Universal Health Services, Inc. (UHS) Q4 2007 Earnings Report, Transcript and Summary

Good morning. I'm Brent Turner, Executive Vice President of Finance and Administration for Psychiatric Solutions, and I'd like to welcome you to PSI's conference call for the fourth quarter 2007. Today's call is being recorded and will be available for replay beginning today through March 6 by dialing 719-457-0820. The confirmation number for the replay is 6726941. The replay may also be accessed through March 6 at our website, which is psisolutions.com, and earnings.com. To the extent that 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 Investor link to News Releases and clicking on yesterday's news 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 quarterly and annual financial performance for 2008. For this purpose, any statements made during this 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 news 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. At this time for opening remarks, I will turn the conference over to our Chairman, President and Chief Executive Officer, Joey Jacobs.

Thanks, Brent, and good morning. Thanks for being with us this morning to review a strong fourth quarter performance for PSI and another great year. The continuing strength of the PSI business model is evident in the 27% growth in earnings per diluted share for the fourth quarter and 30% growth in earnings for the year. These results were at the top-end of our guidance for each period and after we revised our annual guidance upward on two occasions after first establishing it in October 2006. In this respect, we are also pleased today to be increasing our guidance for 2008 as a result of the recent decline in interest rates. Our earnings growth was driven by a 44% increase in our revenue for the fourth quarter and 45% for the year, both of which established new records for the company. Consistent with our historical performance, we produced this growth primarily through the addition of beds through our operations, the great majority of which resulted from acquisitions of inpatient facilities. We also benefited from solid growth in same-facility revenues of 6.5% for the year. True to our business model, this growth generated additional operating leverage, which we complemented through our ongoing initiatives to improve productivity and efficiency in each facility. As a result, we produced a new record for same-facility EBITDA margin of 200 basis points to 22.2% versus the fourth quarter of 2006. This performance was primary accountable for the 49.1% growth in PSI's consolidated adjusted EBITDA for the quarter and its expansion as a percentage of revenue. We remain confident about our prospects to drive same-facility revenue growth for 2008 in our historic range of 7% to 9%. We are enhancing our ability to drive same-facility performance for 2008 as well as aggregate organic growth through the planned addition of nearly 600 beds in existing and new facilities during the year. In addition, PSI is well positioned to continue its long-term acquisition strategies by acquiring at least six inpatient facilities during 2008. We have a strong pipeline of candidates, a favorable pricing environment, and the financial resources to accomplish our goals. In summary, let me repeat that what you have heard before as we consider our strong prospects for long-term profitable growth. Our confidence in our future rests on our ability to continue implementing a proven business model and growth strategy and an industry's growth dynamics remain very favorable for PSI. Simply put, we are the clear leader in a highly fragmented capacity constrained growth industry. While we never take execution for granted, especially in terms of providing the highest quality of care for our patients and their families, we expect the PSI team to continue leveraging our strong momentum for future growth. Thank you again for your time this morning and for you support of PSI. I will now ask Jack Polson, our Chief Accounting Officer to review our fourth quarter financial results in more detail.

Thank you Joey. Our revenue for the fourth quarter increased 44.1% to $403.4 million. Consolidated adjusted EBITDA grew 49.4% for the quarter totaling $72.3 million and increasing 60 basis points as a percentage of revenue to 17.9%. Income from continuing operations for the fourth quarter was $23.4 million, an increase of 29% over the prior year, while income from continuing operations per diluted share rose 27.3% to $0.42. PSI same facility revenue increased 5.3% for the quarter, primarily as a result of a 0.6% increase in patient days and 4.6% increase in revenue per patient day. We were extremely pleased with the 200 basis points expansion of our same facility EBITDA margin to 22.2% for the quarter, which compared to 20.2% for the fourth quarter of 2006, as well as with a 70 basis points expansion in total facility EBITDA to 20.8% As we've discussed with you before we are confident that overtime we continue to have several 100 basis points of margin potential remaining. As we successfully expand same facility revenue productivity and efficiency. As Joey indicated, our financial position at the end of 2007 and our continued strong cash flow from operations, positioned us well to pursue our expansion strategy during 2008. Cash flow of $125.7 million for the full year was 1.6 times income from continuing operations. The ratio of total debt at year end to pro forma annualized consolidated EBITDA for the fourth quarter again improved sequentially to 4.1 from 4.4 times for the third quarter and 4.6 for the second quarter. Turning to our financial guidance for 2008, and as described in yesterdays press release. We are increasing our previously established guidance range for 2008 by $0.10 to a new range of $1.93 to $1.97, which reflects the lower interest environment since we first provided guidance on November 1st. In addition, we today established our guidance for diluted earnings per share for the first quarter of 2008, in a range of $0.42 to $0.43. As always our guidance does not include the affect of any future acquisitions. This concludes our prepared remarks this morning. Operator, please open the floor for any questions.

