Earnings Call: Q2 2021

Aug 12, 2021

Earnings release

Good morning, everyone. Welcome to the Medical Facilities Corporation twenty twenty one Second Quarter Results Conference Call. After management's remarks, this call will include a question and answer session whereby qualified equity analysts will be permitted to ask questions. Before turning the call over to management, listeners are reminded that certain statements made in today's call, including responses to questions, 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 about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements, 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. Please note that today's call is being broadcast live over the Internet, and the webcast will be available for replay beginning approximately one hour following the completion of the call. Details of how to access the webcast replay are available in this morning's news release announcing the company's financial results. I would now like to turn the call meeting over to Mr. Rob Harar, President and CEO of Medical Facilities. Thank you, Jennifer. Good morning, and welcome to our second quarter earnings call. Joining me today is David Watson, our Chief Financial Officer. Earlier this morning, we released our second quarter results. Our news release, financial statements, MD and A may be accessed through our website at www.medicalfacilitiescorp.ca and have also been filed with SEDAR today. Our second quarter was highlighted by a continued strong recovery in case volumes on a sequential and year over year basis. Surgical case volumes were up at each of our facilities, with Sioux Falls Specialty Hospital, MFC, Nueterra ASCs, and the Black Hills Surgical Hospital experiencing the largest increases. Our facility service revenue was up 44.2% from the second quarter of last year. In line with the higher surgical case volume across all facilities, we also saw an increase in operating expenses, partly offset by the impact of the sale of Two Rivers Surgical Center in September 2020. Our EBITDA for the quarter was down 3.7% from the second quarter of last year. But as a reminder, we recognized just over $21,000,000 in government stimulus income in the second quarter of last year versus $572,000 this past quarter. Importantly, compared to 2019 as a baseline, second quarter EBITDA, excluding government stimulus income, increased 12.7%. Looking ahead to the back half of the year, we remain cautiously optimistic in our outlook. While we are pleased with the continued volume recovery in the second quarter and encouraged by the continued rollout of vaccines across The US, there's still a lot of uncertainty due to the Delta variant in many parts of the country. COVID nineteen cases have been on the rise so far throughout the summer, and we continue to support the vaccination rollout at each of our facilities and in general. Regardless, all of our facilities are open. We have sufficient PPE on hand and continue to take all necessary precautions. And we have a strong base from which to grow, both organically and by way of strategic acquisitions. On the topic of organic growth, the 4,500 square foot expansion at Arkansas Surgical Hospital is moving forward as expected, remains on track for completion before the end of the year. We also look to capitalize on the strong ASC market, whether through potential acquisitions or de novo opportunities like St. Luke's ASC, which we opened last year and continues to ramp up volumes. With that, I would like to now turn the call over to David to discuss our second quarter financial results. Thanks, Rob, and good morning, everyone. I will discuss our financial performance for the quarter, then provide an update on our balance sheet and liquidity. But first, I would like to remind everyone that all dollars announced expressed in today's call are in U. S. Dollars unless stated otherwise. Our facility service revenue for the second quarter was $97,600,000 which is up 44.2% from the $67,700,000 in the second quarter twenty twenty. The increase was primarily due to higher case volume, as prior year volumes and case mix were impacted significantly by the pandemic. Overall surgical case volumes increased by fifty one point one percent, Outpatient cases increased by sixty two point one percent. Inpatient cases increased fifteen point six percent. Although second quarter surgical case volume from continuing operations increased significantly compared to 2020, it was still about 6% below the second quarter of twenty nineteen. Total revenue and other income was $98,100,000 for the quarter, an increase of 10.5% from $88,800,000 for the same period in 2020. As Rob mentioned, facilities received an additional $572,000 in government stimulus during the quarter, while they received just over $21,000,000 in the second quarter of last year. Operating expenses for the quarter increased by 14% to $81,200,000 to a more normalized level driven by the growth in case volume. As a percentage of total revenue and other income, operating expenses increased to 82.7% from 80.2% in the prior year, but compared favorably to 86.4% in the second quarter of twenty nineteen. EBITDA for the quarter was $23,700,000 or 24.1% of revenue, compared to $24,600,000 or 27.7% a year earlier. Compared to 2019 as a baseline, second quarter twenty twenty one EBITDA, excluding government stimulus income, increased 12.7% and the margin was 23.7% compared to 21.8% in second quarter twenty nineteen. In the second quarter this year, we generated cash available for distribution totaling CAD7.5 million, resulting in a payout ratio of 29.2%. This is a slight increase from second quarter of last year due to the strengthening of the Canadian dollar relative to the U. S. Dollar. