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21st Century Oncology Holdings, Inc. (Pending:ICC)

Q2 2014 Earnings Conference Call

August 28, 2014 9:00 am ET

Executives

Frank English - Treasurer

Daniel Dosoretz - CEO, Co-Founder, Radiation Oncologist

Gary Delanois - SVP, Multispecialty Operations

Rich Lewis - SVP, CFO-USA

Analysts

Operator

Greetings. And welcome to the 21st Century Oncology Holdings Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host Mr. Frank English, Treasurer for 21st Century Oncology. Thank you, sir. You may begin.

Frank English

Thank you, operator. Before we begin today, I would like to review the Safe Harbor Statement. This conference call may contain forward-looking statements about the company's future plans, expectations and objectives, concerning, but not limited to the company's expected financial results and estimates for 2014.

Words such as will, may, expect, intent, anticipate, plan, believe, could, and variations of these words and similar expressions are intended to identify forward-looking statements. These forward-looking statements are not historical facts and are subject to risks and uncertainties that could cause the actual statements to differ materially from those predicted in the forward-looking statements including, but not limited to the company's actual results and risk factors described in the risk factor section of other information on the company's most recently filed Annual Report on Form 10-K.

The company undertakes no obligation to publicly update or revise the forward-looking statements contained herein to reflect change of events or circumstances as of the date of this conference call.

Finally, before I transition the call, I want to announce that due to the transactions currently being contemplated by the company that we will not be taking any questions after the call.

And with that, I would like to turn the call over to Dr. Daniel Dosoretz, our Chief Executive Officer.

Daniel Dosoretz

Thank you, Frank. Thank you all for attending our second quarter 2014 conference call. With me today are Gary Delanois, our SVP of Operations; Rich Lewis, our SVP and CFO of our U.S. operations; Joe Biscardi, our SVP, Controller and Chief Accounting Officer; and also Frank English, our Treasurer.

Also by my side today is David Beckman, who is our Interim CFO come to us from FTI. FTI is a global business advisor firm that is assisting us in achieving our operational goals. We are also grateful to have the assistance of [Brendan Hayes from the Mostyn Firm] (ph), who is assisting us in re-balancing our capital structure.

Today, we are going to report our second quarter results, which are quite good and inline with our expectations of growth in same and acquired markets. But, before I start, I want to publicly thank, Mr. Bryan Carey, who has recently resigned as our President and CFO. Bryan was instrumental in the vital acquisitions of OnCure and SFRO and assisted us inferring our mission to be the largest global provider of cancer services. He is moving on to pursue a different path, but his support and dedication to our enterprise made recognition by all.

As I mentioned before, we meet today most of the senior members of our team including our SVP of operation, the CFO of our U.S. operations, our Senior Vice President, Controller and our Treasurer. Many of you have already know these team members well. Everyone of them have had a long-track with 21st Century Oncology and they work as a wealth of experience and dedication assures us that our performance in our operations, execution of our strategy and our non-parallel commitment to patient care will continue forward and will be well-executed. They are all here today as a reminder about their commitment to the company and about our ability to continue to execute on our plans.

As its public knowledge, the company has executed a recapitalization support agreement which provides for either an external equity contribution or recapitalization by converting a portion of our senior subordinated note in exchange for equity interest in the company. We are in the process of evaluating these two alternatives as outlined in our prior communications regarding our capital structure.

In either case, the end result would be a much stronger company with increased capital flexibility that will allow us to continue to pursue the growth strategy which has been reflected in our second quarter.

And now, to our performance, we had a good quarter. Our existing markets continue to grow at over 2% in treatments per day. The RVU per treatment, a key indicator of treatment complexity was done somewhat representing the effect of the CMS cut in place for the 2014 fee schedule. Yet, these [decreases] (ph) significantly lower than the CMS cut. This continues to demonstrate our ability to [diffuse] (ph) expertise and technology through a very large platform providing the best care to our patients in dealing with various types of cancer.

