Medical Facilities Corporation (DR) Earnings Call Transcript & Summary

Employees and other stakeholders, we are hosting today's meeting virtually via live audio webcast. We look forward to seeing you in person when it is safe meeting. Let me introduce the other speakers, Mr. Robert Horrar, the company's President and Chief Executive Officer; and Mr. David Watson, the company's Chief Financial Officer. I will act as chair of the meeting. I will ask David Watson to ask -- to act as secretary of the meeting and Bernadette Villarica of Computershare to act as scrutineer. In view of the need to attend to a number of formal matters, certain shareholders or their proxies have volunteered to move and second resolutions where required. While this procedure will facilitate the handling of formal matters, any shareholder or proxy holders may ask questions. Instructions on how to ask questions and the voting procedures will appear on your screens. I would also like to remind you that only registered shareholders or duly appointed proxy holders that have logged into the meeting using your previously obtained control numbers are entitled to vote, ask questions or take an active part in this meeting in a designated field on the web portal. We will endeavor to answer your questions during the meeting as time permits. Please note that this meeting is being recorded. However, no one attending is permitted to use any audio recording device or otherwise record and distribute a recording of this meeting in any fashion whatsoever. The last Annual General Meeting of Shareholders was held on May 14, 2020. Any shareholder who wishes to review the minutes of that meeting should contact us using the Ask a Question functionality on the meeting web portal. I'm also tabling a copy of the 2020 audited financial statements. These are publicly available, as are the proxy materials and are posted on our website and SEDAR. Please note that upon completion of the meeting, the CEO and CFO will be making a presentation. Following their presentation, they will endeavor to address questions you may have that are submitted to the Ask the Question functionality on the web portal. Accordingly, during the formal portion of this meeting, I ask you to limit any submitted -- to limit your submitted questions to those matters directly related to the specific matters being considered. Shareholders have been provided with notice and proxy materials for this meeting in accordance with applicable laws, and these are publicly available, posted on our website. And I have been advised by the scrutineers that prior to the meeting, proxies were received from the holders of 10,174,405 shares or approximately 32.71% of all shares entitled to be voted. As a result, we have a quorum for this meeting, and the meeting is properly constituted for the transaction of business. We will now proceed with the formal part of our agenda, the introduction of resolutions. Before we consider the business of the meeting, I would like to outline the voting procedures to be used at today's meeting. We will conduct each vote by way of a vote cast through the Lumi platform and those submitted by proxy. If you have voted your shares by proxy prior to the start of the meeting, your vote has been received by the scrutineers, and there is no need to vote those shares during the meeting unless you wish to revoke or change your vote. As we proceed with the business items to be considered at the meeting, polls on the individual business items will open for voting and then close as I direct them following the final item to be voted upon. Registered shareholders who have not submitted a proxy and wish to vote their shares or wish to change their vote may do so by clicking on the Poll button on the screen. Duly appointed and registered proxy holders may also vote using the same manner. I will now present the 3 resolutions that will be considered at this meeting. We will conduct the vote on all resolutions put to this meeting by way of online ballot by clicking on the voting buttons on the web portal. The first item of business for which this meeting has been called is the election of 7 directors to hold office until the next Annual Meeting of Shareholders of the company or until their successors are duly elected or appointed. The management information circular states that there are 7 candidates proposed by management. The secretary will now read their names.

The names of the nominees are Lois Cormack, Stephen Dineley, Erin S. Enright, Robert O. Horrar, Dale Lawr, Jeffrey C. Lozon, Reza Shahim.

Since no further nominations have been received in the required time lines, I declare the nominations closed. Seven persons have been nominated as directors, and there are 7 directors to be elected. Can I please have a motion for the election of the directors?

Mr. Chair, I hereby move that each of the 7 persons whose names have been read to this meeting by the secretary for election as director of the company be elected to serve until the Annual Meeting of Shareholders to be held in 2022 or until his or her successor is duly elected or appointed or he or she otherwise ceases to hold office.

Mr. Chair, I ll the motion.

The next item of business for which this meeting has been called is to consider and if thought appropriate to approve a resolution reappointing KPMG LLP as auditors of the company and authorizing the Board of Directors to fix the remuneration of the auditors. In order to be approved, the resolution must be passed by a majority of the votes cast thereon. Can I please have a motion for the reappointment of the auditors?

Mr. Chair, I hereby move that KPMG LLP be reappointed as auditors of the company at a remuneration to be fixed by the Board of Directors of the company.

Mr. Chair, I second the motion.

The next item of business for which this meeting has been called is to consider and if thought appropriate to approve a special resolution approving an amendment to the articles of the company to allow for participation in and attendance of shareholders' meetings by electronic or virtual mediums as more particularly set forth in the circular. In order to be approved, the resolution must be cast by not less than 2/3 of the votes cast thereon. May I please have a motion to the amendment of the articles?

