Medical Facilities Q2 2024 Earnings Report

Medical Facilities EPS Results

• Actual EPS: -C$0.03
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Medical Facilities Revenue Results

• Actual Revenue: $146.64 million
• Expected Revenue: $144.66 million
• Beat/Miss: Beat by +$1.98 million
• YoY Revenue Growth: N/A

Medical Facilities Announcement Details

• Quarter: Q2 2024
• Date: 8/6/2024
• Time: N/A
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 8:30AM ET

Medical Facilities (TSE:DR) Corp owns a diverse portfolio of surgical facilities in the United States. Through its wholly-owned subsidiaries, the company owns controlling interests in four specialty hospitals and six ambulatory surgery centers. The hospitals offer a range of non-emergency surgical, imaging, diagnostic and pain management procedures, and other ancillary services. Its key revenue source is from the facility service income. The corporation's operations are based in the United States.

Medical Facilities Q2 2024 Earnings Call Transcript

Key Takeaways

• Medical Facilities reported a 2.4% increase in Q2 facility service revenue, driving a 21% rise in income from operations and a 13.7% boost in EBITDA, supported by higher surgical and pain management volumes and favorable case and payer mixes.
• The company announced the launch of the Black Hills Heart and Vascular Institute, featuring a state-of-the-art cardiac catheterization lab and offering a full spectrum of preventive, interventional cardiac, vascular and vein procedures.
• In Q2, MFC reduced its corporate credit facility by $5.0 million and returned $3.9 million to shareholders via the repurchase of 421,800 common shares under its normal course issuer bid.
• Following a U.S. SBA review, MFC secured full forgiveness on $6.9 million of PPP loans, which will be recorded as government stimulus income in Q3, and is pursuing relief on the remaining $5.1 million of loans.

Presentation

[Operator]

Good morning, everyone. Welcome to Medical Facilities Corporation's 2024 second quarter earnings call. After management 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 today's call may contain forward-looking statements with 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 materials, 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&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.

[Operator]

Such statements speak only as of the date made. I would now like to turn the meeting over to Mr. Jason Redman, President and CEO of Medical Facilities. Please go ahead, Mr. Redman.

[Jason Redman, President and CEO at Medical Facilities Corporation]

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 second quarter results. The news release, financial statements, and MD&A are available on our website and have been filed in SEDAR+. Please note that the income statement variances discussed by David and I this morning will exclude the results from the divested MFC Nueterra ASCs and non-controllable non-cash corporate-level charges related to share-based compensation plans. Overall, our hospitals continued to perform well in the quarter, benefiting from higher surgical and pain management case volumes, as well as favorable case and payer mixes. These factors resulted in a 2.4% increase in facility service revenue, and combined with savings at the corporate level, helped drive a 21% increase in income from operations and a 13.7% increase in EBITDA.

[Jason Redman, President and CEO at Medical Facilities Corporation]

Well, on the topic of our hospitals, back in early June, we announced that our Black Hills facility will expand its services to include heart and vascular care with the opening of the Black Hills Heart and Vascular Institute. The institute will provide a comprehensive range of services, from preventive care to interventional cardiac, vascular, and vein procedures. To support the institute, Black Hills plans to build a state-of-the-art cardiac catheterization lab for advanced cardiac and coronary procedures. The clinic and lab will be situated next to Black Hills Surgical Hospital. MFC is excited to partner with Black Hills team to meet the increasing demand for quality heart and vascular care in Rapid City and its surrounding areas. In addition to our solid financial results for the quarter, we made further progress in paying down corporate debt and repurchasing shares under a Normal Course Issuer Bid.

[Jason Redman, President and CEO at Medical Facilities Corporation]

In the quarter, we reduced our corporate credit facility by a further $5 million and returned another $3.9 million to shareholders through the purchase of 421,800 common shares under the NCIB. Subsequent to quarter end, we received favorable news regarding the U.S. Small Business Administration's review of $6.9 million of the $12 million in Paycheck Protection Program loans issued to certain facilities during the pandemic. The SBA completed its review of these particular loans and confirmed full forgiveness. As a result, we will record this $6.9 million as government stimulus income in the third quarter and reverse the corresponding liability previously recorded under government stimulus funds repayable.

