Donald Sapaugh - President
Mike Griffin - CFO
Jeffery Cohen - Ladenburg Thalmann
Sanjay Nayar - Bharat Capital
Dennis Van Zelfden - Brazos Research
University General Health System, Inc. (OTCPK:UGHS) Q3 2013 Earnings Call February 4, 2014 11:15 AM ET
Ladies and gentlemen, thank you for standing-by. Welcome to the UGHS 2013 Third Quarter and Year-To-Date Earnings Conference Call. As a reminder, this conference is being recorded and maybe accessed through the UGHS’ website www.ughs.net. A replay of the conference call will be available one hour after the call through February 12, 2014 at 9:00 AM Eastern Time, by dialing 877-344-7529. International or local participants dial 412-317-0088 and entering the conference ID number 10040663.
Before we get started, I would like to remind everyone that any forward-looking statements made during this call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. Such forward-looking statements are based upon current expectations and there can be no assurance that the results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of important factors and risks, which are identified in our press release and our Annual and Quarterly Reports filed with the SEC.
These forward-looking statements are based on information available to University General today and the Company assumes no obligation to update statements as circumstances change. During this presentation, we will refer to non-GAAP financial measures such as EBITDA and adjusted EBITDA. A reconciliation of such measures to the most comparable financial measures is contained in our previous press releases, which can be found on our web site at www.ughs.net.
As a reminder, we are hosting an Investor & Analyst Day in Houston, which began yesterday and will be continuing into today. I would like to thank those of you who have taken the time to join us at the Four Seasons in Houston and have the opportunity to visit our flagship hospital within the city and our other facilities in and around the Texas Medical Center. Given the tremendous interest in the event and attendance from our shareholders, we anticipate hosting similar investor-oriented events in the future.
Now I would like to focus our discussion back to the primary purpose of today’s conference call. University General Health System continues to successfully execute on its physician centric, diversified, integrated, delivery system demonstrating significant sequential revenue growth.
I would now like to turn the conference over to Donald Sapaugh, President at University General Health System.
Thank you, Amy and good morning and thank you all for joining today’s call. I have with me today Mike Griffin, Mike is our Chief Financial Officer; Ed Laborde, our General Counsel; and Ms. Kris Trent, our Chief Accounting Officer; all of whom will be available and assisting me today with today's call.
For the nine months ended September 30, 2013 revenue totaled 127.2 million, with an adjusted EBITDA of 10.7 million. This compares to 84.2 million in revenue and adjusted EBITDA of 29.5 million for the same period in 2012. This is an increase in revenue of 51% year-over-year. The primary driver of this growth came from our general acute care revenue from our flagship hospital in Houston, Texas which was exceptionally strong year-to-date.
This reflected higher occupancy rates, due to the continued increase in adjusted patient days which refer to the increase in in-patient and out-patient volume. This acceleration in performance began developing in 2012 and is expected to continue into 2014. We’re grateful for the patients and the support of our shareholders, while we worked closely with our auditors to finalize the filings and we’ll work diligently to regain the trusts of our loyal shareholders for a timely delivery of both financials and regulatory filings in the future.
As we’ve done on previous calls, I’d like to recap our corporate strategy and our long-term objectives. We are an in-network model versus an out-of-network model. We are -- and thus we reside at a mainstream of the healthcare division. As an important note to emphasize, healthcare reform is dynamic; it did not began with the Affordable Care Act, but has been ongoing for decades and will continue for many years to come. Thus changes in reimbursements are ongoing regardless the political environment and other outside governing body.
So the development of an integrated ecosystem is complex, it requires tremendous coordination that has consumed a large portion of our time, effort, energy and other resources, but which we believe will yield tremendous benefits to our shareholders over the long run. As such, I want to first briefly discuss our investments and hospital expansion projects in and around the Houston area and Baytown, Alvin, and Pearland, three suburbs near our Houston hospital. Each of these will have two components, a real estate component and an operating component.
The real estate entity will be owned by a UGHS affiliate as an equal partner in the case of Baytown, a majority partner in the case of Alvin and a minority partner in the case of Pearland. The operations at each of these hospitals would be 100% owned by another UGHS affiliate, all of these facilities we believe are in underserved markets will complement our existing operations and will be non-dilutive to our common shareholders.
