Britt Reynolds - President and Chief Executive Officer Tyler Murphy - Chief Financial Officer

Lennox Gibbs - TD Securities Neil Maruoka - Canaccord

Good morning, ladies and gentlemen. Welcome to the Medical Facilities Corporation's 2017 First Quarter Results Conference Call. Before the call is turned 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 Law. 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, 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 Mr. Britt Reynolds, President and CEO of Medical Facilities. Please go ahead, Mr. Reynolds.

Thank you, operator, and good morning everyone. Joining me today is Tyler Murphy, our Chief Financial Officer. Prior to market opened today, we released our 2017 first quarter financial results. Our news release, financial statements and MD&A may be accessed through our corporate Web site at www.medicalfacilitiescorp.ca and were also released on SEDAR today. For today's call, I will start my discussion with the results of the past quarter. Tyler will then review the financial results. I'll wrap-up with some comments on our progress after which we will open the call for questions. It was a year ago today I first addressed you as the Medical Facilities Corporation's CEO. A great deal of progress has been made in the year and I'm particularly pleased with the results of the past quarter. A hallmark of our facilities and a testament to their quality and profile on the community -- it is a continued growth in case volume. This was no different in the first quarter of 2017. We had growth in surgical cases of 10.3% which results positive contributions from all the one of our centers including newly acquired facilities. There were two components to this growth that we should note. First, a high proportion of those cases were for more complex procedures, which translates to higher revenue per case. Secondly, this case growth came predominately from commercial insurers and private payers. For MFC, this means that we received a higher margin for the procedures delivered. The results on this past quarter are an indication of those we are striving to achieve going forward. And I'm confident that we have put together pieces in place for substantial growth results as were defined in our strategic plan. In line with that plan, we added a new member to our team to address our operations. Rob [indiscernible] joined us a Chief Operating Officer this month. Rob has over 25 years experience in healthcare operations with some of the largest operations in the United States. He will be responsible for working with our local leadership teams to operationalize performance, contain costs and increased market presence as well as negotiating with payers and integrating net new facilities. With this addition, we now have a team with a full complement of skills to execute our growth strategy and significantly skills for assets. Now, Tyler will provide more detail and insight for our financial performance for the first quarter of 2017. Tyler?

Thanks Britt. As on our previous calls, I would like to note that all of the dollar amounts expressed in today's call are in U.S. dollars unless otherwise stated. In Q1 2017, MFC had revenue of $89 million, a 17.2% increase over $75.9 million in Q1 2016. Incremental revenue from acquired facilities was a main driver of growth along with contributions from the new urgent care and ENT clinics at Black Hills, increased revenue from improved case mix along with annual price increases. This is the seventh consecutive year-over-year increase in quarterly revenue. As Britt mentioned, surgical cases increased by 10.3% overall in the quarter with outpatient cases growing by 13.1%. Of the case growth, the majority or 26.1% came from commercial insurance and private payers followed by Medicare and Blue Cross, Blue Shield. As a result of new acquisitions, depreciation and amortization increased by $1.7 million year-over-year that's moving income from operations to $13.3 million from $14.8 million in the first quarter of 2016. Adjusting for depreciation and amortization, income from operations was $20 million in the first quarter of 2017 compared to $19.9 million in Q1 2016. I will also mention that income from operations was impacted by about $2.4 million as a result of a temporary absence of a key physician at our Unity Hospital, which required the rescheduling of several complex cases. I'm pleased to report, however, that the surgeon returned to work in late March at full capacity and one other surgeon has also joined the team. Cash available for distribution in Q1 2017 was $10.8 million Canadian, a 9.6% decrease from a $11.9 million from a year earlier related to the increased maintenance capital expenditures at the center level. On a per share basis, our cash available for distribution was $0.34 Canadian in Q1 2017 compared to $0.384 Canadian per share in Q1 2016. The resulting payout ratio was 8.9% for the quarter compared to 73.2% for the previous year. We had cash and cash equivalents of $60.6 million and about $42.5 million Canadian available on our credit facility. We believe we are well-positioned to execute on our growth strategy. For additional details on the specific results for each center, please refer to our MD&A. Now, Britt will provide some comments on our strategy, and then, we'll take your questions. Britt?

