New Frontier Health Corporation Ordinary Shares

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 Zuma of ICR. Please go ahead.

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.newfrontierhealth.com. 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 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 file with the SEC on Form 6-K. Now, please allow me to introduce the management team on the call today. Mr. Roberto 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 Shute, the Chief Financial Officer of NFH, and Mr. David Zong, 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.

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 both for us and for others around the world, with the pandemic impacting all walks of life and the macro economy. 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 we'll 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.

Thank you, Professor. For those of you following along with our presentation deck, please refer to page six and seven for snapshots of the quarter and the year. For the fourth quarter of 2020, our revenue continued to recover, having increased by 4.4% from the prior quarter to R654 million. Our revenue for the full year 2020 declined by 7.7% year-on-year due to the reduction in patient polling and the number of procedures performed during the COVID-19 pandemic, especially during the 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, facilities and people. Thanks to the tremendous strength and the determination of our entire team, we managed to navigate the pandemic in a swift and smooth manner. With macroeconomic recovery and life returning to normal in China, we continue to see positive trends in our business course quality. 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 admissions and outpatient admissions were still 17.3% and 19.5% lower than last year's level, respectively. This is mainly due to low 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 remain closed and enhanced personal hygiene and protective measures for school children were implemented. In addition, in Q4, both outpatient and inpatient ASD 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, less urgent services were postponed due to the pandemic. For full-year 2020, outpatient and inpatient ASD increased by 11% and 15% year-over-year, respectively. In Q4, back-utilization decreased to 34.8% compared to 40.1% in Q4 2019. due to lower inpatient admissions during the COVID-19 pandemic. For the full year 2020, that utilization rate decreased to 33.3% year-on-year from 38.3% due to similar reasons. The revenue breakdown, as a result of the above, revenue from our Tier 1 facilities and their associated clinics increased by 4.4% in Q4 2020 compared to Q3 2020. primarily due to steady growth in various specialties, such as family medicine, internal medicine, surgeries, and orthopedics. However, for fiscal 2020, revenue from UFHS Tier 1 facilities and the associated clinics decreased by 11.9% year-on-year due to an overall decline in patient polling for the year as a result of COVID-19, as well as lower obstetrics revenue due to low birth rates in 2020. and lower revenue from pediatrics year-on-year. Similar to Tier 1 facilities, 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 prior quarters. For fiscal 2020, revenue from UFHS Tier 2 facilities and other assets as a group decreased by 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 obstetric services as compared to the prior year. As for the extension assets, given increased grant recognition and new patient uptake at UFHS Guangzhou and Prozone facilities, Q4 revenue for our extension asset as a group increased by 5.4% for the over quarter and for fiscal 2020 increased by 29.3% year over year. H8 talks about revenue recovery. As you can see, despite episodes of COVID breakout during the last three quarters in 2020, we have recovered to growth. However, decline in pediatrics and patient polling continue to drag on our revenue recovery. Further, given Tianjin and Qingdao hospitals are heavily exposed to those two specialties, they are still not yet fully recovered, even during Q3 and Q4. 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 implementation of cost-laving initiatives, as well as strong revenue ramp-up from expansion assets. For fiscal 2020, adjusted EBITDA increased by 61% year-over-year. Further, our Guangzhou Hospital continues to be used as our positive since May 2020. We're pleased with our latest recovery trends and believe they bode well for the longer-term growth of our business. Now I turn the call back to Roberta, who will share our latest developments from recent months. Roberta, please go ahead.

