.

A.J. Rice – Soleil Securities

All right may be I will --

Brent Turner

We will get that detail and follow back up with you.

A.J. Rice – Soleil Securities

Okay. That's great. And then just on the volume comment taking it in a different way, if you are going to look at the markets in which you had some of these adverse publicity adverse is the broad market, I mean does that explain any of the volume weakness you seeing that some of those market where you have the adverse publicity versus the broad other markets you are in?

Joey Jacobs

No, no, that has not occurred. I was in Chicago this week visiting our other large facility in Chicago and in the next sunny days they will be wrapping up on another 42 bed expansion. And we think those beds will come on line and be full, so and then in Houston market. We are seeing good patient days there so no.

A.J. Rice – Soleil Securities

Okay. All right, thanks a lot.

Operator

We'll take our next question from Jeff Englander with Standard & Poor’s. Please go ahead.

Jeff Englander – Standard & Poor's

Good morning guys. Just to clarify, the DCF poll continues to be just at Riveredge, you're seeing other amenities to other facilities in the Illinois, correct?

Joey Jacobs

Absolutely.

Jeff Englander – Standard & Poor's

Okay second part of the question is Joey you mentioned on the liability expense you're reserving for higher claims costs per claim. And it's my understanding that, that's fairly across the Board's experience for most companies. And I'm wondering if you have any feedback from your actuaries whether that's the case?

Joey Jacobs

At other companies I don’t know; we haven't asked them what's going on in other companies, no.

Jeff Englander – Standard & Poor's

Are you -- I guess the other way to put it, you've being told that this is an industry trend and you need to do this, as a result of an industry or just as a result of your --

Joey Jacobs

No this is our operation -- this is company specific to us.

Jeff Englander – Standard & Poor's

Okay and then just the last question is, can you – you've mentioned that if the $0.05 for the fourth quarter related to Riveredge, $0.03 was related to the Holdings, $0.03 was related to investigation can you give any kind of color around the change in guidance how much you're looking for in terms of investigation cost and how much is related to the hold?

Joey Jacobs

We don't give that level of detail. I think the message we want to send is that the revised guidance incorporates the lower level of utilization at Riveredge, so that we don't have, we have 95/94 facilities in operation, 95 now with the new hospital in Franklin, Tennessee. So we're much bigger than just that one facility. So, the revised guidance incorporates that general softness there, and we're not going to continue to specify its incremental impact.

Jeff Englander – Standard & Poor's

Right. Okay. Thanks very much.

Joey Jacobs

No problem.

Operator

And we'll take our next question from Mark Arnold with Piper Jaffray. Please go ahead.

Mark Arnold – Piper Jaffray

Just a couple of follow-up questions. In the other operating expense line, I know that's where the, I believe that's where the professional liability reserve comes in to play. But the other components of that, the investigative costs and legal costs, should we expect there to be some elevated level, or to see the other operating expense line at a somewhat elevated level for the next few quarters as well as you guys continue to work through or work with the groups in -- that the government in Illinois and at some of these other facilities, or should we expect that to come back down to more normalize level?

Joey Jacobs

Well, the professional fees related to that are going to be in the professional fees line. So, it wouldn't be in that line. But what you see in that line, I would look at the entire year as a proxy for going forward. And in your models. I don't see any significant change in either that line or in the professional fees related to just that.

Mark Arnold – Piper Jaffray

Okay. So, what you're saying is that look at 2009 as being similar to 2008 on an annual basis.

Joey Jacobs

Yes.

Mark Arnold – Piper Jaffray

Okay. And then, Joey, you mentioned you expect to add about 400 beds in 2009. Can you give us just some sense of timing of when you expect those to kind of come on line?

Joey Jacobs

You should think about a 100 a quarter.

Mark Arnold – Piper Jaffray

Okay. And then just one last question, Brent I think you just mentioned, the new hospital or I don't know if you classify it as new or replacement in Tennessee. But how does that and then I think you have one other replacement hospital in is it Cleveland that should open in the couple of years? Can you just give us a sense as to timing on those and how that impacts the volumes when they open?

Brent Turner

Sure, when I describe the new facility in Franklin that’s a new construction but it is a replacement hospital for our national rehab psychiatric license. And then the other new build we did in 2008 was Lincoln Prairie and Springfield, Illinois. You mentioned the Cleveland facility, we actually, we had those plans in place due to our Windsor Hospital in Green Falls only being having 40 beds and not having the real-estate to expand. However when we made the acquisition of horizon they had a facility in the market and we consolidated those two hospitals and ample room for growth there. So, the de novo replacements are very unique and we don’t have anything on the plans on the intermediate horizon for anything further there.

Mark Arnold – Piper Jaffray

Great. Thank you.

