New Frontier Health Corporation (NFH) Q4 2020 Earnings Call Transcript

Good day, everyone, and welcome to the New Frontier Health Corporation’s fourth-quarter and fiscal-year 2020 earnings conference call. Please note that today’s call is being recorded. I would now like to turn the conference over to Mr. Bill Zima of ICR.

Please go ahead.

Bill Zima — Investor Relations

Thank you, operator. Hello, everyone, and welcome to New Frontier Health’s fourth-quarter and fiscal 2020 earnings conference call. The company’s earnings results were released earlier today and are available on the company’s IR website at www.nfh.com.cn. In addition, remarks today will be accompanied by a presentation, which can also be found on the company’s IR website.

Before we continue, please note that the discussion today 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, the company’s results may be materially different from the views expressed today.

Further information regarding these, and other risks, and uncertainties is included in the company’s Form 20-F filed with the U.S. Securities and Exchange Commission and other documents filed with the U.S. SEC. New Frontier does not assume any obligation to update any forward-looking statements, except as required under applicable law.

This press release also includes financial measures that are not calculated in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. For a reconciliation of these measures to the most comparable measures calculated in accordance with IFRS, please see the earnings release or investor presentation published by New Frontier Health today and filed with the SEC on Form 6-K. Now please allow me to introduce the management team on the call today. Ms.

Roberta Lipson, chief executive officer of NFH; Mr. Carl Wu, president of NFH and chairman of the executive committee of the board, will provide updates for the quarter. Following management’s prepared remarks, we will open up the call to questions. During the Q&A session, Mr.

Walter Xue, the chief financial officer of NFH; and Mr. David Zeng, chief operating officer of NFH, will also be available to answer questions. With that said, I would now like to turn the call over to Roberta. Roberta, please go ahead.

Roberta Lipson — Chief Executive Officer

Hello, and good day, everybody, and thank you, Bill. We’re pleased to have you join us for a discussion of our fourth-quarter and fiscal 2020 results. 2020 was challenging for us and others around the world, with the pandemic impacting all walks of life and the macroeconomy. We’re pleased to see the pandemic substantially brought under control, aided by the rollout of the COVID vaccine.

We continue to see recovery in revenue and are hopeful will experience increases in physical patient visits moving forward as well. I’ll now turn the call over to Carl Wu, who will provide more details about our financial performance for the fourth quarter and full fiscal year. Carl, please go ahead.

Carl Wu — President

Thank you, Roberta. For those of you following along with our presentation deck, please refer to Page 6 and 7 for snapshots of the quarter and the year. For the fourth quarter of 2020, our revenue continued to recover, have been increased by 4.4% from the prior quarter to RMB 654 million, while revenue for the full-year 2020 declined by 7.7% year on year due to a reduction in patient volume and the number of procedures performed during COVID-19 pandemic, especially during first half of 2020. With regards to patient volume, throughout the past year, we demonstrated strong resilience and agility, as well as the commitment to invest in technologies, facility, and people.

Thanks to the tremendous strength and the determination of our entire team, we’ve managed to navigate the pandemic in a swift and smooth manner. With macroeconomic recovering and life returning to normal in China, we continue to see a positive trend in our business’ first quarter. In Q4, total outpatient volume and inpatient volume recorded a 1.2% and 7.4% increase from the prior quarter respectively. However, looking at the full-year volume data, total inpatient admission and outpatient admissions was 17.3% and 19.5% lower than last year’s levels respectively.

This is mainly due to lower admission in the obstetrics department due to nationwide low birth rates in 2020 and lower admission in the pediatric department throughout UFH’s facility, as schools remained closed and enhanced personal hygiene and protective measures for school children were implemented. In addition, in Q4, both outpatient and inpatient ASP increased by 14% and 15.1% year on year respectively. As a result of an increase in the number of higher acuity services offered at our facilities, as least — less urgent services were postponed due to the pandemic, for full-year 2020, outpatient and inpatient ASP increased by 11% and 15% year over year respectively. In Q4, bed utilization decreased to 34.8% compared to 40.1% in Q4 2019 due to lower inpatient admission during the COVID-19 pandemic.

