Medical Facilities Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 5 speakers on the call.

Operator

Good morning, everyone. Welcome to Medical Facilities Corporation's 2023 Second Quarter Earnings Call. After management's remarks, this call will include a question and answer session in which qualified equity analysts will be permitted to ask questions. Before turning the call over to management, listeners are reminded that today's call may contain forward looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities Laws. Forward looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements.

Operator

Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information, please consult the MD and A for this quarter, the Risk Factors section of the annual information form and Medical Facilities' other filings with Canadian Securities Regulators. Medical Facilities does not undertake to update any forward looking statements. Such statements speak only as of the date made. I would now like to turn the meeting over to Mr.

Operator

Jason Redman, President and CEO of Medical Facilities. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q2 earnings call. With me on the call is our Chief Financial Officer, David Watson. Earlier this morning, we reported our Q2 results. Our news release, financial statements and MD and A may be accessed through our website, the medical facilitiescorridor.

Speaker 1

Ca and have also been filed with SEDAR. We had a solid second quarter. Our facilities service Our income from operations and EBITDA were up 8.3% and 9.2% respectively when excluding non controllable non cash charges at the corporate level related to share based compensation plans. While the charge in the quarter was nominal, the corresponding expense reversal last year boosted our income from operations and EBITDA by approximately $2,000,000 These non operational charges match the actual performance of our business. Excluding them provides a more accurate assessment of our ability to generate cash flow and deliver returns to our shareholders.

Speaker 1

During the quarter, we used our strong cash flow to pay down debt and returned another $1,900,000 to shareholders through share repurchases. We also substantially completed our overhead cost reduction plan, which we first announced along with our change in corporate strategy last September. We benefited from our cost saving initiatives during the quarter. We are pleased to say that we have now reduced corporate costs by an annual run rate of approximately $5,000,000 Subsequent to quarter end, we completed the sale of City Place Surgery Center and Maricopa Hills ASC and sold our non controlling ownership interest in St. Luke's.

Speaker 1

The transactions following quarter end provided aggregate net proceeds of $2,300,000 The buyer of St. Luke's also assumed debt of $5,000,000 and the lender received we leased MFC from his pro rata guarantee. Finally, I wanted to give a quick shout out to our 4 surgical hospitals, each of which received 5 star ratings for staff responsiveness based on publicly reported measures from the annual HCAAP survey data from CMS. With that, I'd like to turn the call over to David to review our financial results. David?

Speaker 2

Thank you, Jason, and good morning, everyone. I would like to start by reminding everyone that all dollar amounts that follow are in U. S. Dollars unless stated otherwise. Facility service revenue for the quarter increased 7.2% to $109,500,000 largely due to case and payer mix, as well as the impact of Sioux Falls moving its anesthesia service and related billing in house in the current year.

Speaker 2

Overall, surgical case volumes were down 5%. However, as Jason mentioned earlier, Excluding the MSC Nueterra ASCs, volumes were up 1%. Excluding the MSC Nueterra ASCs, observation cases increased by 30.2%, while inpatient cases were down 10.8% and outpatient cases were down 1.4%. Our operating expenses increased by $7,900,000 or 9.1 percent to $93,900,000 Consolidated salaries and benefits were up by $1,300,000 or 4.3 percent, primarily due to the impact of Sioux Falls moving its anesthesia service related billing in house in the current year, higher clinical and non clinical salaries and wages and separation costs for our former Chief Development Officer. Clinical and non clinical salaries and wages were subject to annual increases, full time equivalent increases and market wage pressures.

Speaker 2

The higher salaries and benefits were partly offset by cost saving initiatives at corporate level to the tune of 1,200,000 and forfeiture stock options related to the former Chief Development Officer in the current year. Consolidated drugs and supplies were up $2,900,000 or 8.6 percent, largely due to an increase in spine and higher acuity orthopedic cases, partly offset by higher vendor rebates and the closure of clinical operations at East Wind Surgery Center back in May. Consolidated G and A increased by $3,000,000 or 19.4%. Swing was mainly due to non controllable corporate level costs related to share based compensation plans, driven by an increase in our share price in the quarter versus the significant decrease in corresponding $2,000,000 expense reversal in the same period last year. While we also had increases in billing fees, contracted services and facility related expenses, as well as costs pertaining to Sioux Falls' Accountable Care Organization.

Speaker 2

These were partly offset by cost savings of $500,000 at the corporate level. Income from operations was $15,600,000 representing an increase of 8.3% when excluding non cash charges Jason and I highlighted. EBITDA for the quarter was $21,200,000 which was an increase of 9.2 percent when excluding the same charges. Finance costs for the quarter increased $16,700,000 due primarily to the $16,400,000 increase in non cash costs related to the change in value of the exchangeable interest liability. Like share based compensation, the value of the exchangeable interest liability fluctuates based on the share price, which resulted in a $14,400,000 reversal of expense the prior year.

