Medical Facilities Corporation (DR) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Medical Facilities Corporation 2022 Fourth Quarter Earnings Call. [Operator Instructions] Before turning it 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. 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&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. Jason Redman, President and CEO of Medical Facilities. Please go ahead, Mr. Redman.

Thank you, operator. Good morning, everyone. Joining me today is our Chief Financial Officer, David Watson. We reported our fourth quarter and year-end results earlier this morning. Our news release, financial statements and MD&A may be accessed through our website at medicalfacilitiescorp.ca and have also been filed with SEDAR. The fourth quarter was highlighted by the continued strength of our core business. Our facilities service revenue reached an all-time high for the quarter due to a more favorable case in payer mix, combined with a 5.7% increase in surgical volumes at our 4 specialty surgical hospitals. In the quarter, we returned additional capital to shareholders through a substantial issuer bid as well as our normal course issuer bid program. Under our SIB, we purchased 3.1 million shares at an aggregate purchase price of $25.5 million. Additionally, under our NCIB program, we purchased 433,300 shares at an aggregate purchase price of $2.5 million. Combined, we purchased just under 4.9 million shares or about 16% of our total shares in 2022, representing a significant return of capital. We continue to pursue opportunities to reduce expenses, including overhead cost reductions. During the quarter, we concluded a separation agreement with MFC's former CEO. And this, combined with the retirement of our former COO, will result in significant savings in salaries and benefits on a prospective basis. We also dealt with onetime items that negatively impacted our results for the quarter. We reversed $12.3 million in Paycheck Protection Program, or PPP, loans from government stimulus income. This amount consists of all PPP loan balances for facilities whose forgiveness applications have been denied or under review. Nonetheless, we are pursuing all reasonably available channels for reversing any denials. Any loans that are subsequently forgiven will result in a recognition of income. We recorded a noncash impairment charge of $16.5 million related to the continued underperformance of the MFC Nueterra ASCs. This was a noncash item. It is important to highlight that these ASCs do not contribute materially to our results. In December, we sold our remaining 31.7% interest in Unity Medical and Surgical Hospital and settled the associated loan receivable for gross proceeds of $2 million. Before turning the call over to David, I'd like to give a shout-out to our hospitals, which continue to rank among the best hospitals in the U.S. for high quality of care. In fact, Sioux Falls Specialty Hospital, Black Hills Surgical Hospital and Arkansas Surgical Hospital were each recognized by Healthgrades as one of America's best hospitals for joint replacement surgery in 2023. A little over a month ago, Black Hills Surgical Hospital was ranked as the #1 hospital in the United States for major orthopedic surgery for medical excellence by CareChex, which also ranked Black Hills as the #1 hospital in the market for overall hospital care, overall surgical care and general surgery for 2023 in both medical excellence and patient safety categories. Around the same time, Arkansas Surgical Hospital was named the 2022 Human Experience Guardian of Excellence award winner by Press Ganey for the fourth year in a row. This award is part of an annual rank to the top hospitals in the country and is based on direct feedback from patients. ASH was the only hospital in Arkansas to receive this award. With that, I'd like to turn the call over to David to review our financial results. David?