Thank you. (Operator Instructions) And we will go first to Ryan Daniels with William Blair.

Hey, good morning, couple of quick questions on some of the financials. First, in the fourth quarter I noticed that CapEx jumped up nicely to about $25 million, which I think was a record for the company. Can you talk a little bit about what was in that number, and maybe give us a feel for what we should look forward for CapEx in 2008?

Yeah, I can briefly talk about that. We did have, I don't have the number exactly in front of me, but we had about 1.7% of CapEx in maintenance CapEx, the remainder being expansion CapEx. And that continues to be our expectation going forward with maintenance CapEx.

Okay. And then if we think about the same-store margins as we look out to early 2008, I know that ABS will be in the same-store for the full quarter. And I know you'll be putting on some new beds, which I would assume will enter at slightly lower margin at least upfront. Should we anticipate that same-store margins might come down a little bit early on in the year and start to rebound throughout the year?

Ryan, this is Joey. I do need to make clear that ABS is in the same-store numbers for month of December. I don't know if everyone realizes that. We do have them in there and they will be in there for the first full quarter of this year. Same-store that we had for the first quarter of '07 was 20.4%. Hopefully our margin will stay at that level or above. They are in there for one month of the fourth quarter and our margin was 22% So, hopefully for doing our job, growing our census that our margins will hang in there and ABS is partially in there for the fourth quarter. So, 20.4 is the comp for the first quarter and of last year that we did for '07, so we will just wait and see, but I do think we'll have margin improvements.

Okay, and then anything with that being in there for month at ABS facilities on same-store growth basis to that, move the needle one way or another during the quarter, either up and down or is that fairly consistent?

Absolutely it hurt as the same-store metrics on patient days.

Okay.

f:

Yeah.

So, once again we are very bullish on the Pines, it's positioned well, its census is growing back. But once again this project is a four year project versus what we normally say when we acquire a facility, a three year project. But that's been fairly communicated out there, but it is in our same store numbers and the 0.6 is very disappointing. We wanted to have more than that and we think this year that we will. Please everyone needs to keep in mind the same the 9% same-store revenue growth, that's an annual goal. And we ended up with 6.5, through the first nine months we were there, we let it slip away in the fourth quarter and we will redouble our efforts this year to make sure we are in the same 9% range.

Okay, that's helpful color, and then two more quick ones, and I will hop off or get into the queue. Just on the other operating expenses, I know that came in a little lower than our model. I guess looking back over last few years, it appears that, it actually always comes down in the fourth quarter sometimes as a percent of revenue it has actually come down even more sequential than we saw this quarter, but is there anything you need kind of seasonal aspect so that they push that down typically in Q4?

Two things occur there and Ryan the things are going back and doing the research, other expense ended up at 9.3% of revenue for the year and 9.3% last year for 2006. So if I were modeling for 2008, and what our internal budget shows, we are right in that 9.3% of revenue for that category. The only thing unusual to is that we've acquired Horizon on June 1st, so the third of last year we would be conservative in our accruals for such things as insurance in other areas travel, entertainment, recruitment those things, repair and maintenance there.

Right.

And our fourth quarter is always a quarter where we true those up for the whole year. And I think you saw in last year of '06 that it had been running above nine, drops below nine for the fourth quarter and it did it this year. So this is what occurred there, but as far as modeling for 2008, a little guidance there I would use 9.3, because it's been that number for the past two years.

Perfect, and then last one just got some questions about the [MedCal] cuts, that doesn't impact you because you have all acute there right. So you don't really have any California Medicaid, is that fair to say?

That is fair to say that those cuts are not really impacting us.

Perfect. Alright, thanks, guys.

Thanks.

And we will take our next question from Adam Feinstein with Lehman Brothers.

Okay. Thank you. Good morning, everyone.

Hey, Adam.

