Chindex International Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Chindex International, (CHDX)

Chindex International (NASDAQ:CHDX)

Q4 2012 Earnings Call

March 14, 2013 8:00 am ET

Executives

Roberta Lipson - Co-Founder, Chief Executive Officer, President and Director

Lawrence Pemble - Chief Operating Officer, Executive Vice President, Director and Chief Financial Officer of Chindex Medical Limited

Analysts

R. Gregg Hillman

Colin Lee

Operator

Good day, ladies and gentlemen, and welcome to the Chindex International Fourth Quarter 2012 Financial Results. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn conference over to your host, Ms. Roberta Lipson, CEO of Chindex International. Please go ahead.

Roberta Lipson

Thank you. Good morning, and welcome to Chindex International's Fourth Quarter 2012 Conference Call. Joining me on the call today is Larry Pemble, our Chief Operating Officer.

Before we proceed with the summary of operating results for the period and an update on recent events, I'll ask Larry to read the Safe Harbor statement. I'll make some brief comments, and Larry will then review the financial results. Finally, we'll open to Q&A.

Larry, please proceed with the Safe Harbor statement.

Lawrence Pemble

Yes, thank you, Roberta, and good morning, everyone.

Please note that this call will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC, including in our Form 10-K for the year ended December 31, 2012, which will be filed on Friday, March 15. Chindex does not undertake any obligations to update any forward-looking statements, except as required under applicable law.

Roberta Lipson

Thanks, Larry. As Larry noted, we announced our quarterly financial results on Wednesday after the market closed. An earnings release is now available on the company's website.

I'd like to begin the call with highlights about our financial performance in the fourth quarter and full year of 2012. Over the course of the year, our quarterly financial results have consistently reflected growth in existing facilities and increasing contributions from new facilities and new service lines. We are particularly proud to have finished 2012 with a solid quarter, in terms of both revenue and profitability.

For the fourth quarter, revenue grew 36% year-over-year to $43.5 million, representing the strongest ever quarterly revenue from healthcare services. Adjusted EBITDA grew 45% year-over-year to $9 million, representing a 20.6% adjusted EBITDA margin. The fourth quarter is historically our strongest quarter, and proportional share of revenue contributions from the main service lines remain consistent with historical levels. However, it is worth noting that as Beijing and other major Chinese cities experienced severe air pollution this winter, we saw a higher-than-usual number of patients checking in our clinic and hospitals for respiratory illnesses. For the full year of 2012, revenue grew 33% year-over-year to $152.4 million. Adjusted EBITDA grew 49% year-over-year to $28.2 million, representing an 18.5% margin. These data points are at the high end of our guidance range and illustrate our ability to execute on our expansion plans.

Next, I'd like to provide you with an overview of the progress we've made in our ambitious build-out plan over the past year. Beijing, our largest metropolitan market, remains our major source of revenue growth and thus, is a major focus of our expansion plan. Over the past year, we have introduced new advanced technologies here at Beijing United, UFH's flagship hospital, clinics and diversified services. At the BJU main campus, by the end of 2012, we have put into operation 70 available beds out of a total of 120 licensed beds. In step with demand growth, we'll continue increasing available beds in phases as we continue to move outpatient services to our off-campus clinics. Our marketing team has been employing multiple channels, including traditional media, social media and community outreach, to increase awareness of our recently enhanced surgery expertise and our other new service lines. Admissions have been increasing for our cardio and neurosurgery units, which have been making good use of our improved operating theater facilities.

During the fourth quarter, we completed the construction of Beijing United Family Rehabilitation Hospital. Currently, we're in the final stage of installing equipment and obtaining licenses for services. Based on government approval guidelines, we expect to start admitting patients as early as the second quarter, and we'll ramp up the new facility over the 2013, 2014 period. We're very excited about the potential of this premium quality rehab services hospital, the first of its kind in China. Our target patients are those recovering from surgeries or debilitating illnesses in the neurological, cardiac and orthopedic areas. As we continue building up treatment and surgical services at BJU's main campus, the rehab hospital will provide a valuable extension of our integrated health care offering.

