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Chindex International Inc., (NASDAQ:CHDX)

Q4 2013 Earnings Conference Call

March 17, 2014 8:00 AM ET

Executives

Roberta Lipson – President and Chief Executive Officer

Lawrence Pemble – Chief Operating Officer

Analysts

Sachin Shah – Albert Fried & Co. LLC

Operator

Welcome to the Chindex International Fourth Quarter 2013 Financial Results Conference Call. This call is being recorded. I would now turn the call over to your host, Roberta Lipson, President and CEO, and Larry Pemble, the COO of Chindex. Please go ahead.

Roberta Lipson

Thank you, good morning and welcome to Chindex International's Fourth Quarter 2013 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, then we'll turn to Q&A.

Larry, will you 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, included in our Form 10-K for the period ended December 31, 2013, which will be filed today March 17, 2014. 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 in our Safe Harbor statement, we announced our quarterly financial results this morning prior to the U.S. market open. Our earnings release is now available on our IR website. I would like to begin with highlights of 2013, where we made significant accomplishments on three major fronts.

First of all we reinforced our core competencies and key differentiators which are the premium quality comprehensive services in our existing network facilities, because of our first mover advantage more than 15 years of experience and our commitment to continuously improving our hospital services and facilities. The United Family Healthcare network is the only multicity, multi facility foreign owned and operated hospital network in China with the capacity to serve the expatriate, diplomatic and affluent local Chinese communities.

Advanced diagnostics, preventative and surgical care services are being offered in three full service hospitals along with satellite and specialty outpatient clinics. The BJU main campus remains our largest revenue driver. As of December 31, 2013 we had 70 beds in service out of the total of 120 licensed beds, patient trafficking revenues grew across departments especially pediatrics and family medicine.

During the fourth quarter we continued to complete advanced surgical procedures in our new neurosurgical and interventional cardiology services. At the New Hope Oncology Center we continued to make progress in establishing patient referral systems and growing our reputations for advanced treatment modalities in both chemical and radio oncology.

In our Shanghai main hospital we continue to navigate through the negative impacts and the delayed opening of the Quankou Clinic and the ramp up phase of the new physicians onboard during the fourth quarter. Tianjin hospital which has 26 licensed beds continued to ramp up its marketing recognition and revenue, the process has provided invaluable experience for us opening comprehensive care facilities in second Tier cities. We have our next hospital underway in Qingdao which will make use of our experience in Tianjin. That’s the hospital development that’s underway in Qingdao not opened yet.

*Guangzhou Clinic which offers a broad scope of clinical services continues to grow rapidly through expanded services and maximization of current clinic space, because our service model is provider driven and patient centric, we continue to implement important measures to support a larger base of patients and greater brand awareness. In 2013, we upgraded our IT infrastructure and clinical support platforms and refined our marketing strategies.

Now existing and potential patients find it easier than ever to reach our physicians and gain attentive medical consultation not only through our formal appointment system, but also through their highly interactive social media presence. We also regularly monitor China’s public insurance policies and look facilities – product support, especially for our growing base of Chinese patients. In all of our key markets we have established direct billing relationships with most international insurance – insurers as well as many domestic insurers covering care provided in China.

Another major accomplishment in our business in 2013 which that we delivered on our promise to bring additional facilities into our existing markets, as well as expanding our service menu. Several new expansion projects became operational in 2013, solidifying our efforts to offer a full spectrum of healthcare services and create network synergies.

In January 2013, we piloted the United Family Home Healthcare Service, UFHH in Beijing, and later in the year rolled it out to Tianjin and Shanghai. This service has not only brought the experience of premium standard care to the homes of patients, but also spread the knowledge about UFH comprehensive and specialty care offering. Now we have seen increasing patients flow from postpartum visits, geriatrics and palliative services growing incrementally every month, and an increasing number of cases of conversion from home healthcare patients to hospital and clinic patients.

In June, we officially opened our rehabbed hospital in Beijing. Through the quarter, we have increased – we have increasing – perhaps have been increasing patient referrals from public hospitals in Beijing, Shanghai and Singapore as far as our own acute care facilities and surgical departments. The patients flow and revenue contribution are ramping up inline with our expectation, but keep in mind that its opening and this ramp up period were help up for six months due to regulatory delays, which impacted our 2013 performance.

We also attracted well know surgeons to start offering sophisticated cardio and neurosurgical procedures in the BJU main campus. This has enhanced the depth and breadth of our service offerings within our network, and created new opportunities for both our rehab and home healthcare program. In July, we opened Shanghai United Family Quankou Clinic in Puxi, which now houses multiple outpatient clinics that were previously constrained in the Shanghai Hospital main campus. This allowed us to increase capacity for inpatient services at the main campus hospital by approximately 10%.