I guess several questions here and just a follow-up on the question on the other operating expense line. So your point is always that you'll continue to see it run at about 9.3% of revenues. But even just looking besides the percentages the absolute dollar is being down, I guess is what I was having a hard time reconciling. So if we go back to 9.3 it would imply that the dollars will go up in the first quarter by about $6 million. Once again, can we just talk through that, I understand that [hordes] may have taken that number up in the third quarter. But just once again looking at the absolute dollar just trying to better understand that trend? And then I have a couple of follow-up questions.

Sure Adam, now quite frankly I am optimistic that we can bring it in below 9.3 for this year. But usually we don't give guidance out for individual specific items like that. So though that may have been just a little overstatement in the accruals for the third quarter and we true them up in the fourth quarter, so if we were to take $1 million, just for an example, I’m not saying that’s the number or anything because I haven’t gone back and done the detail or if you took $1 million and added, you know, took it from one quarter put it into the next quarter, it doesn’t take a lot to move those numbers around there percentage wise so we’re very comfortable with the 9.3. And the fourth quarter historically is a quarter where we do focus on expense management because between Thanksgiving and January 1st we know our census is going to drop and we’re managing as much as the expense items as we can, and if that means postponing travel or some expenses that we can postpone we will do that. That’s the reason you see the seasonality I think in the fourth quarter.

Okay and then just a follow up on another cost line item is just the bad debt expense, you guys have made some progress there. So I guess just comments, how much of the improvement was just from the acquisitions getting better?

We had a great bad debt month. We had a consistent great bad debt year. I think it came in at 1.9% for the year so and that’s comparable to the previous year. I will say that ABS that our folks there have done a good job since that acquisition and so we are positive there, the facility that had bad debt issues with Horizon, we have been working hard on that facility too. So there has been a lot of work by our business office directors in all of our facilities, and our CFOs and our division business office people. So that's just a lot of effort on good work, and once again, with us, we've said it many times before, always use four quarters for us. Always use four quarters for us when you are looking at trends and whatever and we think bad debt came in right where it should have come in.

Okay, and then just, with respect to the first quarter, I guess, the Easter holidays little bit earlier this year, just trying to factor that in, but then you do have an easier comp in the first quarter because you had a very robust same-store revenue growth last year in the first quarter. So, can you just talk around that, in terms of any items that will impact Q1 that we should be thinking about?

Well, the only thing really Adam, the only thing Adam that you should really think about is the Pines facility. You do not grow 80 patients back in one month or two months or three months. We are growing that facility back, and I think its census now has tripped back over 200 patients there so, it will take us all year to get back to that 275-280 number so, that's going to hurt us during the first, second and third quarters, but we are going to go through that. Now, on the benefit side, we will have beds coming online at existing facilities. so, we are very optimistic, we think that 7% to 9% revenue growth and the 3% to 5% patient day growth is there for us this year. It's just going to be execution from us and we are, some people say how do you feel about the 6.5 for last year and the 5.3 I think for the fourth quarter, how do I feel? Mad, frustrated. It was there for us, it was our game to win, and we just let it slip away, so we are working very hard on that Adam. Easter is in March, absolutely and as folks that follow the company know we are very seasonal, because of child and adolescent population that when schools are out the census will be soft. So we are not the Easter spring breaks yet, so we don't know how much that impacts us but that will be a factor.

Okay and it's one final question and then I will get back in the queue here. The 7% to 9% number, we've been talking about that for a long time as the company grows you did 6.5% this year, still pretty close in the same ballpark, but obviously a little bit lower. At some point do you started to thinking about a 6% to 8% type of growth number instead of always having to be 7% to 9%. I know for '09 you are saying that you still feel comfortable with the 7% to 9%, but you think as we look out past 2008, should we think about maybe a little bit different range or, I know it's hard to answer that but certainly just…

I will be glad to answer it Adam. We just had some bad luck last year, that 7% to 9% was well with in our grasp and we just had some bad luck. We're already off to a better start this year, with all these beds being built and with many of those beds being built in the third and the fourth quarter. I think it positions us well for 2009, even be more strongly in our determination to beat the 7% to 9% revenue growth. So we have too many things going our way, this year some of the troubled facilities will get better. We are building more beds and building more programs and so the 7% to 9% was in our grasp for 2007 and we have missed it by 50 basis points and I pissed about that, but we've regrouped and we're targeted for that for 2008, and we'll going to make it happen.

Okay. Thank you.

