MFCSF - Medical Facilities Corporation (MFCSF) Q4 2022 Earnings Call Transcript
2023-03-09 11:56:05 ET
Medical Facilities Corporation. (MFCSF)
Q4 2022 Earnings Conference Call
March 09, 2023, 08:30 AM ET
Company Participants
Jason Redman - President and Chief Executive Officer
David Watson - Chief Financial Officer
Conference Call Participants
Endri Leno - National Bank
Doug Miehm - RBC Capital Market
Presentation
Operator
Good morning, everyone. Welcome to Medical Facilities Corporation 2022 Fourth Quarter Earnings Call. After management's 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 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, 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.
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
Thank you, operator and good morning, everyone. Joining me today is our Chief Financial Officer David Watson. We reported our fourth quarter and year-end results earlier this morning. Our news release, financial statements and MD&A may be accessed through our website at medicalfacilitiescorp.ca and have also been filed with SEDAR.
The fourth quarter was highlighted by the continued strength of our core business. Our facilities service revenue reached an all-time high for the quarter due to a more favorable case and payer mix, combined with a 5.7% increase in surgical volumes at our four specialty surgical hospitals.
In the quarter, we returned additional capital to shareholders through a substantial issuer bid, as well as our normal course issuer bid program. Under our SIB [ph], we purchased 3.1 million shares at an aggregate purchase price of $25.5 million. Additionally, under our NCIB program, we purchased 433,300 shares at an aggregate purchase price of $2.5 million.
Combined, we purchased just under 4.9 million shares, or about 16% of our total shares in 2022 representing a significant return of capital. We continue to pursue opportunities to reduce expenses, including overhead cost reductions.
During the quarter, we concluded a Separation Agreement with MFCs former CEO and this combined with retirement of our former COO will result in significant savings in salaries and benefits on a prospective basis. We also dealt with onetime items that negatively impacted our results for the quarter. We reversed $12.3 million and pay check protection program or PPP loans from government stimulus income. This month consists of all PPP loan balances for facilities whose forgiveness applications have been denied or under review.
Nonetheless, we are pursuing all reasonably available channels for reversing any denials. Any loans are subsequently forgiven will result in a recognition of income. We recorded a non-cash impairment charge of $16.5 million related to the continued underperformance of the MFC Nueterra ASC. This was a noncash item. It is important to highlight that these AFCs did not contribute materially to our results.
In December, we sold the remaining 31.7% interest in Unity Medical and Surgical Hospital and settled the associated loan receivable for gross proceeds of $2 million. Before turning the call over to David, I'd like to give a shout out to our hospitals, which continue to rank among the best hospitals in the U.S. for high quality of care.
In fact, Sioux Falls Specialty Hospital, Black Hills Surgical Hospital and Arkansas Surgical Hospital, where each recognized by health grades is one of America's best hospitals for joint replacement surgery in 2023. A little over a month ago, Black Hill Surgical Hospital was ranked as the number one hospital in the United States for major orthopaedic surgery for medical excellence by CareChex, which also ranked Black Hills as the number one hospital in the market for overall hospital care, overall surgical care and general surgery for 2023 in both medical excellence and patient safety categories.
Around the same time, Arkansas Surgical Hospital was named the 2022 Human Experience Guardian of Excellence Award winner by Press Ganey for the fourth year in a row. This award as part of an annual ranking of the top hospitals in the country, as based on direct feedback from patients. ASH was the only hospital in Arkansas to receive this award.
With that, I'd like to turn the call over to David to review our financial results. David?
David Watson
Thank you, Jason. Good morning, everyone. I'll discuss the financial performance for the quarter and provide an update on our balance sheet and liquidity. I would also like to remind everyone that all dollar amounts expressed in today's call are in U.S. dollars unless stated otherwise.
Facility service revenue for the quarter increased 7.9% to $119.4 million, compared to Q4 2021. As Jason mentioned, each of our Specialty Surgical Hospitals experienced higher volumes for the quarter, with their combined case volumes increasing 5.7% compared to the fourth quarter the year before, and 1.5% when compared to the fourth quarter of 2019.
The higher facility service revenue was also attributable to the combined positive impact of case and payer mix, as well as $1 million related to ASH moving its anaesthesia service and related billing in house earlier in 2022.
