Medical Facilities Corp
TSX:DR
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Good morning, everyone, and welcome to Medical Facilities Corporation's 2020 Second Quarter Earnings Call. [Operator Instructions]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&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 1 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 Horrar, 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 Schario, our COO. Earlier this morning, we released our second quarter results. Our news release, financial statements and MD&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'll spend some time this morning talking about how we are managing through it.The quarter started off in line with our expectations. And 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. 3 of our MFC Nueterra ASCs were temporarily closed due to state mandates.The impact from COVID-19 varied at each of our facilities, but in May, volumes began to improve. The 3 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-19 by partially offsetting lost revenue due to the pandemic, and the 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 health care system. Although our financial results for the first half of the year have been impacted, we are 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 end of 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 the 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 6 specialties, including orthopedics, GYN, gastroenterology, plastic surgery, urology and general surgery. Facility features 4 ORs and 5 extended care rooms to accommodate outpatient surgery, 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're 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, I'll remind that all dollar amounts expressed in today's call are in U.S. dollars, unless otherwise stated. I'll 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-19 pandemic during the second quarter as elective cases were restricted, either voluntarily or by government mandates. 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 $21.1 million received by the facilities during the quarter.Overall, surgical case volume for the quarter was down 38%. The largest decrease was in outpatient cases, which decreased 42%, while inpatient cases decreased 25% and observation cases decreased by 20%. Case volumes were most heavily impacted in April, but began recovering in 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 $21.1 million of government stimulus income, was $88.8 million. This is a decrease of $5.4 million or 5.8% compared to the second quarter of 2019. Facility service revenue for the quarter was $67.7 million, down 28.2% from the same quarter last year.The government stimulus program served a vital role to the U.S. health care system over the past several months. During the second quarter, our facilities received approximately $47 million of total funds from various U.S. government programs, including a public health and social services emergency fund, the PPP, or Paycheck Protection Program, and the Families First Coronavirus Response Act. Of the $47 million received in the quarter, $23.4 million represents advanced payments for Medicare, which were liability, payer advances on our balance sheet. These 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 the 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 $71.2 million, representing a decrease of $10.2 million 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 $7.7 million 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 $24.6 million or 27.7% of revenue compared to $20.5 million 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-19. In the second quarter, we generated cash available for distribution totaling CAD 8.2 million, resulting in a payout ratio of 26.5%. This compares favorably to the prior year payout ratio to 179%. Turning to the balance sheet. At the end of the second quarter, we had consolidated net working capital of $74.3 million compared to $71.5 million at year-end 2019. Cash and cash equivalents totaled $79.8 million, and debt outstanding on the corporate credit facility was $84.8 million. The $24.7 million 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, please refer to our MD&A.This concludes our prepared remarks. So we'll now open up the call for questions. Operator?
[Operator Instructions] We have our first question from the line of Doug Miehm from RBC Capital Markets.
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?
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, we'll wait and see.
Okay. And then my other question, just has to do with -- I've been 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 netting it off against expenses?
Yes, under the relevant accounting guidance, it's optional. We elected to report it as revenue because we thought it prevent -- provided a more clear picture of what that was as opposed to offsetting expenses. We hope it would provide more comparability in future periods.
We have our next question comes from the line of Chelsea Stellick from IA Securities.
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. And 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, 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 August. And so when can we expect sort of a ramp-up in that, like August, you'll have your first case in?
December.
Yes. We think that that's going to ramp up very quickly. And by December, we should be fully ramped by the late fourth quarter.
[Operator Instructions] We have our next question from the line of Eduardo Garcia from National Bank Financial.
Just a couple for me. In terms of the government support, what are the terms for this support? Is it forgivable? 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 of $21 million that was received during Q2?
Yes. Yes. So there was about $12 million 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 this program, most likely this quarter or the next.
Okay. And the next one I have is more, in general, in terms of like trends. Have you seen like volumes that were more impacted in specific regions? Or maybe like it was more impacted in ASCs rather than hospitals?
Well, certainly, it was impacted more in the ASCs. We had several -- 3 of them actually that were closed due to state mandates. But they were -- as we indicated earlier, they were opened 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, running about 7% in June, we did note that we had a higher acuity. We had 17% increase in inpatient volumes there. So as the demand and the backlog came back, and our clinic volumes continue to ramp, we think they will continue to carryforward into -- and it is, in the third quarter.
There are no 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.