In December of last year, we announced the opening of Beijing United CBD Clinic. The clinic's location in Beijing's preeminent commercial and lifestyle center not only meets local market demand, but offers a wide-ranging marketing platform to elevate UFH's profile among expatriates and affluent Chinese nationals who live and work in this area. At the New Hope Oncology Center, we reported last quarter that we received final certifications for the operation of our state-of-the-art linear accelerator, which now completes our offering of full ambulatory cancer treatment. Our patient census is increasing and our reputation in the field of cancer care is growing rapidly as well. As we announced last quarter, the United Family Home Health, or UFHH program, is another groundbreaking new service that United Family has introduced to China. It is early in the story but we feel confident in UFHH's long-term potential and its importance in deepening our distinctive integrated care offering. The extremely positive feedback we've received from the initial patients and our medical professionals that serve them reinforces this confidence.

In Shanghai, as we previously discussed, the dental clinic affiliated with the Shanghai Hospital is domiciled in a large upsized building, only a portion of which was being used for clinical activities. Fortunately, we have recently obtained approval for renovation of the rest of the building, which will more than triple the size of the clinic space. We expect the renovation to become a major component of our facility's expansion in the Puxi area. As we move more outpatient services out of the hospital in Shanghai, it will allow us to expand the in-patient room availability in the hospital by at least 10% this year.

Meanwhile, the Huashan Pudong Hospital, which we manage through a shared management structure, continued to grow its services as well. As part of our strategic plan for the Shanghai market, we are also actively looking for other future hospital sites in Pudong. In Tianjin, the 26-bed facility is still in the startup phase but is ramping up nicely. Tianjin is our first hospital in a second-tier city in China. We are integrating our United Family network support services and moving rapidly through the learning curve associated with the new location for our primary care model. In Guangzhou, our joint venture partner has begun construction on the foundation of the hospital site in that city. We hope to take over for decoration and fit-out of the building in 2014.

Consistent with our insights into the nature of the market opportunity for private health care services in China, we will continue pursuing a 3-tiered strategy, focusing on geographic and service expansion and development of superior human capital. In terms of geographic expansion, we'll continue to explore opportunities to replicate and build upon our successful services model to additional sites within our existing markets, as well as to other affluent metropolitan markets in China. Regarding services expansion, we'll continue ramping up newly introduced services and deepening the quality and reach of services that fit our integrated health care platform. With our already highly renowned human resources, we intend to broaden their clinical reach and training activities. Expanded management and service training programs, in addition to our world-class nurse training program, will ensure that our talent pool continues to grow with our organization. We're also working on plans to establish residency and certification programs.

I'll now turn the call back to Larry to review our latest financial results in more detail.

Lawrence Pemble

Thanks, Roberta. For the 3-month period ended December 31, 2012, our revenue was $43.5 million, an increase of 36% over the prior year period. On the cost side, development, preopening and startup expenses were $2.8 million in the quarter, in line with our expectation. These charges related to a wide array of key new infrastructure projects vital to supporting the company's expansion strategy. In Beijing, these expenses principally included those for the expansion of the Beijing United Campus, lease and development expenses for Beijing United Family Rehabilitation Hospital and those for the construction of a clinic in the Central Business District. Outside of Beijing, these expenses included those relating to the ramp-up of the Tianjin hospital, the ongoing expansion of our Pudong operations in Shanghai, as well as the clinic expansion in Puxi.

It is worth noting that in 2012, we witnessed the first signs of positive impact from previously accumulated costs incurred for wide-scale expansion in Beijing. Many core departments at the BJU main campus, such as pediatrics, family medicine and OB/GYN, experienced noticeable growth due to pent-up demand that we could not address when such departments operated in more limited facilities. Development expenses in 2013 are now migrating to new service lines, such as UFHH, and new training programs and into new geographic territories, which lie outside our core services provided by the BJU main campus. Advances into novel areas naturally take more time to ramp-up. In addition, in 2013, we will be investing heavily in new network services. All told, 2013's development costs are expected to take longer to recoup, and we expect to plateau somewhat from 2012's sales and adjusted EBITDA growth rates.

