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LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Barclays Global Healthcare Conference

March 13, 2013 4:15 pm ET

Executives

William F. Carpenter - Chairman, Chief Executive Officer and Chairman of Quality Committee

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Steven Silver - S&P Equity Research

Joshua R. Raskin - Barclays Capital, Research Division

I'm just going to start the audience portion before we get started, so let's get your clickers ready, we're going to try and do the automated audience response system real quick. The first one, hopefully is obvious. Will health reform be a positive for LifePoint in 2014? Let's start with very negative at 1, very positive at 5.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Easy consensus there. There's still one stickler for negative for hospitals, we're going to find this person by the end of the conference. Second question, as LifePoint contracts remember their geographies and their markets relative to others, would we expect those rates to be closer to Medicaid or commercial?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right, a little bit more mixed than I would've expected, but okay. Next question, utilization trends, so think about admits here. Would we expect in 2013 a significant increase or a significant decrease somewhere between 1 and 5?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So probably flat to up is what it looks likes. Next question, how would you like to see the company deploy its capital, would that be through M&A/JVs, repurchase shares, increase dividends, repay debt or invest in the core business?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So mostly M&A, more than half M&A. Okay, that's interesting. Do you think then this is the -- we've been using earnings per share. Will earnings per share be up in 2014?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

A lot of quick response, wow, there we go. We have a consensus. All right. Current -- do you currently own shares of LifePoint?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

A 50-50 split, so you got a little bit of work. And then last but not least, let's get the sentiment question, would your bias on the stock be positive, neutral or negative?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right, certainly, a positive bias here, it's not surprising, that's great. So I'm going to turn it over to Bill Carpenter as they load up the slides in the back, the company's Chairman and CEO. I've already taken more than 3 minutes of your time, Bill. So I'm going to turn it over to you. We're going to hold questions until we get to the breakout session after that. So with that, my pleasure to introduce Bill.

William F. Carpenter

Yes, Josh, thanks very much. And thank you, all, for being here on a beautiful afternoon. I'll talk a little bit about LifePoint Hospitals. I love this feedback, it's very, very good and good to know.

So today, I'll talk about the LifePoint story, which is executing on a focused strategy. I'll talk about the financial performance of the company, as well as what we have done and are doing in order to position the company for long-term value creation. These will be the highlights that we go through as we go through the presentation. LifePoint is achieving growth by focusing on a very clear strategic plan that I'll review with you.

We're improving quality of care and service in our hospitals. We continue to do things to grow in every single market in which we own hospitals. We're recruiting physician, adding service lines in our communities. We have one of the best balance sheets in the industry, continuing to be levered at about 3x earnings. We have done a number of acquisitions recently, and I'll talk about those, especially since I've received the feedback in the questionnaire that you want to see acquisitions. We can talk more about that. And the Duke-LifePoint partnership really is an important thing and I believe a differentiator for our company. It's an active partnership in which we have acquired 4 hospitals to date, and 3 of which, we are improving quality in rural hospitals around the country.

And the pipeline for acquisitions is strong. So LifePoint's geographically diverse. We own 57 hospitals today in 20 states around the country. That's important from the point of view of spreading the risk of any one particular state's Medicaid program across the many states.

We -- it has been reported in the local press recently that we have 3 letters of intent currently in place: 1 in Virginia and 2 in Michigan. And so I'll talk about those. If those hospitals come through as we anticipate, we will be 60 hospitals by the end of the year.

So our payor base continues to be stable. As you think about this, the Medicare, Medicaid, maintaining pretty consistent percentages across the years, so I think that's the point of this slide. We have a non-urban footprint, which allows us to have very minimal local competition. That means a couple of things. In 57 markets, we are the only hospital, 53x. So of our 57 markets, there are 53 markets where we are the only hospital.

Now even where we have the only hospital, there is still minimal competition from other providers such as surgery centers or diagnostic centers, urgent care centers even in smaller communities. So we have the ability, we have that presence, market share presence in all of our markets.

We still have the ability to gain market share, though, even where we're the -- in such a strong competitive position because people still leave our communities for care, particularly for services that we have not historically provided. So our strategy is to add service lines that have not been provided previously and recruit doctors to come in to those communities.

And to the extent there is a local competitor, we will look at making end market acquisitions, and I'll talk about a couple of those in a moment as well.

And we are certainly a very important relationship for commercial payors. Because we're the only hospital in town, it is important to have the hospital as a part of any plan. And so we have leverage in those negotiations as well.

