Medical Facilities Corporation

Medical Facilities Corporation

CAD15.55
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Medical - Care Facilities

Medical Facilities Corporation (DR.TO) Q4 2017 Earnings Call Transcript

Published at 2018-03-22 13:42:06
Executives
Robert Horrar - CEO & President Tyler Murphy - CFO James Rolfe - Chief Development Officer
Analysts
Neil Maruoka - Canaccord Genuity Prakash Gowd - CIBC Capital Markets Neil Linsdell - Industrial Alliance Securities Endri Leno - National Bank Financial
Operator
Good morning, everyone. Welcome to the Medical Facilities Corporation 2017 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 Mr. Robert Horrar, President and CEO of Medical Facilities. Please go ahead, Mr. Horrar.
Robert Horrar
Thank you, operator, and good morning, everyone. Joining me today is Tyler Murphy, our Chief Financial Officer; Jim Rolfe, our Chief Development Officer; and Jimmy Porter, Vice President of Operations. Prior to market opening today, we released our 2017 fourth quarter and full year financial results. Our news release, financial statements and MD&A maybe accessed through our corporate website at www.medicalfacilities.corp.ca and are also filed on SEDAR today. For today's call, I will start by discussing the results of the past year, Tyler will then review the financial performance, and then I will wrap up with some comments on our outlook; after which we will open the call to questions. In 2017 as has been the case since our inception 14 years ago, our facilities continue to demonstrate their quality and leading market position through increased surgical volume in revenue. We completed about 36,000 surgical cases in 2017, that's an 8% more than previous year. As in previous years, the fourth quarter remains our busiest, about 10,000 in Q4. This was a 3% increase over Q4 2016 and with growing -- coming primarily from outpatient procedures. We achieved $385.3 million of revenue in 2017, a 13.5% increase over the $339.5 million achieved in 2016. Of this growth, about $30 million was from Unity Hospital and Prairie States Surgical Center, both acquired in 2016. We achieved 4.5% growth or $15 million from facilities owned in 2016. Throughout 2017, our focus was on organic and acquisition growth strategies. In terms of organic growth, we focused on expanding our services at our facilities, recruiting physicians and adding access points. In 2017 we developed urgent care centers and our Little Rock Arkansas and Sioux Falls markets. The center in Sioux Falls opened in Q4 and the Little Rock Arkansas this past January 2018. We expect both will increase our outreach in the surrounding communities. We continue to recruit physicians at our facilities to expand our services. By the end of 2017, we added 17 net new physicians which includes 7 orthopedic surgeons. Acquisitions were also a priority for us and we look at several opportunities and evaluated them against our current portfolio to ensure they were aligned in terms of high quality accretive earnings and growth potential. We actually walked away from several before we found one that was aligned with our criteria. Early this year we announced the acquisition of 7 Ambulatory Surgery Centers from Meridian Surgical Partners for $46.5 million. The ASCs are located throughout the U.S. increasing our geographic diversity, reinforcing our focus on orthopedic surgery, neurosurgery and pain management, and most importantly, increasing our investment in the outpatient services space. As with our other facilities, we have a controlling interest in these ASCs and all our partner with local physicians. An important feature of this acquisition is our partnership with NueHeatlh, a leading operator of over 50 healthcare facilities with over 20 years' experience. NueHealth will provide day to day management and operations support to the centers including accounting, recruitment, materials management, payer contracting and benefits administration. We expect to see comprehensive synergies from the arrangement including NueHealth's group purchasing program which will allow facilities to benefit from immediate supply cost savings through the economies of scale of NueHealth's 50 plus managed facilities. In addition, this acquisition has a solid platform for further growth. Through the partnership, we have the opportunity to acquire or develop new ASCs in current and new markets. We are excited about the opportunity this presents for MFC. Now Tyler will provide more details and insight into our financial performance for 2017.