Mr. Chair, I hereby move that the special resolution amending the articles of the company to allow for participation in and attendance of shareholders' meetings by electronic or virtual medium as more particularly set forth in the circular be approved.

Mr. Chair, I second the motion.

Thank you. Are there any questions regarding the 3 motions to be voted upon? I will now invite Trevor Heisler of NATIONAL Public Relations to read any questions submitted.

Good morning, Jeff. Please wait a moment while I gather any questions submitted through the portal. I see no questions submitted through the web portal. Please go ahead, Jeff.

The meeting will now vote on the election of directors, the appointment of auditors and the motion to approve the amendment to the articles as I stated earlier. Each of the resolutions will be conducted by online ballot. Any registered shareholder or proxy appointee who has not yet voted or wishes to change their vote may do so by clicking on the Voting buttons on the web portal and following the instructions there. There will be a one-minute pause for voting. [Voting]

Now that everyone has had the opportunity to vote, I declare the polls on each item to be voted upon to be closed. In respect of the election of directors, the Board of Directors of Medical Facilities Corporation has adopted what is commonly referred to as a majority voting policy. Under that policy, a director is required to tender his or her resignation if he or she receives more withhold votes than votes cast for his or her election. The scrutineer's report on the vote regarding the election of directors shows that each of the nominees would receive a greater number of votes for his or her election than would be withheld from his or her election, and none of the nominees would have to tender the resignation under Medical Facilities Corporation majority voting policy. Therefore, I declare that each of the 7 nominees whose name has been read by the secretary has been elected a director of the company to hold office until the close of the next Annual Meeting of Shareholders or until his or her successor is duly elected or he or she otherwise ceases to hold office. Congratulations. In respect of the appointment of the auditors, the scrutineer's report on the vote regarding the reappointment of the auditors show that the resolution has passed. Therefore, I declare that KPMG LLP has been reappointed as the auditors of the company and that the Board of Directors is authorized to fix the remuneration of the auditors. In respect of the amendment to the articles of the scrutineer's report on the vote regarding amendment to the article showed that the resolution has passed. Therefore, I declare that the amendment has been duly approved by shareholders. As we have not received any request for further business to come before the meeting, I declare the meeting terminated. I would now like to ask Robert Horrar and David Watson, the company's CEO and CFO, to make a presentation and to answer your questions.

Thank you, Jeff, and good morning, everyone. I appreciate you joining us today. David and I will now provide an overview of the past year as well as an update on our outlook and growth plans. First, I would like to direct your attention to our disclaimer on the forward-looking statements as the following presentation should be viewed in context of this disclaimer. We can advance the slides. 2020 was a challenging year for everyone. That being said, Medical Facilities was off to a strong start in 2020. Our results in January and February last year were favorable to the same months of 2019. However, as the pandemic began to spread across the country, in the final half of March of last year, our business was impacted by the cessation of elective cases and COVID-19 had a material impact on our business in the second quarter of 2020. Fortunately, our volumes rebounded significantly and quite dramatically in the second half of the year, and we continue to approach pre-COVID levels. Our results for 2020 were solid and in line with 2019, in large part due to some of the decisions we made both prior to and during the pandemic. On this slide, you can see the pronounced impact that COVID-19 had on our volumes in the second quarter of 2020 and in particular in April, when 3 of our ambulatory surgery centers were temporarily closed due to state mandates. Total surgical cases in April of 2020 were only 27% of the volume in April 2019. By mid-May, restrictions were lifted on elective surgeries in all of our markets, and volumes began to recover. The third quarter saw a dramatic rebound in case volumes, and volumes continued to normalize throughout the fourth quarter despite the higher prevalence of COVID-19 across the U.S. Despite the improvement, COVID-19 continued to surge and impact our volumes during the fourth quarter as some patients deferred care. Our ability to recover quickly was due to the hard work and commitment of our partners and associates to ensure that our facilities continue to provide a safe environment for patients and staff. The critical importance was the government stimulus funding that our hospitals and ambulatory surgery centers received at various times through the year. These funds, in addition to the changes we made to our dividend and retirement of our debentures at the end of 2019 as well as selling equity in Unity Medical in early 2020 and its underlying real estate in the second quarter, allowed us to weather this unprecedented storm as well as we did. Last September, we announced the opening of St. Luke's Surgery Center in Chesterfield, Missouri. This de novo ASC offers 6 specialties, including orthopedics, plastic surgery and general surgery. We're happy with the progress of the St. Luke's ASC and expect cases to continue to ramp up throughout 2021. We like the de novo space and look forward to doing more partnerships like St. Luke's, and I'll talk more about that in our outlook later in the presentation. For now, I'd like to turn the presentation over to David to discuss our financial results for 2020 and the first quarter of 2021.

