Medical Facilities' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.20.14 | About: Medical Facilities (MFCSF)

Medical Facilities Corporation (OTCPK:MFCSF) Q4 2013 Earnings Conference Call March 20, 2014 10:00 AM ET

Executives

Donald Schellpfeffer - Chief Executive Officer

Michael Salter - Chief Financial Officer

Analysts

Lennox Gibbs - TD Securities

Doug Miehm - RBC Capital Markets

Trevor Johnson - National Bank

Operator

Good morning, ladies and gentlemen. Welcome to the Medical Facilities Corporation 2013 Fourth Quarter and Year End 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 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’ 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 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 Dr. Donald Schellpfeffer, Chief Executive Officer of Medical Facilities. Please go ahead, Dr. Schellpfeffer.

Donald Schellpfeffer - Chief Executive Officer

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 fourth quarter and full year 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.

In 2013, MFC continued to deliver with strong and stable results. It is my pleasure to announce that in our 10 years of operation, we have achieved another milestone with record-breaking annual revenue of $309.2 million, up 29% from the $239.4 million for the same period in 2012.

Our acquisition of Arkansas Surgical Hospital contributed significantly to this revenue increase. We saw an increase of 8.5% in revenue growth of the company’s existing facilities due to a favorable shift in case mix, an increase of surgical cases and pain management procedures as well as contributions from our urgent care and primary care initiatives. Income from operations for 2013 increased to $91.1 million or 30% of revenue compared to $78.7 million in the same period last year. All of our centers reported increases in income from operations primarily due to a more favorable case mix.

Looking at cash available for distribution, our strong operating performance with lower corporate expenses and interest income was partially offset by a decline in foreign currency gains and higher tax provisions. As a result of increased distributions and lower realized foreign currency gains, our payout ratio for 2013 was 84.3 in line with the previous year of 83.3.

Michael will now provide more detail and insight into our financial performance for the fourth quarter of 2013. And I will conclude with views on how the larger economic environment is impacting the healthcare market in our business. We will then open up the call to any questions you may have.

With that, let me turn the call over to Michael to discuss our financial results. Michael?

Michael Salter - Chief Financial Officer

Thanks, Don and good morning, ladies and gentlemen. Before I begin, please note that all the dollar amounts expected in today’s call are all in U.S. dollars unless stated otherwise. For the fourth quarter, revenues increased to $89.6 million, up 25% from $71.9 million for the same quarter last year. The increase towards revenue resulted from Arkansas Surgical Hospital reporting $16.4 million of revenues.

Overall, our specialty hospitals performed well as all were up from the same period a year ago. Overall, facilities experienced an increase in surgical cases and pain management procedures, specifically Sioux Falls experienced an increase in orthopedic and neurology case as well Oklahoma Spine, so a higher per case charges on their surgical case and pain management procedures. Black Hills experienced an uptake in revenue generated for urgent care and a more favorable case mix. Finally some of our specialty hospitals received Medicare and Medicaid incentive payments for the implementation of electronic health records which also contributed positively to facility revenues.

With the inclusion of Arkansas Specialty Hospital consolidated operating margin was up slightly from 32.3% to 33.2%. In the fourth quarter of 2013 operating expenses increased during the quarter consistent with the changes in case volumes and case mix, inflationary increases and vendor prices for drugs and supplies as well as expenses at Arkansas and start-up phase cost associated with primary and urgent care initiatives.

Our consolidated income from operations in the fourth quarter of 2013 increased by 28% to $29.8 million from $23.2 million compared to the same period one year ago. During the fourth quarter we recorded net income of $21 million compared with $39.9 million for the same quarter last year. The decrease was primarily attributable to the change in values of the exchangeable interest liability and convertible secured debentures.

Turning to cash available for distribution or CAFD was CAD$13.5 million and increased from CAD$10.7 million generated in the fourth quarter of last year. Due to last year’s increase in dividends effective September 2012 and the conversion of our 2008 convertible debentures in April 2013, our deferred distributions increased CAD$8.8 million from CAD$8 million for the same period a year ago.

The results in payout ratio for this quarter dropped to 65.2% compared to 74.7% for the same period a year ago. As of December 31, 2013 MFC had outstanding foreign exchange forward contracts calling for future delivery at $72.6 million which will be converted at a weighted average rate of CAD$103 per U.S. dollar through November 2015.