Speaker 2

In the quarter, we generated cash available for distribution totaling CAD6.6 million, resulting in a payout ratio of 30.8%. Looking at our NCIB, during the quarter, we purchased 316,100 of our common shares for a total consideration of $1,900,000 For the 1st 6 months of the year, we purchased 734,000 shares, returning $4,500,000 to our shareholders. We also used our strong operating cash flow and cash balance to repay $9,000,000 on our corporate credit facility during the quarter, bringing the balance down to 27,000,000 This contributed to a decrease in cash and equivalents at quarter end. At the end of the quarter, we had consolidated net working capital of 22,300,000 including $27,900,000 of cash and equivalents. For comparison, at the end of 2022, we had working capital of 32,500,000 including cash and equivalents of $34,900,000 Inclusive of lease liabilities, our net debt to equity remains low at 0.87x as compared to 0.94x at December 31, 2022.

Speaker 2

This concludes our prepared remarks. We would now like to open up the call for questions. Operator?

Operator

Thank you. And your questions will be pulled in the order they are received. Your first question comes from Endri Leno, National Bank. Endri, please go ahead.

Speaker 3

Hi, good morning. It's Andre Boto sitting in for Endri. My first question pertains to the remaining ASCs. What's your For them given that they're such a small part of the business now.

Speaker 1

Yes. So let me address that. I mean, the last remaining ASC that we have with Nueterra is in the process of being dealt with now. The other ASP we have, Newport, no decision has been made with respect to that yet.

Speaker 3

Okay. And do you expect beyond ASCs in terms of more asset sales?

Speaker 1

Sorry, can you repeat your question please?

Speaker 3

Beyond the ASCs in terms of more asset sales?

Speaker 1

Yes. No decision has been made yet with respect to any disposition of further assets.

Speaker 3

Proceeds, what is your plan for them?

Speaker 1

Again, the Any proceeds that the Board has not made any decision with respect to allocation of proceeds yet.

Speaker 3

And my final question, do you see the 2024 Medicare budget increasing Increase affecting Doctor's specific mix at all?

Speaker 2

Overall, I think the 24 increases are roughly a net increase of about 3%. Now that's overall and not procedure specific. I don't have the detail yet on how it applies to our specific specialties.

Speaker 3

Okay, great. Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from Sahil Dhingra, RBC. Sahil, please go ahead.

Speaker 4

Hi, good morning. This is Sahil filling in for Dagmeem. Thank you for My first question is what was the contribution of the assets that have been disposed off and that were disposed off after the quarter?

Speaker 2

Yes. Hi, Sahil. The contribution was Really immaterial. As we've noted, we saw a decrease in case volume at The MSC and Ontario ASCs and the corresponding impact of that on earnings is what you'd expect.

Speaker 4

Okay. Then my second question is, going forward, how are you going to prioritize between debt trade payments and dividend increase or share buybacks?

Speaker 1

Yes. So the allocation of capital is something that Board is constantly looking at, where obviously there's various methods that we can use to deploy that capital, but no decision has been made yet.

Speaker 4

Okay. And in terms of inflationary pressures, are you seeing any normalization there, if you have any updated color on those?

Speaker 1

Yes.

Speaker 2

Overall, I would say, on the labor side, we're Seeing less need for special payments, recruiting bonuses, that type of thing. So like much of the industry, that's beginning to normalize. That said, we do continue to see the types of increases that you're seeing across Most labor markets. And on the expense side, we on the other expenses, drug supplies, that kind of thing, We do benefit from having a group purchasing plan in place, but we are experiencing The same inflationary pressures that everyone else is.

Speaker 4

Okay. And Are you seeing any pressures from new competition that has come up in some of the markets?

Speaker 1

No, not currently. Nothing that's been material to our operations.

Speaker 4

And then the final question is, what explains the Year over year decline in cash available for distribution even though EBITDA was broadly similar?

Speaker 2

Yes. If you look at the calculation of cash available for distribution, it includes the prior year includes the So if you were to remove that, it changed the picture a bit.

Speaker 4

Okay, great. Thank you so much for taking our questions.

Speaker 1

Sure. Thank you, Sehil.

Operator

Thank you. There are no further questions at this time. Please proceed.

Speaker 1

Thank you, operator. I'd like to thank everyone for taking the time this morning. We look forward to speaking with you again in November.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Medical Facilities Q2 2023
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