Also in 2013, our partners started the Phase I construction at the proposed Guangzhou Hospital. With the contribution from Fosun Pharma, CML [ph] Alma Lasers, a leading global medical energy based device manufacturer with a comprehensive product offering and international sales network. As we discussed in detail on the last call, changes in the operating environment followed the Alma acquisition, posing industry wide challenges and altering our original projection for CML’s operating results.

However, we have been smooth organizational integration at the manufacturing, distribution and strategic planning levels, strengthening our confidence since CML’s ability to grow through strategic opportunities. A third major achievement in 2013, was that we achieved our performance target despite being impacted by several factors including licensing delays at our rehab hospital and Shanghai Quankou Clinic and from unplanned personal changes in the Shanghai Hospital in the second half of the year.

For the fourth quarter revenue grew 12% year-over-year to $48.8 million, and adjusted EBITDA was $9.4 million representing our strongest fourth quarter performance to-date or the two respective measurements. For the full year revenue grew 18% year-over-year to $179 million and adjusted EBITDA was $29 million. Overall, impart of what we’ve achieved in 2013, which demonstrated strengthen durability of our business model and execution capabilities.

As China’s affluence population growth, there is an expanding focus on healthcare serviced from private medical facilities. We are developing strategies to capture these addressable opportunities. At a time in which relations between patients and doctors are heightened in the public hospital panels, our premium healthcare models features sound patient-doctor relations and personalized care to patients through the entire lifecycle.

Properly trained doctors and nurses are in high demand and we are funding research, training and certification programs to sustain our network expansion and long-term growth. As you may have know, on February 17 we announced that Chindex has entered into definitive merger agreements with a buyer consortium that includes TPG, Fosun Pharma and myself in a transaction that would resulted in Chindex becoming a private company. We believe the addition of these new partners and committed financing are needed to achieve the next phase of our growth plan, which includes new facilities in our current service locations as well as significant geographic expansion.

Completion of the transaction is subject to certain conditions that have been outlined in the transactions filing and our 10-K and we expect the transaction to close sometime in the second half of the 2014 calendar year. Beyond what has been announced publically, I’m not able to talk in detail about the process or the status of this pending merger.

I’ll now, turn the call over to Larry to review our financial results in more detail. Larry please take it away.

Lawrence Pemble

Thanks, Roberta. I’ll start with a review of our fourth quarter results and then briefly reflect on our full year performance. Revenue was $48.8 million for the quarter an increase of 12% over the prior year period making our strongest fourth quarter to-date. On the cost side, operating expenses for the fourth quarter of 2013 were $47.8 million compared to $39.5 million in the prior year period.

Development pre-opening and startup expenses were $4.1 million in the fourth quarter, an increase from $2.8 million in the prior year period. The majority of these expenses relate to lease and development expenses for Beijing United Family Rehabilitation Hospital, expansion activities for the CBD and Shunyi clinics the ramp up of Tianjin Hospital and the ramp up of Quankou Clinic in Shanghai-Puxi, the ongoing operations of our managed clinic in Pudong as well as lease expenses related to our planned Qingdao Hospital facility.

During the fourth quarter, we also incurred legal and other professional fees from our pending merger agreement of $1.3 million. These fees along with other development expenses were excluded from our non-GAAP adjusted EBITDA results; we expect to incur additional expenses in connection with the pending merger during 2014 particularly in the first quarter.

For the fourth quarter salary and compensation expenses rose by 22% year-over-year to $27.2 million, this increase was driven by increases in personnel at the corporate level to support our network expansion and at individual new facilities to support new service lines, our key operating metric adjusted EBITDA was $9.4 million for the fourth quarter compared to $9 million for the prior year period.

Our quarterly results also include $948,000 of non-cash stock compensation expense compared to $857,000 in the prior year period. Depreciation and amortization of $3 million compared to $2.2 million in the prior year period. The higher D&A costs are result of our new and expanded facilities that were not fully operating in the prior year, including the Rehab Hospital and the Shanghai Quankou Clinic.

We recorded a tax provision of $1.9 million in the three months ended December 31, 2013 compared to $2.3 million for the same period last year. This quarter our recorded tax provision of $1.9 million would have been reduced by approximately $200,000 if we could have recognized the benefit of startup entities.