And we'll go next to Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everyone. I guess just to follow-up on some of the comments you made about some of the enhancements you're making to get back in to the 7% to 9% organic growth range. So if you can just give us some commentary around some of the things that you're doing just operationally to enhance growth that would be helpful. I know obviously additional beds help in capacity constrained markets. But maybe just talk a little bit about what you might be doing differently on an operational basis? Thanks.

Sure, Adam. Just like when you have a family of facilities and as I mentioned earlier the Pines is the one impacting at the most for us, but if you were just to take our bottom three facilities not the bottom ten just our bottom three facilities, and if we focus on them and get them on the right track, we would have done well about 7% for last year. So quite frankly we can get above 7% in '08 just by doing what we did last year and just working on these three facilities. Now in addition to that we have more than 600 beds coming online for us in 2008, and that's about a little over 140 in the first quarter and 160 in the second quarter and the remaining through the third and fourth quarters. So that is just, that's insurance for us on growing the patient days. So it's very unfortunate that we had some bad luck with a couple of facilities and the Pines. And are we working on those and are those on top of mind awareness, absolutely. That's the reason I'm so bullish that 7% to 9% is here for us, that we have to execute. We still have to execute and not have any other facilities get in trouble, but it is a small number of facilities that if we just fix. That 7% to 9% is there.

And if you just, can you talk a little bit about anything you are doing differently in marketing, referral sources. I understand, maybe there is a few turnaround situations, but just on more portfolio broad basis, could you give us some color there?

Something corporately that has occurred is that Terry Bridges has, now has a business development person at a senior level working for him in the Chief Operating Officer's office. So, we now have someone more coordinating with the divisions and with the facilities, and especially the troubled facilities on their marketing plans, there needs to build the beds, to new programs. So there have been additional resources during the past six months that we have applied to the program development and marketing side of the business referral development, and elevated that person up to Terry's office. So we have put more resources there Darren, to work with the facilities at the local level to make sure we are seizing all the opportunities. But the best thing we can do is to build our beds.

Okay, and then just as far as the '08 outlook goes, you have given us some visibility on the first quarter. My question is can you provide, just some commentary about the earnings ramp over the course of '08. I know you have got some start-up, so which quarters would be impacted most by the start-ups and is there any unusual expense running through the first quarter that we need to be aware of.

Well, in the first quarter we will be spending money ramping up the Illinois project in Springfield, Illinois. And that project is supposed to come online in the second quarter. So, we have the CEO hired, that we will be spending money there, that which is on our budget, which is in our earnings guidance. So we do have that project coming online in the second quarter so up until we get it open and even a little while after we have it open, it's going to be hurting their earnings and we have that built in our guidance. The interest expense that we raised the guidance on really works from April, a little bit in March but it's more of an April through the December thing, because the way we had laid off the debt and those tranches are coming new and getting renewed at the lower LIBOR. So that is a little bit backend loaded. Now historically, if you look at the company, we usually make in the first quarter what we made in the last quarter of the previous years, so we think we're reasonable there. So we're growing the business and "Knock on Wood"' we're working very hard and turning around some of the facilities that may have given us trouble last year. So we're doing all those things.

Thanks, just last question here relates to occupancy rates and some of the bed count numbers that we'd like to see in your the press releases. What was the occupancy rate same-store and total company and then can you just breakdown the license bed counts in each of the total company and same store bucket, so we can just know that? Thanks.

Darren actually the occupancy was about 73% total for the company. We have 10,283 licensed beds for the quarter and we had about 9,700 operated in the quarter. I do not have that break down on the same store work on this call.

You added how many beds in the quarter?

Just right around 100.

Great, thanks a lot.

Yes, thanks Darren.

And we will go next to Andreas Dirnagl with JPMorgan.

Hi guys good morning. I'm sorry I don't think we beat this horse enough. So I might as well try and get in a couple of blows myself. Joey, maybe can we just take a step back we had some weakness in that same-store revenue comp in the first quarter. We had the weakness again in the same store revenue comp in the fourth quarter. Can you maybe just provide a little more colored generically as to what you think went wrong and just to throw it out there, I mean some of the things you've said in the past are sort of bad luck. I mean, what does that mean? In the past you've talked about that perhaps you weren't prepared enough for expansion beds, and so you got caught behind the capacity issue this quarter. Maybe just provide a little bit more color and then why you don't think it's going to occur again next year?

