Medical Facilities Corporation (OTCPK:MFCSF) Q2 2013 Earnings Conference Call August 14, 2013 10:00 AM ET
Donald Schellpfeffer – Chief Executive Officer
Michael Salter – Chief Financial Officer
Fred Garcia – RBC Capital Markets
Good morning ladies and gentlemen. Welcome to the Medical Facilities Corporation 2013 Second Quarter Results Conference Call. Before turning the call over to management, listeners are cautioned that today’s presentation and the 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 medical factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factor 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 or other interested parties who may want to review the call at a later time.
I would now like to turn the meeting over to Dr. Donald Schellpfeffer, Chief Executive Officer of Medical Facilities. Please go ahead, Dr. Schellpfeffer.
Thank you, operator, and good morning ladies and gentlemen. Thank you for participating in today’s conference call. Joining me today is Michael Salter, Chief Financial Officer of Medical Facilities Corporation or MFC. Prior to market open today, we released our 2013 second quarter financial results. Our news release, financial statements, and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca and was also filed on SEDAR today.
During the second quarter, we experienced revenue growth of 35.7%. Revenue increased to $73.7 million from $54.3 million for the same period last year. Our recent acquisition of Arkansas Surgical Hospital added $12.8 million in revenue. A favorable shift in case mix of the facility and additional revenue for primary and urgent care at Sioux Fall and Black Hills also added to the revenue.
Income from operation increased by 19.2% to $20.8 million compared with $17.5 million in the same quarter last year. Cash contributed $1.9 million to operation – the income from operation. All of our other centers except Black Hills Specialty Hospital and SSCMC in California reported increased income from operations primarily due to increased case mix.
Looking at cash available for distribution, our strong operating performance and lower corporate expenses was partially offset by higher debt repayment and maintenance capital expenditures. As a result of increased distributions and lower realized foreign currency gains, the payout ratio for the quarter rose to 93.8% compared with 85.1% for the second quarter last year.
Michael will now provide more details and insight into our financial performance for the second quarter. And I will conclude with our views and how the larger economic environment is impacting the healthcare market in Medical Facilities business. We will then open up the call for any questions you may have.
With that, let me turn the call over to Michael to discuss our financial results. Michael?
Yeah, thanks, Don, and good morning ladies and gentlemen. Before I begin, please note that all dollar amounts expressed in today’s call unless we state otherwise are in U.S. dollars. For the second quarter of 2013, revenues increased to $73.7 million, up 35.7% from the $54.3 million we recorded in the same quarter last year.
This increase was primarily driven as Don noted by a $12.8 million contribution from Arkansas Surgical Hospital, which we acquired late in the year 2012, and increased revenues from our remaining specialty hospitals. Increases at our specialty hospitals were the results of favorable shifts in case mix at certain number of hospitals and revenue from our primary and urgent care initiatives. Revenue at the Ambulatory Surgery Center in California was impacted by a decline in pain management procedures and an overall decrease in payor reimbursements as the center moves closer to being in network payor, within network payor contracts.
Despite having recorded an increase in surgical cases, consolidated operating margin declined from 32.2% to 28.2% in the second quarter of 2013. Operating expenses increased during the quarter consistent with the changes in case volumes and case mix. The inclusion of $10.9 million expenses at Arkansas, as well as start-up phase costs associated with our primary and urgent care initiatives. While operating income as a percentage of revenue declined, consolidated income from operations did increase by 19.2% to $20.8 million, up from $17.5 million for the same period last year.
During the second quarter, we recorded net income of $14.6 million compared with $8.4 million for the same quarter last year. The increase was primarily attributable to the change in values of our – the exchangeable interest liability and convertible secured debentures both of which have mark-to-market adjustments every quarter, a decrease of $7. 8 million during the second quarter, resulted an increase in net income reported.
Cash available for distribution or CAFD was CAD$9.4 million, an increase from CAD$9.2 million Canadian generated in the second quarter of last year. Due to last year’s increases in dividends effective in September 2012, and the conversion of our 2008 convertible debentures during April 2013, our declared distributions increased to CAD$8.8 million from CAD$7.8 million both numbers Canadian dollars. As a result of this increase, the payout ratio was 93.6% this year compared to 85.1% for the same period a year ago.
As of June 30, 2013, MFC had outstanding foreign exchange forward contracts totaling $82.8 million, which will be converted at a weighted average rate of CAD$1.0245 per U.S. dollar through May of 2015. Based on our analysis of pro forma cash available for distribution, using the current levels of performance we projected and we will continue to generate sufficient U.S. dollars to satisfy our contracted obligations under these hedges. And that hedge contracts will provide us with sufficient Canadian dollars to satisfy our anticipated dividends of the current rate of CAD$12.5 per share, further details of which calculations and our assumptions are contained in the MD&A.
Lastly, let me give you an update on our Normal Course Issuer Bid. During the second quarter, we purchased 74,700 common shares under the NCIB at an average cost of CAD$14.86. This translates to a total consideration of CAD$1.1 million.
During the second quarter our previous NCIB expired on May 14 and was replaced with a new NCIB that is effective from May 15, 2013, this year until May 14, 2014. We continue to believe that our repurchase plan from time to time provide us with the opportunity to acquire common shares at attractive price levels. Through the combination of cash retention and the proceeds from the debenture offering, the company has now built its cash and cash equivalents and short-term bank deposits to $40.9 million as at June 30, 2013, which places us in a great position for future growth.
I would now call on Don for his closing comments.
