Universal Health Services, Inc. (UHS) Q1 2009 Earnings Report, Transcript and Summary

Please standby we are about to begin. 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 first Quarter of 2009. Today’s call is being recorded and will be available for replay beginning today through May 15, by dialing 719-457-0820. The confirmation number for the replay is 8739453. The replay may also be accessed through May 15 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 our website by following the Investors 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 financial performance for 2009. For this purpose, any statement 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 first 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 our opening remarks, I’d like to turn the conference over to our Chairman, President and Chief Executive Officer, Joey Jacobs.

Thank you Brent and good morning. Thanks for being with us today. PSI produced solid results for the first quarter of 2009. Our revenue increased 6.3%, and income from continuing operations grew 11.1%. Overall, our same-facility results were inline with expectations with 3.4% growth in revenues and a same-facility EBITDA margin in excess of 20%. We continued to generate substantial cash flow from operations and we used our free cash flow to reduce debt. As you recall from our fourth quarter conference call, we indicated that our first quarter same-facility growth was likely to be in the low-single-digits. We were pleased to see the census levels improve in March above January and February. In addition our same-facility revenues reflect – reflected having one fewer day in the first quarter of last year as well as the admissions hold in Chicago. Together, these two factors had an impact of same-facility revenue and patient days totaling nearly 200 basis points. In regards to our Chicago facility, we are continuing to meet and work with the Division of Children and Family Services. Our leadership team at the facility is doing a great job of demonstrating that we are providing consistent and effective care for our patients in keeping them safe. There have been no significant incidents at Riveredge since August 2008. In fact we’ve initiated a number of excellent programs at the facility, and we believe the quality of care provided by the facility is better than ever. As we look towards the remainder of 2009, we are encouraged that the improvement in March census, has carried over thus far in April. This improvement supports our expectations, for an increase in same-facility revenue to the mid single-digit range, as does the continued addition of new beds to existing facilities. We expect same-facility EBITDA margin to benefit from improved same-facility revenue and from our continuing initiatives to enhance the contribution of each facility. As a result, we have affirmed our established guidance, which anticipates earnings growth of 17 to 21% for this year. With substantial cash flow and low maintenance capital expenditure requirements, we believe we are well positioned to continue to – we are prepared to continue to position PSI for the long-term adding new beds to capacity-constrained facilities and using free cash flow for further debt reductions. We will continue our initiatives to enhance the top and bottom line performance of each facility. And we are intensifying our focus on investment in providing our patients the highest quality of care. In closing, I’ll add that on a longer-term basis, we remain confident about our growth potential based on the strong industry dynamics and our position as the country’s leading in-patient provider. Demand continues to grow at a faster pace than supply in an industry that remains highly fragmented. Given both mental health parity and the national drive to lower healthcare costs, we believe the focus on addressing mental health issues promptly and comprehensively will only strengthen. So based on our strength today and compelling long-term industry trends, we believe we are well positioned to manage PSI for the long-term benefit of all our stakeholders. Thank you again for your time this morning, and now Jack Polson our Chief Accounting Officer will review our financial results in more detail.

Thank you, Joey and good morning. PSI’s revenue for the first quarter of 2009 was $450.4 million, up 6.3% from $423.8 million for the comparable 2008 quarter. Income from continuing operations attributable to common stockholders increased 9.9% to $27.8 million, while income from continuing operations attributable to common stockholders per diluted share, rose 11.1% to $0.50. Our growth in revenue for the quarter was produced primarily by a 3.4% increase in same-facility revenue, which was consistent with our guidance. This increase included a 2.8% increase in revenue per patient day and a 0.5% increase in patient days. Our lower same-facility revenue growth affected same-facility EBITDA margin as did the increase in our insurance reserves. At 20.4% for the quarter the margin declined 70 basis points from 21.1% for the first quarter last year. Our consolidated adjusted EBITDA for the quarter increased 2.7% to $78.1 million. In addition to the factors mentioned, adjusted EBITDA also reflected a transition to our new Rolling Hills facility in Franklin, Tennessee, from the Nashville Rehab facility, which affected margins by approximately 40 basis points for the quarter. PSI’s net cash provided by continuing operating activities increased to $40.3 million for the latest quarter from $12.3 million for the first quarter of 2008. Capital expenditures totaled $24.7 million, primarily for the addition of new beds and maintenance costs. We applied cash and free cash flow to debt reduction, to lower total debt by $40.8 million from our debt level at year-end 2008. As a result debt-to-total capitalization improved to 50% – 58% at the end of the first quarter of 2009 from 59.6% at year-end 2008 and 62.4% at the end of the first quarter last year. Total debt to adjusted EBITDA for the quarter improved to four times from 4.3 at year-end. As a final note, we have affirmed our financial guidance for 2009 earnings from continuing operations per diluted share in a range of $2.24 to $2.32, which represents an increase of 17 to 21% compared with 2008. The company’s guidance does not include the impact from any future acquisitions. This concludes our prepared remarks this morning. Sarah, would you please open the floor for any questions?

Certainly (Operator Instructions). We’ll go first to Ryan Daniels, William Blair. Ryan Daniels – William Blair: Yeah, good morning guys. A couple quick housekeeping questions, first on the financials. I noticed the supply costs were down actually pretty nicely year-over-year even on the good revenue growth. Is there anything there unusual during the quarter or is that something we should anticipate kind of being under check for the remainder of the year?

I think Ryan, that was a good quarter for us. We did get a rebate check from our purchasing group that was a little bit larger than I thought we expected, than we were expecting. We have been working for over a year on drug costs and dietary costs. So January was a good month for us for supply costs, and I wouldn’t read a lot into just one month and more use historical percentages there, but I would like to see it slightly tick down as we go. Ryan Daniels – William Blair: Okay, that’s helpful. And then I think Jack mentioned the 40 basis points of margin pressure from the relocation of Rolling Hills. Is that something that is going to continue a little bit into the second quarter? Or is that pretty much done and we’re through that pressure?

The Rolling Hills/Nashville Rehab project, we brought that hospital online in the middle of January. That project during the first quarter lost $1.6 million. Ryan Daniels – William Blair: Okay.

We expect that to breakeven during the second quarter. It still will put some margin pressure; it’s still going to be below the company’s margin. Ryan Daniels – William Blair: Okay.

But, the first goal is to get it to breakeven, and we think that’s going to happen. Right now the Rolling Hills hospital is at 50% occupancy, and we’ve been open about 90 days. So of the 80 beds we’ve got – already got 40 of those beds full. So, we’re pleased with where it’s at. So, but it did put pressure on our margins. Ryan Daniels – William Blair: Right. And then the cash flow, my last financial question looks very strong in the first quarter. I know that’s typically a weaker quarter. It looks like good working capital management, but anything else there that was unique to drive that so far above net income during the period?

Not really, Ryan. It’s obviously our working capital was the real big difference, the working capital management. Coming off of 2008 a little bit of difference would have been first quarter; we typically pay our performance-based cash, incentive cash bonuses. And obviously with our lower performance in 2008 that outflow was less in our first quarter of 2009. Ryan Daniels – William Blair: Okay. That makes sense. Then maybe a couple of bigger ones and I’ll hop back in the queue. I know you guys have talked about previously some states maybe tightening utilization a little bit, especially on the RTC sides and shifting settings in it. We’ve heard at least anecdotally that with the stimulus some of that has lessened and I’m curious if you have seen that, and if maybe that’s one of the drivers behind improving census in March and April, after the stimulus was passed and the states got those funds?