I guess maybe bad luck was bad terminology there. We did not like four weeks between Thanksgiving and Christmas. That created too much seasonality for us so we now found out that we do not like Thanksgiving coming as early as it can in November, that you always worry about after Thanksgiving, kind of the census ramped back up before the holidays around Christmas and Hanukkah kick in and so we know we don't like four weeks in between Christmas and Thanksgiving. So I classify that as bad luck. We had one facility in August get in trouble with an infection control issue, which hurt us and that was bad luck, it should not have occurred and we paid a dear price for that but that facility has been fixed and is coming back in the first quarter very robustly. So Darren that was a little bit of bad luck. When I refer to bad luck, that is that we had 7% revenue growth through the first nine months, and so we had it there within our grasp. Could we have moved a little quicker? Could we have built a few more beds? Sure and that's what we're trying to make sure happens in 2008 that we get the beds built, that we get the programs implemented and that all our facilities do well on the clinical side. So that's what I characterize as bad luck.

Okay and then the 100 beds that you added in the fourth quarter, do those count towards the 600 beds that you're adding throughout 2008 or are those separate?

They're separate.

And can you give an idea as to sort of how those 600 beds are going to kind of come on line over the year? Is it sort of an even flow or is it front or backend loaded?

It's about 140 in the first quarter. It's about 175 in the second quarter, and maybe 100 in the third quarter and then whatever the balance then will be in the fourth quarter.

Okay great and then one final question. I just want to confirm yet again despite the potential language confusion in the press release. Your discussions or your guidance for a minimum of six acquisitions that's still going off the clock there started when you completed the Horizon acquisition. So you're looking for that mid this year is that correct?

That's correct.

Okay great. Thank you very much.

Alright.

And we'll go next to Tom Gallucci with Merrill Lynch.

Good morning. Thank you. Just a couple of quick follow-ups hopefully, I guess just the first in your last response there, you mentioned you could have built some beds faster. Can you just describe for us sort of that process of planning new beds and getting them off the ground? Is that more corporate or local, and maybe if it's more local and you think it should have been done better is it becoming more of a corporate issue or?

It's absolutely from corporate all the way down to the local CEO. The key is the local CEO through his division President to Terry and myself and also during last year we hired a Construction Project Manager to oversee all the projects that were doing now. The good thing here is I'm looking at a schedule and for 2009 we already have more than 400 beds approved to build in 2009. So I guarantee you, we're at a much better position on building beds right now than we were January of ‘06 and we're better organized and we do improve the process. We want to make it quicker and so actually, I think I approved a project this week that will be on the 2010 bed. So we're doing a much better job there.

If you were looking at that list a year ago, did you have a bigger number and you just didn't get them done or was the number just small and it should've been bigger?

It's a combination of both; should've been bigger and we should've done it quicker. Then on the other hand, I have to give our people in the field some credit here. Like in California, with that pent up demand, there was really nothing they could do. We just had to wait on the local zoning and the state approval. There's just so much you, how hard you can push those state officials and we just had to wait even though it was very painful to wait and we hope to have those beds, two thirds of those beds will come online in the fourth quarter and a third of those will come online in the first quarter of '09. So it's hard to wait when you know those beds, you're turning patients away and you're waiting on those beds.

And then just speaking of occupancy and sort of what you were saying there about having some places where you actually turn people away. How do you sort of model new beds coming online on a same-store basis and what that occupancy is? Is it typically places that are pretty full so you get a high occupancy? Or is it sort of comes online over time? Or how does that work?

Well if it's an RTC facility, that facility's probably running 95% to 100% occupancy. And we're building beds there. Unfortunately for an RTC bed the length of stay is 180 days. So if you brought on 20 beds, it may take you six months to get 20 admissions to fill those beds up. But once you fill them, they're full. On the Acute beds, like in California, when you're turning patients away, you can have a big impact on those beds the day you open them up. We do not; we expect that within 12 months we would be at the company's occupancy level on those. So on the Acute side, we're running about 73%, 75% level for those beds, that within a year they would be at the 73%, 75% level.

Do you have the breakdown of the 600 between RTC and the Acute?

Sure I do. We've given out enough detail but yes we do have them by bed type.

I mean is it 50-50? Or something that's skewed way one direction or the other?

It is more acute. It's probably 60-40 Acute to RTC.

Okay. And then my last question just on the interest expense and the raise of the guidance on that number. Can you just update us on what percent of the debt now at this point is variable? And in the assumption on your EPS raise, what are you assuming on interest expense? It's sort of the current rate or something gets better, something gets worse?