Thanks, Carl. This quarter, we've taken a variety of measures 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 State Bay. Please turn to slide 13. Our new facility, the United Family Jean Bay Women's and Children's Hospital, recently completed construction, held a completion ceremony on March 27th, and will begin full operations in the coming weeks. The hospital is the first level three accredited specialty hospital in the USH network. With over 25,000 square meters of space, the facility is conveniently located near Beijing's Olympic Village with direct access to major thoroughfares. With a capacity of more than 200 beds, the hospital is expected to provide outpatient clinic services, 24-7 pediatric emergency services, inpatient care, and neonatal intensive care services. to provide best quality medical services, we recruited a number of external clinical talent in core specialties, including obstetrics, gynecology, pediatrics, post-partum rehabilitation, and family medicine to complement our confirmed internal staff transfer plan from other USH facilities in Beijing. Services offered at this beautiful new facility will include a full range of both gynecological and obstetric services, including sub-specializations in various areas of women's and children's health. The medical team will be led by Dr. Leo Wei, the OBGYN medical team is led by Dr. Lai Ai Lin, and the pediatric team will be led by Dr. Yang Li, each of whom have many decades of leadership and clinical experience in their respective fields. Moving on to slide 12, you'll see updates on the BJU Beijing Building 1 lease exploration from last quarter. As mentioned last quarter, the lease on Building 1 of the Beijing campus first began in 1995 and was renewed in 2016. The second 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 underway for potential non-renewal with plans for certain existing operations should be relocated to existing United Family satellite clinics, as well as other United Family facilities in Beijing. The majority of the clinics will be relocated to building two on the same campus, as well as some moving these streets on commercial space adjacent to the hospital. Watches in patient maternity rooms as a result of the relocation will be supplemented by space in the newly opened United Family Jean Bae Women's and Children's Facility. Now I'll turn the call back to Carl Loh again, who'll share more details about the going private proposal. Carl, please go ahead.

Thank you, Roberta. I'd like to give a brief update on the preliminary non-voting going private proposal. Please turn to slide to speak. On February 10, 2021, our board received a preliminary non-binding proposal from a group of investors aiming to acquire all outstanding ordinary shares in a go-in private transaction for US$12 per share in cash. The proposed transaction results in MSH becoming a privately held company and delisting its ordinary shares from the New York Stock Exchange. that MFH received a clarification from the buyer group's representatives indicating that the buyer group intends to, at a later time and in connection with the proposed transaction, also propose to acquire all outstanding warrants to purchase ordinary shares of the company not already beneficially formed by members of the buyer group or their affiliates. 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 certain advisors. This concludes our present remarks. Operator, we are now ready for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Jason Liu with Credit Suisse. Please proceed with your questions.

Hi there. Hi, Benjamin. Thanks for taking my questions, and congrats on a strong fourth quarter and 520 results. I have two questions regarding 2021, as well as potential guidance, and then two questions on expenses. For 2021, I was wondering if the company would be given guidance, and as well, what other guidance 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 break-even or positive adjusted EBITDA in 2021 for expansion assets. And then regarding some of the expenses, we see that for fourth quarter for the SWV 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 SWV expenses could go back up? And then in addition, regarding the supplies expenses, we've seen that that has gone up as well in fourth quarter. Do we expect this to be maintained going forward in 2021 as well? Those are my questions. Thank you.

Maybe I can take the first question regarding guidance. We are not putting out a four-year guidance in the next of the going private process. Further, given uncertainty, few remaining, for centuries, particularly around South African statuettes not recovering, about the four-year guidance. Previously, we have not put out four-year guidance in any case in the prior reporting period. But in light of the ongoing private proposal, we wanted to allow the special committee to do their independent evaluation and the typical company going through the phase will not give out guidance. In Q4, there are one-off benefits, including salary reductions that are temporary in nature that will be reverted in 2021. The regression has been completed. there are some benefits that definitely included in the Q3 and Q4 numbers.

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 complexity services as well?

So, I think there were some mixed changes as a result that .

Well, generally speaking, you said supply expenses, right? So the question is about supply. Yeah. So generally speaking, supplies are very linked to revenue. So as revenue goes up, obviously supplies go up. Some of our services are more supply-heavy than others, for example, vaccines, PPR. 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 miss. I don't think it's the complex services that so much raise the supply ratio, but definitely vaccines and definitely vaccines too. And yes, and so COVID obviously will also impact our use of consumables given the need for extra needs for PPE. But I think that we'll see that attenuate over the year as COVID calms down, continues to calm down as well.

I think, Jason, in our Q3, I think you're referring to page 17. I think in the Q3 results, we also had broken down revenue by specialty. I think after increases in supplies and materials usage, the percentage of revenue was also the result of the growth in a number of our segments, including our surgical specialties, where typically there would be more consumables. So I think as a percentage, Got it. Thank you.

That's very helpful. I'll jump back in the queue. Thank you.

Thank you. As a reminder, you may press star 1 to ask a question at this time. Thank you. At this time, I will turn the call back to management for closing remarks. There are no further questions at this time, but I'll turn the call back to management for closing remarks.

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

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.