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of $61,500,000 and consolidated net working capital of $48,100,000 compared to $45,000,000 at year end. Cash and cash equivalents included $20,800,000 of Medicare advances after $2,300,000 was recouped in the second quarter. The outstanding balance on our corporate line of credit was $31,000,000 at quarter end. Inclusive of lease liabilities, our net debt to equity stands at 0.49. We continue to be very well resourced to capitalize on potential growth opportunities and our leverage remains significantly lower than our U. S. Trading peers. For additional detail on our financial results, including specific results for each facility, please refer to our MD and A. With that, we would like to now open the line for questions. Operator? Thank please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question for just a moment to allow everyone an opportunity to signal for questions. We'll go first to Andre Leno with National Bank. Hey. Good morning. Thanks for taking my questions. I was wondering if you guys can talk a little bit. I mean, said the volumes are generally recovering or have recovered. If you can a bit about how is it trending versus historical levels? And what are you seeing so far in Q3? Hey, Andrew. Thanks for the question. The volumes have continued to improve. We saw in the first quarter that certainly up significantly compared to 2020. Still a little bit below the same period in 2019, but that continued to improve in the second quarter. We were about 6% below second quarter twenty nineteen. And, you know, we're cautiously optimistic. I think all things being equal, we'd expect that trend to continue, but obviously with potential impact of the delta variant, we're we're cautious on that. Okay. No. No. For sure. And as a follow-up there, I mean, does the caution come from a general sense of caution that cases are increases, or or are you seeing anything in terms of cancellations or postponement? It it's a general caution at this point. Okay. Okay. Great. Thank you. The second question I have, you mentioned it or or, Rob, rather in the prepared remarks and it was in your press release as well into exploring growth opportunities in the second half of the year, the de novo and acquisition. So I was wondering if you can talk a little bit about what would kind of sway you one way or another to to the network to an acquisition? And if you can talk about what kind of size are you considering? Would it be more of a sort of a packing kind of situation, or would you even look for something of of of the size? Well, in general, Andrea, we've talked about our growth opportunities in the ASC side are are significant, listed in terms of, you know, the looks that we're getting in our pipeline. Our pipeline is active. We continue to look at both de novo development opportunities as well as acquisitions. And so we see that market starting to pick up in terms of activity. Clearly, we've talked about that. And so we, you know, we we see a lot of activity right there. It takes a while, of course, to work through development opportunities and and to diligence acquisitions. And the size are generally what we've got about now in terms of the ASC portfolio for that two to four OR size. K. Great. That's good color. Thank you. And my next question and I have a follow-up, but I'll I'll jump in the queue after. I was wondering if you can talk a bit about the the CMS fee schedule for this year. Any impact of the procedures or, like, what what impact would it have to medical facilities, if at all? Yeah. You know, I think I think the overall lift on the schedule is 2.3%. You know, the expectation is that, you know, from from our specifics, it should be, you know, in line with that. Okay. Great. And the the follow-up to that is that is there the reinstatement of the inpatient list had any impact to medical facilities at all or or any thoughts you might have on that? I I believe you're talking about the inpatient only list. You know, it's CMS. I think it's it's pulled back from that this year. And, you know, and just in general you know, I'll just say in general, our volumes continue to improve, you know, across the board. So at this point, I would say that not that's not been the impact. K. Okay. So so no no changes there. Right? So it should be more or less Not a not not right. Right. K. Great. Thanks. I'll I'll jump in the queue. Thank you. Thank you. We'll go next to Doug Neum with RBC Capital Markets. Yes. Thank you, and good morning. First question just has to do with the surgical case volume increase that you're seeing, and you noted I read that large part of that 68% coming from Medicare shown or growth. And then I think it was 38% from BlueCloth Blue Shield. Can you talk about why you're sort of over indexed right now to Medicare growth? Just curious about that. Yeah. Doug, I appreciate the question. This