Universal Health Services, Inc. (UHS) Earnings Call Transcript & Summary

All right. Great. I want to thank you all for joining us at the day 2 of the BofA Virtual Vegas Conference. We are presenting today -- it's my pleasure to introduce Universal Health Services. UHS is one of the largest providers of acute care hospital services as well as behavioral health care services. Presenting today, we have Steve Filton, who is the CFO of the company.

And I guess, Steve, maybe where I want to start it off is where we kind of starting of a lot of these presentations. Just trying to understand your view about the pace and the timing of the rebound in volumes off of these than with depressed COVID levels? And I guess, would you just kind of walk through first the acute care side and then how you're thinking about the behavioral side.

Yes. So Kevin, I think like most hospitals in the country, most of our hospitals. So those -- most of our, at least, acute care hospitals saw a peak in their COVID demand, COVID patients, et cetera, in kind of the early January of '21 period. And I think since then, we've seen a pretty steady decline in COVID patients. And I would say after kind of a brief pause maybe until the end of February beginning at the end of February and early March, a relatively steady recovery in non-COVID volumes including on the acute side, your values your traffic, the scheduled elective procedures, generally all of our non-COVID business. And [ we've added ] behavioral, patient behavior as well, I would say that for everything but emergency room volumes, which still remain 80% -- 15% to 20% of pre-pandemic levels. I would say almost all of our other volume metrics, acute care admissions, behavioral patient days, acute care, elective standard procedures, have been hovering in the 95% to 100% pre-pandemic levels. There have been some days and a couple of days where we'll go over prepaid levels. And when we are saying pre-pandemic levels at this point, we're generally comparing ourselves to a comparable 2019 period. And so the momentum seems to be building. We hear this from our own physicians who tell us that as more and more people get vaccinated, they're finding a greater willingness on the part of their patients to schedule procedures that have been more postponed, et cetera. So Our sense is that we'll continue with -- quite frankly, and we've certainly spoken about this before, I think the greatest obstacle to getting back to pre-pandemic levels of demand, particularly on the behavioral side is making sure that we have adequate staff to treat those patients who are really willing to [ part of that ].

Yes. So I guess when we think about that 95% back to normal, how are you thinking about the overall volume? Are you assuming a normal number in the back half of the year? Do you think there's going to be a period of pent-up demand where we're going to see above 100% for some period of time?

So I think our original -- and our current guidance for 2021 did presume that over the first half of 2021, there would be this incremental sort of recovery and that by the back half of 2021, absent another surge due to variance or whatever it might be, but presumably the back half of 2021, we thought and our guidance reflected would look a lot more like the back half of 2019 than it would -- the back half of 2020. And I think that's still our point of view. And again, the sort of gating mechanisms from my perspective on the each side to a degree, I mean there is the demand psychology that is I do think some patients are waiting until they're fully vaccinated before scheduling their procedures But then I think our physicians and their capacity becomes a gating mechanism. So I hear our story both, I think, objectively and anecdotally, that patients now say, okay, I'm fully vaccinated. I'm ready to have my knee implant or my colonoscopy, whatever it is, and they're scheduling it 4 or 5 months out because that's the backlog that their physician office has not so much that the hospital has per se, but that the individual physicians had. And then I think, again, on the behavioral side of the gating mechanism were know that demand is there. We measure it in some inbound calls and Internet inquiries, et cetera. And at least in some cases and in instances, the gating mechanism there is just making sure that we have sufficient staff versus doctors, some nonprofessional personnel. And again, I think our view is that, that tends to continue to improve incrementally as the year goes on where people get vaccinated. It's go back to school, which I think helps working mothers a tremendous amount. I think a lot of the unemployment benefits will ultimately expire, which helps us with the nonprofessional part of our workforce. So all those things can continue to get better as [ we live in ].