Yeah Tom, this is Brent. We have about 43% of our debt that floats and as indicated earlier LIBOR is approximately 200 basis points lower today than it was in November when we had first established our 2008 guidance. So that's what we have based it on based on the interest rate outlook there. We will see some significant savings on our floating rate.

Okay, thank you.

And we'll go next to Ken Wekley with Credit Suisse.

Thanks, can you hear me okay?

Good, Ken, how're you doing?

Doing very good. I was just curious if you could give me the payer mix for both businesses in-patient and RTC, if that's possible.

We can't give you the American payer mix on both of them, but we can give you the payer mix that has been updated for 2007, if you would like that.

Sure.

Sure, Medicaid is 32%.

Okay.

Commercial is 33.

Okay.

Medicare is 13.

Okay. Is the payer mix very different for in-patient versus RTC or is it roughly the same?

No, an RTC facility is going to be more Medicaid state driven. State agencies, other school departments state agencies, is 16%.

Okay, I have one more question. Have you had any facilities, you mentioned one facility I think you said had an infection control problem. Did you lose the ability to take patients in? Is that what happened or can you give us some detail there?

I'm not going to give you any new detail, but it sure hurt the census. But it's been fixed, so we're very pleased with there, and no other detail than it's fixed and they're re-growing their census very quickly.

Is the problem sort of typical for a psychiatric hospital?

No, not at all. It was a very unusual occurrence that was easily to fix, but people are very sensitive about infection control today.

Sure. And I guess just the last question, in terms of management ownership of the company, can you tell me where you are again in terms of senior management and how that's changed over the year?

Well, I can't give you the exact details. The proxy statement will be coming out pretty soon and you'll be able to see that. Senior management, as far as I'm concerned, most of senior management, if we choose to sell or buy, it's usually under a 10-B 5 1 plan, which is shown you can see my sales for last year. I can also tell you that the restrictive stock that I get this year that's just vested, you have the option of canceling the shares to pay the taxes or writing a check, and I wrote the check to keep the shares. So that's about as much as I can give in detail on that and the proxy statement will be coming out pretty soon.

Okay, thanks so much.

And we'll take our next question from John Ransom with Raymond James & Associates. John Ransom - Raymond James & Associates: Hi, good morning.

Hi John. John Ransom - Raymond James & Associates: Let's talk about the management business for just a minute. What's your outlook for that business in ‘08 when the PTS really starts to cramp on the Acute's and have you guys been able to pick up some new contracts off that kind of a natural run down in the that business?

Sure, John. It's in our guidance for the, you know we did that budget back in October and November, so we did our guidance. So we knew we had pretty good visibility in what contracts would renew and what might go away and so it's in our guidance. It is a flat to declining business. Nothing has accelerated there due to the first 52 days of this year. John Ransom - Raymond James & Associates: Right.

There has been no acceleration there John that I can see, and that and quite frankly we've signed several new contracts and we've entered into a kind of preferred arrangement with a large med/surg company. So our folks there, [Mike Sol] heads that up for us and he's somebody we promoted back in December to that position and Mike and his team have done a fantastic job, along with [Cindy Sheriff] and the EAP Company. And so, as you can see from other, it's hanging right in there. And it's in our guidance and we have not seen any acceleration on possible re-negotiations or terminations. John Ransom - Raymond James & Associates: Okay and then talk about your development. If I recall, you have a hospital opening what, first and third quarter? And we had thought about that as about $0.04 to $0.05 earnings per share and that as you, as those hospitals open up, is that still a good assumption or has anything changed it?

Nothing has changed. You are right, the Springfield project is open to come on line in the second quarter and the Rolling Hills project is actually in the fourth quarter. John Ransom - Raymond James & Associates: So it's back a quarter from what we understood?

Yes. John Ransom - Raymond James & Associates: Okay.

And quite frankly John, I think on Rolling Hills, we won't open that thing December 15 if it's ready, we will wait until January. And get through the holidays. If it's that close, if it's going to get completed between Thanksgiving and Christmas, we will just wait to let the New Year get out of the way and bring that thing and open in January. John Ransom - Raymond James & Associates: And as you look out, are there other development opportunities that might happen beyond ‘08 with your, now that you've got these [tie-ends] with your management contracts?

There is one that we're having reasonable discussions with. John Ransom - Raymond James & Associates: But, no, no big pipeline?

No, nothing there, no. John Ransom - Raymond James & Associates: Okay. And could you remind us, looking globally at the company, what the RTC acute split is?