In order of expected openings, let me begin by talking about Baytown. We have existing operations in the Baytown area, including hospital out-patient department, an ambulatory surgical center, a sleep center, diagnostic imaging. We also have a polyclinic and other related strategic relationships. Thus we’ve already created a strong physician network in the areas that will be severed by the hospital.
Our plans have been reviewed by the State of Texas and have contributed to the demolition of a former hospital. This would become a 48 bed general acute care hospital with a very large emergency room, ICU, multiple operating rooms will also available to provide for minimal invasive treatment. We anticipate opening in the first quarter of 2015. The contribution of the equity by the current land owner is valued at between $3 million to $4 million. Again, we anticipate our participation in this to be non-dilutive to our current shareholders.
Alvin; Like Baytown, This is a market where we have developed relationships with key physicians over a period of nearly 2 years, and where we have a polyclinic and modally owned ambulatory surgical center within reasonable proximity. This is the natural expansion for us and will represent a predominantly ER driven hospital with initially 15 beds, a large emergency room. Currently, there are approximately 16,000 ER visits from this community annually which will allow us to take advantage of the high demand in that area. We anticipate opening the hospital in the second quarter of 2015.
The contribution of equity by the current land owner is valued at roughly $2 million to $3 million. We’ve also established great relationships within the community, including Alvin Community College, the city and the county. At the end, this expansion it will be non-dilutive to our existing current shareholders.
Pearland; this small market is the fend area of Houston and grossly underserved. The city's population has grown nearly 6-fold in less than 30 years. We anticipate the hospital to include 50 beds with a very large emergency room, operating rooms, diagnostic imaging, a medical office building, senior living community, and other ancillary services. We anticipate opening this faculty in the third quarter of 2015.
The contribution of land to the real estate company is roughly $10 million to $11 million. With each of these we will have great leverage of complimenting our flagship hospital at Houston, and our development partners will contribute significantly for the equity and debt financing of these projects.
As you can see the hallmark of our strategy is growth. We believe that in the development of a regional healthcare network will create a solid foundation that can withstand changes in reimbursement, revenue mix, case mix, and patient patterns.
In addition to Baytown, Alvin and Pearland we will continue to extend our reach within Houston, the Houston metropolitan area while expanding our regional delivery system in Dallas. This growth will be reflected initially in higher volumes and revenues which will then be seen in the bottom-line. We’re confident that this strategy will allow UGHS to be successful both operationally and in building substantial shareholder value within the investment community.
Finally, we believe that the future of healthcare is to deliver the highest quality of care in a most cost effective and least restricted patient environments. Going forward, the acquisition and development of hospital out-patient departments or HOPDs will continue to be a key component of our long-term growth strategy.
With that said, I want to turn the call back over to Mike Griffin, our Chief Financial Officer, so that he can share more specifics about our financial performance. Mike?
Thank you Don. Given the scope of our business, we believe it is important to discuss certain aspects and the performance by segment. Our total revenues for the third quarter of 2013 increased by 13.5 million or 37.6% to 49.6 million compared with 36 million in third quarter of 2012. The revenue increase was primarily attributable to a 26.5% increase in the number of surgeries performed by UGHS. The number of surgeries totaled 2,603 in the third quarter of 2013 compared to 2,058 for the third quarter of 2012.
For our combined hospital segment, our total revenues for the first nine months of 2013 increased by 36.3 million or 47% to 110.6 million compared with 75 million for the same period last year. The revenue increase was primarily attributable to a 10% increase in our average daily census at the Huston hospital which for the 9 months ended ’13 improved to 43, compared with 39 for the same period last year. This increase in net patient service revenues was also driven by a 20% increase in surgical volumes which totaled 6,945 for the first nine months of 2013, compared with 5,420 in the same period last year.
While net patient service revenues increased we simultaneously embarked upon marketing and advertising strategies that while improving total revenue that cost the Company approximately $10 million through 09/30/2013. We have analyzed the effectiveness of these initiatives going forward and anticipate a substantial reduction contributed approximately 2.5 million annually in 2014. This should positively contribute to total expense savings of nearly 9 million in 2014.
We also experienced a significant increase in salaries, wages and benefits, some of which reflected increased staffing levels and compensation increases within the industry that were necessary in order to retain the quality staff we have recruited. In addition to cost associated with the HOPD acquisitions and integration by nature of lower margin on a higher volume of admissions are critical to our multispecialty physician centric regional diversified healthcare delivery system.