Based on our analysis of pro forma cash available for distribution using our current levels of performance we project that we will continue to generate sufficient U.S. dollars to satisfy our contracted obligations under our hedging program and that the hedge contracts will provide us with sufficient Canadian dollars to satisfy anticipated dividends at our current rate of CAD$112.5 per share. Through the combination of cash retention and the proceeds from the debenture offering the company has now built its cash, cash equivalents and short term bank deposits of $48.7 million at December 31, 2013 that helps position us for further growth.

Let me now call in Don for his closing comments.

Donald Schellpfeffer - Chief Executive Officer

Thanks, Mike. The outlook for MFC is affected by many interrelated factors including the economy, healthcare reform and management strategies. The U.S. economy continue to strengthen in 2013 with more favorable employment levels and improvements in the housing market. Financial markets ended the year on a high note in the S&P 500 increased 30% with it’s best annual performance since 1997 and the Standard & Poor’s TSX Composite Index kept it’s momentum ending the year with a 7% increase during the quarter.

As financial markets show resilience we continue to monitor potential impacts from recently implemented tax increases, spending cuts and the continual withdrawal of stimulus measures. We’ve the firm belief that our company will continue to benefit from the fact that over 97% of our revenues are generated in South Dakota, Oklahoma, and Arkansas. These states persistently demonstrated that unemployment and residential portfolio rates are below the national average. As the economy recovers and unemployment rate declined further, we’re confident that non-Medicare and non-Medicaid patient volumes will grow and have a positive effect on the results of the toughening operations.

While recent issues with the implementation of the Patient Protection and Affordability Care Act provides further uncertainty for healthcare providers we do believe that ultimately that Patient Protection and Affordability Care Act combined with demographic pressures and continued growth in healthcare cost will cause all sectors of the healthcare industry to experience the continued pressure and reimbursement levels from both the government-funded plans and private insurance companies. Nonetheless, the combination of increasing average age and life expectancy of the U.S. population, overall population growth, advances in science and technology and increasing proportion of population of access to health insurance will be key drivers to increase demand for the services we provided in our centers.

Our management team believes that our business model, strong balance sheet and operating margins along with the proven track record will continue to have the headwinds created by the current economic environment in healthcare reform. In order to manage expectations, we continue to assess and identify accretive acquisition opportunities. We will also remain focused on driving operating performance across all our centers over the long-term to minimize the impact in external factors. We believe that our performance going forward will be driven by the increased utilization of our extended facilities at our hospitals, which already contributed to higher caseloads and a more favorable case mix.

Related to this, we will support the physician recruitment efforts of our centers as we believe that increases in the number of physicians holding medical science publishers and/or ownership interest in our centers is one of the best methods of positively impacting results. The integration and development of revenue increasing initiatives, such as our primary urgent care operations at two of our hospitals will also expand our capabilities of service offerings. We remain confident in the company’s operations being able to continue to generate cash available for distribution that will be more than adequate to satisfy our current annual dividends of CAD$1.125 per common share.

We would now like to open the line up for any questions if you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Lennox Gibbs from TD Securities. Your line is open.

Lennox Gibbs - TD Securities

Good morning and thanks. A couple of questions related to the urgent primary care business model, I think you have been running at in one case for better than a year. Have you been able to validate that model basically, particularly with respect to revenue and volume impact to the core surgical facility? That’s the first question. And just a general sense of what you have been able see with respect to returns on those investments and time to profitability once you have launched one of those facilities?

Donald Schellpfeffer

Yes, good morning Lennox.

Lennox Gibbs - TD Securities

Good morning, good morning.

Donald Schellpfeffer

Over to the question, yes, we have been operating in these two centers, where we now have primary care urgent care facilities. And the answer to that question is that yes, we have seen validation of the concepts that underlie the idea of having urgent care, primary care to basically provide patient services that will ensure that patients are seen and handled at our facilities. We have seen that and I believe it’s fair to say that we are optimistic that it will progress over time is improving.

Lennox Gibbs - TD Securities

If you think it could be a bit more quantitative, I guess what we would like to get a sense of is if you were to look at this core – one of the core surgical facilities, what percentage of the volume or revenues would you contribute to the urgent primary care facilities?

