Earnings Call: Q2 2020

Aug 13, 2020

Good morning, everyone, and welcome to Medical Facilities Corporation's twenty twenty Second Quarter Earnings 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 to the MD and A for this quarter. The risk factors section of the annual information form and medical facilities or 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 meeting over to Mr. Rob Hobbaugh, President, CEO of Medical Facilities. Please go ahead, sir. Welcome to our second quarter earnings call. Joining me today are David Watson, our Chief Financial Officer Jim Rolfe, our Chief Development Officer and John Chariot, our COO. Earlier this morning, we released our second quarter results. Our news release, financial statements and MD and A are available on our website and have also been filed with SEDAR today. We hope that everyone joining us on this call remains in good health. These past several months have obviously been challenging for most of us as we deal with the pandemic here in The U. S. And around the globe, and we will spend some time this morning talking about how we are managing through it. The quarter started off in line with our expectations. Like all of our peers, the combination of stay at home orders and the restrictions on elective procedures throughout The United States had a material impact on our business in the month of April and into May. Three of our MFC, Nueterra ASCs were temporary closed due to state mandates. The impact from COVID-nineteen varied at each of our facilities, but in May volumes began to improve. The three ASCs that were closed reopened and by mid May restrictions were lifted on elective surgeries in all of our markets. The recovery was more pronounced in June with hospital and clinic volumes returning closer to normal. This recovery has continued into the third quarter. Throughout it all, our hospitals and surgery centers adapted to the changing situations as needed. All of our hospitals and ambulatory surgery centers have taken and continue to take every precaution to ensure that our facilities remain safe places for physicians, staff and patients. Our facilities also reduced the variable costs to offset lower volumes attributable to restrictions on elective procedures. In addition, each of our facilities received government stimulus income designed to help mitigate the impact of COVID-nineteen by partially offsetting lost revenue due to the pandemic and additional expenses required to keep our hospitals and surgery centers open. These programs have defined eligibility requirements and restrictions and were designed in part to support and maintain staffing levels. I know that our physician partners and all of our teams are truly grateful for the stimulus relief aid received in each of our respective facilities. To date, our facilities have been successful in securing necessary supplies and have not experienced any significant supply disruptions that would affect their ability to treat patients. The pandemic has had and continues to have substantial impact on society as a whole, and in particular our healthcare system. Although our financial results for the first half of the year have been impacted, we're encouraged by the positive trend in our volumes since April. We're fortunate that the decisions we made in the months before the pandemic significantly improved our financial position and have better enabled us to weather the storm. Likewise, the close of our real estate transaction at the June further strengthened our balance sheet. While there's still a high degree of uncertainty surrounding the duration of the pandemic and its effects, we remain focused on growth opportunities. I'll note that we have completed construction of a St. Luke's Surgery Center of Chesterfield. We expect to receive our license and do our first case this month. St. Luke's currently offers six specialties including orthopedics, GYN, gastroenterology, plastic surgery, urology and general surgery. Facility features four ORs and five extended care rooms to accommodate outpatient surgeries such as total joint replacement of knee and hip. Finally, we continue to see substantial opportunity in the ASC space and we remain focused on growing our ASC platform. In addition to pursuing potential acquisitions, we are evaluating various ASC de novo opportunities. With that, I would like to turn the call over to David to review our financial results for the quarter. David? Thanks, Rob, and good morning, everyone. As usual, a reminder that all dollar amounts expressed in today's call are in U. S. Dollars unless otherwise stated. I will spend a few minutes going over our second quarter financial performance, then provide an update on our balance sheet and liquidity. As Rob mentioned, all of our facilities were impacted by the COVID-nineteen pandemic during the second quarter as elective cases were restricted either voluntarily or by government mandate. These restrictions were not listed until partway through May. The negative impact of these restrictions was partly offset by the recognition of government stimulus income of $21,100,000 received by facilities during the quarter. Overall, surgical case volume for the quarter was down thirty eight percent. The largest decrease was an outpatient case, which decreased forty two percent. While inpatient cases decreased twenty five percent and observation cases decreased by twenty percent. Case volumes were most heavily impacted in April, but began recovering the latter part of May with continued improvement in June. You may have noticed the new line item for government stimulus income that is included in our results from continuing operations. This represents government stimulus funds received and recognized as income during the quarter by the hospitals and surgery centers. Our total revenue and other income for the quarter including $21,100,000 of government stimulus income was $88,800,000 This is a decrease of $5,400,000 or 5.8% compared to the second quarter of twenty nineteen. Facility service revenue for the quarter was $67,700,000 down 28.2% from the same quarter last year. The government stimulus program served a vital role to The U. S. Healthcare system over the past several months. During the second quarter, our facilities received approximately $47,000,000 of total funds from various U. S. Government programs, including the public health and social services emergency fund, the PPP or Paycheck Protection Program and the Families First Coronavirus Response Act. Of the $47,000,000 received in the quarter, 23,400,000.0 represents advanced payments from Medicare, which are a payer advances on our balance sheet. These advances advanced payments will offset future billings to Medicare beginning in the third quarter. As Rob mentioned earlier, our facilities flexed expenses to the extent possible. However, certain stimulus funding limited their ability to reduce headcount and payroll. The loan amounts received under PPP program are eligible for forgiveness to the extent they were used for certain