In 2012, salary and compensation expenses rose by 29% year-over-year to $22.3 million. This has been driven by the additional human resources that support our new hospital in Tianjin and staffing increases to match our facilities expansion in Beijing and Shanghai. We also have begun recruitment of a new team of medical professionals and staff for our Beijing United Family Rehabilitation Hospital, which will open in 2013. Our key operating metric, adjusted EBITDA, was nearly $9 million, an increase of 45% over the prior year period. Adjusted EBITDA margin for the fourth quarter was approximately 21% and nearly 19% for the full year period. Both are in the high end of our guidance range. Including all expenses, income from operations for the fourth quarter of 2012 was $4 million compared with $2.1 million in the prior year period. Our quarterly results also include $857,000 of noncash stock compensation expense compared to $630,000 in the prior year period, depreciation and amortization of $2.2 million compared to $1.5 million in the prior year period. This quarter's high figure is the result of increases in fixed assets that have been put into service over the past year.

A tax provision of $2.3 million in the 3 months ended December 31, 2012, compared to a provision of $835,000 for the same period last year. As we have noted previously, our tax provision is heavily impacted by tax accounting rules that prevent us from taking the benefit of net operating losses in development and startup entities, such as Tianjin United and Beijing Rehab, until they demonstrate their profit potential. In this quarter, the recorded tax provision of $2.3 million would have been reduced by approximately $1 million if we could have recognized the benefit of startup entities. The nature of these taxes is detailed in Note 11 of our 10-K filing. In the future, as our development entities mature and demonstrate future profitability sufficient to utilize the net operating losses generated in these startup periods, we expect to be able to recognize the accumulated tax benefits.

We recognized income of $1.6 million for our Chindex Medical Ltd. joint venture in the quarter compared to immaterial income in the prior year period. These results include $3.6 million in income for transition services related to the decision by one distribution partner to distribute their products through direct marketing operations. We remind investors to view the results of our investment in CML with caution and continue to exclude the fluctuations in the CML equity income when evaluating us a pure-play healthcare services business. As we have previously noted, 2012 was a year of strategic positioning for CML. The company is currently investing -- investigating potential M&A projects, as well as expanding its product offerings. Over the 2012 period, it added several new product lines in areas of robotic surgical systems, computed tomography imaging systems and oncology treatment modalities. Investment in product registrations and presale marketing during the year and continuing into the 2013 period will provide the basis for sustained growth in new technology areas in the CML distribution businesses. The potential M&A activities are in line with the long-term strategic plan for the company.

Including the contribution from the CML venture, we recorded GAAP profitability. Our GAAP net income in the fourth quarter was $3.5 million or $0.20 per diluted share compared to a GAAP net income of $1.2 million or $0.07 per diluted share in the prior year period. I would also like to discuss our full year financial results. Specifically, revenue from healthcare services increased 33% to $152.4 million from $114.4 million in the prior year period. This result topped our guidance range. Development and startup expenses in the full year 2012 rose to $11.2 million from $7.8 million in the prior year. Income from operations increased 7 -- 67% to $9.5 million compared to income from operations of $5.7 million in the prior year.

Adjusted EBITDA increased 49% to $28.2 million from $19 million in the prior year. GAAP net income for the full year 2012 was $4.1 million or $0.24 per diluted share compared to GAAP net income of $3.2 million or $0.20 per diluted share in the prior year. Foreign exchange loss for the full year 2012 was $373,000. As of December 31, 2012, we had $33.2 million in unrestricted cash, cash equivalents and investments. Our upcoming 12-month capital expenditure plan totals up [indiscernible] and up to $12 million for existing facilities, maintenance and organic development. Our patient service receivables were approximately $19.6 million as of December 31, 2012. PP&E increased to approximately $98 million.

In the fourth quarter, it became more apparent that strong top line growth momentum has begun mitigating the negative impacts of high development expenses and tax provisions. While this reminds us that the Chindex story is one of growth and economies of scale in the long term, I want to stress that 2013 will primarily be a year of continued expansion, ramping up new facilities and new service lines and other investment initiatives. Therefore, we encourage investors to continue using non-GAAP metrics to evaluate our performance. In particular, we plan to beef up investments in our operating infrastructure and technology platforms that are necessary to support our rapid growth.