Michael Salter

At this time, we really don’t segment the numbers. So, I can’t really give you numbers on it. Suffice it, I would say that we expected to see certainly the referrals come into our facility or to our physicians that then bring those cases to our facility and that has occurred. And I believe that it has occurred and Don can join in on this to the extent that we did expect it to happen. We are seeing that happen.

Lennox Gibbs - TD Securities

Okay.

Michael Salter

Keep in mind it is incremental, but also by virtue of the fact that it is incremental to our business. And it’s also it’s a two-pronged strategy it’s defensive and is a little bit offensive on the development side.

Lennox Gibbs - TD Securities

Okay. And then you spoke or the release this morning spoke of improvement in the case mix, broad-based improvement in the case mix on the quarter, any reason to believe that this is anything more than quarter-to-quarter variability?

Donald Schellpfeffer

Lennox it’s Don. Part of that basically is with the economy improving basically the number of people that would be – fall under the Medicaid basically or the state and U.S. government supported decreases as the employment rate increases so you’re going to have fewer and fewer of those. So if its – these numbers follow pretty much with the economy does in the U.S., if the economy goes away valid just on the average or case mix of the – due to the uninsured and or the government supplied insurance is going to increase. And so I think part of that is based on the fact that as the economy gets better in these particular states even though it’s better than primarily in all, in the entire country that you’re going to see a slight uptake in these numbers based on the patients that are insured.

Lennox Gibbs - TD Securities

Thanks very much.

Operator

And your next question comes from the line of Doug Miehm from RBC Capital Markets. Your line is open.

Doug Miehm - RBC Capital Markets

Thank you. Good morning.

Donald Schellpfeffer

Good morning.

Michael Salter

Good morning, Doug.

Doug Miehm - RBC Capital Markets

Yes, good morning. Just a quick question with respect to those electronic medical records, could you maybe give us a bit more information on – you indicated that it significantly impacted one of the sites, but across the whole group if it impacted the other sites as well, what was the total amount and is this a one-time event or do you expect to recognize these types of revenues over in the next while?

Michael Salter

Doug, the payments that you get from the (Fed) on this initiative, it was part of the Affordable Care Act and also that spending bill that they put in when the economy take back in 2008, 2009. The payment stream comes to you and it can be between three and four payments depending on this center. Our significant centers are either in the second like two the second payment out of three or four that they will receive. What I would say is that in this last year there was about 2 million in aggregate across all of the centers was the number that was recorded. And I think you have to be aware that the accounting treatment for these electronic health records it was so there’s a little bit of controversy and the Obama administration basically stepped in and said by virtue of directives that you have to treat this as income for providers and that is what we do, of course the cost and the capital costs are handled in a normal way in terms of that are in those expenses.

So I think in terms of the actual payments clearly it is a one-time event because the program and Don can talk more to this, but the program is structured that there were incentive payments to a point in time and then if you – after that if you have not performed as you were supposed to under the electronic health initiative then there are penalties that go in after that point in time. So the good news is that we have qualified under the program or centers have achieved money and won’t be subject to those penalties, that penalty phase that kicks in I believe in 2015, right. Don.

Donald Schellpfeffer

There’s an example Doug I believe in Sioux Falls we received two payments and our final payment of $300,000 to $400,000 will be even at the end of 2014 or beginning of 2015 the same would go for Black Hills. And the total amount and like I said I don’t have the number in front of me, but the overall between all of our centers be probably $1 million or slightly more than $1 million in the next year or 18 months. Dakota Plains received their first payment in the fourth quarter of 2013. And like Michael said there are parameters that you have to go by and they keep updating the date that you think need to be implemented and if not you get penalized or don’t get paid. But currently all the centers are onsite as far as getting it done in a timely fashion.

Doug Miehm - RBC Capital Markets

Okay. That’s good. So just to be clear then, you said Michael you said $2 million for the whole of last year. How much was the actual amount in the fourth quarter?

Michael Salter

I don’t – Doug I don’t have the number by the quarters, it was $2 million over the whole year.

Doug Miehm - RBC Capital Markets

Okay, great..

Michael Salter

If you wanted a guesstimate it might be about half of that and maybe slightly more.

Doug Miehm - RBC Capital Markets

Alright. And then the other question I had is with respect to the marketplace out there in terms of acquisitions, are you still looking at specialty surgical hospitals, has there been any changes with respect to pricing of those or is it roughly still the same? And then are you still contemplating and move back into the ASC space or will that simply depend on the type of facility that you might be looking at? Thank you.