[Jason Redman, President and CEO at Medical Facilities Corporation]

For the $5.1 million in PPP loans that remain, we will continue to diligently pursue all reasonably available channels to reverse any remaining denials for the outstanding PPP loans. I would now like to turn the call over to David to review our financial results for the quarter. David?

[David Watson, CFO at Medical Facilities Corporation]

Thank you, Jason. Good morning, everyone. As usual, please note that all dollar amounts that follow are in US dollars. Second quarter facility service revenue grew 2.4% to $107.2 million. The increase of $2.5 million was attributable to higher surgical and pain management case volumes, as well as favorable case and payer mixes. Total surgical cases were up 2.8%, as observation cases increased by 13.1% and outpatient cases were 6.1% higher, but inpatient cases were down 21.7%. Pain management cases were up 2.2%. Total operating expenses declined 0.9% to $88.3 million, with reductions in drugs and supplies and G&A expenses, mostly offset by the increase in salaries and benefits.

[David Watson, CFO at Medical Facilities Corporation]

Consolidated salaries and benefits increased 5.4%, primarily due to higher clinical and non-clinical salaries and wages as a result of annual merit increases, full-time equivalent increases, and market wage pressures. This was partly offset by the impact of the sale of Black Hills Surgical Hospital's Gillette Urgent Care Center during the quarter and cost-saving initiatives at the corporate level. Consolidated drugs and supplies decreased 3.6% due to a case mix that reflected lower acuity cases and improved cost savings at certain facilities. Consolidated G&A expenses were down 4.8% due to lower equipment rentals and purchases, lower physician guarantees, cost savings at the corporate level, and the sale of the Gillette Urgent Care Center in April. As Jason highlighted earlier, EBITDA increased 13.7% to $23.8 million.

[David Watson, CFO at Medical Facilities Corporation]

Looking quickly at our balance sheet, at the end of the quarter, we had consolidated net working capital of $8.7 million and cash and cash equivalents of $18 million, compared to net working capital of $19.8 million, and cash and cash equivalents of $24.1 million at year-end. The reductions in net working capital and cash and cash equivalents are the result of the continuing return of capital to shareholders through dividends and share purchases under the NCIB program, as well as further reductions in corporate debt.

[David Watson, CFO at Medical Facilities Corporation]

Through the first six months of the year, we have paid $3 million in dividends, reduced the outstanding balance of our corporate credit facility by a total of $10 million, including $5 million during the second quarter, and returned $5.7 million to shareholders through the purchase of 675,700 common shares under the NCIB. This concludes our prepared remarks. We'd now like to open up the call for questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Douglas Miehm of RBC Capital Markets. Please go ahead. Your line is open.

[Douglas Miehm, Life Science Tools and Diagnostics Analyst at RBC Capital Markets]

Hey, good morning. Thank you for taking my questions. First question just has to do with two specific hospitals, I guess Sioux Falls and Oklahoma. Sioux Falls was exceptionally strong this quarter, up 9% overall in terms of revenues. Perhaps you can expand on the reason for that. Then, maybe the same for Oklahoma, but the other way, considerably weaker than anticipated. I know that you talked about the combined impact on case and payer mix, but is that a move or a change that is what could be sustained going forward? Or would you expect a rebound just based on quarterly pacing?

[David Watson, CFO at Medical Facilities Corporation]

Yeah. Hey, Doug. So with respect to Sioux Falls, you know, as we mentioned, you know, they had higher surgical case volume. The mix was good. They saw more higher acuity spine cases, and that's as well as ENT procedures. So overall, that's what was driving that. They did have a strong, you know, very strong quarter. On the, you know, upside, they saw, you know, a lot of it was case mix, so, you know, less on the inpatient, more on the outpatient side. However, I think that's more of a quarterly and, you know, we'll have to see how that goes.