We have made substantial progress in the integration of OnCure platform which we acquired in October 2013. We have commissioned and added nine new accelerators, upgraded nine existing ones and have been successful in transforming a large portion of OnCure's operations into our physician model.

In addition, we have achieved efficiencies with a consolidation of multiple offices, when there was a geographic overlap particularly in the West Coast of Florida. These synergies have resulted in increased performance in the legacy OnCure centers as Gary Delanois and Rich Lewis will describe to you. We continue to see additional upside and are optimistic that the OnCure acquisition will continue to create value for us.

The SFRO acquisition has been a great one. Bringing with it expanded markets and a potential for additional synergies along with an experienced group of operators who will continue to be involved and successfully run and grow their operations. Working along side with them and the management of – team of SFRO, we will continue to enhance our performance.

We have a strong pipeline of acquisitions and joint ventures with large hospital systems, which will be executed once we complete our recapitalization and strengthen our capital structure. We are viewed as a mascot partner for many large healthcare plans and hospital systems. We offer clinical expertise, business acumen and the ability to provide extraordinary care to patients at a lower cost position us well for the changing landscape in healthcare.

And with these, I will pass the microphone to Mr. Gary Delanois. Gary?

Gary Delanois

Thank you, Dr. Dosoretz. The second quarter of 2014 was an important quarter for 21 C in that we continue to optimize the two largest acquisitions in our company's history significantly adding to the strength of our fundamental business of delivering the most advanced, integrated cancer care to patients in the United States and Latin America. The second quarter marked the second complete quarter after acquiring OnCure.

This transaction has been transformative for 21 C as it has increased our scale in key markets resulted in cost efficiencies and accelerated revenue growth. Importantly, OnCure is achieving the lift expected from its becoming part of 21 C.

As mentioned on our third quarter 2013 conference call, we continue to expect the OnCure transaction to achieve approximately $30 million of incremental annual run rate pro forma EBITDA including $7 million of operating cost synergies by the end of 2014.

Revenues and EBITDA for the quarter were also positively impacted by a full quarter's contribution from South Florida Radiation Oncology, a large integrated cancer care company based in Southeast Florida, which we purchased a 65% stake-off in February of this year.

The integration of these acquisitions has already exceeded our expectations and we believe the results achieved thus far validate our ability to add value to and to efficiently integrate new acquisitions with minimal disruption.

During the second quarter, we saw growth in nearly all of our operational metrics demonstrating stable underlying trends and improving volumes. Despite 21 C solid results during the quarter and year-to-date, the postponement of the IPO in May meant that the company was unable to achieve its desired deleveraging.

We believe that the market is rapidly and dramatically changing with physicians increasingly deciding to work for either large physician practices such as 21C or joining hospital groups.

In July, the company entered into two agreements with a group of note holders that will result in an important deleveraging of 21 C. We believe this deleveraging will help enable us to more fully take advantage of important strategic investment opportunities going forward. Rich will discuss these agreements in further detail later in our prepared remarks.

Domestic same market therapy revenue per treatment increased 6.5% from the second quarter of 2013 due to service mix and continued improvements in managed care pricing. Total RVUs per day in our domestic freestanding centers increased 44% in the second quarter versus the same period of the prior year.

On a same market basis, RVUs per day decreased slightly by 1.3% versus the same period last year due to a reduction in the 2014 Medicare reimbursement rate. However, as Dr. Dosoretz mentioned earlier, this decrease was less than the actual Medicare cut due to the company's ability to spread technical expertise to all our centers and continued to apply the advance technologies and providing the best care for our patients.

Total second quarter completed domestic radiation oncology cases were up 9.3% over year. Second quarter treatments per case were roughly flat year-over-year, while revenue per case increased modestly versus the second quarter of 2013.

Our field operations remain strong as we continue to execute our business plan emphasizing organic growth and strategic acquisitions.

