Donald Schellpfeffer - CEO Michael Salter - CFO

Neil Maruoka - Canaccord Genuity

Welcome to the Medical Facilities Corporation's 2014 Fourth 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 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.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for participating in today's conference call. Joining me today is Michael Salter, the Chief Financial Officer of Medical Facilities Corporation or MFC. Prior to market opened today, we released our 2014 fourth quarter and year-end 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 the fourth quarter we reported a revenue of 87.6 million down 2.2% from 89.6 million for the same period last year. The decrease in revenue resulted from unfavorable shift in payor and payor mix. Additionally we experienced a reduction from electronic health records, incentive payments under the EHR program payments are expected to decline with the completion of each stage. Consolidated income from operations for the quarter were 24.4 million down 2% from 24.9 million recorded in the same period last year. Cash available for distribution decreased 9% compared to the same period last year. The decline was due to the lower cash flow generation from our centers, a higher provision for current income taxes and higher foreign currency losses on foreign exchange forward contracts which matured in the respected periods. However we still achieved favorable cash available for distribution with the payout ratio of 72.1%. As we have previously informed the market our year-over-year revenue and income from operations can fluctuate from quarter-to-quarter and center by center. This is a result of shifts in cash mix, payor mix, physician scheduling and case counts. Michael will now provide more detail and insight into our financial performance for the fourth quarter of 2014. And I will conclude with our views on how the larger economic environment is impacting the healthcare market and 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?

Thanks, Don. Good morning, ladies and gentlemen. Before I begin my usual cost [ph] from all of the dollars amount I will express unless I say otherwise are U.S. dollar denominated. For the fourth quarter we recorded revenue of 87.6 million, a decrease from 89.6 million in the same quarter last year. Despite an increase in cash volumes and increase in ancillary services, revenue was offset by unfavorable shifts in payor and case mixes. Revenue growth of Black Hills unit was due to an increase in surgical cases and a more favorable shift in cash mix attributed to an increase in in-patient case volumes. Sioux Falls remained consistent with the same period a year earlier as the facility experienced revenue growth in it's ancillary services, favorable shift in case mix and an annual price increase but was offset by a decline in plastic surgery and neurosurgery cases as well as an unfavorable shift in case mix. Dakota Plains saw an increase in surgical cases, favorable shift in case mix and annual price increases but again was partially offset by decline in the EHR payments which Don eluded too in his opening remarks. Oklahoma experienced an unfavorable shift in case mix and lower case volumes which were partially offset by a favorable change in their payor mix which was primarily attributable to an increase in cases that draw higher reimbursement rates. Newport Coast was impacted primarily due to the change from an outer-network to an in-network payor model and also an unfavorable shift in case in payor mix. So on a consolidated basis we saw an overall increase in surgical cases, and pain management procedures as well as increased revenues from our ancillary services such as imaging, primary and urgent care. However these increases were offset by more cases with lower reimbursement rates that is less favorable case and payor mix. Our consolidated income from operations for the fourth quarter of 2014 decreased 2% to 24.4 million from 24.9 million a year earlier. Income from operations experienced a decrease as a result of the changes in case in payor mix. During the fourth quarter we recorded net income of 8.6 million compared with 21 million with the same quarter last year. The decline was primarily attributable to an increase in income tax expense. Cash available for distribution or CAFD was CAD12.2 million, a decrease from CAD13.5 million generated in the fourth quarter of last year. Our declared distributions 8.8 million in-line with the same period last year with a resulting pay-out ratio for this quarter of 72.1% compared to 65.2% for the same period a year ago. As at December 31, 2014 MFC had outstanding foreign exchange forward contracts for future delivery of 37.2 million which will be converted at a weighted average rate of CAD1059 per U.S. dollar through the end of December 2015. Cash and cash equivalents of short term and long term investments remain strong at 54.2 million at December 31, 2014. Let me now call on Don for his closing comments.

Thanks, Mike. MFC outlook can be affected at many inter-related factors which include the economy, healthcare reform and management strategies. The U.S. economic activity continue to grow at a moderate pace, the labor market demonstrated solid job gains with improvements in the unemployment rate. The housing sector continued to remain slow but improvements we’re seeing in both household spending and business fixed investments. The S&P 500 experienced a gain of 4.9% while the TSX ended on a negative note by losing 2.1% at the end of the fourth quarter. The less than favorable performances by the TSX have a results of the concerns on global growth and unstable commodity prices. Additionally the dramatic decline of oil prices pulled the index lower later in the quarter. We will continue to monitor potential effects for recently implemented tax increases spending cut and the continued withdrawal of stimulus measures. We remain confident that we will benefit from the fact that over 97% of our revenues are generated in South Dakota, Oklahoma and Arkansas which are states that continue to exhibit favorable economic trends. The mid-term elections have handed the republicans control of both houses of Congress which produces somewhat uncertainty as to the future of the Patient Protection and Affordability Care Act. The U.S. Supreme Court appears to be closely divided on the future of the Patient Protection and Affordability Care Act and inspected through on this case in the September of 2015. It remains difficult to act -- to assess it's impacts given the level of uncertainty for healthcare providers. We believe the implementation of the Patient Protection and Affordability Care Act will cause the health industry to experience a number of challenges and opportunities. We anticipate that the increase in number of patients will result in an increased number of surgical cases and with the reduction in uncompensated care. Healthcare entities may also be offer reimbursement incentives rewarding those with quality of care and operational criteria. However the ongoing pressure on reimbursement rates will remain a challenge for most healthcare providers. The combination of the increasing average age and life expectancy of U.S. population, overall population growth and increasing proportion of the population will access to health insurance and advances in science and technology will continue to drive an increased demand for the services we provided at all of our centers. We will continue to assess and identify accretive acquisition opportunities while remaining focused on driving operating performance across all of our centers over the long term. Management intends to continue capitalizing on our unique business model. One of our approach is to positively impact our performance going forward will be to support physician recruitment efforts at our centers in order to drive increased utilization of our expanded facility at our hospitals. We believe that increased the number of physician holding medical staff privileges and/or ownership interests in our centers are one of the best met methods of positively impacting results. The integration and development of revenue generating initiatives such as our primary and urgent care operations at two other hospitals will also expand our capabilities and service offerings. Management continues to focus on accretive opportunities for revenue generation while applying best practices and cost reduction strategies to achieve the company's business and strategic objectives. The management team remains confident in the company's operations being able to continue to generate cash available for distribution that is more adequate to satisfy our current annual dividends of CAD1.25 per common share. We would now like to open the line up for any questions that you may have. Operator?