For example, we are investing in a customer service center, which is dedicated to managing patient increase and processing appointments. This is a step to further optimize the patient experience with our premium quality services. We are also investing in our IT infrastructure [indiscernible] communications, among our growth investments. These expenditures will be either expensed or capitalized in the coming quarters and may dampen our GAAP bottom line in the near term. However, such capital expenditures will support us to yield greater return for our shareholders over the long term. In 2013, we will continue growing at a very rapid pace. As Roberta noted, our strategic priorities will focus on continuing the growth of existing facilities, ramping up new facilities and service lines and expanding across geographies and service offerings. These efforts may take some time to drive high consolidated growth rates.

Regarding our financial guidance for the full year 2013, for the top line, we expect to be able to deliver year-over-year revenue growth in the mid- to high-20s, with annual revenues of approximately $193 million to $196 million. For adjusted EBITDA, we expect growth in the high- to mid-teens -- excuse me, mid- to high-teens, resulting in $32 million to $33 million in adjusted EBITDA return. Development and startup expenses are expected to be approximately $8 million for the first half of 2013 and in the range of $14 million to $15 million for the full year 2013. The development, preopening and startup expenses will be primarily resulting from the startup period of the newly opened hospital in Tianjin and the preopening and startup expense of the Beijing rehabilitation facility.

That concludes my comments on our financial results. I will now turn the call back over to Roberta.

Roberta Lipson

Thanks, Larry. In the exciting China health care market, Chindex offers a unique combination of consistency and growth. Whereas many investors have become interested in the health care service sector in China, United Family is the only company with a track record of 15 years, allowing us to have grown from one small primary care community hospital to a network, which offers continuity of care from prevention and primary services in our outpatient clinics to advanced diagnostics and medical and surgical care in our 3 full service hospitals, to cancer treatments in our New Hope Center, as well as home health for postoperative, chronic diseases and concierge services and soon-to-be, in our state-of-the-art, world-class rehabilitation hospital. Not only is our multicity hospital system joint-commission accredited and operating to a real international standard of quality, but we also enjoy brand recognition on a national basis. United Family Healthcare is the only nationally recognized hospital system renowned for quality and premium service, and Chindex is the company best positioned to realize the potential of the growing demand in China for premium health care services.

That concludes our prepared remarks. And now let's open the call to Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Gregg Hillman of First Wilshire Securities.

R. Gregg Hillman

Can you talk about -- for the home health care business and like, nursing homes, I know, like, the strategy in some hospitals in the United States, is to by -- in nursing homes to have them feed the census in their hospitals. And is -- will the home health care business help to increase the census of the hospitals?

Roberta Lipson

Gregg, that's the concept -- it's part of the concept because, I think, it will be a nice business in and of itself. But we're finding that the home health business, even though it's in very early days, is bringing customers that would not necessarily intuitively come to the hospital. So it's an older demographic, and once we get that relationship, it means that, once they need to be hospitalized, there's a very good chance that they'll be using our facilities. So right now, there's -- the majority of the patients are elders who is not coming in to come to the hospital on a regular basis, older people with chronic diseases, some postop patients and a lot of postnatal patients. So that's the package that they can add on to their birthing package. So those people, the postnatal people are people that would have been in the system anyway. But these elder patients and people with chronic diseases, this we're finding to be a very nice way to get people of the demographic that wouldn't naturally have come to the hospital in the first place.

R. Gregg Hillman

That's great. And I think you just opened a health -- you just offer that service in Beijing, or is it offered in other cities?

Roberta Lipson

No, so far in Beijing only. We hope to extend to other cities. In fact, I think that there's going to be a training in Tianjin next month, so they can start there as well. But eventually, we'll move it out. We want to really perfect the model before we go to too many different geographic areas.

R. Gregg Hillman

Okay. And in terms of the top national level, is there -- I guess both of you must be kind of constrained in your time because things are so busy and so much is going on. Is there like a chief operating officer now at the company? And are you going to change the, like, the higher management structure to support the growth?

Roberta Lipson

Well, Larry is actually the COO of Chindex International, and he oversees things on a corporate level. Here in Beijing, we have a corporate United Family Healthcare level operating team, which is a pretty extensive group of very talented people, including myself; Dr. David Rutstein, who's our Chief Medical Officer for the group; Brent Johnson, who's our Vice President of Shared Services. And then, we have, on that team also, shared services expertise in marketing and rehab. We have a vice president of information technology. So it's quite a big team of people that are dealing with the not only development of operations of standardizing the operations of all of our facilities.

Operator

[Operator Instructions] Our next question comes from Colin Lee Luzich Partners.

