Medical Facilities Q4 2023 Earnings Call Transcript

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March 14, 2024

There are 4 speakers on the call.

Operator

Good morning, everyone. Welcome to Medical Facilities Corporation's 20 20 3 4th Quarter Earnings Call. Analysts will be permitted to ask questions. Before turning the call over to management, listeners are reminded that today's call may contain forward looking statements within the meaning of the Safe Harbor provisions of the Canadian Provincial Services laws. Forward looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements.

Operator

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, 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. I would now like to turn the meeting over to Mr.

Operator

Jason Redman, President and CEO of Medical Facilities. Please go ahead, Mr. Redman.

Speaker 1

Thank you, operator, and good morning, everyone. With me on the call is our Chief Financial Officer, David Watson. Earlier this morning, we reported our 4th quarter and year end results. Our news release, financial statements and MD and A are available on our website and have been filed on SEDAR Plus. Throughout 2023, we remain disciplined both operationally and financially.

Speaker 1

We executed our strategy to focus on our core operations, drive financial performance and unlock additional shareholder value. We completed the divestiture of the MSC Nueterra ASCs and successfully achieved overhead cost reductions. We reduced our corporate debt and returned additional capital to shareholders through a normal course issuer bid. The 4th quarter was a very solid finish to a strong year. Higher surgical volumes helped drive revenue increases and profitability for the quarter.

Speaker 1

Excluding the divested ASCs, surgical case volumes were up 4.9%, contributing to a 7.8% increase in facility service revenue compared to the Q4 of the year prior. Similarly, when excluding the results from the divested ASCs as well as the prior year impairment charge relating to those ASCs, our income from operations for the quarter was up 144 percent to $25,600,000 and adjusted EBITDA increased 97.3 percent to $30,500,000 We used our cash flow to pay down the outstanding balance in our corporate credit facility by $8,000,000 in the quarter $20,000,000 for the year. During the quarter, MSC returned an additional $2,000,000 to shareholders to the repurchase of close to 300,000 common shares under our normal course issuer bid. For the year, we repurchased approximately 1,190,000 common shares for total consideration of $7,400,000 As we look back in 2023, it is clear that our deliberate and focused approach has made MSC stronger and better positioned for 2024 and beyond. Speaking of positioning, our surgical hospitals continue to rank among the best hospitals in the nation for high quality of care.

Speaker 1

Last month, for the 2nd year in a row, Black Hills Surgical Hospital was named the number one hospital in the U. S. For major orthopedic surgery in both medical excellence and patient safety categories by Care Chex. Around the same time, Sioux Falls Specialty Hospital received the 2024 Outpatient Orthopedic Surgery Excellence Award from Healthgrades and was ranked amongst the best hospitals in the U. S.

Speaker 1

For outpatient joint replacement surgery. And in January, Arkansas Surgical Hospital ranked in the top 5% of healthcare providers for patient experience over the last year, being named a Human Experience Guardian of Excellence Award winner for the 5th year in a row by Press Ganey. We are proud and thankful for the dedication and high quality of care provided by the teams at each of our facilities. On that note, I'll turn the call over to David to review our financial results in more detail. David?

Speaker 2

Thank you, Jason. Good morning, everyone. Before I begin, please note that all dollar amounts that follow are in U. S. Dollars unless stated otherwise.

Speaker 2

Also note that the year over year income statement variances I will discuss exclude the results from the divested MSC Nueterra ASC. Starting with our income statement, total revenue and other income for the quarter increased $20,200,000 or 19.9 percent to $122,300,000 The increase is mostly attributable to the $12,300,000 reduction in government stimulus income in the prior year quarter due to the reversal of PPP income. The remainder of the variance was due to a 7.8% increase in facility service revenue in Q4 2023. The growth in facility service revenue was due to changes in case mix from a higher proportion of orthopedic and spine cases and a 4.9% increase in surgical case volumes. Sioux Falls moving its anesthesia service and related billing in house in 2023 also contributed $1,100,000 to the increase.

Speaker 2

Looking at our surgical cases for the quarter, observation cases were up 28.8% and outpatient cases increased by 4.2%, but inpatient cases were down 13.9%. Operating expenses for the quarter totaled $96,600,000 which is down $11,400,000 or 10.6 percent from the same period in 2022. However, as you may recall, the Q4 of 2022, we recorded an impairment charge of $16,500,000 relating to the MFC Nueterra ASCs. Excluding the prior year impairment charge, operating expenses increased $5,100,000 or 5.6 percent. As a percentage of total revenue and other income, operating expenses decreased to 79% from 105.9% in Q4 2022.