Tyler Murphy
Thanks, Rob and good morning everyone. 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. As Rob mentioned, MFC had revenue of $385.3 million last year, a 13.5% increase over $339.5 million in 2016. On a quarterly basis, revenue was up $111.3 million, up 3% from Q4 2016. The increase was driven by Surgical Case growth, offset somewhat by an unfavorable pair of mix. Off note was a 15.8% increase in revenue at Sioux Falls reflecting an increase in total knee and spine cases. Also impacting the quarterly revenue results were revenue adjustments at Unity Hospital. Based on a change in assessment of collectability from earlier periods of 2017 which amounted to $1.7 million. As we mentioned last year, we have got a new finance team in place at Unity and are taking measures to realign and improve it's financial structure. In line with this, we conducted our annual impairment assessment, we identified an impairment of $7 million at Unity and an impairment of $1.4 million at IMD, our hospital admin services business. It's important to note however, that these are non-cash charges that do not affect our cash balances liquidity or operating cash flows. Adjusted EBITDA which excludes the goodwill impairment charge was $33.1 million in Q4 2017, flat compared to $32.3 million in Q4 2016. Adjusted EBITDA for the full year excluding the goodwill impairment charge was $94.6 million, a 4.3% increase compared to $90.7 million in 2016. Increased revenue from our facility, particularly Sioux Falls and Arkansas, contributed to the growth offset by the CEO transition charge we incurred during the year. Adjusted EBITDA margin for the past quarter in the year was 28.8% and 24.6% respectively. This compares to 29.9% and 26.7% respectively for the same period the previous year. Cash available for distribution in 2017 was CAD51.7 million, compared to CAD50.7 million in 2016. On a quarterly basis, cash available for distribution was CAD16.7 million in Q4 2017, a 6.5% decline from CAD17.8 million in Q4 2016. Impacting cash for distribution was increased interest payments on the corporate credit facility and higher corporate expenses. On a per share basis, our cash available for distribution was CAD1.67 in 2017 compared to CAD1.63 in 2016. For the fourth quarter, this was CAD0.54 compared to CAD0.57 in Q4 of 2016. The resulting payout ratio was 67.5% for the year and 52.3% for the quarter compared to 69% and 49% respectively for the previous year. At the end of 2017 we had cash and cash equivalents of CAD65 million and about CAD32.2 million available on our corporate credit facility. We believe we have sufficient resources to execute on our near-term growth strategies. For additional detail on specific results for each center, please refer to our MD&A. Now Rob will provide some comments on outlook and then we will take your questions. Rob?
Robert Horrar
Thanks, Tyler. Overall, we are pleased with 2017 and what we achieved in building a stable platform for growth. As we plan for the future, we will be guided by four key strategies for growth and operational success. First, industry leading quality and service; our facility partners are committed to maintaining high quality and patient satisfaction stores that have placed them among the best in the United States. Our extraordinary physicians, care givers and team members consistently maintain high standards of patient care and service excellence. And our facilities are specifically designed for physicians to operate at high efficiency while providing attractive patients and environments; the quality is also a key factor in physician recruitment and retention. Second, a strong physician centric management mode. Our success is routed in partnerships with physicians, empowered physicians drive higher quality of care and higher patient satisfaction. We bring value to our partnerships with efficient business practices, access to data resources and strategic planning. Together with our physician partners, our facilities are able to deliver exceptional patient care in their communities. Third, growth, both organic and through acquisitions. We will continue to focus on enhancing and adding services to our existing facilities including the recruitment of new physicians and the addition of ancillary services such as urgent care clinics. Also every out positioned opportunity will be assessed with a thorough due diligence process to ensure any new facility we acquire matches the high quality and strong performance in the existing portfolio. Finally, maximized operating efficiencies with a strong and growing portfolio, facilities are scaled and enables us to leverage operational efficiencies. We will focus time and attention on assisting facility partners to improve efficiencies and value added services like group purchasing and the sharing of best practices. Now is an exciting time for Medical Facilities Corporation; our reputation for performance and excellence is only possible with the sincere commitment of our physicians partners, facility leaders and teams who provide high quality patient centered care every day. On behalf of Medical Facilities Corporations management team and the Board of Directors, thank you for your ongoing support. With that, we'd now like to open the line for questions. Operator?
Operator
[Operator Instructions] And your first question comes from Neil Maruoka from Canaccord Genuity.
Neil Maruoka
A question on Unity, you generated $11.5 million in revenue, even if we adjust for the $1.7 million, your margins are still relatively weak, 18.2%. Can you give us an update on the integration there; is that an issue? And what can be done to drive revenue or cost reductions at that facility in particular, I know that there was heavy reliance on one position there that have impacted the results in previous quarters but what is your strategy to turn that around?
Robert Horrar
I appreciate the question, I'll take it in reverse Neil. Number one, it's growth, that's what we can do to add to this center. We bought it -- the acquisition was made with the understanding and belief, there are plenty of opportunities and we still believe that. Those growth plans are in process and active and there are opportunities to grow and that built-in volume and with new physicians. So that's the number one thing we can do at this center. As Tyler mentioned in his remarks, to answer your first question, we brought on a new CFO, new finance team at this hospital to match expenses to their performance and they are very focused on getting that in line right now.
Neil Maruoka
And is there any issues with integration or is that substantially complete?