Yes. So I guess you've kind of mentioned here that the issue on the behavioral side is staffing. And you just started to answer, I think, the question there. Maybe just talk a little bit more about why that is? I mean for better for worse, there's one comp out there. And so Acadia's been able to staff and grow during this time period, and you've had more difficult time doing it. So I want to get a better sense from you about what you think the relative delta is between the 2 companies? And is there anything the company itself is doing? Or are you more kind of relying on some of these broader trends to fix the staffing shortfall?

So one of the things that certainly I've become much more aware of over the last several years is that while there certainly are sort of macro staffing dynamics in the country and obviously, labor shortages are certainly not specific to health care and on that specific to UHS. But I have learned that they really do tend to be geography specific, market specific. We don't face these issues in every one of our markets. During the pandemic, I think we tended to see that labor issues were heightened whenever they were higher levels of COVID volumes in the market, not even necessarily, but we were seeing more patients, more COVID patients in our specific behavioral hospitals, but there were more patients in the market itself. And look, we've been on the other end of this. For years, I know that in the U.K., Acadia faced labor shortage issues that they talked about very publicly and people would ask us, we obviously have a much smaller footprint in the U.K. than they did, and we're facing those same issues. And again, while sort of at a macro, broad level we were, I don't think we were facing them to the degree that they were, and we used to ask our U.K. folks. It was just really kind of a question of geography, and I think, let's see -- we're just seeing sort of the opposite effect here in the U.S. over the last 1 year or 2. As far as your second question of whether we are just waiting for the broader situation to improve? Certainly not. It is by far -- I think that the single biggest focus of our operators, I sit through -- I think, only a fraction of the conversations that we have on that subject and there's an incredible amount of detailed work at every sort of level, if you will, of kind of the staffing continuum that is looking and evaluating compensation issues of being competitive in every single market. I think there's a different judgment about what it might take to attract more personnel. Whether that's base wage rates, sign on bonuses tuition reimbursement, loan forgiveness, all these things. And again, they often take on a different character in every market. Also an enormous amount of attention to retention once we do hire new employees, nurses, in particular, providing every new nurse with appropriate training and a mentor and a preceptor and making sure that if they want educational opportunities, if those are available to them and discuss their career paths with them. Because there's definitely a point of view that we had at every nurse who is employed by us and quite frankly I think any hospital in the U.S. will ultimately have an opportunity to go somewhere else and make a couple of dollars an hour more. And what you really want to make sure happens is that when that opportunity arises that and you almost feels -- that he or she really has other reasons to want to stay at the hospital, stay in the system that they're in, and we have a more robust future, et cetera. So yes, I mean we can spend an hour just talking about things that we're doing to address those issues. And quite frankly, back to your original question, I mean I think it will be a combination, both the sort of macro dynamics getting better, I mentioned more and more nurses getting vaccinated, kids going back-to-school, unemployment, benefits expiring. All those things, I think, will be helpful. But at the same time, we're doing a tremendous amount of focus to initiatives to make sure that we're out competing and out running our competitors. Quite frankly, we span the spectrum. It's not just on the behavioral hospitals. It's acute care hospitals, it's doctor offices, any other place that a nurse or other professional could work.

Yes. No, that's helpful. I guess it's interesting because the margins on the behavioral side are relatively strong. And I would think that the incremental margins there would have to be even stronger. So I'm just -- it's interesting that you're not able to put in a relatively meaningful wage increase and kind of solve the problem. I guess why isn't it necessarily that easy, I guess, to do?