Donald Schellpfeffer

Yes, Doug. I mean, we always have our eyes open for opportunities and the last one obviously that we picked up with ASH some 14, 15 months ago, Arkansas Surgical. I mean, the market for specialty surgical hospitals I think as you all know, there is about 300 of them in the United States. My guess is roughly 50 are held from similar drug sales that have the interest of seeing them somewhere between 50 to 60, it would probably be jumped interest between physicians having ownership and the other companies having ownership. I think there is always opportunities there in that group. You are all aware that there is a prohibition on physician ownership going forward, pretty much although it was 300 like ours are all going forward under the law. And you asked of our opportunities out there, you asked about pricing ranges, I would say from the information we see, which is basically there haven’t been a lot of transactions, but from information we see from the experts in the business in the valuation end, I would say there maybe a little bit of movement on the upside of the range, but not a lot. You are still probably talking anywhere from six up to the high of eight at the top end, at the top, top end in terms of multiple.

Doug Miehm - RBC Capital Markets

Okay, fantastic. In ambulatory surgical centers, is that something you are still contemplating or not?

Donald Schellpfeffer

I think it is something that we have always had our eye on ever since IPO. I think we have always made it very clear in our conversations. We do on one and it’s doing fine today after its transition to in-network basis of payers. And I would say it’s something that is always there on the horizon and there are 6,500 of them across the U.S. So a lot of opportunity, but time will tell for us.

Doug Miehm - RBC Capital Markets

Okay. And I just wanted to circle back to the electronic records, the revenue has hit one for one on the EBITDA line or is there some type of margin associated with that?

Donald Schellpfeffer

There would be some expenses, Doug. Off the top I can tell you exactly what that margin would be, there would be some expenses and there would be some depreciation factor.

Doug Miehm - RBC Capital Markets

Okay, thank you very much.

Operator

(Operator Instructions) And your question comes from Trevor Johnson from National Bank. Your line is open.

Trevor Johnson - National Bank

Hey, good morning gentlemen.

Donald Schellpfeffer

Good morning, Trevor.

Michael Salter

Good morning, Trevor.

Trevor Johnson - National Bank

Just a quick one, can you give us just a quick update on recruitment efforts at the various physicians, at the various hospitals?

Donald Schellpfeffer

Trevor, recruitment basically is an ongoing thing at all of our centers, because as you know the physicians at work there, they come and go for lots of various different reasons. Obviously, we are involved as much as we possibly can in that eight at going to the Specialty Hospital Convention to PHA Association which with the centers are all, specialty hospitals all are a member of, but for the most part, it’s a local situation anything that we can do to help them do that. That’s a simple example of just reviewing yesterday at our part of the meeting was that Sioux Falls 10 years ago restarted, we had 40 initial doctor owners, while currently we are 60 and of those 60, 33 are people or physicians who are not part of the initial IPO. So, as I said, it’s an ongoing thing and there is lots of reasons why physicians come and go on various (indiscernible) etcetera going forward, but yes we are active as we possibly can to keeping encouraging doctors to work at our facilities and work at owners.

Trevor Johnson - National Bank

When you are looking at 2014, I am not sure if I have the gauge on, is there any big producers that you try to keep a part on just to make sure that you can back sell one data site to make an exit potentially?

Donald Schellpfeffer

Trevor, that is big producers starting to get people into each one of the subspecialties, I think a specialty like orthopedics and sports medicine usually if someone as they are heading for retirement, usually the back selling as they bring on somebody a year to be forward, but InterDigital decides to retire (indiscernible) exception. So that’s usually how it works. That’s number one. And number two also is demographics if there is a need that they are exceeding what basically they can handle or fielding handling their practice then they will bring these people on sooner.

Trevor Johnson - National Bank

And as I bring, now you don’t see any patients that any big players are doing that?

Donald Schellpfeffer

No. Like I said, it’s usually ongoing and normally the big players are adding individual either one every two or three years on the average.

Trevor Johnson - National Bank

Okay, thanks Don. Appreciate it.

Operator

And there are no further questions. I will turn the call back over to the presenters.

Donald Schellpfeffer - Chief Executive Officer

Thank you for participating in today’s call and for your continued interest in Medical Facilities Corporation. We look forward to reporting on our progress in the next quarter. Thank you and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!