Ryan, what I can give you is that, if you take February the 29 out of the first quarter, for ‘08, and look at the growth over the same period of time, the same number of days, our acute volume was up 2.5% and our residential volume was up 0.6. So both were in positive territory and so, you get back to one that way it’s down to 1.6 growth, 6% growth in patient days and that’s the 0.5 that we reported, plus the 110 basis points for the leap year day. So, we had good growth in the first quarter. Really March was strong for us, but both areas of our business had growth in the business. We do believe the stimulus money has helped. We know it’s helped all the states’ Medicaid budgets. So, we see it in those stats; so we were positive across the board on increase in service. Ryan Daniels – William Blair: Okay, that’s really helpful data, and then last question and I’ll hop off. Just in regards to Q2, if we think about it, obviously it’s still a difficult year to comp. I know Easter shifted into Q2 so, we should we be thinking of that as maybe the lower level of the remaining quarters on a same store basis. Is that a fair assumption given the Easter shift and the one more quarter headwind from Riveredge that we should see that lower and then maybe rebounding a bit back half of the year?

Absolutely, Easter was in April and the Riveredge comp gets better in the third quarter. But as we’ve said in our press release even though April, Easter was in April. We’ve had, we’ve got great census numbers for April and similar to March’s trend so we’re pleased with the census demand for the services in April, but you’re right on both assumptions. Easter was in April and Riveredge will comp better in the third quarter. Ryan Daniels – William Blair: Okay, maybe a little more, a little more pressure but still down at mid single-digits?

Yes. Ryan Daniels – William Blair: Great thanks a lot, nice quarter guys.

Thanks.

Next from Robert W. Baird, we’ll hear from Whit Mayo. Whit Mayo – Robert W. Baird: Thanks, good morning. Joey, I just wanted to get your update on the Joint Commission’s Core Measure scores. We’ve heard the pilot testing has ended, but do you have an update as to the timing of when the National Quality Forum may actually endorse those measures? Is there any word on milestones we should be aware of at this point, and do you have a sense for how many providers will participate?

First I think they will reach agreement in the second quarter on the core measurements. And then it will be, Joint Commission will need to ramp up to roll them out. So I personally don’t see anything happening before October 1 from Joint Commission, when they would release the data on core measures. Now quite frankly, it’s across all the industry so everybody would be reporting the seven core measurements out, and we had 13 facilities that worked on the pilot project. And we have for, since January 1 of this year, we have been very aggressive in our communication and education in looking at those scores for the whole company; and if you were to visit at one of our facilities you would come across the seven core measurements posted prominently on a display and what the scores are and how they’re doing and how they’re trending so, but you will not – we will not see it publically I think the earliest would be October 1. It could actually slip to January 1. We’ll just have to wait see. I think all that’s fluid, but it still needs to be blessed by the NQF. Whit Mayo – Robert W. Baird: Do you have a sense of how many providers will participate, when we see the aggregate scoring I’m just trying to get an idea of how many providers?

I think – now this is just me, I don’t know the actual number. I’ve got a feeling more than 250 are going to be in the database. Whit Mayo – Robert W. Baird: Okay, and if I recall there were only 39 hospitals that participated in the pilot, and you had, how many 13?

13. Whit Mayo – Robert W. Baird: That’s well over 30%, okay.

So, we’re 20% of the industry. We are the leaders so; obviously we wanted to take to a more active role in this process. So... Whit Mayo – Robert W. Baird: Okay, okay, now that’s helpful and then maybe just on guidance for a second, recognizing historically the quarters tend to improve sequentially but you’re starting the year at a run rate of only $2 of earnings and from where we stand this does require some significant improvement; not that it’s unachievable. But can you just help us bridge the gap, and secondly what gives you the level of confidence at this point in time?

Okay the first is please note that the Rolling Hills/Nashville Rehab project rose from a $1.6 million to breakeven in the quarter. From the first quarter to the second quarter in comparisons. The biggest drivers is going to be revenue. It appears that we’re going to have 81 more, 8,100 more patient days as compared to the first quarter sequentially. And the way I get to that number is I take the average daily census for the first quarter, and it was 7,650, and it appears that in April, we’re going to average about 7,920 to 7,930. And that’s 270 patients a day more than the first quarter. And if you’ll multiply that by the 30 days in the month of April. And you get somewhere over 8,000, 8,100. You get, so we are projecting that sequentially for April we’re going to have 8,000 to 8,200 more patient days as compared to the first quarter average. So if we could keep that trend through May and June you can do the math on the revenues. The revenues sequentially would be growing nicely from the second quarter to the third quarter. And now what gives me comfort is that a third of the quarter is already over with. We have a good visibility on April so there is only 62 days left in this quarter. So that helps me there. There are some cost reductions that I think, are going to be occurring in the second quarter; so we’ll be picking up some basis points there. I do expect the EBITDA margin to come back and exceed 21% for the second quarter. So, that should be enough. We, I think, on data points using through April 30, that gives us comfort to reaffirm the guidance. And what we’re seeing and with the new beds, we built 80 new beds in the first quarter; 74 of those were acute and six of those were RTCs. So we had 80 beds come online in the first quarter. We’ve got 151 beds coming online in the second quarter; 136 of those beds are acute beds with 15 being RTC beds. And the biggest project of those 151 beds is already online. That’s a California facility that we’ve got online. So, we feel good about the beds that we built in January and the beds – I meant the first quarter and the beds that we’re building in the second quarter. So that plus the factors I’ve previously given you; we’ve got our fingers crossed. There are 62 more days to go to the second quarter, but as of today, that’s how we see the second quarter. Whit Mayo – Robert W. Baird: All right.

And you can work through your model, and I think you’ll see that earnings per share growth, grows nicely for the second quarter. I’m not giving you all the positives that are in our model, but I’ve given you lot of things, a lot of the assumptions that we are using. Whit Mayo – Robert W. Baird: I appreciate all the details. That’s the best explanation I’ve heard. I’ll go ahead and jump back in the queue. Thanks.

Next we’ll hear from Kevin Campbell, Avondale Partners. Kevin Campbell – Avondale Partners: Thanks. Just to follow up on that last question, you had mentioned some cost reductions. Is there anything more specific you can provide as it relates to that or is it just going to be more along the dietary and drug costs or is there something else that you’re doing?

I think we’re going to see cost reductions in some of the larger areas too, so, which are other expense, professional fee expense, and salaries and wages. Just by the sheer fact that we’re growing the patients days, we will become more productive. And so, I think there was some cost in this. We did not in January, we did not adjust the core staffing of our facilities, just because of the census was weak there in the first part of January and first part of February. And so, and I’m glad we didn’t because the census came back strong in March and is strong in April. So, you’ll see improvements, should see improvements as a percent of net revenue in most of those expense areas. Kevin Campbell – Avondale Partners: Okay, could you comment too, on the Residential Treatment Center side of the business. I guess one of your competitors had mentioned yesterday on their call that they’re seeing some pressures on utilization there, average length of stay, et cetera. Have you witnessed that at all, and I know that your average length of stay came down sequentially in, was that a result of that or was it just more mix shift towards more acute, et cetera as it has been in the past?

Well, obviously, if you remember, if you adjust for February 29 out of the numbers, acute grew 2.5 and obviously that has a length of stay of 10 days, and residential patient days grew 0.6. So that’s what made our total length of stay come down. There was just small movement in the length of stay downward, but nothing, nothing that I would build as a trend, or anything significant. It was more of a mix issue for the company.

And Kevin this is Brent. We – when you look at our RTC census, we’ve actually increased census on the RTC side every month through April this year. So while the first of the year started out very slow as we indicated, it has improved each month since then. Kevin Campbell – Avondale Partners: Great. Could you also comment on pricing? It was basically flat sequentially, which was a little unusual, was there any driver there?