So LifePoint has 4 clear strategic priorities. They're shown on this slide, and I'll spend a moment talking about each one. The first is quality and service. We have a focus on improving core measure scores, as well as improving our service areas, including HCAHPS. We are doing this through very focused efforts, including a quality focus with Duke University. We are improving HCAHPS performance, and we are the only for-profit company to have been awarded a Hospital Engagement Network contract from the Department of Health and Human Services. This is important because HHS identified LifePoint as a laboratory, if you will, for improving quality care in smaller communities.

What they want to see is, and with our help, they want to determine how do you reduce readmissions and how do you reduce hospital-acquired infections and conditions in smaller hospitals. To the extent they have the ability, we have the ability to show that, that it will benefit hospitals all across the country and again, we think a differentiator for LifePoint.

We have partnered with Duke in this work. Actually, Duke was so excited about LifePoint being awarded this grant that they have joined us in helping to do this work, and have brought significant data analytics to the mix on it.

Our second strategy is to grow organically in each market where we're located. That is done by adding the right physicians, engaging with them in a better way in order to have them more dedicated to the hospital and managing physician relationships better.

We're also improving service lines. We have a focus on the emergency department, improving the throughput and improving the patient experience in the emergency room, and that's been an important thing for us.

We're also expanding service lines across the company. These are typically the service lines that we see where we have the ability to add services in smaller markets: cardiology, oncology, surgery, often with a specialization, so general surgery but surgery with a specialized focus. And then imaging services for us have continued to be areas for growth.

We've also grown strategically through acquisitions. There are a number of hospitals in the pipeline and we feel great about our opportunities there. We continue to be aggressive in the way we search for hospitals, yet disciplined in the hospitals that we choose to partner with. Our strong balance sheet gives us a great ability to make these acquisitions, and we are -- have been targeting hospitals in faster-growing markets, with a little bit more diversified employer base. The Duke LifePoint partnership has given us a real advantage in this area. We have purchased, over the last 18 months, approximately $500 million of net revenues with our partner from Duke. $300 million of those revenue came from the market general acquisition, I'll talk a little a bit more about it in a minute. Of the 3 letters of intent that I mentioned a moment ago, however, none of those are being done with Duke. Those are all LifePoint acquisitions on a standalone basis. In addition to that, we have entered into other partnerships, for instance, a partnership with Norton Healthcare in the Louisville, Kentucky, area in order to partner with Norton to buy, own and operate hospitals in a region around Louisville.

And we think there are other opportunities for other partnerships, obviously, in the future.

Duke LifePoint Hospital -- Healthcare is a joint venture that own and operator community hospitals. We're the majority owner. With the managing partner, we will consolidate the financial results. The partnership began in North Carolina. It was the focus there, sort of around the Duke catchment area, if you will. However, we have expanded that partnership to beyond the North Carolina area with our acquisition of Marquette General Hospital in September 2012.

The next slide have a few recent acquisitions. I'll run through them very quickly. Scott Memorial in Scottsburg, Indiana, a small hospital that we acquired, the first hospital that we acquired with Norton Healthcare. Marquette General, a significant hospital, a 315-bed, $320 million net revenue hospital in Marquette, Michigan. It really forms the hub, if you will, of a network that we hope to develop in the upper Peninsula of Michigan. And we have acquired this hospital alongside or within our Duke LifePoint partnership. So this hospital will be known as a Duke LifePoint hospital, which will give it the ability to be branded in that way. We think it will give people in the Upper Peninsula the quality assurance that they need, and many of those people have been leaving the Upper Peninsula and going up to Mayo. So this is a competitive advantage that we will achieve alongside Duke.

I mentioned end market acquisitions a moment ago. And so this Woods Memorial Hospital acquisition is an important one. This one is within 10 miles of our Athens Regional Hospital, that we've owned for quite some time and will fit in quite nicely there. A small hospital, but has great opportunity for us to be able to work more synergistically within the area.

Twin County Hospital is another Duke LifePoint partnership owned in Galax, Virginia. And Maria Parham Medical Center in Henderson, North Carolina, near Durham and also a place that Duke already had a presence.

Person Memorial, a similar situation to the Maria Parham Hospital.

Our third key strategic initiative is around operations excellence. LifePoint has always been known as being very good operators of hospitals. Our margins speak for themselves in that regard. But we're constantly looking for ways to improve the efficiency of our hospitals. Recently, it's important to note that we entered into a shared services agreement with the Parallon to provide payroll, supply chain and accounts receivable services.