Now, I'll turn the call over to Rich for additional color on our second quarter financial results.

Rich Lewis

Thank you, Gary. Second quarter total revenues were $265.9 million compared to total pro forma revenues of $190.8 million in the same quarter of 2013, a year-over-year increase of 39.3%. Domestic freestanding same market revenues increased 8.9% in the quarter compared to the same quarter last year. The increase in revenue was principally driven by $65.1 million in revenue contributions from OnCure and SFRO, increased expenses in international revenue growth.

From a volume perspective, domestic total treatments and freestanding center treatments per day were up 53.9%. On a same market basis, freestanding treatments per day increased 2.2% year-over-year due to further integration of the ICC model.

Pro forma adjusted EBITDA was $43.2 million, or 16.2% of total pro forma revenues compared to $24.8 million or 13% of total pro forma revenues in the second quarter of 2013. Income tax expense in the second quarter of 2014 was $934,000, compared to $1.4 million in the second quarter of 2013.

Net loss for the second quarter of 2014 was $204.6 million, compared to a net loss of $19.5 million in the second quarter of 2013. The net loss in the second quarter of 2014 included non-cash related impairment charges of approximately $182 million attributable to the recapitalization support agreement and revisions of the company's financial forecasts primarily to write down goodwill to their implied fair values.

Our international business had another strong quarter. Total second quarter international cases increased 17.3%, compared to the same quarter in 2013. Total net patient service revenues were $24.3 million, up 8.2% year-over-year. This was driven by strong expenses, additional volume from acquisitions, low depreciation during the quarter and Argentina peso relative to the U.S. dollar and a continuation in the increase in the number of high revenue IMRT treatments and 3-D treatments versus 2-D treatments as compared to the same period in 2013.

Adjusted EBITDA for the quarter was $7.6 million, up $2.3 million versus the same quarter last year. Net cash provided by operating activities for the period ended June 30, 2014 was $9.9 million, compared to net cash provided by operating activities for the same period 2013 of $3.6 million. Net cash provided by operating activities was primarily driven by management of our vendor payables and increased cash flow related to our OnCure and SFRO transactions.

Total cash expenditures were $23.1 million compared to the $17.8 million for the first six months of 2014 as compared to the prior year. The increase over last year reflects accelerated spending on the upgrade of equipment and software at OnCure, which already has resulted in OnCure performing ahead of expectations. We had $1.1 billion of net debt as of June 30, 2014. Days revenue outstanding at June 30, 2014 were 40 days, up from 35 days compared to the same time last year. At quarter end, we had approximately $25.7 million of unrestricted cash. There were $79.5 million of borrowings under our $100 million revolving credit facility.

Now, I will turn the call over to Dr. Dosoretz, who will provide closing comments.

Daniel Dosoretz

Thank you, Rich. In summary, 21st Century Oncology had a solid quarter operationally as indicated by same market treatment growth, achievement of expected results from the acquired operations, continued international growth for medical developers and improved margins resulting from expense management and synergy realization.

We recognize the need for deleveraging and are completely dedicating to make that happen. We believe that in the market where physicians are increasingly choosing large physician practices such as 21st Century, the company will continue to be presented with numerous attractive investment opportunities from groups that want to join 21 C. We are committed to achieving a capital structure that will enable us to provide premier technology, resources and services to our physicians, hospital system partners and clinical teams worldwide and by that doing, the company will also generate attractive rewards from our stakeholders.

Thank you very much for joining us today. And we look forward to providing you with updates of our processes in future calls and documents. Thank you very much. Thank you, operator.

Operator

Thank you. This concludes today's teleconference. We thank you for your time and participation and have a wonderful day. You may disconnect your lines at this time.

Question-and-Answer Session

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Source: 21st Century Oncology Holdings' (ICC) CEO Daniel Dosoretz on Q2 2014 Results - Earnings Call Transcript
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