It is 53 acute, 47 RTC. John Ransom - Raymond James & Associates: Okay and just one other kind of global area of inquiry. You guys had some operational issues with your RTC facilities; I know you've talked about doing some things differently there in terms of refurbishing the facilities and maybe taking them offline at times to refresh the facilities. Is there any other things that you are doing differently in that business and have you seen any positive operational impact from those changes?

Well, we are about to see the positive changes. We probably cost ourselves 100 basis points on the same-store numbers last year and especially in the fourth quarter where we have deliberately taken the patient days down like 20 beds a facility, and we have renovated the facilities. For example the one in Austin Texas comes to mind the Oaks. We've taken 20 beds offline since July of last year and the last of those 20 beds come online in March. So, once again, we have about three of those where we have been proactive in taking the census down, and renovating them and bringing them back online, and it probably costs us 100 basis points. So, maybe that's a little bad luck too, but it is the right thing to do versus as you know the Manatee Palms situation where we had to close the whole facility. So we are doing more of a proactive there and then Kathy Bolmer, who is our Executive and Vice President of Compliance and Quality. We have beefed up her staff, and they are doing a much better job assisting our facilities on compliance and quality issues, surveys being more proactive and so we done a lot there. We've made it a primary focus as it should be for the local team at the facilities. So, we have done a lot of good work in the last 18 months in that area. We will see the benefits of that this year. We will see the benefits, when Oaks comes online in March, you know, in April 20 more patients a day will be at that facility. John Ransom - Raymond James & Associates: Okay.

And will that help the same-store numbers absolutely. John Ransom - Raymond James & Associates: Okay, that's great. And looking at state Medicaid, budget is reset in the second half of the year and given some of the state budget issues are you getting any early visibility on what that's looking like from a pricing standpoint?

We've no visibility yet other than we've seen nothing that would want us to change our mind on our guidance there. You know 3% to 5% pricing for us, the government payers probably in the 2% to 4% range for the Medicaid state budgets. That is a July 1, October 1 issues for the state. So, we are still a way out to see what is going to happen there. Remember child and adolescents are the type of patients that we take care. We do not take the Medicaid adult patients. So, once again, we believe that is a protected patient. John Ransom - Raymond James & Associates: Okay, thank you.

Thanks, John.

And we will go next to Kevin Campbell with Avondale Partners.

Great, could you guys just remind us what exactly is included in all those other operating expense lines what might we expect would be included there?

Okay. It is rents, utilities insurance, travel, repair and maintenance, recruitment and others.

Alright, okay. And when you look at your acquisitions I just want to confirm to you because it sounded like I guess the language made it sound like you were going to be fixed between by year end but I think you said earlier that it was going to be -- the clock has started with the Horizon acquisitions which were June 1st, so I understand that you still expect to do six acquisitions by June 1st of this year?

That is correct and let me go back I mentioned rent is not in there that's leases. It’s a separate item, sorry.

Okay, thanks.

And then our goal is to have six acquisitions by June 1st.

Okay. And what sort of multiples, have they started to come in and what are you really seeing out there right now?

We see reasonable multiples looking back on trailing earnings in the seven to eight range for a single facility if it's more than a one facility transaction if you have four, five, six or seven facilities together you'll get a premium. But all the transactions we are looking at are very accretive to PSI, so once again once we announce the acquisition we would be raising if it's significant enough which, you know, I expect these six would be that we would be raising earnings guidance when we announce the transaction. So we are very excited and very close to having that done and June 1st is a big goal.

Okay. And then real quick on interest rates have you guys given any consideration to sort of locking in these low rates, is that something you are looking at?

We constantly manage our balance sheet, net interest rate exposure quite frankly we are continuing to benefit with 43% continuing to float and some of the outlook. We like that differentiation with the 50, kind of, 60/40 floating and fixed. So we are comfortable where we are and obviously $0.10 is meaningful accretion from that interest rate exposure that we are realizing for 2008.

Okay. And then lastly, looking at the expansion, what sort of costs might we expect sort of in advance of those openings on either a per bed basis, or a total dollar basis? Might we see -- I know you said you were looking in the second quarter and fourth quarter when they’ll be opening, so presumably you are going to have some costs in the first and third quarters. What might we expect and where exactly would that sort of flow through in the income statement?