Thanks, Tyler. As we discussed on several previous calls, the new management team at Medical Facilities Corporation has an increased focus on growth both through acquisition and organically. Before I close, I'd like to briefly discuss our current facilities and core strength of our operations. As you know, we have six facilities, five specialty surgical hospitals and one ambulatory surgery center. What's important to note is the operational high quality of these facilities. Our surgical facilities are all top rated by national and local market surveys on quality and patient satisfaction. For example, our Black Hills Surgical Hospital in South Dakota has a positive referral rating where patients are asked if they would refer their family members and friends which has a 92% rating. The national average is only 72%. The Unity Medical and Surgical Hospital in Indiana is in the top 1% of hospitals in U.S. for patient satisfaction. And Arkansas Surgical Hospital was recognized recently as one of the top 36 U.S. hospitals with the lowest readmission rates for patients needing high and new replacement surgeries. What does this mean for MFC shareholders? It means that our facilities have a substantial competitive advantage on their markets. As patients continue to be more active in their healthcare services our strength to provide surgical care will have a positive influence on these centers positively in the future. This high quality is also a key factor in physician recruitment and retention. The healthcare system in the U.S. is competitive and facilities compete on all fronts. This dynamic has been the case during the entire -- during my entire career. With the MFC hospital portfolio and the operational skills of the best facility executives in the industry, I'm totally confident about our ability to compete and succeed in the market. With that, we would now like to open the line for question-and-answer about our operations.

[Operator Instructions] And our first question this morning comes from Lennox Gibbs from TD Securities. Please go ahead.

Good morning. Thank you. Other than Sioux Falls and Black Hills, are you facing prospects, are you aware of any prospects are significantly intensified competition in any of the other -- in any of your local markets, and if so can you step us through what may or may not be unfolding?

Yes. I would tell you that there are no recent developments, Lennox, on anything in any of the other markets. I would also tell you both to the existing markets in South Dakota that you're referring to -- we have to be prepared for competition at all times. So there is existing competition in our market to just not more recent. And then as you're alluding to some more recent press around market growth in the South Dakota market. So, we're prepared but nothing new or developing that we're aware of.

Okay. And then, just more broadly and more of an industry question I guess, is what we're seeing in Sioux Falls, Black Hills is such sort of more aggressive stands on the part of the general hospitals trying to capture some high value procedures and high value operations. Is that kind of maybe I shouldn't see lead in the edge, but is it part of a broader trend and this isn't necessarily just MedFac question, an industry question, is that part of a broader trend or is that more isolating, how would you characterize it?

Well, I would tell you, as I've discussed before, we're going to be in both the acquisitive and so naturally applied to our organic markets. We're going to be end markets where there is competition. We really don't want to be and what I would call the lower tier, a very small market base, it's really not where Jim and the team is focused on from an acquisition standpoint. So to be absolutely transparent, we have to embrace competition, Lennox. It's going to ebb and flow on any given market whether they want to develop something new or they have recruited a specialty base. So, we're going to be in a constant state of moving back and forth and quite candidly in my 31 years, the element of competition is present in every market that we're in. So, it's more about how we respond and continue to keep our strong positions we've talked about.

Okay. Thank you.

[Operator Instructions] And our next question comes from Neil Maruoka from Canaccord. Please go ahead.

Good morning, guys.

Good morning.

Hi, how are you doing?

Good, good. I just had a question on Unity, you'd mentioned -- I missed the number in your comments, but you said that your income from operations was impacted by -- over $2 million due to the rescheduling of -- an injury to surgeon rescheduling there. Could you provide a more color on that, how that impact was -- without revenue or income from operations. And then, you also mentioned that you would add a new surgeon, could you provide a little bit more detail there and maybe an update on your recruitment efforts at some of the other facilities.

Yes, good morning. It's Tyler. Yes, as you can see if you look in MD&A, we were down about income from operations at [EMAs] [ph] was down about $2.7 million, about $2.4 million of that is related to surgeries that were put off from the first quarter and in many cases will hit in the second quarter. Due to an injury, we had a surgeon who without and he could not operate during that period. He came back at the end of March and ramped backup and many of those cases that had been put off are now getting scheduled in and actually performed. And I'll let, Britt to give you some commentary on the recruitment.