50 basis points came to us from the phase out of PPS. So the total number was impacted 50 basis points by PPS. We’re phased in now. So that would have been a half a point there. We’ve seen nothing. We see the stimulus bill helping all the states’ Medicaid budgets. And the states have still been pretty quiet about what they are going to do with rate increases for Medicaid and for the psych services. So, we are already fixed until July 1 for those services. So, we’ve got our fingers crossed here. We do expect Medicare to give us a 3% cost of living increase July 1. So, that’s our expectations there. So, a little mix, a little intensity among the payers in the first quarter. The 50 basis points from impact of being phased into PPS. So, we’ll just wait and see how that trends in the second quarter. So, but we’ve not heard anything significant on reductions and reimbursement in any of our states. Kevin Campbell – Avondale Partners: Okay. And last question could you comment on the Riveredge Hospital and maybe your efforts to diversify your referral base? And how that’s been effective or not?

Well it’s a beginning process. We are remodeling, the facility we were putting several million dollars into remodeling and updating the facility while the census has been down. I’m pleased to know that our Intensive Treatment Unit came back online yesterday 12 beds, that we had down for renovations. We run slightly over a 100 patient days there at Riveredge, and the care is very good. Carey Carlock and her team are doing a wonderful job there. And we’re telling our story to the Division of Children and Family Services there, and so we’re working through that process, but we do, this time next year we do think we will have more adult patients there than we had in 2009. Kevin Campbell – Avondale Partners: Okay. Thank you very much

And from Raymond James, we’ll hear from John Ransom.

Hi, good morning. Can you give us an update on United, that acquisition?

Hi, good morning. Can you give us an update on United, that acquisition?

United Medical?

Yeah

Yeah

Those five facilities, the Kentucky facilities are doing fantastic. We are actually expanding the facility at Dupont. We just got an approval to build 20 beds there. And we’ll be bringing those 20 beds online by the end of the year. So, Kentucky is doing extremely well. The Ocala facility was a startup out of that group in Ocala, and it’s doing, it is ramping up and it can do better, but it’s ramping up and we are very pleased with how things are going there. Our Wekiva facility is going to a transition to more acute beds there. And we have big hopes for that. Our Jacksonville facilities has been a little disappointing, but we’ve got plans and actions there. So overall the UMC transaction, we’re absolutely pleased with those five facilities that we bought this time last year, and I expect great things to continue and more expansions for those facilities.

Okay thanks. And secondly, I know you’ve had a number, you had, what, 13 of your hospitals in this core measure pilot for a year. Have you found that just the process of posting these measurements and reinforcing that, has that caused an actual change in the quality, in how these measurements are achieved? I’m not asking this question very well, but just about the fact that you’re measuring and then publicizing it. Does just that very fact, does it cause the needle to move measurably in terms of the quality scores?

Okay thanks. And secondly, I know you’ve had a number, you had, what, 13 of your hospitals in this core measure pilot for a year. Have you found that just the process of posting these measurements and reinforcing that, has that caused an actual change in the quality, in how these measurements are achieved? I’m not asking this question very well, but just about the fact that you’re measuring and then publicizing it. Does just that very fact, does it cause the needle to move measurably in terms of the quality scores?

John absolutely, any time you take seven specific core measurements and start posting them and putting the score in there every month and putting a goal there for them every month. And then we’re displaying them in the most visible place in the hospital for our employees, usually their break rooms or where they check in or where their information boards are at. So if they see them, the board is like a four by six board that’s on the wall that has these scores. And so absolutely, that by itself brings a lot of attention to those areas. Now, there is some debate about the seven core measurements, do they actually raise quality or is it just gathering of information. I think over time it will raise quality. It does, absolutely, do a better job of documentation of what’s happening with the patient. So, yes to all of your questions, but it’s a beginning process and we’ve been tracking and posting ours since January. We did not do any posting or tracking during the pilot days, but starting January of this year we have started tracking and posting. As you know, if you’ll measure it, it gets attention and so, and in the end it will be better quality for our patients.

And I guess, this is probably not an easy question or maybe it’s unanswerable, but when you talk to, if you get sideways with a state, over a facility with a patient, do you think over time the debate will migrate into a more global quality discussion? Or is it still going to be kind of a highly charged politically driven focus on patients, specific patient incidents. Do you think the state is going to start buying into this stuff or are they just going to see it as well this is just a nice way to try to put a gloss on something, but we’re still going to focus on this patient or that patient and media counts and that sort of things?

And I guess, this is probably not an easy question or maybe it’s unanswerable, but when you talk to, if you get sideways with a state, over a facility with a patient, do you think over time the debate will migrate into a more global quality discussion? Or is it still going to be kind of a highly charged politically driven focus on patients, specific patient incidents. Do you think the state is going to start buying into this stuff or are they just going to see it as well this is just a nice way to try to put a gloss on something, but we’re still going to focus on this patient or that patient and media counts and that sort of things?

I think the – because Joint Commission and the National Quality Forum are behind this effort, it brings legitimacy to it. It will never replace the responsibility of the local and state agencies to investigate incidents, and unfortunately we will always be incident driven. You could have the best core measurement scores and then have a incident, and they have the responsibility of making, tracking that incident. And obviously it helps if the documentation is better and whatever, but it would not take away their responsibility to investigate incidents. So, but five years from now, it may be different.

And I guess the last question I have on this is, have you, they always say it’s not the crime so to so speak, it’s the cover up. Have you learned anything when you’ve had an incident? Has there been any internal learning to try to maybe overkill the response to it on the front-end versus, I guess, that the report that came out gave this solution – gave this perception that maybe, you guys weren’t as responsible on the front end of these things. Has there has been any change to respond to these that might allay some of the fears they get bubbled up at the state level.

And I guess the last question I have on this is, have you, they always say it’s not the crime so to so speak, it’s the cover up. Have you learned anything when you’ve had an incident? Has there been any internal learning to try to maybe overkill the response to it on the front-end versus, I guess, that the report that came out gave this solution – gave this perception that maybe, you guys weren’t as responsible on the front end of these things. Has there has been any change to respond to these that might allay some of the fears they get bubbled up at the state level.

John, I think we are very proactive in providing a safe environment. We have mock surveys going on. We have environmental specialists going to the facilities. We have nurse specialists going through the facilities. All of our CEOs take it very serious. However when an incident does occur, we do marshal additional resources to investigate the incident and to take any correction actions that may happen. So, just like in any business, if you have an incident or something like that, you do marshal extra resources. Now, can you – is that a negative? I don’t think so. But some people may think it’s a negative, but I don’t think so. Some anecdotal evidence of the quality our facilities, we’re providing. This is from one of our facilities in the Northeast. We were told that Aetna was coming out to do a presentation on June the 2. But apparently we were ill-advised. They showed up this morning; this is April 21. A team of people with the General Manager gathered our management team, and we met for about 90 minutes. They conveyed to us that they decided to start doing this recognition, because they just couldn’t believe the improvement in compliance scores we were attaining and how far ahead of the pack they were. We’ll be 30% ahead of the other 27 hospitals, that this Aetna program looks at, we were number one. And they came out unexpectedly to reward this facility for the great job and quality of care that it does. So, we get those kinds of things, all the time and I would encourage again everybody to go to our website. If you’ll click on quality, it will take you to seven more sites of PSI where you can go in and check in on our accreditation scores, recent achievements, testimonial from our patients, and from – we just won a recognition award this week from Nellis Air Force Base in Las Vegas, about the support and care that our facility is giving to the troops. So, I would encourage all of you all, to go there and check in on the positive things that we are doing there. Our online education, university goes live May 30 in the pilot form. And May 30 of next year, we will have all of our 23,000 employees being able to go online, for education and training for the company. So, there is a lot of things that we do proactively that sometimes don’t get recognized. But this was our facility, actually the facility is based in Philadelphia, and we are very pleased with that. And also if you’ll go click on recent achievements or whatever, you’ll find out that we do a Behavioral Education School in Brevard County in Florida. And they recently awarded us a five year contract, and we beat out two other companies that are based in the Philadelphia area for that service. Once again, we have lots of positives; but unfortunately, we do have incidents. And we do, we are committed to keeping the patients safe, and we do marshal the resources to implement quick action, if needed.