Speaker 2

Consolidated salaries and benefits were up 8.3% primarily due to annual merit increases, full time equivalent increases and market wage pressures as well as the impact of Sioux Falls moving its anesthesia service and related billing in house during the year. Consolidated drugs and supplies were up 1.9% in the quarter due to the higher surgical case volume. Consolidated G and A increased 11.6%. The swing was mainly due to non controllable corporate level costs related to share based compensation plans resulting from the decrease in our share price in Q4 2022 versus Q4 2023 as well as increases in both contracted services and other facility related expenses. As Jason mentioned earlier, when excluding the prior year impairment charge, our income from operations was up 144 percent to $25,600,000 and adjusted EBITDA increased 97.3% to $30,500,000 The higher facility service revenue contributed to these increases, but again in the prior year we were affected by the reversal of PPP income.

Speaker 2

In the Q4, we generated cash available for distribution of approximately CAD12.8 million up from CAD9.9 million in Q4 of the prior year. This increase and our lower share count year over year decreased our payout ratio to 15.6 percent for the quarter from 21.2% in Q4 2022. On a full year basis, our payout ratio decreased to 26.7% from 33.8% in the prior year. Looking at our balance sheet, at the end of 2023, we had consolidated net working capital of $19,800,000 and cash and cash equivalents of $24,100,000 For reference, at the end of 2022, our net working capital stood at $32,500,000 and we had cash and cash equivalents of $34,900,000 Among other things, the variations reflect our $20,000,000 pay down to the corporate credit facility had an outstanding balance of $16,000,000 compared with $36,000,000 at the end of 2022. Inclusive of lease liabilities, our net debt to equity remains low at 0.78 times as compared to 0.94 times at December 31, 2022.

Speaker 2

This concludes our prepared remarks. We would now like to open it up the call for questions. Operator?

Operator

Our first question comes from the line of Suhil Thangari, who's an analyst from RBC. Please go ahead. Your line is open.

Speaker 3

Hi, thank you. This is Sahil for Dagnim. Thank you for taking your questions. My first question is, are you facing any impact from the change healthcare cybersecurity event that was reported in February?

Speaker 1

Yes, I can take that. Hi, Salil. How are you doing?

Speaker 3

Thanks.

Speaker 1

So we're not seeing any material impact of the event that's happened with change.

Speaker 3

Okay, great. Then my second question is, can you provide us an update on the competitive dynamics? And also related to this, I saw the pain cases were again down this quarter on a year over year basis and it has been the case for the last couple of quarters. Can you provide us some additional color on this dynamic as well?

Speaker 1

Yes. So I'll talk to the competitive environment and let David talk to pain cases. We're not seeing any significant changes in the competitive environment. Our hospitals continue to perform very well. Our surgical cases are up.

Speaker 1

We're doing a good job at retaining and attracting talent. So we continually watch the environments which we operate, but we haven't seen any strong competitive threats emerge.

Speaker 2

And then, Sahil, with respect to the pain cases, it certainly varies by facility, but in some cases, it's been related to the departure of a pain physician. In other cases, you got pain doctors that are in later stages of career, maybe winding down what they're doing. So we're continually looking to replenish and recruit new pain doctors. So it's just part of the normal cycle.

Speaker 3

Thanks. And my last question is on capital deployment. So what's the latest thinking on capital deployment as we go forward? You could comment on the split between either a dividend increase or share buybacks or further debt reduction? Thank you.

Speaker 1

Thanks, Hill. It's as we've said previously, it's a combination of the 3. So we continually look at how we allocate that capital. We have been active in the NCIB program. So we continue to remain active and that's our intention going forward.

Speaker 1

The Board hasn't made any decision with respect to altering the dividend. And in terms of corporate repayment of debt, that's something that we still intend to proceed with. But we constantly evaluate where to allocate the capital amongst those three priorities.

Speaker 3

Great. Thank you so much for taking our questions.

Speaker 2

Thank

Operator

you. Thank you. Okay. There seems to be currently no further questions from the phones at this time. So I'll hand the floor back to our speakers for the closing comments.

Speaker 1

Thank you, operator, and thank you to everyone joining our call this morning. We look forward to updating you again next quarter.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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Key Takeaways

  • Strategic divestiture of MSC Nueterra ASCs coupled with overhead cost reductions and disciplined capital allocation led to $20 million debt paydown and ~$7.4 million in share repurchases during 2023.
  • Q4 organic growth: Excluding divested ASCs, surgical case volumes rose 4.9% driving a 7.8% increase in facility service revenue, while income from operations jumped 144% to $25.6 million and adjusted EBITDA climbed 97.3% to $30.5 million.
  • Enhanced cash flow produced CAD 12.8 million in cash available for distribution (up from CAD 9.9 million), lowering the quarterly payout ratio to 15.6% from 21.2% a year ago.
  • Stronger balance sheet: Corporate credit facility balance decreased to $16 million (from $36 million), cash on hand was $24.1 million, and net debt to equity improved to 0.78x.
  • Top quality rankings: Black Hills Surgical Hospital was named the #1 U.S. hospital for major orthopedic surgery, Sioux Falls Specialty Hospital won a 2024 Outpatient Orthopedic Surgery Excellence Award, and Arkansas Surgical Hospital ranked in the top 5% for patient experience.
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Earnings Conference Call
Medical Facilities Q4 2023
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