Sure. We were actively recruiting. This is our -- Neil, this is our most productive and really strong surgeon in -- [indiscernible] marketplace. So, it was significant for us, but we're pleased it's totally full recovery everything is good. And he was actually seeing patients by the end of -- by the end of the first quarter to TF as Tyler said, readdressing procedures in the second quarter. So, that's all good in the macro view. As far as recruiting physicians, we had actively been pursuing a local surgeon there to complement this individual and he has been in the marketplace between 6 and 7 years highly reputable, actually offers a few service dynamics that we don't offer at the facility. And he has been active starting right at the beginning of Q2 as well. So, we feel good about that particular service line now being absolutely short-up and not dependent if there were to be something of the same in the future. As far as other physicians go in terms of recruitment, I'm going to make a blanket statement because it would be a slightly different commentary at each location, but the theme is the same. We are working with local leadership who are keen on developing leads on physicians that want to join our facilities, also our local medical staff have great insight as to other people in the marketplace is pretty familiar with it would have an expressed interest. Jim, his -- in his development role is actively working with our facilities and recruiting physician. So I'll make a blanket statement, hopefully, doesn't sound too blanket that everyone of our facilities have active physician recruitment and interaction in place and has had for several months and a minimum.

Okay, great. And could you comment a little bit maybe on the specialties that you're looking at or how you kind of looking at the individual facilities in terms of bringing in different specialties that might be complementary or that maybe better margins or how you might be dealing that?

Sure. As you know the orthopedic and neurosurgical is a bread and butter. It's the high margin, high complexity service lines that our company was frankly built upon and we continue to grow those even all the way up to the newest people that have joined us. So, those are always going to be -- in the wheelhouse for any new acquisition or some of our markets where there is actually a need expressed by our physician, colleagues where we need more services and more physicians there. So that's always on the radar. Second piece is we're looking into what I'd say regional -- reasonable, excuse me, margins of other services that we could provide and would be either complementary too or are situation based on each individual market. There maybe a group in cardiology, there maybe a group in oncology that might make since for one of our facilities, but not -- might not make sense across the entire portfolio. So, it's a very custom tailored approach each one of those, but I would tell you the services we think that have appropriate margin are ortho, neuro, oncology, cardiac services in certain locations. And then as we go into the ambulatory surgery space with our Sioux Falls acquisition last year. At the ambulatory surgeries basin, it's not an overnight stay. You get a lot more of slightly lower margin which we get a quicker turn and you don't get an overnight stay, so you would see ENT procedures there and general surgical procedure. So, it's really custom tailored, but our primary criteria is, can we deliver good care, that people want to comeback to and can we deliver margin and a price that make sense for us. We don't want to just grow something to grow it.

Okay, great. Thank you.

Thanks.

Our next question comes from [indiscernible] from CIBC. Please go ahead.

Thanks, good morning, gentlemen. I have two questions. First, probably for Tyler on the issue of costs. They appear to be higher as a percentage of revenue across all of your cost categories especially with respect to drugs and supplies and G&A. Can you comment in terms of this increase more of a one-time issue in Q1 or do you feel sort of -- as a trend for the course of the year.

Yes, on the G&A -- the largest portion of that increase was the amortization that comes along with the acquisition. So that's -- it's not -- it's not necessarily an ongoing thing, drugs and supplies. And then we've talked about it, obviously, I have only been here a couple of quarters, but that is something that we are actively looking at with Rob on Board, he and I are going to continue to try to look at different ways we can help the facilities get aggregated purchasing and really try to combat these raising prices. And so that industry wide across the U.S., I mean everybody is doing the same thing and so we just needed -- we've done a good job, finally getting aggregate data what all our facilities are spending and now we can try to go to the distributor, GPOs and what not and try to drive some savings out of that that's a continued battle in U.S. healthcare across the continuum.

If I could add to Tyler's comments. I think we absolutely are confident that we can working with our local leadership teams and medical staff members that we can make a dent into it. I don't want to sit on every quarterly conference call and say, we get it, we want to make progress on it, but we're not quite there. So, I want to be very transparent. We know the issue, we are blessed with revenue growth and case growth right now. I mean, it is very, very comparable, I mean it's very, very impressive compared to any leg of the industry be it acute care or our comparable lines of business. So, our focus just to put it straight out there and put us on the spot is, these three to four areas of expense management, which we think we can do by greater aggregation as Tyler said on services or even in some cases maybe we outsource the whole process to somebody who give us an aggregate cost differential it's better.