Robert Horrar
There is no issues with integration, we continue to -- again, execute on the growth plans and right size the expenses but there is no issues on integration.
Operator
Your next question comes from Prakash Gowd from CIBC. Your line is open.
Prakash Gowd
Just one follow-up on the Unity Medical; can you elaborate a little bit more with regards to the decrease in revenue. You mentioned that it was due to a change in assessment of collectability from early year periods. Is that related to an out of network issue and harder to collect or is it other billing issues or something else entirely?
Robert Horrar
As you know, having things on the books you have to do retrospective look backs to see what you actually collected. And so as we brought in a new finance team, a part of what we [indiscernible] was take the balance sheet, go through every category and let's make sure we have everything cleaned up and taken care of in 2017. So if we look back retrospectively at the collectability of certain -- all up and down commercial, medical, private pay, that's where the adjustment came from. So we feel like everything is clean going forward and where we need to be.
Tyler Murphy
And just to add some more color to your question, we're not -- this is not a network center, so that's not the issue. It was more of the bad debt collectability issue that we needed to clean up going forward.
Prakash Gowd
And then specifically for your South Dakota facilities, could you talk a little bit about physician and nursing turnover and where were you at the end of 2017 in terms of your optimal personal numbers?
Tyler Murphy
I can tell you that we don't have any unusual turnover in the South Dakota market versus any of our other facilities at this point. We're appropriately staffed in all markets, so we have no issue on that right now.
Robert Horrar
Yes, and as we've said before our centers because of their nature, because of the scheduling of the surgeries, we actually have a lot of good recruitment tools for nurses and other staff because they want to come to a place where they are not having to work the emergency room, they are not covering the ICU, so we have some bit of it but there hasn't been any change in that turnover.
Prakash Gowd
And just lastly and more of a high level question; with regards to the trend we're seeing in the industry around value based care and bundles payments, can you comment specifically about your business; are you seeing this creep into your business at all, specifically for the orthopedic procedures and how you think it might impact you going forward?
Robert Horrar
We've seen very little of it actually and our approach to this has almost been proactively, where can we find those opportunities to engage in bundles and bring in more volume into our center. So we see this just in terms of a positive and approaching it where it could bring us additional volumes but we don't have a great deal of that in place right now.
Operator
Your next question comes from Neil Linsdell from Industrial Alliance. Your line is open.
Neil Linsdell
I just want to ask you about the NueHealth JV, completed in February. Can you give us any additional details that will help us in incorporating this into the models?
Robert Horrar
I only give you high level and then I'm going to have Jim Rolfe tell you about the structure. So it's important to note that the NueHealth team gives us a very broad infrastructure to manage these facilities and to add additional facilities at no additional cost. We did not add cost to the centers for moving this to partnership with NueHealth. So with that I'll let Jim yield more color.
James Rolfe
Yes, we did extensive due diligence on NueHealth when we are looking at this Meridian transaction and we are very impressed with their operations and for many and for us, we're excited about this complement. They've been in the business, in the ASC business for 20 years which is a long time and they managed from one ASC to lower hospital, so they are very robust in that but also I'm excited on development because again they've been in business for 20 years, they've seen a lot of deals and they are old -- but their existing model is, they take a minority stake in these ASC to surgical hospitals and they manage them. So I think we complement them as far as being able to back a controlling interest in new entities like ASC and research hospitals and having their equities in managing. So I'm really excited about the pipeline and our pipeline is really full just in the 2 or 3 months that we've been associated with them. So like Rob said, this gives us a platform to grow organically around our existing markets, as well as it gives us a vehicle to actually go after one deeds and two deeds [ph] on the ASC side.
Tyler Murphy
Final remarks, not exactly a hands-off relationship either, our MFC management retains board positions in each ASC, so we are also active in the operations as well.
Robert Horrar
And Neil, one last thing to note, I'm sorry -- is that this is -- we are not exclusive with each other; if they sign a deal that we don't want to do, they can do it, if we sign a deal that they don't want to do, we can do it. So this is not an exclusive arrangement but it is a good one.
Neil Linsdell
Okay. Can you provide any more details on the financial impact?
Tyler Murphy
At this point this is too early, we just bought in February and -- but we -- I will tell you that we look at the acquisition in terms of the opportunities going forward and we know and have identified a lot of good opportunities on the growth side, as well as on the expense management side. So this acquisition affords us good opportunities on both.
Neil Linsdell
So in the growth side, anything you would do would go into this JV?
Robert Horrar
Not necessarily. As Jim said, this is not exclusive, we prefer it -- yes, if it comes through the pipeline and we want to do it together, then it makes sense. We absolutely would like to do that, if not, we are not -- it's not an exclusive arrangement.