Really, what we're doing in this regard is focusing LifePoint's time and attention on the clinical side of the business and relying on Parallon, which is a first-class operation to handle these back-office functions. We think it's going to be a big saver for us. We have said that the impact in 2013 will be $7 million to $10 million as we bring the first 20 hospitals into Parallon.

Obviously, meaningful use has been -- it's very important, and we continue to work harder in order to make sure that all of our hospitals are meaningful users within the timeframe prescribed.

And then finally, the key strategy for LifePoint, to continue to develop our talent. This is particularly important in non-urban markets. That we have to make sure that our people are growing in order to take the opportunities that exist in a more complex environment. And so we have programs like the LifePoint Learning Academy and LifePoint leadership Institute that have been very, very popular and very productive for us as a company.

So let's talk about financial performance for a minute. I mentioned our margins, they've been among the best in the business for quite some time. There's been pressure on the margin over the recent years. And there continues to be pressure on the margin, largely caused by our having brought on a significant number of new acquisitions. So remember, when we acquire a new hospital, it is often a nonprofit hospital that has had margins in the low to mid single-digit area. And we will then grow that up to the company's average over the next 4 years or so.

But during that time period, the margins of these acquired hospitals are going to put pressure on the company's margin. We've grown revenue over the years. We've grown EBITDA over the years. With respect to EPS growth, there, again, in 2012, we saw pressure on the EPS line. This is largely the result of about a $0.30 impact of depreciation in the year.

So as a result of investments that we've been making in technology for meaningful use and the acquisitions that has impacted the depreciation line and impacts EPS.

So we believe that LifePoint is well positioned for value creation. You all know these challenges that face the industry, and I won't go through them, each of them. But I will say that what we're trying to do with LifePoint, as we view the period of -- from now over the next several years as health care reform becomes fully involved as an opportunity for us to prepare and to improve the infrastructure of the company in order to take advantage of that growth. So we're making significant investments in service lines. We are actively looking for ways to manage costs within the company, things like Parallon, that will take costs out of our system, making sure that meaningful use is -- that we are ready for meaningful use and that we are making the appropriate investments and quality to be ready for value-based purchasing and quite frankly, to be able to be a hospital where people want to come for care and where physicians want to practice.

So we're improving quality scores, and we're doing the things that we need to do in order to position the company appropriately for long-term success.

This slide indicates the way that we have deployed capital in the past, and I think it's a good marker for the way that we believe we should deploy capital in the future. We're always going to be -- to make sure that our hospitals are well equipped, that they have the best technology to take care of our patients in order for our doctors to be able to feel comfortable with the care that they're delivering to their patients. And so investments in our existing hospitals are critically important. Secondly, we're going to make good acquisitions, and we continue to have a great pipeline available for acquisitions. And then finally, we look for ways to return capital to our stockholders.

Traditionally, we have had in place and continue to have in place a stock buyback program. We have recently re-upped on that stock buyback program to the tune of an additional $100 million. And so I think at this -- as of the end of 2012, there was approximately $195 million remaining on the expanded stock buyback program.

Over the last couple of years, since 2010, I think, we have repurchased about $400 million of the company's stock and returned that capital back to the stockholders.

So we have ample liquidity to continue to execute on our plan. Free cash flow for the company continues to be strong. We recently entered a new senior credit facility and amended our previous facility. So we have plenty of availability. In fact, the acquisitions that we have done in the recent past have all been from cash flow.

We continue to have one of the best balance sheets in the industry as I mentioned previously, and we're levered at 3x.

So we think we have positioned the company well to grow into the future. These slides -- this slide goes back to the beginning of the company. And so if you just focus over the right-hand side, the things that we are doing today are really designed to take advantage of the scale that the company has developed in the recent past. We're focusing on our strategic plan and investing in quality and buying good hospitals. And Duke LifePoint is a differentiator. With things like this HEN contract that gives us the ability to improve quality, alongside with Duke, that really does position the company to be able to be known in the industry as a place where other hospitals want to come and be a part of LifePoint.

So why invest in LifePoint today? We are a group of experienced hospital operators, executing on a focused plan, with the ability to grow share in each market where we own hospitals today, with a strong balance sheet that we are comfortable in using in order to make strategic acquisitions and to return value to our stockholders.

So thank you very much, again, for being here this afternoon. I guess it's time to move to the breakout session.

Steven Silver - S&P Equity Research

[indiscernible]

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