Yes. Just to add -- then last point to add is, you've got to remember also we have the Unity Hospital in operating expenses this year that was not there last year so that -- that is operating expenses obviously increased and we've already talked about their issues in the first quarter bringing the margins down and with that -- that will again not repeat itself.

Okay. Now, that's great. So, just if we're looking more at a steady state situation is for the category of drugs and supplies would have 30% of revenue be reasonable as a go forward assumption?

I'm not sure that, I mean, I think where it is right now as drugs and supplies costs are not going to go down, but you know it's -- they were 29.9% up from 29.3%, so I mean, there was not a large increase. So, I think you are in the right range. Again, we're going to -- we hope to continue to grow revenue as we bring additional cases and physicians in our facilities and so hopefully every time that percentage doesn't go up as we attack it from both the revenue and the cost side.

And we made this comment earlier, but it really does have an impact and that is part of this really impressive growth that pleases us is in a higher acuity case slopes. And in those really high acuity cases, which we won, so let's make no mistake about it. They have disproportionately higher drug utilization. So the process that I discussed earlier is really where we are going to make the input. But, all day along we love -- we will still take the higher case volume and higher acuity.

Okay. Great. That's fine. And just quickly any commentary you can make in terms of the acquisition pipeline, the status of that the size of acquisitions you are looking for and kind of some sort of guideline on timing?

Yes. I think as we discussed and we shared at the last Board meeting following our strategic planning process really to solidify where we would make some slight modifications and where we would continue to stay true to the direction. There are a lot of opportunities in the pipeline that Jim Rolfe, our Chief Development Officer and I following him, are working on -- there is at least a meeting or two within an entity every week. So just to give you some level of magnitude. It covers a broad spectrum. It covers a broad spectrum from singular ambulatory surgery centers to organizations of 10 to 20 ambulatory surgery centers to just like with you Matt last year, a lean on a very attractive or positive to us, surgical hospital and that is attractive. And we are entertaining some corollary services very discreetly, if they really re-complement our existing market. So, in a nutshell, I would say there is a lot of life activity out there. There is a number that I won't try to quote to because I'm not sitting in front of it. But, suffice to say the punch line is, this ambulatory activity and the opportunities this year have vested last year's actual acquisitions and that was vesting year-over-year-over-year. So you can see that it's really growing and as supposed to going away. And that really excites us as we are putting our team together.

Okay. And just a follow-up on that. Have you seen any impact on those discussions and negotiations from the potential or repeal replaces ObamaCare and any future initiatives of the Trump government might implement? Did that had an impact on it?

Yes. We really haven't seen anything from outside [indiscernible] that we would view as peer information that would be helpful to us. So, we come to really our own thought process about that. It's really just not predictable and I hate to say like we can't give you an answer. But, it really is not. The one thing I do want to keep sharing because I think it's important for our analysts and our investors base to know is that our services are discretionary by the surgeons not meaning where the [indiscernible] or not. But, they are bringing those cases to their hospitals. And that is a very, very different dynamic then if you are in an acute care facility where you have a 25 bed operating -- emergency department and in an ICU and a lot of the other margin depletive services. We are just different. And I want to keep making that point out. I will keep making that point is because we have selection ability in that and we have a higher percentage of good and commercial thing and other payers in that warehouse. So, we have greater control. So, we might get lumped because we are healthcare providers with acute care hospitals. That I will keep pushing to distinguish us that we are not exactly like acute care hospitals and we definitely are in the two arenas.

That's great. Thanks very much.

And we have no further questions in queue at this time. I will turn the call back over to Mr. Reynolds, for closing remarks.

Yes, ma'am. Thank you. Thank you all for participating on today's call and for your questions. We appreciate those and for your continued interest in MFC. We look forward to reporting our progress during the next quarter and going forward as we see you in the marketplaces during our visit. So, thank you for your time today. We appreciate it.

This concludes today's conference. You may now disconnect.