For the full-year 2020, bed utilization rate decreased to 33.3% year on year from 38.3% due to similar reasons. From the revenue breakdown, as a result of that, revenue from our Tier 1 facilities and their associated clinics increased by 4.4% in Q4 2020 compared to Q3, primarily due to steady growth in various specialties such as family medicine, internal medicine, surgery, and orthopedics. However, for fiscal 2020, revenue from UFH’s Tier 1 facilities and their associated clinics decreased by 11.9% year on year due to an overall decline in patient volume for the year as a result of COVID-19, as well as lower obstetrics revenue due to low birth rate in 2020 and lower revenue from pediatrics year on year. Similar to Tier 1 facilities, our Tier 2 facilities experienced a 3.2% growth in Q4 compared to Q3, attributable to the gradual recovery of patient volume and increase in demand for non-emergency medical services as compared to the prior quarter.

For fiscal 2020, revenue from UFH’s Tier 2 facilities and other assets, as a group, decreased by 15.8% — 15.6% year on year due to decline in patient volume as a result of COVID-19 and a decrease in demand for pediatric and ob — obstetric services as compared to the prior year. As for the expansion assets, given the increased brand recognition and new patient uptick at UFH’s Guangzhou and Pudong facilities, Q4 revenue for our expansion assets, as a group, increased by 45.4% quarter over quarter, and for fiscal 2020, increased by 29.3% year over year. [Inaudible] revenue recovery, as you can see, despite episodes of COVID breakout during the last two quarters in 2020, we have recovered growth, however, decline in pediatrics and pediatrics and aspects of revenue to outpatient volume continue to drag on our revenue recovery. Further, given Tianjin and Qingdao hospitals are heavily exposed to those specialties, they have not yet fully recovered even during Q4 and Q — Q3 and Q4.

Re — regarding adjusted EBITDA which is on Page 11, in the fourth quarter, adjusted EBITDA increased by 252.1% year over year. The increase was primarily attributable to revenue recovery and the ongoing implementations of cost-saving initiatives, as well as strong revenue rent comp from extension assets. For fiscal 2020, adjusted EBITDA increased by 51% year over — year over year. Further, our Guangzhou hospital continues to reduce our cost base since May 2020.

A key to NFH’s recovery trend and believe it bodes well for the longer-term growth of our business. I’ll turn the call back to Roberta who will share our latest development from previous months. Roberta, please go ahead.

Roberta Lipson — Chief Executive Officer

Thanks, Carl. This quarter, we experienced a variety of pressures to overcome the difficult situation resulting from the COVID pandemic and stimulate the recovery process. I’d like to introduce our new Women’s and Children’s Hospital in Beijing. Please turn to Slide 13.

Our new facility is the United Family Jingbei Women’s and Children’s Hospital recently completed construction and the Completion Ceremony on March 27 and will begin full operations in the coming year. The hospital is the first Level 3 accredited specialty hospital in the UFH network. With over 25,000 square meters of space, the facility is conveniently located in — near Beijing’s Olympic Village with direct access to major facilities. With a capacity of more than 200 beds, the hospital is expected to provide out-patient clinic services, 24/7 pediatric emergency services, in-patient care, and neonatal intensive care services.

To provide the best-quality medical services, we encouraged a number of external clinical talents with four specialties including obstetrics, gynecology, pediatrics, post-COVID rehabilitation, and family medicine to complement our confirmed maternal staff transfer trend from other UF — UFH facilities in Beijing. Service is offered at gingiva from the facility will improve the full range of both gynecological and obstetric services, including sub-specializations from various areas of women’s and children’s health. The medical team will be led by Dr. Liu Wei, the OB-GYN medical team is led by Dr.

Lai Ailuan, and the pediatrics team will be led by Dr. Yang Ming. Each of the team have many decades of leadership and clinical experience in their respective field. Moving now to Slide 12, you’ll see updates for the BJU Beijing Building 1 lease expiration from last quarter.

As mentioned last quarter, the lease on Building 1 that was the Beijing campus first began in 1995 and was renewed in 2016. The effective lease expired on December 31, 2020. However, we have a temporary arrangement in place to continue using Building 1 for a period of time. Provisions are under way for a potential nonrenewal.

This plan for — certainly, existing operations to be moved — relocated to existing United Family satellite clinics, as well as other United Family facilities in Beijing. The majority of the clinic will be relocated to Building 2 on the same campus, as well as some newly leased, street-front commercial space adjacent to the hospital. And in-patient and maternity growth as the result of the relocation will be supplemented by space in the newly opened United Family Jingbei Women’s and Children’s facility. Now, I’ll turn the call back to Carl Wu again to share more details about the “going private” proposal.

Carl, please go ahead.

Carl Wu — President

Thank you, Roberta. I’d like to speak about the update on the preliminary non-binding “going private” proposal. Please turn to Slide 15. On February 10, 2021, our board received a preliminary non-binding proposal from a group of investors.