Kevin, let’s get closer to the opening of those facilities in the ramp-up for those costs before we just start closing those numbers. And if it’s significant enough we will mention them. Now we opened up the Hughes Home in Danville, Virginia last year and never disclosed and we had operating losses there, so let us get closer to it. We’ll give you the numbers as we book the expenses.

Okay. Alright, thank you very much.

And we’ll go next to Whit Mayo with Stephens.

Good morning. Can you give us an update on your divisional structure today? You know, how many hospitals per division? Any changes there in organizational leadership that you made there? Thanks.

Okay. Sure. There is 11 divisions, and we have one opening, which we are about ready to make an offer to and we did trade out a couple of those positions during last year and we are very excited about the team we have and they are focused and I think Terry has done a good job in recruiting other division presidents and so the most recent one was Sharon Worsham, a long term CEO for us and she’s off to a great start and she started December, I guess and she’s off to a great start and she has kind of the mountain division region for us.

And those that you traded out, were those replacements or were those just you’re filling a void there?

Those were replacements.

Okay, alright. That’s all I got. Thanks, guys.

Thanks, Whit.

And we will go next to Jeff Englander with Standard & Poor's. Jeff Englander - Standard & Poor's: Good morning guys, can you hear me?

Yes Jeff. Jeff Englander - Standard & Poor's: First question, and Joe you mentioned the three, I guess, worst performing facilities, if you want to phrase it that way; first question is was the facility with the infection control issue one of those? And then could you give us more color on what types of things you’ll be doing to those three facilities specifically to turn them around?

I am not going to get into a lot of detail here. Yes, the one with the infection control, the infection control issue is one of those three. Quite frankly it’s the quickest of the three to fix and quite frankly as far as I’m concerned give it 30 more days and it is fixed. And so, that one will be going away. The Pines is a long-term project, where we’ve changed a lot of staffing at the local level and brought in new clinical directors and program directors and we took it down to where we knew the programming was very sound and now we’re going back to open. As I mentioned earlier that’s a four-year project versus a three-year project. So that is about much detail on those three that I’m willing to give right now. Jeff Englander - Standard & Poor's: Okay. The other question would be can you remind us again, I think in terms of residential, what the seasonal patterns are around vacation times and particularly at the end of the year?

Sure. Any time schools are out. Any time schools are out. As we mentioned earlier, spring breaks, because Easter is moving into March. There’s going to be a lot more spring breaks and schools closings in March this year as compared to last year when Easter was in April. All the holidays, Thanksgiving, December for us, once December 22nd gets here, it’s probably January the 5th before the census will come back or we see the trends coming back there that it will soften up and be there. In the summer time, schools get out, usually now about June 1st, and June, July and August are summer months where schools are out and less incidents occur and then schools start back up usually around Labor Day. However, we are a company that positions full year around the school programs. We like that, but unfortunately for us most school systems take the summer off. Jeff Englander - Standard & Poor's: Great. Thanks very much.

And we’ll go next to Frank Morgan with Jefferies and Company.

Good morning. Two housekeeping questions. One, could you remind us what the actual number of management contracts are as of the fourth quarter? And then secondly, on these acquisitions that you expect to close in the first half of the year, do you think these will be six one-offs or do you think it’ll be a small chain acquisition? Thank you.

Frank, we’ll let Craig Hartman get back with you on the number of contracts that we have. I don’t have that data here with me. On the acquisitions, stay tuned. I would expect an acquisition to have multiple facilities in it.

Okay, thanks.

Thank you. And we will take our final question from Mark Arnold with Piper Jaffray.

I just have one quick question. Just clarifying on the 600 bed addition this year, you mentioned Rolling Hills might be end of Q4. Is that included in that 600 bed number?

Yes, it’s 80 beds.

Okay. And then the renovations on the RTCs, when you take those beds down, are you including when those come back?

No.

Okay. That’s just strictly all new beds capacity, not mothballed beds or anything you’ve taken down?

Correct.

Great. Thank you very much.

I think that’s the end of the questions, so once again thank you for your interest in PSI and to the 22,000 employees out there that many of those might be listening in. Thank you so much for a great 2007. We set many records for this company on earnings growth, revenue growth, quality of care, improving our facilities. 2008 once again should be a year similar to what we’ve experienced and once again, I look forward to the 7% to 9% same-store revenue growth, our acquisitions, improving margins and delivering great care. So once again we’ll talk to you at the next call. Thank you.

Thank you. That does conclude our conference call today. We appreciate your participation. You may disconnect at this time.