So that's a great question. And again, as you might imagine, something that we talk about a great deal and that I'm very focused on because as a financial person, I think I share the view very much that you articulated, which is because the dynamic is we're turning patients away and often in large numbers at particular hospitals, if there's a significant amount of incremental wage investments that we could make or human capital investment that we can make. And still, in my mind, have a prudent economic result. The challenge is severalfold. Again, as I suggested to you, Kevin, number 1, we're not just competing with the behavioral hospital across town or next door that's maybe paying $1 or $2 an hour more. In many cases, we might be competing with a not-for-profit acute care hospital who's paying 40% more or 50% more. I mean some of the wages that nurses have been chasing, particularly during the pandemic, are really these wild premium rates. Sometimes they're leaving the market to chase those rates, et cetera. And those are just simply things that we can't deal with. I do believe, again, back to the conversation we were having before, if that's something that in at least -- maybe not in the short term, but at least in the intermediate term, settles down, those opportunities for us is to make those premium dollars are going to decline pretty significantly as the amount of COVID frequency declines, et cetera, but that's an element of it. The other element is what I suggested before. We're certainly not -- we always want to be competitive, and we sort of run that into our hospital time that if our wages are not competitive, everything else we do becomes [ in a moot ]. So we certainly always want to be competitive. But we also don't want to be in the position of competing solely on sort of that last $1 or $2 an hour because at the end of the day, we sort of view that as a losing proposition that we may, for a week, be in the hospital playing a dollar more than everybody else. But next week, somebody else will. And so we're much more focused on these for the longer-term dynamics where once we hire nurse, we really are trying to make sure that they have a lot of reasons to want to continue to work with us, so then our retention rates go up, et cetera. And again, I'm sure you know this. Nurse retention is a significant issue in the U.S., not just for UHS, not just for behavioral nurses. Thinking of the overall nurse turnover in the U.S. is well over 30% a year, which is an extraordinarily inefficient number. But it just sort of outlines or sort of presents what it is that we're working again.

Yes. And it feels to me like this is an important time, might feel like I'm being a bit horse here, but just want to follow-up to some degree. One of the things that we've noticed is that, in general, it seems like the acute care hospitals in any way you're talking about, temporary staffing coming down significantly and labor kind of normalizing because persons won't be on quarantine and some of the things you mentioned about, kids going back-to-school, et cetera, the nurse staffing companies seem to be projecting that, while rates will come down as the year goes on, that in general the supply demand imbalance in nursing workforce is probably going to end the year as bad, if not worse, than it was entering 2020. I guess how are you thinking about that? Are we still going to be in a relatively elevated labor shortage even after kind of these things normalize from what appears to be an acute situation the last couple of quarters? And if so, do you see a point in time when you're going to be able to drive the volumes equal to the demand that you're seeing? Or is this always going to be a gating factor? Or just going to be gating factor for a number of years?

It's a great question. And one -- again, we certainly talked about and are focused on significantly in company. We'll just take a step back and talk about the fact that we were in a pretty tight labor market pre-pandemic, and our national unemployment was down about [indiscernible]. And we have struggled with labor shortages, particularly in behavioral, several years ago, in 2015, 2016. That was really and probably the predominant issue what we chased back then. I think we've made a lot of progress since then, and interestingly enough, and actually one of the more frustrating aspects of the pandemic that was that late in 2019, December '19, January '20 and February '20 when -- right before the pandemic, I think we really felt like we have finally started to get some real traction in that regard. Behavioral demand was reaching sort of levels that we have seen in the early 2010 to 2015 period. And -- but back to your point, I mean labor was still tight. It was not like we had a flush labor market, but I think that we at least sort of we're seeing kind of a status quo in terms of supply demand. So I think it's -- I think what you say is fair or at least what you articulate it staffing company, I think it's fair. I don't think we're going to sort of come out of or emerge from the pandemic with an excess of labor. I think it's still going to be a pretty tight labor market, et cetera. But I also think it's naive not to recognize that the pandemic itself created an enormous amount of supply/demand inbound. It took a lot of nurses and put them on the sidelines because they have the virus and they didn't want to work and they would burn out, and a lot of those nurses will return. It gave a lot of nurses, as I was suggesting before opportunities to make really premium dollars. And we absolutely saw tons of examples of nurses chasing those dollars. But those opportunities are going to diminish clearly as the virus recedes, et cetera. So again, I think intuitively and objectively, the supply/demand will come back into some sort of balance. Will it still be a tight labor market? Sure. And that's where I think we're really focused on what are the things that we have to do to outcompete our peers in a particular market because it's not like nurses are just going to be flooding into our doors. And we certainly don't have that perspective [indiscernible].

