Medical Facilities Corp
TSX:DR
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Good morning, everyone. Welcome to the Medical Facilities Corporation 2019 First Quarter Results Conference Call. 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&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. Listeners are also reminded that today's call is being recorded for the benefit of individual shareholders, the media and other interested parties who may want to review the call at a later time. I'd now like to turn the meeting over to Mr. Rob Horrar, President and CEO of Medical Facilities. Please go ahead, Mr. Horrar.
Thank you, James, and good morning, everyone. Joining me on the call today is Tyler Murphy, our Chief Financial Officer; and Jim Rolfe, our Chief Development Officer. Earlier this morning, we released our first quarter results. Our news release, financial statements and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca and were also filed on SEDAR today. Our case volume was up significantly for the quarter as we added 1,387 surgical cases compared to the first quarter a year ago. That represents an increase of 12.4% comprised of same facility volume increases in a full quarter of contributions from MFC Nueterra ASCs we acquired in February of last year, which obviously only contributed partial results in the first quarter of 2018. While our case volume was up, the composition of case mix and payor mix was different. In fact, this past quarter shows the impact that changes in our payor and case mix can have on our financial results. Changes in payor and case mix impacted our revenue growth for the quarter and our operating results. This highlights the importance of our strategy to diversify our assets through the acquisition and development of physician-aligned ambulatory surgical centers and surgical hospitals and to drive same facility growth. We made good progress against this strategy in 2018, with a substantial expansion of our geographic footprint as a result of acquiring the 7 MFC Nueterra ASCs. And the diversification of our service offering, such as opening 2 urgent care centers. Clearly, the progress we made in 2018 has better positioned us for continued growth. We have a broad and robust pipeline of acquisition opportunities comprised of ASCs and surgical hospitals. Our pipeline with respect to ASCs is bolstered by our MFC Nueterra partnership. And as always, we are diligent in evaluating new opportunities that are accretive to our portfolio. Whether through acquisition or opening new urgent care clinics, growing and diversifying our national presence reduces our risk that may arise in a particular geography, including changes in payor mix. We also continue to grow organically in our existing facilities, recruiting more physicians as well as adding new operating and procedure rooms. Our growing presence also better positions us to capitalize on one of the biggest drivers of medical spending in the United States over the next decade or so and that is the growth of 65 and older demographic. This age group is expected to grow around from 53 million today to over 71 million by 2030. And this group grows -- as this group grows and people live longer, we expect there to be a higher need for orthopedic and other surgical procedures. I would like to now turn the call over to Tyler to discuss our financial results for the quarter.
Thanks, Rob. As usual, I would like to remind everyone that all of the dollar amounts expressed in today's call are in U.S. dollars unless otherwise stated. I would also like to point out that effective January 1, 2019, our financial results include the impact of IFRS 16, a substantial change to lease accounting standards. MFC adopted IFRS 16 using the modified retrospective approach and our financial results prior to 2019 were not restated. As a result, when comparing our 2019 EBITDA to periods prior to January 1, 2019, the impact of IFRS 16 should be considered. We had revenue of $99.1 million, which was up $1.5 million or 1.5% compared to the $97.6 million in the first quarter of last year. In the first quarter of 2019, we had a full quarter of revenue from the MFC Nueterra ASCs, first 2 months in the first quarter of 2018. That contributed $2.7 million in extra revenue compared to quarter 1 of 2018. The higher case volume represented $2 million in revenue but was offset by the changes to our payor mix and case mix, as Rob alluded to earlier. Surgical case volume growth over the same period last year came mostly from Blue Cross Blue Shield, which was up 34.8% and Medicare cases, which were up 16.4% compared to Q1 of last year. While we experienced a small increase in revenue, income from operations was down $14.1 million in Q1 of 2018 to $10.2 million in Q1 of 2019. Consolidated EBITDA was down 4% to $19.3 million for the quarter. As a percentage of revenue, our EBITDA margin was 19.5% compared to 20.6% for the prior year. The decrease was due to lower EBITDA from a few facilities, most notably Unity Medical, with these decreases being mostly offset by the IFRS 16 impact for the quarter. The variance at Unity was due primarily to payor mix with a higher proportion of governmental payors as well as an increased proportion of lower-acuity cases. In Canadian dollars, our cash available for distribution for the first quarter was CAD 5.3 million, down from CAD 9.4 million in the first quarter of last year. Our resulting payout ratio for the quarter was 166.3% compared to 92.2% for the same period a year ago. I would like to add here that our financial results do exhibit some seasonal fluctuations with the fourth quarter generally being the strongest quarter for us, as we typically see patients using any remaining deductibles of their insurance coverage for the year. Just as a point of reference, over the past several years, going back as far as 2013, the first quarter has been our weakest quarter. All of this to say that a single quarter can be impacted by seasonal variations that do not necessarily impact our ability to pay dividends over a longer period of time. Looking briefly at our balance sheet, at the end of the first quarter of 2019, we had cash and cash equivalents of $46.5 million and about $81.2 million available on our credit facility. This is in line with what our cash balances were at the end of 2018. For additional detail on our financial results, including specific results for each facility, please refer to our MD&A.With that, we would now like to open the line for questions. Operator?