Operator

We will take our next question from Gary Taylor with Citigroup. Please go ahead.

Gary Taylor – Citigroup

Hi, good morning. I have a few questions. First, what was the number of beds added in the 4Q?

Joey Jacobs

Gary sorry just put that schedule away right one. Fourth quarter we added about 150 beds and that was construction, the construction was completed in the fourth quarter.

Gary Taylor – Citigroup

So, if you look at adding maybe a little more than 550 beds around the course of 2008 on beds of about approximately 10,000 beds I think it's generally the number you disclose that’s about 5% increase in the number of beds and even assuming those are kind of ramping ratably. You still might assume maybe those would have contributed a couple points year-over-year. The patient day growth and I think even adding back Riveredge you would be kind in the 2.5% range. So if kind of makes everything else look pretty flat at year-over-year X the bed growth and is that a fair way to look at the quarter. Contribution from those beds is in it high as a couple percentage points.

Joey Jacobs

Well, let me make couple things one that we did 500 total beds of expansion new build in 2008 only 380 of those would be same store and of those 150 didn’t even get completed until the fourth quarter. So the math is much smaller in terms of what you would assume to be impact in the fourth quarter. We get no impact from the 1 to 150 that we are completed in the quarter itself.

Gary Taylor – Citigroup

Right, so I presume then, some of the tail effect of what's been put in place ramping into '09 as part of the confidence by you will have positive patient day growth in '09?

Joey Jacobs

Absolutely, sure.

Gary Taylor – Citigroup

On the kind of sticking to that same thought process, is the reason for the much lower expectation about 1Q same store revenue, I assume as volume related and that’s probably obviously because you have seen almost two months of it, but is leap year factor in why you think the 2Q picks up from the 1Q levels or is it beds or is it both?

Jack Polson

Well, Its both, but its obvious the math of an extra day in February of last year, when you get paid for diems, its obvious, that’s quite frankly to 110 basis points in the first quarter when you do the math. So the quarter for last year is they get a 110 basis points head start on this year's quarter because they had an extra day.

Gary Taylor – Citigroup

Right, I just wanted to understand if there was anything else that was impacting that. And then in terms of your margin outlook, if I take my model down to kind of mid-single digit revenue growth for the year, to fight my way back to your guidance. It looks like almost a 100 basis points of margin expansion on a consolidate basis which is more than you accomplished in '08. Am I in the ballpark or are the reasons to be more optimistic about margin growth in '09 versus '08 should be comparable.

Jack Polson

You are in the ballpark.

Gary Taylor – Citigroup

So presumably you obviously have a little less of a tailwind from Medicare and you are not going to have the same patient day growth you saw in '08 so where do you get the extra margin leverage from?

Jack Polson

We are constantly working on the supply cost, the drug cost, the food cost, the benefits of the company. As mentioned earlier when we went after the reinsurance market, we were able to lower the premiums on the reinsurance market for that. So if the other expense items there. So that we are working on to help us have margin improvement there.

Gary Taylor – Citigroup

On the other operating expenses if you didn’t do acquisitions in '09 to move that number higher is that a number that can look pretty flat in terms of total dollars, would you still anticipate you’ve got dollar growth in that line item?

Joey Jacobs

I do not have that budget in front of me for that detail, Gary. You might call back and Brent or Jack can you give you that detail.

Gary Taylor – Citigroup

Okay, last question. Just in terms of free cash flow, the kind of, after routine we would think somewhere $100 million to $130 million of free cash flow you are going to spend $80 to $100 on the de novo beds. So, that leaves a pretty small number of that’s left either for debt reduction or for a few modest acquisitions. So, I just didn’t -- I heard Brent respond, I didn’t quite understand. Someone had asked would you have any willingness to tap any of the $100 million that’s only in place through the end of the year, which seems like maybe it's a little risky. And I didn’t hear exactly or understand exactly what your response was on that?

Joey Jacobs

We have $300 million of revolver until the end of the year and again we have validation that we can -- we get the structure of that current $200 million. Quite frankly if the lending environment improves and let's hope it doesn’t get any worse but if were to improve between now and the end of the year, it's not prohibited that we would ask to extend $300, it's just scheduled as we know it to mature on December 21, 2009.

But we won't sit ideally and let that go by. So, we are behaving as if we have a $300 million revolver which is the case today. And as we mentioned earlier, there are other avenues of available capital that we would price accordingly in the valuation of the transaction we would evaluate in order to continue to make acquisitions that are accretive to our bottom-line.

Gary Taylor – Citigroup

Your acquisition outlook is going to be more active and where it’s been in the last few months when you -- there was some uncertainty just about how the refinancing will?