[Operator Instructions]. Your first question comes from Neil Maruoka with Canaccord Genuity. Your line is open.

My first question is just on Dakota Plains, it looks like you saw a bit of rebound relative to what we have seen over the past few quarters. Don you alluded a little bit to recruitment. Is there ongoing recruitment efforts there? Have you being successful in bringing in some new orthopods or is that rebound mostly due to improving case volumes and mix?

They are constantly looking for additional new orthopedic surgeons and other physician who can continue to work that facility but my knowledge here is new one added, it was basically the fact that traditionally toward the year-end -- when year-end comes in the fourth quarter and there they are a lot busier than they have been so it's primarily due to the case mix and as doctor performing more surgeries in the fourth quarter.

And then at Oklahoma, we thought we were seeing a bit of improving trend after it's moving in network in 2013, but Q4 seemed to be weak and what should probably be seasonally strong quarter. Was the weakness there due to the lingering effects of that shift in network?

That’s primary reason. The continued shift financial you’re going in network is the reimbursement as you know Neil, it's less than when they are out of network.

And so how long do you expect that effect will linger before you should see those volumes growing back again?

I would say Neil, like when you go in network and we have had this at two facilities, we have had at surgery center in Newport Coast and I made the comment that during my delivery here that that was primarily due to an in-network shift and it's really hard to say you know specifically it's how long that effect can linger but I think our experience is it probably lingers longer than one imagines initially. So I’ve come back to Oklahoma saying I think that we will still see some lingering effects of that shift but I think it's also very much combined with shifts in favorable, unfavorable case mix as well and also payor mix and all of those things combined really impacted our option [ph] and I think have, you made the comment like you noticed also for the last three, four quarters, it's been mixed and certainly it has and that I think is a reflection. It's best summed up and that it's the reflection of payor mix shifts and we have had that -- we have seen for instance we have seen an increase in their Medicare over the last three, four quarters, case mix will drive it as well. We have seen and I will ask Don, to maybe comment to that but in the type of procedures that are done at some of our hospitals including when you get into in-plant stimulators for pain management that type of thing and those can really play havoc with your margins.

Okay. And maybe just a broader question then, margins were down year-over-year, every quarter the shares except for Q3 and it's kind of a similar trend to what we saw last year. Can you give -- Don, you talk about reimbursement pressures in your comments, can you talk about really what's been driving that and if you expect that that you can see a reversal of that margin pressure going forward as you look to contain cost and what not.

The good news is Medicare has increased their reimbursement across all of our hospitals, [indiscernible] obviously most as you know Neil, most of the private insurance carriers across the Board basically are decreasing reimbursement and the way it normally works is that these are contractual relationships with the various insurance vendors one year at a time so you’ve to [indiscernible] free negotiation moving that going forward and in addition to that the percentage starts the lower population we’re doing more and more larger procedures but the reimbursement is less and less so as part -- which is going to the pressure as far as the reimbursement and as far as the numbers that you’re referring to.

I think Neil, I will just add to that too and I will [indiscernible] to page 16 in the MD&A you know if you look at the year-over-year income from offices as a percentage and I will come back to my usual thing that it can be, it's diverse. It's not just a straight downward trend on any -- there is a number of our centers who are actually up the share year year-over-year which I think it gets very much to supporting the thesis that we evolved that we will see the case the payor makes changes in that but I think also you do have to keep a couple of others which I sort of view as more permanent items in our overall margin that being the acquisition of ASH few years ago obviously took down the aggregate consolidated operating margin just because it has historically operated at a much lower margin and we bought it on that basis. Also the move in two of our centers into the urgent care, primary care that because of the nature of those service lines they are just not big margins and they do get the consolidated margin when you look at it but again I would come back to the point when you look at that table on page 16, you will see those variations and certainly some of our centers have declined and for the reasons we have talked about and but other ones we have seen some improvement in them.

[Operator Instructions]. There are no further questions at this time. I will turn the call back over to the presenters.

Thank you for participating in today's call and for your continued interest in MFC. We look forward to reporting few other progress at our next quarter. Thank you very much and have a great day ladies and gentlemen.

Good day.

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