Right, well and then my last question. I know you’re talking about a mid-single digit same-store number. Is that a structural change in your view? Or is that a 2009 change because of some of the unique things happening this year? Do you think it’s a seven to nine over the intermediate term or do you think it’s 5% now?

Right, well and then my last question. I know you’re talking about a mid-single digit same-store number. Is that a structural change in your view? Or is that a 2009 change because of some of the unique things happening this year? Do you think it’s a seven to nine over the intermediate term or do you think it’s 5% now?

Now, John you’re asking the most optimistic person in the world. I think, our second quarter is shaping up to be a good quarter. And all of our facilities will be in the same-store in the second quarter.

Right.

Right.

So, with the patient day growth, once again we’re only a third of the way into the quarter. But with our patient day growth so far, could that be some day us being in the seven to 9% ranges again? I don’t know if we’ll publicly set that goal, but I can see us achieving seven to 9% revenue growth some time in the future.

And what has been the – those were great numbers you gave out. I think the market loves the more transparency. What do you think has been the biggest census driver? I mean that’s a big, over 200 patients in your facilities. I know you talked about specialty RTC weakness in early March, but what has been the biggest reversal, over the past six weeks in your census?

And what has been the – those were great numbers you gave out. I think the market loves the more transparency. What do you think has been the biggest census driver? I mean that’s a big, over 200 patients in your facilities. I know you talked about specialty RTC weakness in early March, but what has been the biggest reversal, over the past six weeks in your census?

Well, I think, it started in the middle of February I guess.

Okay.

Okay.

The biggest thing is we’ve had a lot of beds come online, and we built those beds to meet to the demand. And one of our Chief Operating Officers took on the special project of growing the RTC business.

Okay.

Okay.

And I think we’ve done an excellent job, on doing a better job telling our story to the referral sources that might be using the RTC business. So it’s a combination of all those things. It’s a combination of Brooke Glen being the best provider in the Aetna Network. That will get you more referrals.

Okay. Well, thanks for all the detail, Joey.

Okay. Well, thanks for all the detail, Joey.

Thanks.

Next we’ll hear from Kevin Campbell, Avondale Partners. Kevin Campbell – Avondale Partners : Hi, I just wanted to follow up on the sequential improvement in earnings and not really as it relates to what you expect this quarter, but can you just remind us, I look back historically from ‘04 to ‘08, there almost is always a pretty big improvement from the first to the second quarter anywhere from three to $0.06. What has been the key driver for that historically?

Well I think it’s always been patient days. I think we’ve always run a higher occupancy probably in the second quarter, as compared to the first quarter. Once again, as you all know, holidays and how we come out of the holidays is important to us and, but however unusual to this year, Easter was in April. And we blew through that pretty good with demand for the services? Kevin Campbell – Avondale Partners: Okay, and then one last question. Just real quick on your, floating rate debt, what – are you paying one month LIBOR right now? And what’s the margin currently in as you pay down debt, where do you think it will go throughout the year?

Sure, yeah we are paying one month LIBOR on our floating rate debt. The revolver is at 520, 5.25% over that LIBOR, and then the term loan is 1.75% over the 30-day LIBOR. So as we pay down debt obviously we will pay down the revolver piece, and that’s at the 525 over. So, currently our mix of fixed to floating debt is about right at about 60% or so because that, as we, as you know we swapped a little bit of the term debt two years ago. Kevin Campbell – Avondale Partners: Okay, thank you.

And from Piper Jaffray, Mark Arnold.

Good morning, just a couple. Most of my questions here have been answered, but your revenue per treatment was a little bit, revenue per patient day was a little bit lower in the quarter than I was expecting. And, it sounds like the acute side grew a little faster than the RTC side. So, is there anything going on there? Can you talk at all, maybe about trends in your outpatient volumes, anything with mix or anything there that would help explain the flat sequential revenue per patient day?

Good morning, just a couple. Most of my questions here have been answered, but your revenue per treatment was a little bit, revenue per patient day was a little bit lower in the quarter than I was expecting. And, it sounds like the acute side grew a little faster than the RTC side. So, is there anything going on there? Can you talk at all, maybe about trends in your outpatient volumes, anything with mix or anything there that would help explain the flat sequential revenue per patient day?

Okay the first quarter was impacted 50 basis points, because we are now fully phased in for PPS. So, that impact of not getting an annual increase January 1 for our PPS facilities caused a 50% basis, decrease for us here. It is, from what we have studied, it was just mix across the facilities that impacted the number in the first quarter a little softer than we thought. We’ve not seen any major payer decreases at all. And so that’s how we saw the first quarter, and that’s how we researched it and – but the biggest impact there was the 50 basis points from no longer phasing in PPS.

Okay. But on a sequential basis, forget about the pricing increase growth just, I think you were at 585 versus 587, I think in Q4. When you say mix, are you talking about acuity of patients, not mix between the acute and RTC side of the business?

Okay. But on a sequential basis, forget about the pricing increase growth just, I think you were at 585 versus 587, I think in Q4. When you say mix, are you talking about acuity of patients, not mix between the acute and RTC side of the business?

Acuity of patients does not drive revenue for us. They’re all per diems, so you don’t get extra money if the patient is more sick.

Okay.

Okay.

So this is basically the mix in the acute versus RTC or it might be, we’ve had more, we may have had more acute patients at, for example, this is an example $600 a day during the quarter than we were accustomed to having at $700 a day. That for some reason, there was some shift there so it’s a mix inside the acute.

Okay, Okay the payer mix?

Okay, Okay the payer mix?

Yes.

Okay. And then just the other part of that question, can you talk at all about, in the facilities where you provide outpatient services any trends in outpatient volumes and are you seeing, maybe a shift toward or payers pushing patients toward more outpatient services versus inpatient admission?

Okay. And then just the other part of that question, can you talk at all about, in the facilities where you provide outpatient services any trends in outpatient volumes and are you seeing, maybe a shift toward or payers pushing patients toward more outpatient services versus inpatient admission?

Outpatient business for us is important, but it’s much smaller. The outpatient business was up mid-single digits for the first quarter, but it’s a very small number.

Okay.

Okay.

For the company. Okay?

Okay. Just a couple final ones here, your EPS guidance, does it assume any additional debt pay downs throughout the rest of the year?

Okay. Just a couple final ones here, your EPS guidance, does it assume any additional debt pay downs throughout the rest of the year?

Sure, it has a little bit of the revolver pay down as evidenced by just our free cash flow.

Okay. And then one final one. You mentioned one big facility, or bringing on a significant number of beds in California here that’s already opened in Q2. Does that have any drag or opening or expanding significantly at a facility, does that have any drag on say your Q1 results in that facility?

Okay. And then one final one. You mentioned one big facility, or bringing on a significant number of beds in California here that’s already opened in Q2. Does that have any drag or opening or expanding significantly at a facility, does that have any drag on say your Q1 results in that facility?