As previously discussed, during our December shareholder conference call, we anticipate two currently out-of-network managed care contracts to go in-network during the current quarter, which should improve volume, increase overall revenue and reduce the provision for doubtful accounts during 2014.
Secondly, I would like to specifically discuss our 111 bed acute care hospital located in Downtown Dallas. While this project has developed more slowly than anticipated, we are encouraged with our increased surgical volumes and average daily census from the time we took over the facility in 2012.
We have recently acquired four HOPDs, several 501A physician practices and established the psychiatric program for geriatric patients, which has been received with great enthusiasm within the community. However these operations have yet to contribute significantly to our financial results, as the operations have recently been acquired. We are gaining positive momentum at UGHS where acquisition contributed significantly lower than the industry average. This provides the potential for significant operating leverage as we continue to execute our business strategy at this facility.
For example in the first quarter of 2013, we did approximately 1.7 million in negatively adjusted EBITDA while in the following two quarters the cumulative negative adjusted EBITDA was improved to less than $1 million in total. Thirdly, we have and will continue to invest in expansion. This is characterized in our management service companies which are consolidated into our hospital segment. Our investment in management services includes recruitment retention, audit, legal and other costs that contribute to an expense increase of 3 million and 4 million year-over-year and had a direct impact on our adjusted EBITDA.
What are the outcomes of this then? As we discussed previously, a more stable, timely and accurate financial reporting system, recruitment and retention of key staff resources, investment into the expansion of Dallas ecosystem via acquisitions and other marketing and development initiatives, expansion into new Houston area markets which are underserved including Alvin, Pearland, and Baytown which Don mentioned earlier.
Fourth, our senior living segment, this segment continues to perform as anticipated. For the first nine months of 2013 revenues increased 3.3% to 5.9 million from 5.7 million during the same period last year. The average of revenue per unit in 2013 was $3,165 compared to $3,081 in 2012. Occupancy continued to be stable with an overall occupancy in excess of 92.8%. Net operating expenses before depreciation and amortization and interest expense was 1.2 million and 1.5 million for the nine months ended September 30, 2013 and 2012 respectively.
In addition, we have successfully refinanced two of our three owned properties which will allow us to increase our cash flow by nearly 1 million in 2014. This segment has secured relationships and anticipates expansion in 2014 that will continue to contribute to our balance sheet and overall growth.
And finally our support services segment, revenues for the first nine months of 2013 and 2012 were 5 million and 1.6 million respectively, a 216% revenue increase was due to the acquisition of HOPDs, the UGH Dallas hospital and the growth in new external plans. This segment also continues to expand as anticipated to have a strong growth trend in 2014.
With that I will now turn the call back to Don. Don?
Thank you, Mike. I would like to discuss other additional projects that we consider important to our shareholders. First, reflecting our confidence in the future and our growth strategy, we look forward to more robust disclosure and transparency within the investment community going forward. For starters, we are hosting an Investor & Analyst Day this week at our corporate headquarters in Houston, Texas. The objectives of this Analyst Day which will hopefully become an annual event are to allow for interaction with company executives and tours of our existing and future facilities. We welcome all of those who have joined us for this event.
We have had nearly 48 individuals fly-in from coast-to-coast to participate with us and we are very grateful for their attendance. We recognize that 2013 has been a challenging year for our Company and we have much credibility to restore with our shareholders. Our performance in the third and fourth quarter of this year 2013, combined with our 2014 initiatives support our high degree of confidence in the Company and our continued confidence in the future of our model.
With this said, I’d now like to open the line for questions, operator? I am sorry, Amy?
(Operator Instructions) We ask that you limit your questions two at a time. If you have further questions you may reenter the question queue. Our first question comes from Jeffery Cohen at Ladenburg Thalmann.
Jeffery Cohen - Ladenburg Thalmann
Hi, thanks for taking my questions. Just a couple of general ones, could you talk about what your limit is on borrowing and the rates associated with that?
Yes, we have a debt schedule obviously within our Q. Our current total liabilities are $169 million, we have roughly 30 million associated with our Dallas property which is a mortgage, current rate on that is 4.25%, it’s amortized over 20 years and we have a 10 year balloon. We have three things living facilities, the debt and the senior living entity is about 22 million, that’s mortgage debt predominant and two of those are financed with HUD. We have a 35 year term. It is non-recourse and it’s below 4% and just above 4% with the third facility about to move into a HUD 232 loan.
