Medical Facilities Corp
TSX:DR
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Good morning, everyone. Welcome to the Medical Facilities Corporation 2018 Second Quarter Results Conference Call. Before turning the call over to management, listeners are reminded that certain statements made in today's call include responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian provincial security law. 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 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' and other filings within Canadian security 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 would now like to turn the meeting over to Mr. Rob Horrar, President and CEO of Medical Facilities. Sir, you may begin.
Thank you, operator, and good morning, everyone. Joining me on the call today is Tyler Murphy, our Chief Financial Officer; and Jim Rolfe, Chief Development Officer. Earlier this morning, we released our second quarter financial 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.Before I turn the call over to Tyler to review our financial results, I would like to discuss importance of our acquisition of the 7 ambulatory surgery centers in February this year through our partnership with NueHealth, which we refer to as MFC Nueterra. As many of you already know, in addition to organic growth, a key part of our growth strategy is to increase and diversify our revenue base through strategic acquisitions of physician aligned ambulatory surgery centers and surgical hospitals. Our Q2 results underline the importance of the increase in diversified revenue base. The MFC Nueterra ASCs provide medical procedures including orthopedic surgery, neurosurgery and pain management. The addition of these ASCs significantly expanded our capacity and footprint, adding 18 operating rooms and 8 procedure rooms, more than doubling the number of facilities in our portfolio and more than doubling the number of states in which we operate from 5 to 11.In the second quarter, the ASCs added 3,614 outpatient cases to our case volume and contributed revenue of $9.6 million accounting for most of our revenue growth in Q2. I'll discuss the benefits of our partnership with NueHealth in more detail when I discuss our outlook later in the call, but for now, I'd like turn the call over to Tyler to discuss our second quarter financial results. Tyler?
Thanks, Rob, as per usual, I'd like to note that all the dollar amounts expressed in today's call are U.S. dollars unless otherwise stated. Our revenue for the quarter increased 10.8% to $106.5 million compared to $96 million in Q2 of last year. As Rob mentioned, most of this increase came from the Nueterra ASCs. Total surgical cases were up 39.5% with a 60.9% increase in outpatient cases being partially offset by a 5% reduction in inpatient procedures. Excluding MFC Nueterra, same facility case volume was flat. We did see notable volume increases at Unity Hospital in Black Hills but they were offset by decreases in ash -- in Sioux Falls Surgical Hospital. Our case volume for the quarter was negatively impacted by unusually high rate of physician absences due both to vacations and illnesses. Looking at our payer mix for the quarter including MFC Nueterra, surgical case volume from commercial insurance was up 111% and case volume from Medicare was up 63%. While I mentioned Unity case volume was up in the quarter, revenue was down but this was mainly due to fluctuations in contractual reserves last year. If you look at the 6 months year-to-date for Unity, income from operations is actually up $1.2 million versus prior year. We have EBITDA of $23.9 million for the quarter, representing an increase of 3.4% over the second quarter of last year. However, EBITDA as a percentage of revenue fell to 22.5% from 24.1% a year ago, as an incremental contribution from MFC Nueterra of $2.3 million and increases at Black Hills and Oklahoma Spine were offset by decreases at other facilities. Also, the divestiture of IMD sharpens our focus on growing our core businesses of partnering with physicians to own and operate high-quality healthcare facilities. Cash available for distribution in Q2 was $11.7 million, which is down 2.9% from this time last year. On a per common share basis, cash available for distribution of CAD 0.38 was CAD 0.01 or 2.6% lower than the same quarter last year. Distributions remain constant at CAD 0.28 resulting in a payout ratio of 74.3% in Q2, and up slightly from 72.4% in the same period last year. At June 30, 2018, the corporation has consolidated net working capital of negative $9.1 million compared to $33.8 million at December 31, 2017. The change was mainly due to the acquisition of MFC Nueterra ASCs in the first quarter of 2018. At the end of the quarter, we had cash and cash equivalents of $37.2 million and about $12.2 million available on our credit facility. For additional details on our financial results, including specific results for each center, please refer to our MD&A. I would now like to return the call to Rob to provide a few comments on our outlook before we open the call for questions. Rob?
Thanks, Tyler. Looking ahead to the balance of the year and beyond, we will continue to focus on enhancing and adding services at our existing facilities, including the recruitment of new physicians and the addition of ancillary services, such as urgent care clinics, to further diversify our service offering. As you know, hospital systems face a tough reimbursement and expenses environment and are looking for ways to lower the cost of care. With a strong and growing portfolio of facilities, our scale enables us to leverage operational efficiencies. As our growth continues, we'll focus additional time and attention on existing facility partners, improve efficiencies with value-added services like group purchasing and the sharing of best practices. With MFC Nueterra, our 7 ASCs are included in NeuHealth's corporate procurement program, which leverages their 50-plus facilities under management to achieve cost savings. We would expect to achieve further synergies from any future ASCs we may acquire or develop with this new platform. We remain focused on building scale and further diversifying our portfolio through accretive acquisitions. And while our pipeline of acquisition opportunities remains strong, I would add that the ASC acquisition market is particularly -- in particular is characterized by highly competitive buyer landscape as ASC management companies are under pressure to grow through acquisitions in order to meet their investor expectations.Finally, with our track record of superior care of our facilities being the hospital choice of their respected communities, we are well positioned to benefit from the increased demand for surgical services due to the increasing average age and life expectancy of the United States population. With that, we would now like to open the line for questions. Operator?