Aiming to buy all outstanding ordinary shares in a going-private transaction for $12 per share in cash. The proposed transaction would result in NFH becoming a privately held company and delisting its ordinary shares from the New York Stock Exchange. On February 10, 2021, we further announced that NFH received a clarification from the Buyer Group representative in — indicating that the Buyer Group intends to, at a later time and in connection with the proposal section, also proposed to acquire all outstanding warrants to purchase ordinary shares of the company not already beneficially owned by members of the Buyer Group or their affiliates. On March 18, 2021, the board has formed a special committee to review and evaluate the aforementioned preliminary non-binding “going private” proposal with the support of seven advisors.

This concludes our prepared remarks. Operator, we are now ready for questions.

Questions & Answers:

 

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question comes from the line of Jason Liu with Credit Suisse.

Please proceed with your question.

Jason Liu — Credit Suisse — Analyst

Hi, there. Hi, management. Thanks for taking my question and congrats on a strong fourth quarter and FY ’20 results. I have two questions regarding 2021 as well as potential guidance and then some questions on expenses.

For 2020 — for 2021, I was wondering if the company would be — would be giving guidance, and as well what are the guidance that can be given across operating and expansion assets? And then, in addition, regarding expansion assets for 2021, can we expect to see an adjusted EBITDA breakeven or a positive adjusted EBITDA in 2021 for expansion assets? And then regarding some of the expenses, we see as for the fourth quarter for the SWB expenses has gone down quite considerably. Going forward, do we expect some of these fourth-quarter expenses to remain the same into 2021, or do we see some of these expenses to be more temporary, and that SWB expenses could go back up? And then, in addition, regarding the supplies expenses, we’ve seen that that has gone up as well in the fourth quarter, do we expect this to be maintained going forward in 2021 as well? Those are my questions. Thank you.

Carl Wu — President

Maybe I can take the first question regarding guidance. We — we are not filling up a two-year guidance. And then on the going-private process, for the given unpleasant change still remaining for centuries, to be cleared around some of the sub-specialties not recovering, we also believe we’re not in the clear position about this year’s guidance. Previously, we have not given out clear guidance in any case and — and acquire recovering period.

In light of the “going private” proposal, we wanted the special committee to do the independent evaluation, and the typical, what’s this, company going through this phase does not give out guidance. And in Q4, there are one-off benefit, including salary reductions that are temporary in nature that will be reverted in 2021. The reversion has been completed. There are some benefits that’s being included in the Q3 and Q4 numbers.

Jason Liu — Credit Suisse — Analyst

Got it. And then for supplies expenses, do we see that to be maintained as a higher ratio going forward due to the increase in higher-quality — or higher-complexity service as well?

Carl Wu — President

So I think there are some mix changes as a result of that. Actually, Roberta, do you want to —

Roberta Lipson — Chief Executive Officer

Well, generally speaking, you said supplies expenses, right?

Carl Wu — President

Yeah, yeah.

Roberta Lipson — Chief Executive Officer

The question is about supplies — yeah. So generally speaking, supplies are very linked to revenue. So as revenue goes up, obviously, price go up. In terms of our services, more supply heavy than others, for example, vaccines, PCR and — so probably — and also, as we supply more complex services, some of the consumables or the implantables are also quite expensive but so are the revenues resulting from those.

So it will be a mix, but I don’t think it’s the complex services that so much raised the supplies ratio. But definitely vaccines — and definitely vaccines did. So —

Carl Wu — President

Yeah.

Roberta Lipson — Chief Executive Officer

And — yes. And so COVID obviously will also impact our use of consumables given the need for – extra need for PPE. But I think that we’ll see that attenuate over the year as COVID comes down — continues to come down as well.

Carl Wu — President

I think, Jason, in our Q3, we have — I think you’re referring to Page 17. I think in the Q3 results, we also had broken down revenue by specialty. I think part of the increases in supplies and materials usage as a percentage of revenue was also the result of the growth in the number of our subsegments, including our surgical specialties, where, typically, there would be more consumables. So I think as a percentage of revenue increased slightly compared to the prior year.

Jason Liu — Credit Suisse — Analyst

Got it. That’s very helpful. I’ll jump back in the queue. Thank you.

Operator

Thank you. [Operator instructions] Thank you. At this time, I will turn the call back to management for closing remarks. There are no further questions at this time.

I’ll turn the floor back to the management for closing remarks.

Roberta Lipson — Chief Executive Officer

OK. Thank you very much, everybody, for joining the call. We look forward to talking to you again next quarter.