Thank you, Rob. Good morning, everyone. I'll take a few minutes to briefly walk through our annual financial results for 2020 as well as our first quarter results for 2021. All dollar amounts in this presentation are in U.S. dollars, unless stated otherwise. For the year, total revenue and other income from continuing operations was $389.9 million, down 2.1% for fiscal 2019. The 2020 figure included $26 million in government stimulus income received by our surgical hospitals and ASCs. The year-over-year decrease was primarily due to a 14.2% same-store reduction in surgical case volume compared to 2019, mainly the result of the pandemic, forcing facilities to defer elective surgeries and a temporary closure of 3 ASCs earlier in the year. In addition to the pandemic affecting elective procedure volumes, 2019 included cases for the full year from Two Rivers and Central Arkansas Surgical Centers, which were sold in September 2020 and December 2019, respectively. 2020 consolidated income from operations was $67.8 million, an increase of 52% from $44.6 million in 2019. Excluding transaction costs and the sale of the controlling interest in UMASH, adjusted EBITDA for 2020 was $96.1 million. This is a decrease of 0.2% from prior year adjusted EBITDA, excluding the $22 million noncash goodwill impairment charge. Earlier this morning, we released our first quarter 2021 financial results. Total revenue and other income, which includes an additional $4.1 million in government stimulus, was $98.1 million for the quarter. We did not receive any government stimulus funding in the first quarter of last year. Our facilities service revenue for the first quarter 2021 was $94 million, up 1.3% from the $92.8 million in the first quarter 2020. The increase was due mainly to favorable changes in case and payer mix. Overall surgical case volumes were flat with the first quarter of last year. On a same-store basis, outpatient cases increased by 2.6% and observation cases by 15.4% while inpatient cases were down 15.1%. Consolidated income from operations for the quarter increased 66.4% to $18.4 million compared to $11 million for the first quarter of last year. Adjusted EBITDA was $25.1 million or 25.6% of revenue compared to $18.6 million or 20% in the first quarter of last year. In the first quarter of this year, we generated cash available for distribution totaling CAD 7.9 million, resulting in a payout ratio of 27.6% compared to CAD 8.8 million and 24.6% in the first quarter of last year. The decrease in cash available for distribution was due mainly to higher corporate taxes and the relative change in exchange rate between the Canadian dollar and the U.S. dollar, mostly offset by higher cash generated by the facilities. Looking at some key elements of our balance sheet. At the end of the first quarter, we had cash and cash equivalents of $58 million and consolidated net working capital of $42.7 million, giving us a current ratio of 1.46x. The outstanding balance in our corporate line of credit was $31 million. Inclusive of lease liabilities as per IFRS 16, our net debt to equity stands at 0.51x, and our net debt to EBITDA on a last 12-month basis is 0.86x. Our balance sheet is strong. We are well resourced to capitalize on potential growth opportunities, and our leverage remains lower than our U.S. trading peers. I would now like to turn the presentation back over to Rob to discuss our outlook and future growth opportunities. Rob?

Thank you, David. Regardless of the pandemic, the overall population growth in aging demographics in the U.S. are strong positive drivers for the demand of health care services. The seniors population is the fastest-growing age group in the U.S. There are now approximately 56 million people aged 65 and over in the U.S., and this number is expected to increase by 30% to approximately 73 million by the end of the decade. As the 65 and older population grows and people live longer, we expect there to be increased demand for musculoskeletal procedures. Musculoskeletal disease affects nearly 3 out of 4 people age 65 and over. A number of musculoskeletal procedures performed in outpatient settings has been dramatically increasing over time. Ambulatory care is one of the fastest-growing segments of the U.S. health care industry. It was a $30 billion market in 2020 and is expected to grow to $52 billion by 2025 driven largely by patients preferring the greater accessibility and lower cost of ASCs compared to hospital settings. We have multiple organic and inorganic growth opportunities ahead of us. When it comes to organic growth, we continue to expand the capacity of our existing facilities, as we are doing so with Arkansas Surgical Hospital this year. ASC is an important part of our growth thesis. We believe that there's even more opportunity coming out of COVID. In addition to potential acquisitions, our pipeline includes de novo opportunities, similar to what we did with St. Luke's. The de novos do take time to build out but the return on investment's very attractive. As David said earlier, we have a strong balance sheet and a good position to evaluate the right growth opportunities as the pandemic subsides, as anticipated, in the back half of the year. Before we move on to questions, I would like to express my gratitude to our entire team for their hard work and contribution. I'd also like to thank all of our physician partners, nurses, facility leaders and staff as well as all of the medical professionals for their dedication and their incredible efforts during this pandemic. I'd like to thank you, our shareholders, for your ongoing support. We'll now open the virtual floor to questions, and we'll invite Trevor Heisler to read any questions submitted.

Thank you, Rob. Please wait a moment while I gather any questions submitted through the portal. I do not see any questions submitted through the portal. I would now like to turn the mic back over to Jeff Lozon for his closing remarks.

Thank you very much for attending. I will declare the meeting terminated. We look forward to seeing you in the future. Good day.