It didn’t have – this one did not at all, this was our Canyon Ridge facility where we basically doubled the size of the facility. And I don’t think their earnings were hurt in the first quarter, because they were getting ready for this expansion to open up in the second quarter. The reason being that there was not a lot of construction in the ancillary services. The dietary was already big enough to handle the foodservice for these extra beds. So, I did not see that for Canyon Ridge or did not see that in the numbers. If it was, it was minor.

Great. Thank you, nice quarter.

Great. Thank you, nice quarter.

Thanks.

And next we’ll hear from Deutsche Bank’s Darren Lehrich.

Thanks, good morning everyone. Just one housekeeping question before a few others. What is in the discontinued ops at this point? Just wanted to clarify if any facilities moved into that bucket this quarter, if you can just clarify what’s in there?

Thanks, good morning everyone. Just one housekeeping question before a few others. What is in the discontinued ops at this point? Just wanted to clarify if any facilities moved into that bucket this quarter, if you can just clarify what’s in there?

It is the Eltec facility in San Antonio, Texas. And it’s been there since July of last year. And hopefully in the second quarter, we may have it sold.

Okay, so nothing new in that bucket, great.

Okay, so nothing new in that bucket, great.

No.

And then, Brent, sorry if I have missed this, what is the notional amount of your swap in dollar terms at this point?

And then, Brent, sorry if I have missed this, what is the notional amount of your swap in dollar terms at this point?

Sure, it’s $225 million.

Okay, so that’s unchanged.

Okay, so that’s unchanged.

Correct.

And does any of that roll in the coming quarters?

And does any of that roll in the coming quarters?

No, that swap would mature at November 30 of this year.

Great. Okay and then, I guess, I wanted to just ask you, Joey, just to get your thoughts on if there is any updated CapEx guidance you could provide to us. I’m just trying to get a sense for where that money trends since it doesn’t sound like you’re building any de novo’s this year. Although it sounds like you’ve got this bigger project in California.

Great. Okay and then, I guess, I wanted to just ask you, Joey, just to get your thoughts on if there is any updated CapEx guidance you could provide to us. I’m just trying to get a sense for where that money trends since it doesn’t sound like you’re building any de novo’s this year. Although it sounds like you’ve got this bigger project in California.

Our initial guidance on CapEx stays the same.

Just reviewing the details?

Between the combination of maintenance and growth capital we’re still in the 120 range, $120 to $140 million for the year as far as our outlook there.

Okay, and then Joey, maybe could you just maybe comment a little bit more on how you’re capitalizing some of these projects in terms of cost per bed that you’re adding. I guess I’m aware of the project in New Jersey that’s been in the local press that’s essentially a rebuild. So, I’m just wondering if there are more projects like that and therefore they’re more costly on a per bed basis, in terms of the bed additions that you have going forward?

Okay, and then Joey, maybe could you just maybe comment a little bit more on how you’re capitalizing some of these projects in terms of cost per bed that you’re adding. I guess I’m aware of the project in New Jersey that’s been in the local press that’s essentially a rebuild. So, I’m just wondering if there are more projects like that and therefore they’re more costly on a per bed basis, in terms of the bed additions that you have going forward?

Summit is an outlier in the process, Darren. As you know it’s taken us four years or three years to get through the zoning and getting ready for that project. That project is a 2010. I’m trying to find it on the schedule. But that’s going to be – when is it, Brent?

2010.

That’s a 2010 project, and we’re going to be building 24 additional beds there. So, I have not – I don’t have that budget in front of me Darren, but it was, it did take a long time to get that project done, and it’ll be a little bit more expensive just because it’s in New Jersey, as you well know.

Sure. Okay so, but in general, what is your cost per bed to build at this point? I just want to get a sense maybe an update on that relative to where it’s been.

Sure. Okay so, but in general, what is your cost per bed to build at this point? I just want to get a sense maybe an update on that relative to where it’s been.

It’s going to be somewhere, Darren, it’s going to somewhere between the 200 to $250,000 a bed. I’m just – and that’s just going back through my memory right now. It can be much less if we’re just building a new wing, but if it’s a tough construction state, it could be 200,000 a bed, 250. We built Rolling Hills for 250, 275, but that was a replacement hospital. Everything else will be less than that.

Okay fair enough. I appreciate all the detail here. Thanks again.

Okay fair enough. I appreciate all the detail here. Thanks again.

Hey Darren, before you leave, we’ve got two new numbers for you.

What’s that?

What’s that?

Licensed beds, licensed beds.

Well, I was going to take that off line, but I’m happy to take it now.

Well, I was going to take that off line, but I’m happy to take it now.

In the spirit of more disclosure, we’ve got them for everybody. Licensed beds for the quarter ending date 3/31, it’s 10,733; and operated beds 10,278.

Okay so, now that you gave that out.

Okay so, now that you gave that out.

No questions, no questions you just get the data.

The question is how should we think about that relationship between licensed and staff beds over the course of this year? So you said 150 new beds in the second quarter roughly, are those net licensed beds or are those bed beds?

The question is how should we think about that relationship between licensed and staff beds over the course of this year? So you said 150 new beds in the second quarter roughly, are those net licensed beds or are those bed beds?

Those beds would not be in these number yet, Darren.

That’s the other thing, as we give you the construction and the estimated beds going forward they will layer into both of those numbers sequentially in the same quarter. And we’ll give them to you every quarter going forward.

Okay great, appreciate the detail.

Okay great, appreciate the detail.

Thank you, Darren.

And next we’ll hear from Adam Feinstein with Barclays Capital.

All right, thank you, good morning everyone.

All right, thank you, good morning everyone.

Hi Adam.

Just a few things here, maybe just a couple of small housekeeping things to start. Last quarter you talked about liability costs ticking up and you had that catch up charge. So, I just wanted to get a quick update in terms of your liability costs for you at the quarter?

Just a few things here, maybe just a couple of small housekeeping things to start. Last quarter you talked about liability costs ticking up and you had that catch up charge. So, I just wanted to get a quick update in terms of your liability costs for you at the quarter?

We think it’s good for the quarter. We think we are well reserved for the quarter. And we had the actuarial service come in, take a quick look at it. We feel good with what we expensed in the first quarter.

And just can you help me just understand. So, did it increase a lot in the first quarter relative to last year?

And just can you help me just understand. So, did it increase a lot in the first quarter relative to last year?

No it was what we had projected and budgeted. There was no unusual adjustments.

No I understand unusual. But was your budget for that number to increase this year...

No I understand unusual. But was your budget for that number to increase this year...

Sure, sure there is a small increase into that number, Darren.

Okay.

Okay.

I mean Adam. And the actuaries actually thought we were – it’s only one quarter. It’s only one quarter, but we were very conservatively reserved there, but it was what we had budgeted there, which was an increase.

Adam, you should compare that to the full year 2008.

Yeah.

Okay, great. Okay and then just a couple of other small questions here. Just on the interest expense, I know there’s been a few questions about the LIBOR rates and such, but how should we think about a quarterly number. You guys completed the refinancing, towards the end of February. So, as we think about this kind of quarterly interest expense, is there a certain range that we should we think about Brent.

Okay, great. Okay and then just a couple of other small questions here. Just on the interest expense, I know there’s been a few questions about the LIBOR rates and such, but how should we think about a quarterly number. You guys completed the refinancing, towards the end of February. So, as we think about this kind of quarterly interest expense, is there a certain range that we should we think about Brent.

Sure, I would expect there’d be about $19 million of interest expense for the second quarter, which is a slight uptick from the first quarter, but remember we only restructured the revolver and repriced it at the – we only saw that one month in the first quarter. So, when you work through that, that increased spread on the revolver. I think around just inside of $19 million would be our interest expense for the second quarter.