Colin Lee

Can you just detail the occupancy rate for the different cities in Q4 2012?

Roberta Lipson

Yes. Well, I don't think we've published specific operating rates for each city, but the operating rates -- occupancy rate, for example, in Shanghai, where the facility has been around for quite a long time and is getting to be quite mature, is getting very close to capacity. But as I mentioned, we are now building out a bunch of outpatient services in an off-campus facility. And we'll be able to increase the number of beds, and we'll have some more capacity there. Beijing, where we've just tripled the number of beds that we had originally -- or well, we just -- we have now 70 beds in operation, and it's somewhere around 50% occupancy in Beijing, about half. And Tianjin, which is a newer facility, obviously, has a lot more capacity to go. So it is all very dependent on the life cycle and the level of maturity of each particular facility.

Colin Lee

Got you. That's helpful. My second question is, is the CapEx for the Beijing expansion, is that under the amount list -- budgeted in the JPMorgan investor rights agreement? I just want a sense...

Lawrence Pemble

Yes. So that the -- I mean, that goes back some time now so that the original JPMorgan financing package provided for this Beijing expansion, which originally did not include the rehab hospital, we reloaded that program last year. So the scope of the Beijing -- the JPMorgan financing incorporates 2 basic projects: the expansion of the BJU main campus, which we completed late in the -- toward the beginning of the fourth quarter last year, with the opening of the final ORs in that building; and the rehab facility, which, as we've mentioned, will open later on this spring. So yes, so that's -- those are the kind of project scope locations under the JPMorgan umbrella from 2007 or whenever that financing was.

Colin Lee

Got you. So is that a kind of a stale number based on what I'm hearing, or is that kind of...

Lawrence Pemble

Stale number, I'm not don't sure, I don't -- how do you mean stale number?

Colin Lee

Well, as in, since it opened 2007 and you guys reloaded it with the rehab hospital, that kind of forged a RMB 40 million number. That's not an accurate number or is that still kind of accurate? How should I think about that?

Lawrence Pemble

Well, the financing -- the original JPMorgan funding was $50 million, which was we -- the original scope of that project, if you go back to the publicly filed documents, incorporated an expansion of services in the Beijing market and the expansion and the initiation of services in Guangzhou. Because of the land conversion issue that's taken some time in Guangzhou, we migrated the project scope to the rehab hospital, which was, at the time of the original financing with JPMorgan, was not [indiscernible] project at that time, but ended up moving much faster than the Guangzhou United Family Hospital project.

Colin Lee

Okay. Great, that's helpful. My third question is where did the local partner share of the operation show up in the financials?

Lawrence Pemble

Those, in operating expense. So you see, that's a good question. There's no minority interest in our income statement, so these are not equity -- these are not equity-based joint venture relationships that we have in Beijing or Shanghai. They're contractual joint ventures and so we recognize as a management fee basis in operating expense for both of those interests.

Colin Lee

Is that the same thing with the BJU as well, where I think...

Lawrence Pemble

Correct.

Colin Lee

Okay. And they showed up in the operating expense, and they don't even pop up in the balance sheet in noncontrolling interests, right?

Lawrence Pemble

No, no, that's -- yes, yes that is correct.

Operator

[Operator Instructions] Our next question is a follow-up from Gregg Hillman of First Wilshire Securities.

R. Gregg Hillman

Larry, I had just a question about the Fosun exercise of additional -- purchasing additional shares. Did that happen? Or can you -- when is that going to happen?

Lawrence Pemble

It has not happened yet. It's still in process, no change in intent. Fosun Pharma just kind of, in recent memory, completed their listing last year. They were one of the largest IPOs in Hong Kong last year. And so their entire operation got focused on that process. They've kind of just recently completed that. And we -- I can't give you a timeline in particular, but we do expect that an additional investment in Chindex International to go ahead as originally planned.

R. Gregg Hillman

Okay. And where is that security listed by the way, Fosun Pharma?

Lawrence Pemble

Main board [indiscernible] .

Operator

I'm showing no further questions at this time. I'd like to turn the conference back over to Ms. Roberta Lipson for any closing remarks.

Roberta Lipson

Thank you all very much for joining us, and we'll keep doing our best to keep growing the way we've been. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!