is Rob. What we've seen coming out of recovery is that most of a large part to a large part, the deferred cases, you know, were were Medicare. So, you know, starting to see that come back and, know, as COVID and vaccinations roll out. So we've seen, you know, a little bit more growth in that area. And, of course, Blue Cross being in our commercial real line is is also, you know, was a part of that. But that's that's really the reason behind it. Okay. Okay. That makes perfect sense. Right. The other thing that I was wondering about is do you think that the company and other surgical hospitals just in in in general are benefiting from what may be perception that they're they're safer place to have procedures done versus a community hospital where they could get exposure to COVID, etcetera, etcetera? Or do you still feel that they it's simply a function of, you know, the quality of the care and those sorts of things that you can provide relative to a community hospital? Well, I Doug, that's a very good question. I think for the for primarily, it's the quality of the outcomes and things like that that that win the day. The secondly, I'd tell you that that, you know, the yeah. I think that's primarily the what what wins the day here. Now I would tell you we've benefited over, over the time from being a safe place, not treating COVID patients, that we have seen some volume pickups from that, and especially from physicians in the community that are not owners. We've called that we've talked about that in previous calls. And, you know, to to some degree, there may be some benefit from that. But for the large part, it's the reputation, of each of the centers and the quality. Yeah. Okay. Good. And then finally for me, just with respect to multiples and those sorts of things in as you look at your acquisitions. Now de novo is one thing, but the acquisition multiples, are you seeing any price inflation in those, whether they'd be a a surgical hospital or, I guess, it'd be mostly ASCs in in this case. But, anything you've observed there through the period? What we're seeing right now is fairly stable multiples. We haven't seen any expansion of that in over the past, really the past year. So it's fairly stable on the on the multiple side. Okay. Great. That's it for me. Thanks very much. Thank you. Thanks. We'll go next to Chelsea Stelik with IA Capital Markets. Hello. Good morning. I just have a couple of questions. Guess I'm just curious on the outlook I know that you mentioned potential stimulus from from newer packages. I just kinda wanna get a sense of where you expect things to roll out for the remainder of the year. You know, based on on, you know, stimulus that's been received to HLC, you know, we still have some deferred that, you know, we'll be recognizing in the third and fourth quarters. Okay. It's, you know, it's not not not at the same level that, you know, we we've seen in past quarters. Okay. And then I guess this is my last question. I know that you mentioned there's just been a larger proportional increase in surgical cases at, you know, MSC and SSH. Just kind of more color on on the larger increases there and and if that's going to continue moving forward, that the the delta between certain facilities. Well, we just called out those were the, I guess, best the the best performers in terms of the volume for the quarter. I don't, I think overall, we're pleased in general with that with that trend across the portfolio. You know, as David called out, Chelsea, you know, we've we've been we continue to close the gap to, the twenty nineteen levels. You know, even within the third quarter, we saw almost a a continued positive closure rate rate. So, you know, Delta COVID aside, we're pretty optimistic of that continuing. Okay. Yep. That's that's great. That's it for me. Thank you. K. Thank you. And we'll go next to Andre Leno with National Bank. Hey. Good morning. Thanks for the follow-up. Just one for me. Can you guys talk if you're seeing anything in terms of inflation, be it in the within your current staff or even labor pressures in The US when that has impacted hires or anything like that? Yeah. Good good question, Andrew. You know, we've we're in competitive markets. We've always seen, you know, competitive labor market in each of our markets. We have seen increased pressure this year, but nothing that's impacted our ability to maintain staffing levels or operate. Yeah. Thank you. And is there any way, like, the in terms of to the the increased pressure, actually, is it more in terms of recruiting, or is it more in terms of compensation or or keeping staff in house? Yeah. It's it's actually both, because they they end up playing, off on one another. Okay. Okay. Is there the impact quantifiable that you might wanna call out or or not not really quantifiable impact at this point? No. Not at this time. K. K. Great. Thank you. That's it for me. K. Okay. And at this time, there are no further questions. I will turn the call back to Mr. Rob Harar. Thank you, operator. In closing, we thank our physician partners, nurses, and all staff who deliver outstanding care to patients each and every day. And as always, we look forward to reporting on our progress again next quarter. Thank you. This does conclude today's conference. We thank you for your participation.