Great okay, and then just you broke out in terms of the impact of Riveredge on same-store revenues, but just curious as we think about the impact on margins in the quarter. Could you help us think about, what margins would have looked like, ex that? So, just trying to get a better sense in terms of what EBITDA margin. If you can’t give a specific number, can you just help us think about some sort of a range?

Great okay, and then just you broke out in terms of the impact of Riveredge on same-store revenues, but just curious as we think about the impact on margins in the quarter. Could you help us think about, what margins would have looked like, ex that? So, just trying to get a better sense in terms of what EBITDA margin. If you can’t give a specific number, can you just help us think about some sort of a range?

It was a drag, but not significant.

Okay.

Okay.

I can’t give a number there Adam.

Okay.

Okay.

I don’t have a number in front of me. And I don’t know if I would give it, if I had it.

Sure, I understand. I had to ask. So, and then just with respect to Riveredge as well, it sounded like you’ve been very proactive in the last couple of months in trying to get things fixed there. I was just curious; the UIC report came out at the beginning of April. So, I was just curious, if there was any I guess impact on the facility, from that so have the trends there been stable so, I realize they’re still down, and impacted results by 70 basis points. You mentioned April was a good month for the company in the aggregate. I was just curious if the trends at Riveredge have been stable, especially since the UIC report came out.

Sure, I understand. I had to ask. So, and then just with respect to Riveredge as well, it sounded like you’ve been very proactive in the last couple of months in trying to get things fixed there. I was just curious; the UIC report came out at the beginning of April. So, I was just curious, if there was any I guess impact on the facility, from that so have the trends there been stable so, I realize they’re still down, and impacted results by 70 basis points. You mentioned April was a good month for the company in the aggregate. I was just curious if the trends at Riveredge have been stable, especially since the UIC report came out.

They have been stable, and we’re very appreciative of the UIC report and we have taken that document and reviewed it and we’ve had a couple of meetings with the DCFS and their folks. So, before we could have additional meetings we really needed to get that report out. It’s out. And so we’re using it as a discussion document and our folks are meeting and discussing with DCFS, just about on a weekly basis there. And demonstrating and showing to them the great job the team at Riveredge is doing and so it was a milestone that we had to get past. Adam and the census is still, it was 100 patients a day before the report and it’s 100 days patients a day after the report.

Okay, great and then just another question here in terms of the RTC business and you spoke a little bit about that and Brent you made a comment that each month it’s gotten better since the start of the year. And back to your previous comment about more disclosure, just curious in terms of the RTC business, the growth I guess that we know how the overall company grew same store, but the RTC same store growth be significantly different from the overall average or pretty similar. I’m just trying to get a better sense just because you guys did call that out as being more impacted by the economy than the acute business, so just curious in terms of as when we think about growth rates?

Okay, great and then just another question here in terms of the RTC business and you spoke a little bit about that and Brent you made a comment that each month it’s gotten better since the start of the year. And back to your previous comment about more disclosure, just curious in terms of the RTC business, the growth I guess that we know how the overall company grew same store, but the RTC same store growth be significantly different from the overall average or pretty similar. I’m just trying to get a better sense just because you guys did call that out as being more impacted by the economy than the acute business, so just curious in terms of as when we think about growth rates?

As we look at the first quarter Adam, it was 2.5% for the acute and 0.6 for the RTC. Obviously, building of the acute beds is helping that number. We did not build, and we are not building as many RTC numbers. So, that fact alone will not let RTC grow as fast as the acute business. Because we’ve just not expanded beds there like we have on the acute side. So, the math will not let the RTC grow at similar rates as the acute business.

I see.

I see.

And Adam, those two percentage growth are adjusted out for the year 2008.

Adjusted, okay great. All right, thank you, very helpful.

Adjusted, okay great. All right, thank you, very helpful.

Thanks Adam.

And next we’ll hear from Andreas Dirnagl from Stephens Inc.

Yeah good morning guys. Maybe just some more additional detail on some of the things that have already been asked. Joey, on one question your answer sort of struck me as interesting where you said that acuity doesn’t matter because of the fact you are a per diem business. Maybe, we’re using the wrong terminology, but you do have differential pricing for patients depending on sort of how specialized the program is that they’re accessing, isn’t that correct?

Yeah good morning guys. Maybe just some more additional detail on some of the things that have already been asked. Joey, on one question your answer sort of struck me as interesting where you said that acuity doesn’t matter because of the fact you are a per diem business. Maybe, we’re using the wrong terminology, but you do have differential pricing for patients depending on sort of how specialized the program is that they’re accessing, isn’t that correct?

We have some of that, but it’s very minor. What I should have said instead of – the correct words were the different payer mix, inside the acute business. We have acute payers that probably pay us from 600 to $700 a day, and we had more of the 600 versus the $700 a day it looks like, in the first quarter.

Um-hmm.

Um-hmm.

So, it’s inside the payer contracts that we had. It’s the payers, not the acuity. We do not get extra revenue; occasionally we can get it. But normally you do not get – a per diem is a per diem no matter how sick the patient is. And even with Medicare patients, there is a very small change in the reimbursement rate due to complications in co-morbidities, very small. We do – we’re per diem based and it’s more of an all inclusive for all illness.

So, when – when

So, when – when

No matter what the diagnosis is.

So, when you talk about – when you acquire a facility. How you bring in the specialized programs that’s in order to attract the volume of patients; in other words, you can treat those patients that program doesn’t necessarily get a higher per diem than other programs that were already in place when you bought a facility?

So, when you talk about – when you acquire a facility. How you bring in the specialized programs that’s in order to attract the volume of patients; in other words, you can treat those patients that program doesn’t necessarily get a higher per diem than other programs that were already in place when you bought a facility?

That is correct. We’re just bringing more volume to the business.

Okay, great. And then, I guess one more thing on Riveredge. Just from the point of view, you’ve talked about the fact that you’re now back in dialogue with DCFS. Lord knows no one wants you to try and put a date range on when you think something can be resolved. But in terms of how you would characterize the current dialogue, is it similar from what the dialogue you had in the past? In other words, is the viewpoint that you’re moving towards a coordinated action plan that you’re going to put in place and then DCFS, either with UIC or without will review that again and then you know a decision will be made?

Okay, great. And then, I guess one more thing on Riveredge. Just from the point of view, you’ve talked about the fact that you’re now back in dialogue with DCFS. Lord knows no one wants you to try and put a date range on when you think something can be resolved. But in terms of how you would characterize the current dialogue, is it similar from what the dialogue you had in the past? In other words, is the viewpoint that you’re moving towards a coordinated action plan that you’re going to put in place and then DCFS, either with UIC or without will review that again and then you know a decision will be made?

I would hope that would be the outcome DCS – DCFS is in our facility every week and was before the hold and is after hold. So we have a good working relationship with them even during the hold. But they had to go through their process, which the biggest part of their process, was the report and they’ve just now gotten the report. So, the amount of conversations between DCFS and Riveredge has increased. Obviously, the goal is that we would reach agreement and the hold would be lifted. And so we’re working through that process and it’s very sensitive and so, but we’re working through that and so, we’ll just keep you posted.

Okay and then finally just trying to get a little color overall on let’s call it the risk management program. If you now look back at the past couple of years, and it’s part of the business. You’ve had some incidences at certain facilities that have very much been in the press. But if you look at those facilities now in hindsight, are there certain maybe warning signs or early warning signs that you’ve now learned that hopefully you can use to look at other facilities that you have in your portfolio and maybe send in an early action team or something like that? How does that work overall?