That's helpful. And then I guess as we think about the return in volumes, how should we think about the margin? This is still the thing that I'm struggling with the most because it feels like during the pandemic, not that it was by any means easy to manage cost, but I think it's a little bit easier to manage costs when volumes drop and its low acuity volumes dropping. And the payer mix is strong. As volumes come back, I would assume that the lower [ Q2 ] volumes be coming back and the payer mix would be more Medicare and Medicaid. And that to me, it seems like there should be negative implications from a margin perspective. So how are you thinking about that? And is that offset by fixed cost leverage? Or are you expecting kind of a net pressure on margins as volumes normalize?

Yes. So I think it's, again, worthwhile to take a step back and to really think about for a moment, sort of what the negative impacts from a financial perspective were of the virus and the increased amount of virus patients. And how -- when the virus began in March of last year, there was a point of view and honestly, I held it to a degree that, look, this was really just kind of a flu-like event, maybe on steroids, obviously with more serious medical implications, et cetera. But it really was for the first few weeks, and maybe I'm not going to thinking about it in that regard. But obviously, what was flawed in that assumption or presumption was what I describe as the crowding-out effect. So what really drove our negative financial results in the pandemic were not the COVID patients themselves, they were less profitable. They're medical patients who are -- have always been less profitable, surgical or procedural patients. But they weren't unprofitable, and there was government support for them, et cetera. So again, we made a decent margin, et cetera, although it was lower than our overall margin. But the real issue was they were crowding out both physically and psychologically are better patients, which really were our surgical and procedural patients. So at the beginning of the pandemic, our elective and surgical volumes were down 65%, 70%. Obviously, we recovered from those levels in almost a couple of months. But even towards the end of the year, we were still down 15%, 20%. And even as we discussed earlier, we're still maybe a 95% to 100%. We're getting there, we're not quite there, but it's that exchange. So to your point, so the COVID patients are sicker, they stay in the hospital longer, their length of stay is twice what our average patient is, they're more expensive, they can consume more expensive drugs, et cetera. And again -- so the notion is everything I think you say is true. We'll probably see more Medicare and Medicaid patients, so that we didn't have the favorable mix shift that kind of the HCA had, maybe because of that we had more COVID patients. But it's not the payer mix. It's not the volumes per se. It's really that service mix that shifted so unfavorably who's return will really, I think, drive the improvement in margins because we will see more medical patients or procedural patients who clearly have a much higher-margin than the medical patients, particularly the COVID medical patients.

Okay. That's helpful. And I guess one of the things when we think about UHS is historically, the really strong balance sheet that you guys have operated with, which is a huge asset. But I think in a lot of people's minds, including mine, you're under-levered and you could be more aggressive in deploying capital. How do you think about capital deployment priorities? Where you think your leverage should be? And are there opportunities to deploy capital to more meaningful way over the next year or 2?

So first of all, I think that I share, and I think we, as a management team collectively share your view that we're currently under levered. On the year-end call, somebody, could have been you, and I remember, asked Mark a question about external opportunities, acquisition opportunities. And he made the point that for many years, including even during the pandemic, we continue to look at and evaluate and think evaluating in a serious way multiple acquisition opportunities, which for the most part, for a variety of reasons, have not really materialized in any significant way. We've got a few small transactions over the last several years. And that, I think, has been the sort of major variable in determining what an appropriate leverage level is and how we should be deploying capital because everything else in or the capital plan is relatively predictable, both our cash inflows. Obviously, for a while during the pandemic, that was a bit more uncertain. But generally, more predictable CapEx is relatively predictable, et cetera. And again, the external M&A tends to be the sort of the wild part, will be unknown. And look, we talked about in our guidance for the year -- interestingly, in our guidance for 2020, we have talked about a elevated share repurchase program. We have been repurchasing about $400 million worth of stock every year prior to 2020. We went into 2020 guiding to the effect that we were going to double the level of share repurchase to $800 million. And in fact, during the first quarter of 2020, we repurchased $200 million. We were well on our way to meeting that when the pandemic hit and we suspended share repurchase. We've resumed that sort of $750 million, $800 million annual level of share repurchase in this year's guidance. And my guess is if we don't see more external opportunities, number one, we'll tend to front-end load some of that share repurchase activity because I think we have to view that our stock will just continue to rise as our earnings increase. And number two, I think, ultimately, we're probably likely to increase the total amount of return the capital to shareholders mostly through share repurchase, [ quite specifically ] at least dividend as well because I think we share -- again, share the view the we lever that -- our leverage levels while we're probably not -- probably -- we're certainly not comfortable with some of the levels one of our peers have done over years, we're certainly more comfortable or [indiscernible] comfortable with some leverage levels that are certainly higher than what we have currently.