Thank you, Jason, and good morning, everyone. I'll discuss our financial performance for the quarter and provide an update on our balance sheet and liquidity. I would also like to remind everyone that all dollar amounts expressed in today's call are in U.S. dollars, unless stated otherwise. Facility service revenue for the quarter increased 7.9% to $119.4 million compared to Q4 2021. As Jason mentioned, each of our specialty surgical hospitals experienced higher volumes for the quarter with our combined case volumes increasing 5.7% compared to the fourth quarter of the year before and 1.5% when compared to the fourth quarter of 2019. The higher facility service revenue was also attributable to the combined positive impact of case and payer mix. as well as a $1 million -- as well as $1 million related to ASH, moving its anesthesia service and related billing in-house earlier in 2022. Total revenue and other income decreased by $9.3 million to $107.1 million for the quarter. The 8% decrease was primarily attributable to a reduction in government stimulus income driven by the onetime reversal of $12.3 million in PPP income recognized in prior years. On the expense side, consolidated salaries and benefits were up 6.1% over Q4 2021. Contributing to this was a combination of annual merit increases, full-time equivalent increases and market wage pressures due to the shortage of nurses as well as the separation costs for our previous CEO. This was partly offset by the forfeiture stock options by former executives, lower incentive pay at the corporate level and decreased health plan utilization. Consolidated drugs and supplies grew 10% mostly due to case mix and higher surgical case volumes at surgical hospitals and inflationary pressure on prices. This is partly offset by the reclassification of costs pertaining to Sioux Falls' accountable care organization in 2022. Consolidated G&A increased by 11.1%. The $1.7 million increase was mainly attributable to $1.4 million in costs pertaining to the Sioux Falls accountable care organization being mostly reclassified from drugs and supplies into G&A combined with a $1.3 million impact of Arkansas Surgical Hospital moving its anesthesia service and related billing in-house. This was partly offset by lower corporate level costs, a reduction in lease-related costs and the gain recorded on the sale of the remaining equity in Unity. It's important to note, when adjusted for the impact of the impairment charge and the reversal to PPP income, our income from operations was $22.3 million and adjusted EBITDA was $27.6 million for the quarter. In comparison, in Q4 2021, we had income from operations of $25.5 million and adjusted EBITDA of $32 million. As Jason mentioned earlier, the fundamentals remained strong in our 4 hospitals. In the quarter, we generated cash available for distribution totaling CAD 9.9 million, resulting in a payout ratio of 21.2%. At the end of December, we had consolidated net working capital of $32.5 million, including $34.9 million of cash and equivalents. This compares to working capital of $60.9 million, including cash and equivalents of $61 million at the end of 2021. At year-end, we had $36 million outstanding in our corporate credit facility, and a $12.3 million reversed from government stimulus income was reported as a liability under payer advances and government stimulus funds payable. Any PPP loans subsequently forgiven will result not only in recognition of income but also a reversal of the corresponding liability. Inclusive of lease liabilities, our net debt to equity stands at 0.94, which means well below that of our U.S.-listed peers. This concludes our prepared remarks. At this time, we would like to turn it back over to the operator to open up the call for questions. Operator?

[Operator Instructions] Your first question comes from Endri Leno with National Bank.

I have a few. So I'll start with the first one. I'll start from the top with the revenue -- similar to the [ first one ]. So I just want to ask, is that the one you recognized this quarter? Does that include everything? Or is there other -- parts of it under consideration or appeal or anything like that and more could come?

Yes, Endri. So that is everything that has either been denied or is under review. So anything else that's remaining was forgiven and is not under further review.

Okay. That's great to hear. The other question I had, it was -- Jason, you mentioned in your prepared remarks that you're looking to further reduce overhead cost at the corporate. So I was wondering if you can talk a little bit to that. I mean beyond the changes you've made to senior management, what else can you do, be it further changes or be it -- kind of like what levers can you pull to reduce costs further at the corporate?

Yes. So we obviously look at every expense category we have. Obviously, personnel, salaries and benefits was a large portion of our corporate overhead costs. But we've been through and continue to go through our entire expenses, making sure that we adjust it to ensure that it's optimal for the business that we have.

And your change is not optimal -- it's not optimized yet at this point. Is that fair to say?

There's other expenses that we continue to look at. We're always looking at opportunities to reduce expenses. So we've -- we engaged in that in the latter part of Q4 of 2022, and we're going to continue that process into 2023.

Okay. Great. And when it comes to expenses and cost at the hospital level, you called out the shortage of nurses in the MD&A, which has been going through the whole U.S. health care. But how do you see that situation developing into 2023 for nurses and also inflation in drugs and supplies? Are you able to pass these costs on or to partially offset them in some way?