Total revenue and other income decreased by $9.3 million to $107.1 million for the quarter. The 8% decrease was primarily attributable to a reduction in government stimulus income, driven by the onetime reversal of $12.3 million in PPP income recognized in prior years.
On the expense side, consolidated salaries and benefits were up 6.1% over Q4 2021. Contributing to this was a combination of annual merit increases full time equivalent increases in market wage pressures due to the shortage of nurses, as well as the separation costs for a previous CEO. This is partly offset by the forfeiture of stock options by former executives, lower incentive pay at the corporate level and decreased health plan utilization.
Consolidated drugs and supplies grew 10% mostly due to case mix and higher surgical case volumes at surgical hospitals and inflationary pressure on prices. This is partly offset by the reclassification of costs pertaining to Sioux Falls as an Accountable Care Organization in 2022.
Consolidated G&A increased by 11.1%. The $1.7 million increase was mainly attributable to $1.4 million in costs pertaining to Sioux Falls as Accountable Care Organization, being mostly reclassified from drugs and supplies into G&A combined with a $1.3 million impact of Arkansas Surgical Hospital moving its anaesthesia service, and related billing in house. This is partly offset by lower corporate level costs, a reduction in the lease related costs and the gain recorded on the sale of the remaining equity in Unity.
It's important to note when adjusted for the impact of the impairment charge and reversal the PPP earned income. Our income from operations was $22.3 million and adjusted EBITDA was $27.6 million for the quarter. In comparison, in Q4 2021, we had income from operations at $25.5 million and adjusted EBITDA of $32 million. As Jason mentioned earlier, the fundamentals remain strong in our four hospitals.
In the quarter we generated cash available for distribution totaling C$9.9 million, resulting in a payout ratio of 21.2%. At the end of December, we had consolidated net working capital of $32.5 million, including $34.9 million of cash and equivalents. This compares to working capital of $60.9 million including cash and equivalents of $61 million at the end of 2021.
At yearend, we had $36 million outstanding in our corporate credit facility, and the $12.3 million reversed from government stimulus income was recorded as a liability under payer advances and government stimulus funds payable. Any PPP loans subsequently forgiven or result not only in recognition of income but also a reversal the corresponding liability. Inclusive of lease liabilities, our net debt to equity stands at 0.94, which means well below that of our U.S. listed peers. This concludes our prepared remarks.
At this time, we would like to turn it back over to the operator to open up the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] The first question comes from Endri Leno with National Bank. Please go ahead.
Endri Leno
Hey good morning. Thanks for taking my questions. I have a few. So I'll start with a personal, I'll start from the top with the revenue, stimulus reversal. So I just wanted to ask is that the one you recognize this quarter, does that include everything? Or is there other parts of it under consideration or appeal or anything like that, then more could come?
David Watson
Yes, Endri so that is everything that has either been denied or is under review. So anything else that's remaining was forgiven and is not under further review.
Endri Leno
That's great to hear. Thank you, David. The other question I have because Jason you mentioned on your prepared remark that you're looking to further reduce overhead, overhead costs of the corporate. So I was wondering if you can talk a little bit to that. I mean, beyond the changes you've made to senior management, what else can you do? The deep further changes for these kind of like, what levers can you pull to reduce costs further at the corporate?
Jason Redman
So we obviously look at, at every expense category we have, obviously personnel salaries and benefits is a large portion of our corporate overhead costs. But we've been through and continue to go through our entire expenses, making sure that we adjusted to ensure that it's optimal for the business that we have.
Endri Leno
And you say it's not optimal. It's not optimized yet at this point. That's fair to say.
Jason Redman
There's there's other expenses that that we continue to look at. We're always looking at opportunities to reduce expenses. So we, we engaged in that in the latter part of Q4 of 2022. And we're going to continue that process in 2023.
Endri Leno
Okay, great, thanks for the color. And when it comes to expenses, and cost of the hospital level, you called out the shortage of nurses MD&A, which has gone through the whole U.S. health care, but how do you see that situation developing into 2023 be it for nurses on also inflation in drugs and supplies? Are you able to pass this costs on or to partially upset them in some way?