So that’s about 52 million of the 169 million. We have a capitalized lease on the existing building whereas as to Houston and the balance of the debt really resides in -- we have a relationship with MidCap Financial and with MidCap it’s a line of credit that -- and as the total debt is about 19.2 million and the interest rate is approximately 4.5. So that again is a line of credit that’s tied to our accounts receivable and most of our property plan equipment. Because we have been delayed in our filings, we have lost some headroom associated with that, but we’re hopeful that we’ll have this rectified certainly within the next 30 to 60 days.
Jeffery Cohen - Ladenburg Thalmann
Okay, that’s helpful. Can you talk about specifically for the first nine months of the year 2013 EBIT and EBITDA margins, what they have been and what you might anticipate that they could be growing to?
Sure, one of the things we did last night and this will be available on our website sometime this morning. We have a PowerPoint that deconstructs our adjusted EBITDA. And so let me see if I can address that now, because I think it will give you a better framework for understanding. While if you saw in our press release that our EBITDA for the quarter was 10.7 million, our adjusted EBITDA the prior period through September 30th was 29.5. So the question really becomes what’s the difference?
Mike elaborated quite well, the investments that we have made. There are really four areas that negatively impacted our EBITDA. So Houston as a standalone if we just did shot or a year-over-year Houston Hospital-over-Houston Hospital, the EBITDA year-to-date was 25.1 million. We invested 6.4 million in expansion and marketing initiatives, we invested 3.6 million in employee stock grant which was non-cash, we have audit legal fees of 3.5 million and we have a $3.3 million loss out of our Dallas hospital. And we generated 1.5 million of positive EBITDA, out of our senior living division and 0.9 million out of support services. If you add those components together you end up at 10.7 million.
We believe that there are about 9 million of expenses in 2013 that are non-recurring, either these are initiatives, expansion, fees that were incurred that are one-time and will not be recurring in 2014. So while we have had a very robust growth in our revenues, we also recognize that in spite of increasing revenues from 84 million to 27.2 million but there were some expenses associated with that growth that were really investments associated with the growth of the entire business as well as some extraordinary items.
And that will be available after this call, on our website both the PowerPoint as well as this conference call as soon as we have access to it.
Jeffery Cohen - Ladenburg Thalmann
Our next question comes from Sanjay Nayar at Bharat Capital.
Sanjay Nayar - Bharat Capital
Hello, hi guys how are you?
Great Sanjay. Good to hear from you.
Sanjay Nayar - Bharat Capital
Good, well good to be on the call. And I just wanted to say that top-line growth has just been excellent and just looking through some line items and your three month or your nine month ended September 30. Can you explain the provision for doubtful accounts? It seems to be a relatively large bump.
It is a relatively large bump. I’ll see if I can explain a little bit of that. So, the majority of provision for doubtful accounts is really directly attributable to two factors; one, we had a significant growth in out-patient revenues. Our out-patient revenues grew for about 9.5% of net patient revenues to an excess of 12% net patient revenues, nearly 100 million in gross charges. That rapid increase was due to the acquisition and expansion of our hospital out-patient department.
So when we make these acquisitions, what happens is there is always a transition period from the day we make the acquisition with regards to the revenue cycle management, that’s the billing, the coding, the collections. And it slows down flows by at least 30 days. So what we have is a philosophy for accounts receivable that says, anything over 180 days is written off with 100%. That doesn’t seem effected you just have to write it off, so what we had was sort of an arbitratory and anomaly where because of the large term of acquisitions and the transition into our system, we ended up with a much higher than anticipated provision for doubtful accounts.
One of the things that we’re addressing and this is identified, Sanjay, in our PowerPoint is, is that we’re going to and we’ve already begun addressing with outside consultant the strategy, so we can improve not only the philosophy of how we account for those hospital out-patient from our revenues, but the system by which we get the revenues into the revenue cycle management system and then more effectively collect on those. So that’s sort of the first component of an increase in provision for doubtful accounts.
The second component is something Mike mentioned earlier in the call and that is, we’ve been out of network with two very, very large providers. And we anticipate announcing shortly that we’re now in them with these two large providers. And when you’re out of that work in an out-patient setting, the provision for doubtful accounts is going to be artificially higher than what it should be. So we think that it’s predominately attributable to those two factors and the majority of it comes from the HOPDs not from the in-patient sector.