Okay and then finally just trying to get a little color overall on let’s call it the risk management program. If you now look back at the past couple of years, and it’s part of the business. You’ve had some incidences at certain facilities that have very much been in the press. But if you look at those facilities now in hindsight, are there certain maybe warning signs or early warning signs that you’ve now learned that hopefully you can use to look at other facilities that you have in your portfolio and maybe send in an early action team or something like that? How does that work overall?

Absolutely we’re more sensitive to early indicators, absolutely. Absolutely we’re more aware; we’re more sensitive to early indicators. We’re more sensitive to making sure we have the resources in place for them, making sure that we have the right – we’re decentralized. We expect a lot of our Chief Executive Officers, and one of those responsibilities is to have a quality facility. So, we are more sensitive to the front end and to early indications of something might be occurring.

Okay great. Thank you very much.

Okay great. Thank you very much.

And from Longbow Research, David Bachman.

Hi, good morning and thanks for squeezing me in here. Just a couple of quick questions that we haven’t touched on already or want to revisit. I just, we’ve been hearing from a few different places that there may be this secular pressure on utilization or length of stay, more as a secular trend and looking at alternatives to residential treatment. And I just want to get your take on that and if you don’t really see that as perhaps a threat on a longer term basis and if it is, how positioned are you to maybe steer the business to capture whatever those alternatives might be?

Hi, good morning and thanks for squeezing me in here. Just a couple of quick questions that we haven’t touched on already or want to revisit. I just, we’ve been hearing from a few different places that there may be this secular pressure on utilization or length of stay, more as a secular trend and looking at alternatives to residential treatment. And I just want to get your take on that and if you don’t really see that as perhaps a threat on a longer term basis and if it is, how positioned are you to maybe steer the business to capture whatever those alternatives might be?

Many of the patients that are in our RTC facilities today, 10 years ago would actually be in a hospital; the intensity of that patient would qualify them to be an admission in the hospital. Over time, the RTC facilities have taken on more acutely ill child and adolescents basically. Can you move them to outpatients? Yes you can. Is that a goal that everybody should have is that the patients gets well enough to move to an outpatient setting to be closer to home and to support systems? Absolutely, we’re all for that. That is a very much a long-term effort, and we have in certain states Virginia, Oklahoma, we have in certain states we have large group homes, foster homes, Puerto Rico extension of care there already. So, we at PSI has several of our facilities that are doing that. And can we do more of that? Yes. But once again, the acuity of the patient in the RTC facility today is something that would have been in a hospital 10 years ago, is a patient that would have been in a hospital 10 years ago. So it’s hard for me to visualize these people being in an outpatient setting until they improve in a residential setting first. And then once that happens, absolutely we’re all in favor of that child and adolescent going home. We hope there is a home environment for them, if not a foster home or group home or something. We’d like for them to be back in their local school, and we do have that continuum of care in many, in several of our facilities in several of our states. So that’s our stated objective.

Okay that’s very helpful color on that front. And then just two other questions here on the intake and marketing side in terms of interfacing with referral sources, have there been any kind of renewed efforts there or any changes maybe over the past few months as, maybe related to the economy or stepping up efforts there? And then on the, I know it’s small, but the EAP slice of the business just any updates on what you’re seeing in that business? Thanks.

Okay on the RTC referral development side of the business, two years ago it was a local responsibility for the CEOs in their facilities during the past two years and especially during the past 12 months we have created an additional corporate service for that. That helps our facilities, and I think that’s what’s been the biggest impact for us is having a corporate service covering the country. For that matching up the child with the right appropriate facility and service. So, I think that’s working well there and your last question part was?

EAP.

EAP.

EAP. We continue to sell contracts. We just brought on Blue Cross of Montana. I think it’s Montana. We do lose a few contracts. It’s a very much a needed service and actually some of our larger EAP vendor contracts are asking us for additional services and additional project – products, which we’re creating for them. So, it’s a good book of business. And there is some growth there, but it’s small. But we’re very pleased with Cindy Sherif and her team and the excellent work they are doing.

Okay and just one last question. Just again we’re seeing bad debt provisions, in line with historical, where it’s been historically for you. Any other update or just color on that piece of the business?

Okay and just one last question. Just again we’re seeing bad debt provisions, in line with historical, where it’s been historically for you. Any other update or just color on that piece of the business?

No, no, really, more than half of our businesses that are child and adolescents, and they don’t have deductibles or copays. And so, this industry had preauthorization since the early 90s; so bad debts, we think will continue to be in that 2% range.

Excellent. Well we appreciate all the, all the good information and color today.

Excellent. Well we appreciate all the, all the good information and color today.

Thanks.

We’ll next hear from A.J. Rice, Soleil Securities.

Thanks. I have just a couple of follow ups and then one broader question. Obviously the UIC report, which thanks for the comments on, was mainly targeted for the benefit of the Illinois authorities since they’re in discussions with you. But I just was – it’d be remiss if we didn’t ask you, has it prompted any other inquiries from any other regulatory bodies or payers. Has that changed the discussion in any way with anybody else that we should know about?

Thanks. I have just a couple of follow ups and then one broader question. Obviously the UIC report, which thanks for the comments on, was mainly targeted for the benefit of the Illinois authorities since they’re in discussions with you. But I just was – it’d be remiss if we didn’t ask you, has it prompted any other inquiries from any other regulatory bodies or payers. Has that changed the discussion in any way with anybody else that we should know about?

None at all.

Okay.

Okay.

Could we get a call or a question just like you’ve given us one? Yes.

Right.

Right.

Has it impacted any relationships? No.

Okay, and then just maybe to try to comment to Adam’s question a little differently on the general liability area. Has there just been claims filed or size of claims you’re seeing, has there been any material change in the last quarter versus what you had in the fourth quarter?

Okay, and then just maybe to try to comment to Adam’s question a little differently on the general liability area. Has there just been claims filed or size of claims you’re seeing, has there been any material change in the last quarter versus what you had in the fourth quarter?

We have seen none there. And once again, last year it was not – we projected a number of claims we received. We were right on top of that number. What slipped up on us was the average settlement went up about $30,000 a settlement, which – if you could see the size of our settlements, it’s a percent increase there. Once again the settlements are very small.

Okay, and then just finally, on the cash flow projections for this year, it looks like cash flow from ops is about $40 million rounded. Free cash flow after the $25 million or so of CapEx, is about $15 million in the first quarter. As you already mentioned, second quarter, tends to be seasonally stronger than first; third quarter seasonally weaker than first. Should we annualize the free cash flow number for the first quarter? It gives you $60 million. Is that a good number to think about for free cash flow this year or can you give us any help on that? I know you gave us CapEx at $120 to $140 million.

Okay, and then just finally, on the cash flow projections for this year, it looks like cash flow from ops is about $40 million rounded. Free cash flow after the $25 million or so of CapEx, is about $15 million in the first quarter. As you already mentioned, second quarter, tends to be seasonally stronger than first; third quarter seasonally weaker than first. Should we annualize the free cash flow number for the first quarter? It gives you $60 million. Is that a good number to think about for free cash flow this year or can you give us any help on that? I know you gave us CapEx at $120 to $140 million.

That’s right. A.J., it’s Brent. We would expect, we’ve always said our net income times number of shares, our net income plus the non-cash stock comp, which I think based on the midpoint of our range, those would be in the 160, $180 million range combined and that’s what we get about. We’ve forecasted about $50 to $60 million of true free cash flow after growth and maintenance capital for the year. So, the first quarter was very, very robust and probably, it would be a little optimistic to assume we’re going do that, that level for each quarter going forward.

Right. And did you – do you give the breakout between routine and what you’re calling development CapEx?

Right. And did you – do you give the breakout between routine and what you’re calling development CapEx?