[Douglas Miehm, Life Science Tools and Diagnostics Analyst at RBC Capital Markets]

Okay. Then my other question is just, it sounds like one of your, you know, much larger competitors is on the block. And I, I'm curious about how you think about your business and if there were ever an opportunity for you, you to do the same thing or if the company were approached. Is there any way that the minority shareholders here are required to buy into any potential sale of the company? Or is it completely up to, you know, current shareholders, management, and the board?

[Jason Redman, President and CEO at Medical Facilities Corporation]

Hey, Doug. Appreciate the question. I mean, look, if there was, if there was an opportunity for a potential transaction, as you know, the board has an obligation to consider that, and we'll do so accordingly. And that's the decision that the board and the current shareholders would have to make.

[Douglas Miehm, Life Science Tools and Diagnostics Analyst at RBC Capital Markets]

There's nothing that the docs could do to prevent that from happening?

[Jason Redman, President and CEO at Medical Facilities Corporation]

I mean, I think obviously, I mean, anyone who's going to be interested in our assets would want the doctors' support. That's the main revenue generator, so I think they'd want to be in alignment in any transaction that would happen.

[Douglas Miehm, Life Science Tools and Diagnostics Analyst at RBC Capital Markets]

Okay, that's great. Okay, thank you.

[Jason Redman, President and CEO at Medical Facilities Corporation]

Thanks, Doug.

[Operator]

Your next question come from Doug Loe of Leede Financial. Please go ahead. Your line is open.

[Doug Loe, Managing Director and Healthcare & Biotechnology Analyst at Leede Financial]

Yeah, thanks, operator. Yeah, congratulations on the quarter, gentlemen. Thanks for taking my call. Just kind of looking retrospectively back to your announcement on the opening of the Black Hills Heart and Vascular Institute, and appreciate you gave a few general comments in that press release and in your MD&A this morning on just what the breadth of services might be that you might offer within that new initiative. I mean, it's a pretty broad category. I mean, you specifically mentioned catheterization. I assume you might do ablations for heart arrhythmia. You mentioned vein procedures, which, you know, some multiple varicose veins procedures that are currently FDA approved. So those are just two ideas that just kind of popped into my head.

[Doug Loe, Managing Director and Healthcare & Biotechnology Analyst at Leede Financial]

Once you just kind of, you know, define the breadth of services that you might provide within that institute and whether that platform, if sort of successful in the first few quarters, might be expandable to a few other hospitals. I'll leave it there. Thanks.

[Jason Redman, President and CEO at Medical Facilities Corporation]

... Yes, so thanks. You know, it's, I mean, this right now is unique to Black Hills. If there's an opportunity for other areas, I mean, we've stated that we're always going to be looking for ways to add service lines to our other facilities. But for now, it's focused on the Black Hills area. I think the range of services will continue to evolve over time, as these doctors, you know, the three physicians get in place and start to build out their practice, we can see this evolving. But for now, it's really what we've mentioned, the cardiac, the vascular, and the vein procedures. That's going to be the main focus.

[Jason Redman, President and CEO at Medical Facilities Corporation]

But we are, well, as I said, we are building out a state-of-the-art cath lab in our facility, to accommodate a range of different services.

[Doug Loe, Managing Director and Healthcare & Biotechnology Analyst at Leede Financial]

Okay, fair enough. Thanks, gentlemen.

[Operator]

Again, if you would like to ask a question, please press star followed by the number one on your touchtone phone. There are no further questions at this time. I'd now like to turn the call back over to Mr. Redman for closing comments.

[Jason Redman, President and CEO at Medical Facilities Corporation]

Thank you, operator. I would like to thank everyone for joining us this morning. We look forward to updating you again next quarter.

[Operator]

Ladies and gentlemen, this concludes today's conference. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• David Watson, CFO
• Jason Redman, President and CEO

Analysts

• Doug Loe, Managing Director and Healthcare & Biotechnology Analyst at Leede Financial
• Douglas Miehm, Life Science Tools and Diagnostics Analyst at RBC Capital Markets