Thanks, Mike. The outlook for MFC is affected by many interrelated factors including the economy, healthcare report, and management strategies. The U.S. economy continues to demonstrate time to recovery, there have been improvements by two leading indicators, employment level and the housing market.
There remains some uncertainty as to whether this improvement will persist over the long-term as economic growth remains tampered. Financial markets have demonstrated improvement with SMB 500 having a strongest half of any years since 1998. Combining this with stronger employment numbers and housing market could result in growing consumer confidence in spending.
However, potential challenges such as the recently implemented tax increases, spending cuts and planned withdrawal of stimulus measures do remain. We believe that our company can maintain and continue to benefit from the fact that over 97% of our revenues are generated in South Dakota, Oklahoma, and Arkansas.
States that continue to have unemployment and residential foreclosure rates well below the national average. We remain confident that as the economy recovers and unemployment rates decline further, non-Medicare and non-Medicaid patient volumes which declined during the recession will drove and have a positive impact on the results of the company’s operations.
With respect to the healthcare reform, we believe that the continued implementation of the Patient Protection and Affordability Care Act or PPACA, demographic pressures are continuously growing healthcare costs, all sectors of the healthcare industry will experience continuing pressure at reimbursement level both from the government funded plan and from the private insurance companies.
However, the combination of increasing average age and life expectancy of U.S. population, overall population growth, advances in science and technology, and increasing proportion of the population with access in health insurance will drive the demand for the services provided at our centers.
Our management team believes that our business model, strong balance sheet, and operating margins along with our proven track record will continued to withstand the challenges created by the current economic environment in healthcare reform.
In order to manage expectations, we continue to explore accretive acquisition opportunities. We’ll also remain focused on driving operating performance across of all our centers over the long-term to minimize the impact of external factors. We believe our performance going forward will be driven by increased utilization of extended facilities at our hospitals, which are contributing to the increased case loads and more favorable case mixes.
Related to this we will support the physician recruitment efforts of our centers. As we believe that the increase in number of physicians holding medical staff privileges and to our ownership interest in our centers will positively impact results. The integration and development of revenue increase in initiatives such as our primary and urgent care operations at two of our hospitals and we will expand our capability and service offerings.
We remain confident that companies operations being able to continue to generate cash available for distribution that will be more than adequate to satisfy our current annual dividend of the CAD$1.25 per common share.
We would now like to open up the line for any of the questions that you may have. Operator?
(Operator Instructions) Your first question comes from Fred Garcia from RBC Capital Markets. Your line is open.
Fred Garcia – RBC Capital Markets
Fred Garcia – RBC Capital Markets
Good morning. Thanks for taking the question. Just a quick question on the urgent and primary care start-up costs, and jut wondering when those start winding down and when do you – and you are contemplating any new initiatives as well?
Yeah. I think, Fred, on the urgent care and the primary care, couple of things keep in mind. Number one, it is the operation itself, just solely by itself without considering the impacts on our system, which includes our facilities and our physician partners definitely you look to win. And even in the long run the margins on that that type of business will be significantly lower than what the hospital facility itself generated.
We are still in what we would call a development phase or start-up phase where those even what we anticipate for the long run margins on those are still – we’re still below that at this point. I would suggest, based on what we are seeing and I’ll let Don comment on that as well. But I would suggest it will probably be another year, year and a bit before that on the facilities we have come into sink what we anticipated.
The good news – and I think that answers your specific question, but I would like to add. I think the good news that we are seeing is that the impact on our system in terms of our facilities and our surgeons is starting to evolve developers we expected it to do from these initiatives. Don, you would like to add something to that?
I agree with what Mike has to say that, I would look at anywhere from 12 to 18 months through these things to be fully developed, because obviously there is a ramp-up period in the industry at a time. That being said, obviously it should affect the entire system across the board with the other services that we do provide.
Fred Garcia – RBC Capital Markets
Okay. One final and a follow-up to that considering that these initiatives are having the positive impact, are you contemplating expanding them to some of the other facilities?
I would say, yes. Our facilities do speak to each other. I mean, Fred, I think you are well aware of the most of the market is that, our facilities are very self contained as respect to management, but we certainly do talk to each other between the facilities. And yes, there are other centers have expressed interest in looking at similar initiatives. I mean, the whole thrust of these type of initiatives like come back to is the – is building our system been – the facility revenues and ou8r surgeons practices.
You will be obviously helping the other facilities to develop or expand your current systems. And like I said like Michael had reiterated that each one of these is unique and self contained, but sort of our synergies, these are some of the things that we work out together as MFC.
I will just add to that as well Fred, if you look at the facilities we have like Black Hills opened a year ago with their first urgent care facility, it’s a little different from the primary care initiative so far at Sioux Falls. They will be opening the second one, they’ve announced it and I think in the local market, which will also combine occupational health in with it.
So obviously that will still be in the development pace as we move forward. And Sioux Falls similarly they have a little bit different approach to it. So clearly, our other centers are going to be watching how these develop and as we go forward to give maximized benefit to each center and to all of our centers in aggregate.
Fred Garcia – RBC Capital Markets
Okay, great. Thanks.
(Operator Instructions) I have no further questions in queue. I’ll turn the call back over to the presenters for closing remarks.
Well, thank you for participating in today’s call and for your continued interest in MFC. We look forward to reporting on our progress for the next quarter. Thank you very much and have a great day.
Thank you, ladies and gentlemen.
Thank you everyone. This concludes today’s conference call. You may now disconnect.
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