Donald Schellpfeffer - Chief Executive Officer Michael Salter - Chief Financial Officer

Doug Miehm - RBC Capital Markets Matt Bolton - Canaccord Genuity

Good morning, ladies and gentlemen, and welcome to the Medical Facilities Corporation 2015 Second 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, and good morning, ladies and gentlemen. Thank you for joining us for today's conference call. With me today is Michael Salter, the Chief Financial Officer of Medical Facilities Corporation. First, let me note that financial results do not include revenue from discontinued operations, which I'll discuss further in a moment. Prior to market today, we reported our second quarter 2015 financial results. Our new release, financial statements and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca and were also filed on SEDAR today. For the second quarter, consolidated revenue from operations grew 3.4% to $73.6 million, up from $71.2 million for the same period last year. Revenue growth was primarily attributable to our Sioux Falls Surgical Hospital driven by higher case volumes, favorable shifts and payer mix and increased revenue from our ancillary services. Additionally, Black Hills benefited from change of the payments under the Electronic Health Records incentive program. Consolidated income from operations for the quarter was $16 million up 5.1% from the $15.2 million of the second quarter last year and as the percentage of income was 21.7% of revenue compared to 21.4% in the second quarter of 2014. Cash available for distribution increased 26% compared to the same period last year. This increase was primarily due to higher expected recovery of income taxes. In US Dollar terms, we saw increase of US$1 million to cash available for distribution, which was primarily, partially offset by higher foreign currency losses on foreign exchange forward contracts, which matured in the respective periods. As a result, cash available for distribution ended second quarter are 136 consecutive month of distribution another favorable payout ratio of 72.8% compared to 91.5% for the second quarter last year. However, I would like to note that the foreign currency losses net of taxes are backed out of our payout ratio would have improved even further to 65.2% at the average exchange rate over the quarter. We have no foreign exchange hedges in place, past 2015. As we have previously communicated to 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 division scheduling and most importantly from shifts in case mix, payer mix and case counts, which are main drivers of our results. Michael will now provide more detail and insight to our financial performance for the second quarter of 2015. And I will conclude with our views on how the larger economic revenues impacting the healthcare market in our business. We'll then open 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 and good morning, ladies and gentlemen. Please note that all dollar amounts expressed in today's call are in US Dollars unless otherwise stated. Before, I begin reviewing the quarter's financial highlights. I would like to make note of the successful sales of the Dakota Plains Surgical Center. During the quarter, MFC announced the sale of our 65% ownership in the Dakota Plains Surgical Center to Avera St. Luke's. The gross proceeds of approximately $24 million, an attractive valuation relative to the centers 2014 operating income and EBITDA. Additionally, I'm happy to report that our revolving credit facility has been increased to CAD100 million from CAD50 million. We believe that combined the sale of DPSC and the increase in our credit facility are positive for the company and our shareholders. As our financial position is fortified and it allows us to remain flexible to execute on opportunities, that are aligned with our company's strategic objectives. For the second quarter, we recorded revenue of $73.6 million up 3.4% from $71.2 million a year earlier. As Don mentioned, the majority of this growth was driven by higher case volumes, favorable shifts in payer mix and growth and ancillary revenue at Sioux Falls, which contributed $2.9 million through our overall revenue. We are also seeing positive impacts on case volume at Sioux Falls from the Pension Choice legislation approved last November by the borders [ph] in South Dakota. This allows doctors clinics and surgical hospitals to join previously restricted insurance networks. In addition, we are seeing previously uninsured patients, who are now covered under the healthcare exchanges that were established as a result of the Patient Protection and Affordable Care Act. Black Hills revenue grew through increases in urgent care revenue, pain management procedures and favorable changes in case mix. As well as the changes in payments under the Electronic Health Records incentive program, that Don noted earlier. Revenues were partially offset by decline in surgical cases at Black Hills. Oklahoma experienced a slight decrease in revenue of 0.4% primarily due to changes in payer mix, however this gain was partially offset from growth in the both surgical cases and pain management procedures. Our Arkansas unit also saw revenue decrease but of less than 0.2% which resulted from changes in case mix and lower case volumes. But these were partially offset by favorable changes on the payer mix side. Revenue Newport coast, our ASC in smallest center was negatively impacted by a decline in surgical case volumes and changes in payer mix. Although, these were partially offset by favorable case mix. Donald will speak more about Newport's coast results in his concluding comments. On a consolidated basis, we saw an overall increase of 0.5% in surgical cases primarily on the outpatient side and an increase of 8.3% in pain management procedures. As I mentioned earlier, we also saw additional contributions from our ancillary services at Sioux Falls. For the second quarter of 2015, income from operations on a consolidated basis increased 5.1% to $16 million, from $15.2 million compared to the same period last year, which reflected growth in revenue partially offset by increased operating expenses. Primarily relating to increased cost for drugs and supplies tied to volume increases, as well as higher general and administrative expenses. During the second quarter, we recorded net income of $16.4 million compared to $22.4 million for the same quarter last year. The decrease primarily attributable to the impact of the change in value of exchangeable interest liability, as well as lower gains from foreign currency. Cash available for distribution or CAFD was CAD12.1 million, an increase from CAD9.6 million generated in the second quarter of last year. Our declared distributions were $8.8 million consistent with the same period last year. The resulting [ph] payout ratio for this quarter was a favorable 72.8% compared to 91.7% for the same period a year ago. And as Don noted earlier, improvements further were considered FX losses. As of June 30, 2015 MFC had outstanding foreign exchange forward contracts for future delivery of US$18 million in exchange for CAD19.3 million. During the quarter, we have repurchased 6,700 shares our current NCIB is in effect until May 15, 2016. And it is our intention, to continuing making purchases at prices, we deem beneficial to the company and our shareholders. As you may recall, MFC received regulatory approval for NCIB, that allows us to purchase up to 626,350 shares which is 2% of our issued and outstanding common shares at the time of application on May 1, 2015. Our cash, cash equivalents and short-term and long-term investments now stand at a healthy $77.4 million. All in all, it has been a great quarter, we sold DPSC recognizing a good arbitrage opportunity. Have increased our credit line and are currently focused on strategy and acquisition. Management, with the support of our acquisition committee of our board has been and is pursuing a number of acquisition possibilities, while being mindful of our acquisition criteria and accretive value to our shareholders. Let me now call on Don, for his closing comments.