[Operator Instructions] And your first question comes from the line of Lennox Gibbs with TD Securities.
UMASH, is there any demographic or any other sort of structural changes in UMASH's markets that might explain the increase we saw in the government pay on the quarter? That's the first part of the question. And then, secondly, as you look at that payor mix on -- that we saw in the quarter, is that indicative of what we may see in coming quarters?
So I'll take that. This is Rob. First off, we made good progress in -- at Unity last year and overall, we saw, for the quarter, our volume grow there. The issue is that we had a lower acuity of those surgeries and of -- what we see from fourth quarter to first quarter, we have a higher -- we generally have a higher commercial payor mix in the fourth quarter of the year. So that we typically see more governmental payors in the first quarter as a result of just those compressions. So I -- it's not -- it's a little bit more, I think, in this case but it's evenly split at Unity between payor mix and the -- what we just talked about in the government payors and in the case mix, which is the lower-acuity surgery through the quarter.
Okay. Then I'll switch the question maybe to case mix and whether or not what we saw in the quarter is indicative of what we might see in additional quarters? Or is this is sort of an anomaly in terms of the lower acuity cases?
Well, yes. It's -- we think it's more of an anomaly of when we're talking about higher case mix, higher level of acute surgeries, those take a while to source to pre-authorize new insurance and so forth. So we think we're -- there's been no trend, no demographic change, nothing that would indicate that, that would be a continuing issue.
And then secondly on Black Hills, can you speak to any changes you may have seen in referral patterns in that market relative to recent quarters. And also speak specifically to procedural volume trends at that facility.
Sure. So I assume you are referencing the competition that opened at the beginning of the year, and we have not seen any referral pattern changes. If anything, we've seen great success in opening our urgent care in Gillette, Wyoming as well as a clinic there. So I think that's very positive for us. This is -- this facility has also, we mentioned on our last call, recruited 4 new surgeons. They're ramping up as well. So no issues particularly there.
Your next question comes from the line of Neil Linsdell from Industrial Alliance Securities.
So just from everything you have been talking about, it does sound like Q1, there's really nothing to be read into the activities, the payor mix, the case volume that would necessarily reflect any kind of changes through the rest of this year or into next year from normal patterns?
Yes, I would think that's correct. It's - there is nothing. We're not seeing anything in any of our markets that would show a change to just kind of the normal progression. So I think as Rob alluded to, the first quarter we have a lot more Medicare patients than we do in the fourth quarter and that trend every year in U.S. healthcare continues to kind of keep going that way.
Okay. Just every now and again, you -- we hear a story about a surgeon that was out on leave and case volumes got deferred as a result of that. Any kind of issues or any kind of changes that we've seen in the surgeons on staff or availability or that type of thing?
Well. We have had some of those and that was predominantly the issue for us at Black Hills, given all the good growth strategies they've implemented. We did have a couple of physicians who weren't available in the first quarter. But that, as we've seen, that evens out over the course of the year. But that is -- it was an impact again.
Got it. I don't know if Jim's there to talk about it, how's the recruiting or the acquisition strategy coming along? Any -- well, you can't tell us if there's any imminent, I'm sure, but have you seen any changes in attitude as far as being more receptive with the environment?