Absolutely. The maintenance capital this quarter was just a little over 2%. It was 2.3%, and the balance was expansion. That’d be about 3.1%. Those are percentages of revenue.

Okay and then maybe I’ll just ask this last one then. On acquisitions, you made the point as you always do that there is no acquisitions in the guidance. Are we still sort of on hold a little bit on acquisitions, but you’ve got the refinancing, which needs to be done? Are you looking at things again or – where do you stand with that?

Okay and then maybe I’ll just ask this last one then. On acquisitions, you made the point as you always do that there is no acquisitions in the guidance. Are we still sort of on hold a little bit on acquisitions, but you’ve got the refinancing, which needs to be done? Are you looking at things again or – where do you stand with that?

There is not going to be any acquisitions in the first quarter of new facilities. Our two development people are out looking at facilities for potential acquisitions. We need the credit markets to stabilize some more and our goal is to continue to pay down the debt and build beds at are in our existing facilities; and we’ll revisit this A.J., with you all in the – in July when we talk about the second quarter numbers. We’ll be in a better position to talk about the possibility of acquisitions and that sort of thing, but nothing in the second quarter. But we are looking; we do still visit and look at facilities.

Okay, all right, thanks a lot.

Okay, all right, thanks a lot.

Our last question today will come from Gary Taylor with Citigroup. Gary Taylor – Citigroup: Sorry, can you hear me now?

Hey Gary, this is Joey. Gary Taylor – Citigroup: Hey, how are you doing?

Good. Gary Taylor – Citigroup: A few quick ones. When we look at length of stay year-over-year in the same store numbers down half a day, is that – is there a facility-specific issue like a Rolling Hills type thing? Does that RTC showing up? Is there anything obvious on that half day?

No, not it all. Gary Taylor – Citigroup: Okay.

It is just the mix of the acute versus RTC length of stay flowing through; both of them I think. Like on the acute length of stay for the first quarter as compared to last year, I think it was down one-tenth of a day. And then on the residential, it might have been just down one day. I think the length of stay there is, I don’t know the exact number; it could be like 140 going to 139. Nothing significant other than the mix of the patients driving the length of stay down. Gary Taylor – Citigroup: Now what’s your – what is your ballpark acute length of stay now?

The length of stay is between nine to ten days. Gary Taylor – Citigroup: Okay. And you were talking about earlier just kind a range of per diem payments on the acute care side roughly six to $700 per day. Can you remind us on the RTC side, what a range might be?

They would be in the – they average about 330. So give or take 40 bucks each way, I would say. They average I think about 330, 340. Gary Taylor – Citigroup: Okay. Brent, on the balance sheet the allowance as a percent of gross AR has been stable; it actually improved some sequentially. Has there been any change in terms of timing on write-offs? Can you just remind us when you’ve got an account that’s fully reserved when you actually write that off the balance sheet is that at 180 days or 360?

I think that’s – this is Jack. I think that’s more of a function of as we acquire facilities, we’re reluctant to have them write-off too quickly. And as they mature with PSI and as we integrate them, we become more comfortable in the assessment of those claims that are aging out. And with the acquisitions slowing down, we’re seeing them follow PSI processes more closely. Gary Taylor – Citigroup: So, that means, I’m not sure I follow you.

Okay what you saw in the previously was a little bit of growth in that because we’re reluctant to have them write-off too quickly, new acquisitions write-off to quickly. Gary Taylor – Citigroup: Got it.

We wanted to properly assess those things and make sure that they’re following our processes. Now that they’ve been with us for a time, we’re following our processes. It’s not an acceleration overall for PSI. It’s just we’re more comfortable with bringing them onboard our process and writing them, writing them off in due course. Gary Taylor – Citigroup: Okay, I mean, the number looks, the number looks good. I’m not pointing it out of as an area of concern. Is there – can you tell us for a core PSI facility at what point you would write-off a fully reserved account or does it vary by payer or essentially by market?

The latter two, it varies by payer; it varies by facility, and what kind of patients that facility is seeing. So to say, that there is a good example of one, there is not.

However Gary you need to be careful here that, there is rules concerning writing off Medicare bad debts that you have to have them returned from the collection agency before you can do that. All efforts have to be exhausted. Gary Taylor – Citigroup: Sure.

And they really want to see the same effort for your commercial account. So, we probably follow that closer about when we write them off than any other criteria. Gary Taylor – Citigroup: Okay.

Occasionally we can write them off earlier, but more than likely we are letting them go through a collection service cycle one-time. Gary Taylor – Citigroup: Right. Okay, so, overall though there has been no change in that policy --

No, not at all. Gary Taylor – Citigroup: Except maybe you have fewer acquisitions come through.

No, not at all. Gary Taylor – Citigroup: Final question, just going back to margin again. I understood the comments about Rolling Hills but when you look at your – the press release that shows the same-store margin down 70 basis points year-over-year, I think you said Rolling Hills was 40, did I miss anything else that was called out that was driving that?

I don’t think I gave anything specifically, other then the Rolling Hills/Nashville Rehab issue. Gary Taylor – Citigroup: Okay and then so, with the first quarter same-store margin down 70, half of that being Rolling Hills, which gets better on a forward basis, I’m still of the mind that your earnings guidance for the year implies, 70s or 80 basis points of margin, same-store margin growth for the full year. Is that in the ballpark of what you’re thinking? -- Go ahead.

Gary, it’s in the ballpark. And probably what you’re discounting is that as I mentioned earlier during, the first six weeks of the year, we were not aggressive on trying to match that to census. We knew the census would come back so, when you see souring wages and benefits as a percent of that revenue being higher, that number will get better, because of the revenues growing in the second quarter. And so, can we do better in the second, third and fourth quarter? Absolutely, we can do better against those first quarter metrics just by the sheer fact that we knew the census was coming back, and we were not aggressive in trying to reduce head count. Gary Taylor – Citigroup: Got it, you had mentioned some cost reductions for the 2Q. I understand the labor sequentially, because of the census. My last question, I’ll let you go is anything specific you can help us think about just in terms of cost reductions moving forward?

No not, I did not give any specifics, other than I’d anticipate that there will be. Gary Taylor – Citigroup: Okay, all right thanks.

Just some information for everybody. I’ve got a little bit more detail on the core measures in the pilot project. There were 100 about 190 hospitals in the pilot project. We should expect more than 200 to be in the system when fully implemented. Core measurements should be blessed by NQF this summer. Full implementation by October or January. Public reporting of data probably early 2010. And that’s from Mark McClellan who heads up our association, who is closer to this than anybody about the implementation. So, there will be more than 200 hospital facilities in the core measurement. And it is still subject to being approved this summer. And then October, January will be when the first data comes out. Gary Taylor – Citigroup: Okay.

And I guess we’re ready for my closing comments. First, thank you all for joining us and being with us. During the first quarter, I was out to visit several of our facilities: Lincoln Prairie, Holly Hill, Oaks, Streamwood, Riveredge, River Park, Michiana. I had great visits; saw the commitment to quality in keeping the patients safe in every one of those facilities. To those employees, to all employees of PSI, I thank you for doing the outstanding job you’re doing. Absolutely quality is our number one number goal for this company, and keeping that patients safe and having good outcomes. So, thank you very much for that. We’ll be communicating through our website, once again on our efforts. So, please you can go to our website and find updates about Joint Commission scores, feedback from the field and from our patients concerning quality. Our online PSI University goes live at the end of May. So, a lot of good things happening at PSI. We do expect a good second quarter. We do as of April; the census looks very good for us. Hopefully, we can hold it for another 62 days. And we’ll talk to you again at the end of July. Thanks. Operator: Ladies and gentleman that does conclude today’s conference. We thank you for your participation.