So the -- we'll start with salary and -- salaries and labor pressure. The nursing shortage existed pre COVID. COVID exacerbated that problem. So it continues into 2023. Things are improving somewhat. There's a little bit of less pressure. There's not as much requirement for signing bonuses and stay bonuses and things like that. So overall, we are seeing improvement. But there's going to be a continued shortage, and we'll just have to maintain our competitiveness in those markets. On drug supplies, other expenses, generally, many of those are under contract, which maintains pricing. So you're looking at somewhere in the 3% to 4% increases. Other noncontract implants, things like that, can be more expensive. And so we're going to continue seeing price increases as everyone else in the industry is.

Okay. And is there any way to offset them or pass them on or not really? I mean is that a discussion you have with insurance companies? Or is it something to that effect?

Yes. So typically, the insurance company contracts are multiyear. When we got the opportunity to negotiate these contracts, we make the best case we can. We've got roughly 1/3 of our revenues coming from government payers under the Medicare Medicaid plans. Those increases are determined by government and are indexed to inflation. I would say, in general, the increases don't necessarily keep up exactly with the underlying price increases.

Your next question comes from Doug Miehm, RBC Capital Markets.

Yes. First question, just as a -- continuing on some of the expense commentary that you just made. When you think about 2023, let's say, on a year-over-year basis, would you expect EBITDA margin contraction this year based on the commentary you just provided? Or is there a chance that it could be stable or you can even see some strength relative to last year?

Yes. Doug, thanks for the question. As we go into 2023, we obviously don't provide guidance, but I would say, in general, the facilities are going to continue looking to expand on the top line growth that they saw in 2022. Yes, we will see some of the pricing pressure slow down a bit than what we've seen over the past year. So there's certainly an opportunity for improvement.

Okay. Great. Second question just has to do with the dividend. I think we're at 20 -- just above 20% payout ratio. Has any thought been given to potentially increasing the dividend rate as we think about '23 and '24? Or is that something that is not on the table right now?

Yes. So the Board hasn't made any decision with respect to adjusting the dividend yet. We'll have to look at our performance going forward. We're always looking for ways to optimize shareholder returns. So it is a consideration item, but no decisions are made yet, Doug.

Okay. Okay. Excellent. And then my last question just has to do with the competitive environment, especially now that your facilities in South Dakota and Arkansas are scoring so well. I think it was Avera that just announced last week that they're going to be opening up a new 70,000 square foot facility in Tea or Tea, and that won't be ready for 2025. But can you talk about the competitive dynamics in the marketplace, especially given the quality scores that your hospitals are receiving then. What that means from a practical perspective for the ability to attract patients relative to your competition?

Yes. So thanks. I mean, I think you're absolutely right. I mean the market is becoming a lot more competitive. I mean our hospitals continue to do a very good job in attracting and retaining talent. That's going to be even kind of more important. We're making sure that we retain the doctors, and the clinical staff is going to be paramount forward. So I mean like we see the competition increasing. We continue to differentiate ourselves on performance standards. I mean obviously, it's something we're never going to compromise, but it's something we watch very closely. But our doctor portfolio remains strong, and patients tend to be very loyal.

You have a follow-on question from Mr. Endri Leno.

Just one more for me. It pertains more to kind of -- when you look at in your portfolio -- and congrats on getting that UMASH finally out. I mean, is there -- is it still on the table, the noncore divestments and any kind of developments you can talk in there? What are you seeing in terms of interest, in terms of multiple? Or is that off the table? So any color there would be appreciated.

So that's still definitely on the table. That was one of our stated goals that we mentioned back in Q4 of last year. That's still on the table. We can't face any particular transaction if there's ways to optimize value for the shareholders, and we would definitely pursue those opportunities. But can't [indiscernible] to celebrate now.

Yes. There are no further questions at this time. You may proceed.

Okay. Thank you, operator, and thank you, everyone, for joining our call this morning. We look forward to updating you again next quarter.

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