Okay. So this conference normally is in Las Vegas. And so I really missed not doing our Vegas tours the day before the conference for last 2 years. So looking forward to doing that again next year. But maybe since we normally would be there, can you give us a little update on how the Vegas market is performing, as that feels like a market that certainly has been resilient over the past several decades, but maybe is the most economically sensitive? So how is that market, in particular, progressing?

Yes. So I think that during the pandemic, the Vegas market has not materially underperformed the rest of the portfolio. But I think incrementally has, and I think it's for 2 reasons. One is the one that you cited, which I think it's been a market that is more economically sensitive, particularly to the pandemic than other markets. Tourism dropped dramatically, certainly early in pandemic, et cetera. But also because Nevada, and I think Las Vegas, in particular, was a geography that had higher levels of COVID incidence. So that crowding-out dynamic that I talked about before was more evident and more exacerbated in Vegas than it's been elsewhere. And actually for a variety of reasons, sorry, that we're not in Vegas as well. But partly because I think it would be good for investors to hear directly from our operating folks out there. They're pretty bullish about the recovery and I kind of think a lot of that is what they hear from their gaming industry peers who talk about convention and conference bookings and hotel bookings that really post summer and post Labor Day start to really seem to be bouncing back pretty significantly. You mentioned the fact that I think Vegas has been resilient over the years. I've personally been, at least, [indiscernible] just many number of times about how resilient [ Vegas ] been and just seems to be a repeat of that. Again, if people while as they're able to travel, as they're able to attend conferences, et cetera, Vegas seems to be the one place that really want to do more than any other. And there's even speculation that Vegas will benefit from people not traveling internationally, et cetera. We saw that, I think, after the Gulf war, et cetera. We saw that dynamic and it seems to be like that repeating itself again. So again, I think our Vegas folks are very bullish about that, and we as a company are bullish. We have continued our capital plans in Vegas and expansion activities because we had a view that we weren't precisely sure that when the recovery would start and at what pace, but we were fairly certain that it would recover to pre-pandemic levels and above the level [indiscernible].

Okay. And then, I guess, this is something we ask a lot of the companies. Obviously, COVID has impacted a lot of things the way care is provided in the market, the way companies are operating their own businesses. Is there anything that you're doing during -- or have done during the pandemic that you feel like it's something you're actually going to keep doing post when things get back to normal?

Yes. I mean, look, I think -- first of all, I think we are much better prepared for an event like this again in the future. We certainly -- we're always prepared to treat individual patients who had transmittable -- easily transmittable diseases, et cetera, but not necessarily at this large scale I guess one thing I would certainly point to is the supply chain. Obviously, I think prior to the pandemic, we've made things like PPE as commodity sorts of items that we did receive the large supply, et cetera. A lot of those items came from a single geography. They came from China. And I think what -- and this obviously is not a UHS specific lesson. I don't believe. But I think what the hospital industry has learned is that the supply chain needs to be much more diversified, geographically, company wise, et cetera, so that should we face like this, I think there would be much less of an interruption in the supply chain that we saw at the beginning of this.

All right. Great. That's perfect. So I think that's all we have time for. So thank you, Steve, for joining us, and I look forward to doing this in Vegas and hopefully getting to see a stronger economy.

Well, thanks, Kevin.