[Operator Instructions] Your first question comes from Neil Linsdell from Industrial Alliance.
Okay. Just to start off with the ASCs and the NueHealth partnership. You talked about the landscape for acquisitions, you're getting more aggressive buyers looking at the ASCs out there that you are also looking at? Am I right?
That's correct. I think that feeds off of itself, Neil, more activities sort of begetting some more opportunity. And it was very helpful for us in doing the partnership to really bolster our pipeline. So there's just a lot more activity, I think, is the comment.
Okay. And so with the NueHealth partnership that you have, they manage, I think, it's 50 different facilities and that there's ones in that network that might be particularly attractive for you to add to your -- the JV, I guess?
Yes, that's part of it, correct.
Okay. And has there been any kind of progress on those types of discussions?
I think -- I would tell you that -- I'll have -- Jim Rolfe is here. I'll turn it over to him, but I'll tell you that the pipeline really is -- continues to be strong. So...
Yes, Neil, it is. The pipeline is very strong. We -- as Rob said, we maintain a strong pipeline. We're in advanced discussions with several in-market tuck-in acquisitions, but also new market acquisitions as well. The thing about it is there has been some consolidation in the ASC market and so the onesies and twosies as far as ASCs have been a little bit less competitive than the platform acquisitions and so, yes, we remain strong on that. We also are -- been heavily involved in organic growth initiatives for -- in several of our centers as well.
And last quarter, we were talking about the synergies from the NueHealth, their purchasing capacity, and I think Vanderbilt as well. You were talking about 100 -- sorry $0.5 million in initial savings and then there were more that could come on after that. Can you give us an update on how that has been progressing?
Yes. I'll just note that 2 for us, the Vanderbilt initiative for us, it was fully implemented and we continue to see benefits from that. And I would tell you that, that -- we see that number growing as we find additional opportunities. It's not just a one-shot deal. We continue to add opportunities to save even on implants and other initiatives through the purchasing cooperative. And on the NueHealth side, that again, the ASC is competitive from the NueHealth GPO program, and that was also fully implemented in mid Q2. So we'll start to see the benefit of the savings on that as well. So all...
Can you quantify your expectations?
I think -- again, I think we said around $0.5 million, but we'll see that continue to go up and improve. We're not fully based on all of that. It's all fully implemented, but there are more and more programs that we can add to it, as we work with each of our partner facilities. So I really don't have any guidance on that, a particular number, but it will continue to increase. We haven't topped off, I think is the comment.
And I'll just kind of leave it a broad open question. If we look at the competitive environment and the regulatory environment, there are things like the -- we talked last quarter about the knee opportunity taking that inpatient, and the competitive environment, say, in South Dakota or in other places where you have competitors that are not new competitors, but they're trying to improve their offering. Any kind of update on what you've seen? Any kind of reaction from your -- the doctors or other partners that you have?
No, they're not on a competitive front. I'll tell you that the total joint as we mentioned before here, total joints, the demand for that is increasing. We continue to see inpatient demand on total joints as well but the future opportunity clearly is on the outpatient side. So I think if anything, that will continue to be an opportunity both for our hospitals and our ASCs. And nothing -- at this point nothing on the competitive front that's impacting any of our hospitals other than normal.
So no churn in doctors or anything like that as well?
No.
[Operator Instructions] Your next question comes from Endri Leno with National Bank.
I was wondering if you can comment a little bit on UMASH's revenue and operating income decrease? What was the contractual change that happened there?
Yes, I mean, the change is -- it will even out over the year. It was just a different -- looking at different reserves, we had obviously, new financial -- a new CFO come in and we're just making sure that we're looking at everything on our full potential. We have a little bit of some changes in reimbursement up there with Blue Cross and some other things and so it's -- really looking at UMASH -- I think you, you need to look at it on a broad basis again -- for the first 6 months, again it's actually doing quite well compared to the last year and over the year I think we'll be fine.
I mean, is it possible to quantify what operation -- operational income would have been without the contractual services changes, or no?
No, we don't -- I mean, we don't really -- we haven't really broken it out. Again If you look at the -- if you look at it over the 6 months, I mean, they're actually up over $1 million from last year. So we feel good about our prospects there. We have a lot of in-market activity, and recruiting new physicians and really working on that market, it's a big concentration of ours and so we feel good about prospects as we go forward.
And there are no further questions queued up at this time. I'll turn the call back over to Mr. Rob Horrar.
Thank you for participating on today's call and for your continued interest in MFC. We look forward to reporting on our progress next quarter. Thank you.
This concludes today's conference call. You may now disconnect.