Joey Jacobs

Absolutely, we have been on hold with the maturity issue on our revolver and I want to make sure everybody understands, that is behind us and so we are now back in evaluation mode, more active on that front.

Gary Taylor – Citigroup

Okay, thanks.

Operator

We will take our next question from Adam Feinstein with Barclays Capital. Please go ahead.

Adam Feinstein – Barclays Capital

Yeah, thank you. Just wanted to ask a follow-up question here, and just, I guess two things. One, so based on your comments, about the economy and everything else, I means, I know you typically don’t comment on the current quarter but certainly, considering everything going on in terms -- and just the markets impact here with the stock price today, I mean should we infer that the impact in the quarter has been greater than anticipated and I know you said the growth would be lower in the first quarter, but just wanted to clarify that whether I was just what you were anticipating or whether you have seen this impact, Joey, that you mentioned started back in the another fall?

Joey Jacobs

Obviously, we have the census data through today and so obviously the census is softer as we have told everybody, and once again I'll reiterate for you guys they are doing a models, so it's a lower single digit and also due to the comparison of the leap year, last year statically it's going to make it look over. So, and as Brent mentioned earlier, quite a few of our same-store beds were completed in the fourth quarter, and even in the first quarter, the Holly Hill beds were just completed in January. So, we are to more optimistic for the last two quarters of the year, the third and the fourth quarters in our modeling, and pretty conservative in the first two quarters.

Adam Feinstein – Barclays Capital

Okay. And then, just a follow-up, the softness in census and patient day growth, once again you guys are attributing to the economy. In the past, it seems like that wasn’t the case in terms of what you saw in terms of the impact from the economy. So, I guess how certain are you that impact is from the economy and not from other factors such as increased competition or anything else, I guess just wanted to make sure that we properly understand the reason for the weakening and other census for the last six months?

Joey Jacobs

Turning to the operation reviews and the updates I get from our two Chief Operating officers. They have not talked about incidents like you are mentioning. And it's more of a general uneasiness. Unfortunately, I am 55-years-old, I have never seen the economy being where it is today. So, we will just have to -- we are very cautions about the economy in the first half of the year. But we are doing -- there's many spots, we are going to have positive patient day growth. And internally Ron and Terry, their goal is to do 7.5% same-store revenue growth. Their goal hasn’t changed. Our outlook to the investors has changed. We are still very much internally got high expectations from our folks and with good execution maybe, we just have to wait and see how they turn out.

Adam Feinstein – Barclays Capital

Okay. Thank you.

Operator

We will take our next question from David Bachman with Longbow Research. Please go ahead.

David Bachman – Longbow Research

Yeah thanks for the chance to ask a follow-up question, I forgot to get in earlier again just on the commercial HMO, private pay bucket, pretty stable as a percent in net revenue but as a percent of AR for 2008 it's up to 41% versus 36% last year, just want to understand what's driving that?

Brent Turner

David there is a number of various things driving it but the primary thing was our acquisition of UMC. Most of their AR fell into that category.

David Bachman – Longbow Research

Okay thanks.

Operator

We'll take our last question today from Jeff Englander with Standard & Poor's. Please go ahead.

Jeff Englander – Standard & Poor's

Just one quick follow-up Joey contrasting your expansion of your bed plans at the beginning of '08 in the beginning of '09 given the softness you're seeing is there any changes you've made because of that softness in the roll out plans?

Joey Jacobs

No the -- we did go back and re-challenged all the construction projects that we had. And they stand on their own merits that, in that individual market we think the opportunity to grow into those beds is there. And so we did do that we did go back and challenged those in the fourth quarter and so no, Holly hill, as I mentioned before, Rolling Hills which actually started accepting patients in January after a pretty good start there too, so no the new beds that we're building our facilities that needed those new beds.

Jeff Englander – Standard & Poor's

Great, thanks very much.

Operator

And this will conclude today's question-and-answer session. Mr. Jacobs I'll turn the conference back over to you for closing comments.

Joey Jacobs

Sure absolutely thank you. Fourth quarter was a disappointment there was two unusual adjustments and due to the economic environment and patient day growth, we did revise our guidance. But I'm still very optimistic about 2009 can be a terrific year for PSI. Our guidance will show a 17% to 21% earnings per share growth for the year, even with the lower guidance. There are 24,000 employees in this company working very hard today to deliver great quality care and to meet our financial targets. And I trust them believe in them, and it's up to us to execute and hopefully the economy does get better. And so, we are positioned for our strong 2009. And we look forward to talking to you all at the end of the first quarter. Thank you.

Operator

Ladies and gentlemen, this will conclude today's teleconference. We thank you for your participation. You may disconnect at this time.

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Source: Psychiatric Solutions, Inc., Q4 2008 Earnings Call Transcript
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