You may have noticed that the interest expenses for the fourth quarter were $1.5 million which was higher than the typical level for the first three quarters. The increase was mainly due to the final write-off of debt discount related to the JPMorgan Tranche C notes converted to equity during the quarter, which is detailed in our Form 10-K. The interest expenses also included debt service on IFC, DEG and U.S. Ex-Im bank notes which we have discussed in previous calls.

We will continue working with the IFC, the parties involved in the pending merger transactions and other potential capital sources to provide funding to our pipeline development projects, in the near-term we expect to draw down an additional $12 million in debt from the IFC related to our Rehab Hospital project. Full year revenue was $179 million up 18% from 2012 adjusted EBITDA was $29 million up 3% from 2012. Again, factoring in the impacts from the delayed openings of Beijing Rehab Hospital, and the Shanghai Quankou Clinic and personnel changes in the Shanghai Hospital, we are generally satisfied with our performance.

CML contributed $81,000 to our fourth quarter profit, but recorded a loss of $1.2 million for the full year. As we discussed on our last call CML has faced major challenges as other domestic and international pharma and medical device companies operating in China to varying degrees. Regulatory issues for Class A devices were exacerbated by changes in the healthcare governing agencies at the Central Government level. On top of that due to the anti-corruption campaign and heightened scrutiny on sales activity, public hospitals have postponed their purchasing decisions.

Government approvals for high visibility products such as robotic surgery systems have also significantly slowed down, such uncertainties *spilled over into the fourth quarter and even so far into the first quarter of 2014, the impacts are industry wide and larger than excepted. However, we are hopeful that when the anti-corruption campaign gradually *abates, hospital purchasing *activities will recover to more normal levels ultimately benefiting CML.

Including the CML adventure, higher than normal interest expenses and a significant tax *provision, our GAAP net loss in the fourth quarter was $2.1 million or $0.12 per diluted share. As of December 31 2013, we had $33.1 million in unrestricted cash, cash equivalents and investments. Our upcoming 12-month capital expenditure plan totals up to $37 million consisting of up to $17 million for new hospital development programs, up to $15 million for existing facility maintenance* and organic development and up to $5 million for investment in IT infrastructure.

Our patient service receivables were approximately $23 million as of December 31, 2013 PP&E increased to approximately $113.8 million as a result of facility expansion, given the change of circumstances related to our pending *merger, we are not providing guidance for the full year 2014. However, I would like to remind you that the robust market opportunities and our solid business fundamentals remained unchanged. We don’t expect the transaction process to materially interrupt our operations.

Assuming the operating environment remains favorable, we are confident that demand for premium quality comprehensive healthcare services in China will continue to increase patient traffic to our network facilities and expand revenue growth. We will *prudently allocate our resources to development in startup projects at a rate similar to that of the last two years and our adjusted EBITDA profits should continue to grow as we ramp-up new facilities and services lines.

Before we proceed to Q&A, I would like to remind you that the pending major is still subject to approval from our shareholders, as well as Fosun Pharma and Chinese merger laws among other conditions. Therefore, we cannot talk about the process or status of the transaction nor can we comment on specific terms of the transactions such as valuation.

That concludes our prepared remarks for our fourth conference call. Operator, we are now ready to open the call up to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from line of Sachin Shah with Albert Fried. Your line is open.

Sachin Shah – Albert Fried & Co. LLC

Hi, good morning I just wanted to get an update on the regulatory approvals, so is there any update on the *MOFCOM and any update on the filling of the preliminary proxy?

Lawrence Pemble

I think the process as outlined in our fillings is underway. Yes, so I don’t think we can get into any specific details, but as we have – I think there is a fairly detailed rendering of the sequence of events in the fillings and everything is full steam ahead as far as it can be.

Sachin Shah – Albert Fried & Co. LLC

Okay, I mean the merger agreements says you have to make the MOFCOM filing that’s a filed proxy et cetera, et cetera, but there *isn’t any more details aside from that so I think that this would help shareholders immensely just understanding if that has been…

Lawrence Pemble

Well, I think what we’ve said in the filling and what we’ve said on the call is that we expect the transaction to close in the second half of the 2014, I think the expectation is if you – the merger agreement has a time horizon on that which would scope out a closing in the August or September timeframe, I can generally say that we’re on-track for closing according to the merger agreement.

Sachin Shah – Albert Fried & Co. LLC

Okay, excellent. Thank you guys.

Lawrence Pemble

Thank you.

Operator

(Operator Instructions) And I'm not showing any further questions at this time. I would like to turn the conference back over to management for closing remarks.

Roberta Lipson

Well, thank you all very much for joining us today and wishing you all a very good day and a good week.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does concludes the program and you may all disconnect. Everyone have a good day.

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