Thanks, Mike. MFC's outlook can be affected by many inter-related factors, which include the economy, healthcare reform and management strategies. Economic activity in the US gained pace expanding moderately after a relatively flat second quarter. Jobs gains picked up, while the unemployment rate remained steady. Household expanding boosted by declines in energy prices in first quarter, grew moderately in the second quarter as energy prices stabilized and the housing sector stayed slow. A particular North [ph] several large M&A deals were announced subsequent to the quarter end between major health insurance providers. Aetna agreed to buy Humana for $37 billion while Anthem will acquire Cigna for $48 billion and United Health continues to look for opportunities for M&A growth. It is important to note that these deals have not closed yet and due to complex regulatory issues, may not close until later into 2016. While we do not know the outcome of these deals or the impact, they may have on our healthcare providers, we will continue to monitor their progress. The general state of US economy and in particular our disposal income of healthcare consumers, will impact the demand for elective medical procedures. We remain confident that we will continue to benefit from the fact that, most of our revenues are generated in South Dakota, Oklahoma and Arkansas. States have continued to exhibit favorable economic trends. While it remains difficult to assess the impact that Patient Protection and Affordable Care Act. We believe, this implementation will cause the healthcare industry to experience a number of challenges and opportunities. We anticipate that the increase, the number of patients under [indiscernible] will result at increase number of surgical cases with reduction in uncompensated care. Healthcare entities may also be offered reimbursement incentives rewarding those will be quality of care and operational criteria. Our strong results delivering high quality of care and patient satisfaction are evident by a nation-wide survey, which rank all of our specialty surgical hospitals at five stars. And I would like to note that, only 7% of the 3,555 US hospitals surveyed achieve the top five star designation. However, the ongoing pressures of reimbursement rates will remain a challenge for most healthcare providers. The combination of increasing average age and life expectancy of US population. Overall population growth and increasing proportion of population will, with an access to healthcare and advances in science and technology will continue to drive an increased demand for services, we provide in our centers. With our sales balance sheet, we continue to assess and identify accretive acquisition opportunities while applying best practices and cost reduction strategies to achieve the company's business and strategic objectives. We continue to capitalizing at our unique business model, which includes a physician centric focus complemented by physician ownership and an active role in center management. Michael mentioned earlier the challenge faced by our Newport Coast, ASC. California is a very difficult market for physician recruitment and some of the challenge at Newport coast were due to recruitment and that proceeding at the pace we would like to have seen. We'll continue to support our centers with their physician recruitment efforts, as increase in the number of physicians holding medical staff privileges and or ownership interest in our centers are key drivers positively impacting our results. Finally, we remain confident that company will be able to continue to generate cash available for distribution that is more than adequate to satisfy our current annual dividend of CAD1.125 per common share. We would now like to open the line-up for any questions that you may have. Operator, please?

[Operator Instructions] and your first question comes from Doug Miehm with RBC Capital Markets. Your line is now open.

Good morning, Doug.

Good morning, Doug.

Good morning. A quick question, as it relates to just, the buyback and maybe some of your commentary around pursuing acquisition opportunities as you know, shares have been little bit more evolved by now recently. And probably presenting an opportunity for the company to buy back shares and I just thought that, you would have bought back few more shares in the 6,700 that you noted. But perhaps, this is due to the fact that you're reviewing several acquisitions opportunities and would like to keep your cash on hand. Perhaps you could just elaborate on that a little bit?