Neil Linsdell
Okay. And you were talking about the administrative kind of benefits and everything they bring to the table, is there any kind of plan or opportunity to extend what they do to your other existing facilities?
Robert Horrar
Not at this point, it's really is a little bit of an apples and oranges. They are focused on the ASC space and the surgical hospitals are a different world for us, we don't have any plans like that at this time.
Neil Linsdell
And then just lastly, every of your facilities I've visited, they are always undergoing construction to improve; are there any kind of major construction plans to increase services or switch over rooms or expand the facilities that are worth noting?
Robert Horrar
Nothing that I would call out on the call today but I will tell you that this year at the beginning of the end of 2017 we went through an extensive strategic planning process and we identified opportunities to grow and we do have those on our future plans but nothing specific that we can call out today.
Operator
[Operator Instructions] Your next question comes from Endri Leno from National Bank. Your line is open.
Endri Leno
Just a couple for me; I'll start off a little bit with Unity. I have a question on, there is a provision for physician professional services and billing services for $1 million for 2017. So I was wondering if you can expand on that a little bit? And also whether you see any changes to this going forward given the impairment charge and the non-collectability of revenues at that hospital? Thanks.
Tyler Murphy
I'll kind of go revere again on that one like Rob did. The non-collectability; again, we were just cleaning up all the old balance sheet accounts, so we don't believe the revenue that's coming in the door today is not going to be collectible. Any different than any other center, your normal bad debt percentages; that type of thing. Again, most of ourselves is scheduled, it's Medicare, it's commercial, it's private pace; there are collectability that's actually really high. It's not -- so that was kind of a onetime clean-up item, it wasn't -- it's not all of thing [ph]. The impairment, as far as that goes, just -- again, we have to do annual impairment testing for all of our facilities and obviously, I mean -- this is no secret, Unity hasn't lived upto our expectations of the original deal model when it was bought so it was determined based on the performance and the near-term model that we needed to write that down. The growth prospects though have not changed, they might have tracked slower than we originally thought but we still really liked the market, there is a lot of independent groups or other groups in that market that are not affiliated with hospitals at the current time. So we do feel good about the prospects, it's just -- again, this is kind of a one-time clean-up of all of this stuff.
Endri Leno
And would you expect any sort of renegotiation on that provision for services and billing charges that all going forward or just going to remain around that for $1 million level?
Robert Horrar
Well, I'll tell you that we as part of our strategic plan, we're reviewing every contract and arrangement we have at the center and we'll do that at all times.
Endri Leno
My next question is just a quick one actually; on -- how are you seeing the urgent care center, particularly in Little Rock, I mean are you seeing any good tractions since January; I mean it's been a pretty tough flu season, I mean has that impacted traffic at all? And any commentary around that?
Robert Horrar
Yes, actually we are very pleased that that urgent care center is on-budget, on-track for our pro forma adjusting for the flu actually. So even normalizing the growth in the patients per day which we did benefit from -- at that urgent care center to your point. We are very much on-track with our pro forma, so very pleased with the progress there.
Endri Leno
And last one for me, just general of what you're seeing for further acquisitions. I mean it's in terms of multiple out there, would you still expect to realize something around the 10x EBITDA that you paid for the ambulatory surgical center? Is it the last one or is it -- has it decreased a little bit or gone higher?
Robert Horrar
Remember the Meridian acquisition, NueHealth partnership; the Meridian -- I mean this is a platform deal. So -- and again, you're looking at a trailing 12 on that multiple. As I said, we look at this in terms of opportunities going forward, synergies, and we've identified that. So we think that that's actually a better deal for us than that but you want to -- I'll turn this over to Jim Rolfe to comment on.
James Rolfe
That's right. As Rob said, we look at deals; we make sure that it hits our core attributes with good quality, doctor alignment, good earnings and more importantly, growth potential. And when we price a deal, we look at things that are in place already, that really weren't factored into trailing 12, they could have brought on some new doctors, new service lines. So again, we're going to stay disciplined but as Rob said, that acquisition was a platform acquisition with 7 ASCs and it's a pretty limited market when you start talking about platform ASCs. A several ones [indiscernible] but having a platform ASC company was pretty limited space, and so we definitely paid a premium for that or paid up for little bit of that.
Operator
[Operator Instructions] We do not have any questions over the phone line at this time. I will turn the call over to the presenters.
Robert Horrar
Thank you for participating on today's call and for you continued interest in MFC. We look forward to reporting on our progress next quarter. Thank you.
Operator
This concludes today's conference call. You may now disconnect.