Sanjay Nayar - Bharat Capital
Okay, so if we take a look at the numbers for the 9 months, the variance is about 20 million. So we’re based on those two items that you’ve identified 180 days as well as moving the out-patient to in-patient, how much of that 20 million do you expect to collect over the next 6 months? And then let’s just say that it was all in-patients and let’s say you collect the percentage of the 180 days that you’ve accounted for as provision for doubtful accounts?
Yes I would say that’s a very difficult thing to estimate, there will be some recovery. But I don’t think it would more than 10%.
And Sanjay, we haven’t written this off. We have merely allowed for it. So, mind you, it shows up provision for doubtful accounts, but as we collect on those it will show up as a recovery, so we’ll have actually a pick-up to revenues in the future. As we began this call, we talked a little bit about the timing delays and what you find reflected in our financial statements is a very conservative approach at recognizing revenues. And the provision for doubtful accounts is just one of those areas where we believe we’ve taken a very conservative approach with regards to how we account for that revenue.
(Operator Instructions) And our next question comes from Dennis Van Zelfden, Brazos Research.
Dennis Van Zelfden - Brazos Research
Good morning, gentleman. Are there any plans to clean up the balance sheet specifically reducing total debt and getting rid of the convertible preferred, and if there are, how and when?
Dennis, that’s a great question. First of all, our convertible preferred the majority of that’s been cleaned up at this point, cleaned up meaning, what’s occurred historically since April of 2012 is we have had to book not only the direct investor expense but the change in the fair market value of the derivatives. And that shows up obviously as an expense, but there is a corresponding liability that shows up with the liability on the balance sheet. And then as those warrants and -- are in those warrants and agrees to prefer to convert it, it goes from the liability into equity. The majority of that has been resolved.
So by the time you see our K in a couple of months, you’ll note that the liability and the non-cash derivative-related expenses are virtually gone. So that piece of the equation we feel is pretty much resolved. The fact that we were delinquent on our filings for our Qs, really slowdown our ability to execute on a number of term sheets or negotiations of letters of intent with banks who had an interest in writing up with a line of credit, a term note and an accordion feature, so we have hit a masked debt as opposed to equity capital to grow the business quarterly you are not current, it makes it much more difficult in order to enter into the relationship.
Now that we have filed our Qs, our anticipation is that we will have a very busy and robust month of February, working with a large number of lenders attempting to clean up the balance sheet and eliminate as much of the small or noise that we have currently going on within our liabilities.
Dennis Van Zelfden - Brazos Research
So that was really just consolidated debt as opposed to reduce it. I guess what are the plans, if any, to reduce the debt like talk about free cash flow, if any, and CapEx and things like that for one quarter over the next couple of years?
So with the refinancing it will develop tremendous free cash flow because a lot of the debt that we’re talking about is already current. So we’ll take that out and we’ll take it in the long-term. So that we won’t have these payment reduction principle plans, okay. And it will generate significant free cash flow even in ’14 and we’ll continue to do so into ’15.
From the overall standpoint, we want to keep to get debt for growth as long as we’re churning really strong EBITDA’s in each one of our hospitals we’ll continue to grow the debt.
Hopefully we’re going to be able to get a strong enough balance sheet that we can get debt rates backed out in the 6%, 7%, 8% range and use that for the acquisitions and where the three hospitals comes in that Don talked about. So, I think our debt still grows, but I think you look at it more from a debt-to-equity, when you look it from debt service and make sure that we can achieve good results in both those areas.
Yes. I would only add Dennis to what Mike said that our net cash provided from operating activities grew from 4.9 million to 9.5 million for the same period. So we had 9.5 million of cash coming in from operating activity. During that same period, payment on those payable were about 12.8 million during the period. So as we’re able to attract a much more favorable interest rate and eliminate some of the expensive debt that we have on the books we’ll be able to pay that debt down much more rapidly.
But as an alternative we would prefer to extend our debt as opposed to enter the capital markets while our stock price we believe and management and the Board of Directors does not reflect but we believe the future value of the Company will be.
(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Donald Sapaugh for any closing remarks.
Great. Thank you, Amy. Firstly I’d like to thank everyone for participating in this call and we look forward to reporting upon our full year results on a timely basis in the future. Again, thank you everyone and have a great day.
The replay of the conference call will be available one hour after the call through February 12, 2014 at 9 O’clock AM Eastern Time by dialing 877-344-7529 and our national and local participants dial 1412-317-0088 and entering the conference ID number 10040663. Please record your name and company when joining. The conference is now concluded. Thank you for attending. You may now disconnect.
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