qualifying expenses and to maintain payroll levels and related costs. Operating expenses for the quarter were $71,200,000 representing a decrease of $10,200,000 or 12.6% compared to the second quarter of last year. As a percentage of total revenue and other income, operating expenses decreased to 80.2% from 86.4% for the comparable period. Within our operating expenses, the largest variance was in drugs and supplies, which decreased by $7,700,000 or 25%. This decrease was largely driven by lower case volume as well as implant cost reduction initiatives at Oklahoma Spine Hospital. As a percentage of total revenue and other income, drugs and supplies decreased to 25.8% from 32.5% a year ago. EBITDA for the quarter was 24,600,000 or 27.7% of revenue compared to $20,500,000 or 21.8% of revenue in the second quarter of last year. EBITDA increased at most facilities as the government stimulus income and lower operating expenses offset the reduction in volume due to COVID-nineteen. In the second quarter, we generated cash available for distribution totaling CAD8.2 million, resulting in a payout ratio of 26.5%. This compares favorably to the prior year payout ratio of 179%. Turning to the balance sheet. At the end of the second quarter we had consolidated net working capital of $74,300,000 compared to $71,500,000 at year end 2019. Cash and cash equivalents totaled $79,800,000 and debt outstanding on a corporate credit facility was $84,800,000 The $24,700,000 receivable from the sale of the real estate assets underlying Umash was received in July and used to further reduce the amount outstanding on the corporate credit facility. Overall, we are entering the second half of the year with a strong balance sheet. Our underlying business and financial fundamentals remain strong, such that as the market continues to improve, we expect our financial performance will also improve. For additional detail on our financial results, including specific results for each facility, refer to our MD and A. This concludes our prepared remarks. We will now open up the call for questions. Operator? At this time, we would like to take any questions you may have for us today. And that you may rejoin the queue to ask additional questions. We have our first question from the line of Doug Lime from RBC Capital Markets. Your line is open. Please go ahead. Thank you. So first question just has to do with Q3. Do you expect to report further government stimulus during that quarter? And if you do, could you sort of give us an idea where it might stand? Yes. Hi, Doug. Hi. There were certain amounts that were not recognized in the second quarter that will carry over in the third quarter. They're not significant compared to what was recognized in the second quarter. And then regarding further government stimulus, you know, we'll wait and see. Okay. And then my other question just has to do with I've been, you know, taking a look at a number of companies in the space as they have reported. And I'd say you're probably the only one that has included the government income in revenue. Can you tell us why you did that as opposed to mending it off against expenses? Yeah. Under the relevant accounting guidance it's optional. We elected to report it as revenue because we thought it provided a more clear picture of what that was as opposed to offsetting expenses. We hoped it would provide more comparability in future periods. Okay, great. Thank you. We have our next question comes from the line of Chelaya Stalik from IA Securities. Please go ahead. Hi, good morning. So I'm happy to hear there's a reversion back to the mean with case volumes here in June onwards. But just curious how we should look at or rather how your outlook looks third quarter, both in the scenario of a potential second wave or not? Yes. That's a very difficult question in terms of what a second wave would look like. And I don't think we have any indication of that. What we do see though is the continuing return to normal hospital and clinic volumes in the third quarter and barring any other additional second wave or shutdowns, you know, we think we're going to finish the back half of the year pretty much on track. Okay. Great. And just in terms of St. Luke's, I know you mentioned that you're planning on enrolling sorry, the first case here in in August. And so when can we expect sort of a ramp up in in that? Like, August, you'll have your first case and yeah. Yeah. We think do we think that that that's gonna ramp up very quickly? And by December, we should we should be, fully ramped Perfect. By the late fourth fourth quarter. You're welcome. Thank you. Have a good one. You too. We have our next question from the line of Eduardo Garcia from National Bank Financial. Your line is open. Please go ahead. Hello. Good morning. Thank you for taking my question. Have just a couple for me. In terms of the government support, what are the terms for the for this support? Is it for viewable, or is there a part of it that needs to be repaid? I'm sorry. For which Eduardo, I've missed part of that. For which part of the funding? For the government support, the 21,000,000 that was received during Q2? Yeah. Yeah. So there was about 12,000,000 received that were PPP loans. And the expectation is that if you use those funds per the parameters of that program that those loans are forgivable. Therefore, those funds were recognized or the majority of those funds were recognized as revenue during the period. And the facilities will be submitting applications for forgiveness under those programs, most likely this quarter or the next. Okay, thank you very much. The next one I have is more in general in terms of trends. Have you seen volumes were more impacted in specific regions maybe like it was more impacted in the ASC rather than hospitals? Well, certainly it was impacted more in the ASCs. We had several three of them actually that were closed due to state mandates. But they were as we indicated earlier, were open by mid May and we were very encouraged as those volume trends came back in June. And even though we were down a little bit, we're about 7% in June, we did note that we had a higher acuity. We had 17% increase in inpatient volumes there. So as demand and the backlog came back and our clinic volumes continue to ramp, we think that will continue to carry forward into and it is in the third quarter. Okay. Those were my questions. Thank you very much. You're welcome. There are no more phone questions. Rob, please continue. Thank you, operator. Before we go, we would like to express our respect and gratitude to our physician partners and all medical professionals and employees for their incredible efforts and dedication over the past several months. And thank you as well to our investors and everyone on this call for their support and continued interest in MFC. We look forward to reporting on our progress again next quarter. Keep well and be safe. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating and you may now disconnect. Have a great day.