Jason Redman
So the -- we'll start with salary and salaries and labor pressure. The nursing shortage existed pre-COVID. COVID exacerbated that problem. So it continues into 2023. Things are improving, somewhat, there's there's a little bit less pressure, there's not as much requirements for signing bonuses and stay bonuses and things like that. So overall, we are seeing improvement. But there's going to be a continued shortage, and we'll just have to maintain our competitiveness in those markets, On drugs, supplies, other expenses generally, many of those are under contract, which maintains pricing. So you're looking at somewhere in that 3% to 4% increases. Other non-contract implants, things like that can be more expensive. And so we're going to continue seeing price increases, as everyone else in the industry is.
Endri Leno
Got it. And is there any way to offset them or pass them on or? Not really, I mean, it's ever a discussion you have with insurance companies or something to that effect.
Jason Redman
Yes, so typically the insurance company contracts or multiyear when we get the opportunity to negotiate those contracts. We make the best case we can. We've got roughly a third of our revenues coming from government payers under the Medicare Medicaid plans. Those increases are, determined by government and are indexed to inflation I would say in general the increases I don't necessarily keep up exactly with the underlying price increases.
Operator
It looks like Mr. Leno is disconnected. Your next question comes from Doug Miehm with RBC Capital Market. Please go ahead.
Doug Miehm
Yes, good morning and thanks for taking the questions. First question, just as a continuing on some of the expert comment -- expenses commentary that you just made. When you think about 2023 let's say, on a year-over-year basis, would you expect EBITDA margin contraction this year based on the commentary you just provided. Or is there a chance that it could be stable or you could even see some strength relative to last year?
Jason Redman
Yes, hey, Doug, thanks for the question. As we go into 2023, we obviously don't provide guidance, but I would say in general, the facilities are going to continue looking to expand on the top line growth that they saw in 2022. We will see some of the pricing pressure slow down a bit than what we've seen over the past year. So there's certainly an opportunity for improvement.
Doug Miehm
Okay, great. Second question just has to do with the dividend mix. I think we're at – just about 20% payout ratio. Has any thought been given to potentially increasing the dividend rate as we think about 2023 and 2024, or is that something that is not on the table right now?
Jason Redman
Yes, so the board hasn't made any decision with respect to adjusting the dividend yet. We'll have to look at our performance going forward, but we're always looking for ways to optimize shareholder returns. So it is a consideration item, but no decisions are made yet there.
Doug Miehm
Okay, okay, excellent. And then my last question just has to do with the competitive environment, especially now that your facilities in South Dakota and Arkansas are scoring so well, I think it was Avera that just announced last week that they're going to be opening up a new 70,000 square foot facility in Tea. And that won't be ready until 2025, but can you talk about the competitive dynamics in the marketplace, especially given the quality scores that your hospitals and receiving them, what that means from a practical perspective for the ability to attract patients relative to your competition.
Jason Redman
Yes, I still think I mean, I think you're absolutely right. I mean, this market is becoming a lot more competitive. I mean, our hospitals continue to do a very good job and it's attracting retaining talent that's going to be becoming more important, making sure that that we retain the doctors and the clinical staff is going to be paramount going forward. So I mean, like here we see the competition increasing, we continue to differentiate ourselves and performance standard, and obviously it's something we're never going to compromise. But it’s something, we watch that we watch very closely. But as our doctor portfolio remains strong, and patients tend to be very loyal.
Doug Miehm
Okay, excellent. That's it from me today. Thank you.
Jason Redman
Thank you Doug.
Operator
Thank you. We have a follow on question from Mr. Endri Leno. Please go ahead.
Endri Leno
Well thank you for the follow up. Just one more from me. It pertains more to kind of where you’re looking in your portfolio and congrats on getting that [Indiscernible] finally out. I mean is it still on the table, the non-core divestments and many kind of developments you can talk in there? What are you seeing in terms of interest in terms of multiple, or is that off the table? Any color there would be appreciated. Thank you.
Jason Redman
So that's still definitely on the table. That was one of our stated goals that we mentioned back in Q4 of last year, that’s still on the table. We can't see [ph] any particular transaction if there's ways to optimize value for the shareholders. and we will definitely pursue those opportunities. But can't speak to any specific right now.
Endri Leno
Thank you.
Operator
Thank you. There are no further questions at this time. You may proceed.
Jason Redman
Okay. Thank you operator. And thanks to everyone for joining our call this morning. We look forward to updating you again next quarter.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Jason Redman
Thank you.
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Medical Facilities Corporation (MFCSF) Q4 2022 Earnings Call Transcript