Yes. You know Neil, we remain greatly focused on acquisitions of ASCs and surge hospitals. We also are focused on the development of new partnerships ASCs around our current markets. And it seems like for the last 6 months or 8 months I've been on a plane about every week, continuing current discussions with advanced discussions, but also looking at a lot of new deals. And again, we're very, very protective of things that are adjacent to our current assets. There's other -- a lot of deals that I look at that don't fit our criteria, so I just have to pass on them. But, yes, I've been on a plan about every week, trying to advance discussions and expand our pipeline.
Okay. And have you had any additional support or extra activity lately from some of your partners on both the potential to acquire more ASCs or put them in your network? And also on the other partners you have as far as recognizing more cost synergies in your businesses?
The answer on that is yes, and yes.
So NueHealth, I'll give you a little bit more color. NueHealth's been -- our partnership with NueHealth has been very important to that. It adds to not only the operating credibility, but it's given us a good platform to go have those discussions and partnership on the ASC side. We've good cost synergies through our GPO initiatives, we've called out before, a lot of good participation there. NueHealth has its own GPO initiatives that we can take advantage of as well. So on the cost side, we've had a very significant win strategy with our GPO affiliation, [ better built health ].
Okay. And just lastly, anything on the macro side that we should make sure we pay attention to as far as -- I think we saw the -- some surgeries, there was a much more of a push to doing them as day surgeries. Anything else on the healthcare industry that's coming up?
Well, for the most part we see, I think, this year the market basket is going to be more favorable than it was last year for CMS, which will pay in '19 and '20. That's a very favorable part of that rule. Their -- CMS will pay hospital departments the same as ASCs, which I think gives everybody a level playing field. And I see that as a more of an opportunity for us on the acquisition and joint-venture opportunities with health system. So that's it. We'll continue to see a migration to outpatient surgery as technology and benefits afford that. So all that's a very good trend and why we are focused on it, growing that pipeline.
Your next question comes from the line of Stephen Kwai from National Bank Financial.
I'm just calling on behalf of Endri Leno. Just a couple questions from me. Could you just tell us the IFRS 16 benefit to EBITDA for the quarter?
It's $2.8 million. First -- yes, prior year.
And just on the hospital level a little bit and could you talk a little bit about Unity and actually, the MFC Nueterra, what drove the lower year-over-year results on operating income? And is this going to change like how you approach future acquisitions?
Well, I think on Unity, as we've talked about on prior quarters, we've -- we are -- and Jim's spent a lot of time on the plane going up there, in the market, trying to do some other partnerships, bring some new physicians into that market, which is something we -- it's been in our plan for a while. Those relationships take a little while to, kind of, get baked and to try to bring some new volume in. So we still feel good about it. And we think that, that's kind of where that's headed. You want to touch on NueHealth?
Yes, I think we've had good opportunity with the portfolio at NueHealth. We've got a nice platform acquisition that we made there. There is nothing systematic or problematic there. We've got some centers that are up, some that are just challenged for a variety of availability reasons. But we continue to have good discussions on expanding that pipeline, which is important to us. We -- the platform was -- it was bought to grow and that's what we're focused on doing.
Okay. Great. And just a couple more. So the results at Black Hills, did you see any impact from Regional Health Orthopedic that opened in January?
We've not seen any change in referral patterns in that market related to that. As I've said, it was -- the Black Hills situation was purely an availability issue of physicians and it resulted in some case mix impact for the first quarter and then a little bit of cost. But, no, there's been no change in the -- that we've seen to date from that.
Perfect. And, sorry, just a couple more here. Have you seen any changes in competitive behavior or staffing at Sioux Falls in anticipation for Avera's new ortho hospital in Q4?
No impact there yet. I would just tell you that in the United States, staffing in general is -- particularly, nursing -- is always a challenge; it's competitive. There's a large demand for nursing, but we have not seen any -- there's been nothing called out at Sioux Falls related to that.
Okay. Great. And just my last one here. The position -- could you just maybe -- if there's going to be any changes on the position of the dividend going forward?
We have no plans to change the dividend.
[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to our presenters.
Thank you for joining us today and for your continued interest in MFC. We fully believe MFC's best days remain ahead of us and we look forward to updating you on our progress again next quarter. Thank you, have a good day.
This concludes today's conference. you may now disconnect.