Yes, Doug. I would say the 6,700 keeping mind as we were coming up on the Dakota Plains, the sale and the closing of it. We were clearly out of the market, due to blackout considerations. We have been buying if you check with SEDAR, the numbers you will see, we have been buying consistently. Again can't really talk about the level of real buyout, but suffice to say we plan to continue buying, whatever we deem appropriate and at the right prices under the NCIB. The NCIB runs until May, 16. I refer to the number of shares that we have applied for and the application, which was approved. And I would, when you look at the numbers on ours and even historically looking back at our NCIB's. Do keep in mind, we have to buy, the rule is you have to buy behind the tick [ph] and it's quite interesting. I know, I do I go back and I look every day at the volumes and for the trading and you see, what we bought, where it was possible to buy. So the constraining factor on ours is the volume of our trading and the fact that you have to buy behind the tick. I think that's what you would read into it and how you would interpret it, that's how I interpreted.

Okay, so you bought the maximum out, that you paid off given those two factors?

Yes, that's true. That's true.

Okay and sorry, just some commentary around the acquisition opportunities. It is the first time you've really felt that way, that you're reviewing a few opportunities right now.

Well I think, we've always said to the market Doug, that there's two areas we're keenly interested in. Though, we will look at anything that makes sense, that fits with our strategy and or - the basic philosophy underlying the company. We've always said that, we've always said we're always seeing, we see opportunities in the surgical hospital space and the ASC are probably the two, that come to mind most. I think, it's more limited in the area of the surgical hospitals because as you well know, this 250 to 300 out there in the US, there is this ban on physician ownership of hospitals in place, so that obviously limits the supply. There are opportunities that come up from time-to-time obviously our concern is one of them, and you saw how we moved on that. I think we just wanted to reiterate, we do that a very strong support within the company with in terms of our acquisition committee, which the existence which is been in our AIF for the past few years. And management actively working on the area on the area of M&A looking at those opportunities. Obviously, we report something when it has to be reported. But and it can vary, what you're looking at from time-to-time. But there is always things that we're looking at and that are.

Okay and then just, one question for Don. Maybe you could update us on, any physician leaving the company's or any new physicians that have joined in them. Michael, maybe you can just wrap up with that? A question around, are you thinking in putting new hedges in place, given what's happened with the committee in currency or the strength from US Dollar. Are you happy with the way things are now? I'll leave it there. Thanks.

Thanks, Doug. As far as recruitment is concerned, MFC has always been involved with that Black Hills [indiscernible] physicians Sioux Falls have been relatively stable adding replacing people that have left. And also in Arkansas similar to that, most difficult part have been in California where we're putting a pressure putting together a formal plans, as far as going out and spending more time in the recruitment process and still competition out there is, significantly stronger based on the fact, that there is large number of ASC's in that particular area. At ongoing basic, MFC with in conjunction with Newport coast are putting together an ongoing plan, we hopefully strengthen our recruitment prospects of there.

I'll come back to the product [ph] exchange. Clearly, I've referenced we have series of hedges that do run out at the end of December, 2015. So our results for the end of the year will still be impacted by relative [technical difficulty] for Canadian Dollar between now and the year end and I - appears to consensus that it's not going to dramatically, the looney [ph] is not going to take flight and the question of course is, where it will end up? I would refer back to our MD&A. We have a stated policy that we may from time-to-time place hedges. You hear all sorts of terms throwing around as to approaches to hedging, but I would suggest to you that our hedging committee which is in place within the company really evaluate may place hedges from time-to-time as seeing appropriate. At the end, the only thing that's the currency is that all of the [indiscernible] that are being thrown around our friends in the banking committee and the FOREX part of it in particular, are probably going to be wrong. And the looney [ph] will take its own path, its own flight path.

Thank you.

Thanks, Doug.

Thanks, Doug.

The next question comes from Matt Bolton with Canaccord Genuity. Your line is now open.

Good morning, thanks for taking my call. I'm on the call here for Neil Maruoka at Canaccord Genuity. Actually, Doug touched on a lot of the comments, that I was curious about. But just going back to the hedges. I'm curious, I know that there is no after 2015, but for Q3 and Q4, 2015. Do you have any commentary on how it might impact your payout ratio because I noticed it still negative impact for this quarter, but still very favorable compared to Q2, 2014?

Yes, well keep in mind. There's two things, the model of hedges is approximates the amount needed for the distribution and I believe the number [indiscernible] the average of those hedges been in its above 105. So there's still going to be a negative impact. If you didn't have any hedges right now with the dollar floating around $1.30, yes as Don and I both noted. The payout ratio would drop even further. What you're seeing happening right now is that, it's that delta between the amount that sort of hedged and we're paying out in distributions and the remainder of the free cash flow of course is coming through in the CAFD, with the full impact of $1.30, the Canadian Dollar being back trading [ph] by US$1. So you should be able to just model that out based on those numbers. We do provide in the MD&A, you can pull all of the numbers, pretty much, you need to do that modeling.

Okay, great that's helpful and just lastly, just again expanding on Doug's question with respect to maybe some of your plans for the proceeds that you're seeing from the sales of DPSC. Do you have any thoughts there or potential plans on maybe considering diversifying geographically or do you have any more color on that?

Well, again I come back to what I was saying, obviously the primary areas we would probably look are in surgical hospitals and ASCs as we have always said, right back to day one of the company. I mean, that's we are providers of space for surgeons to perform surgeries in that, and it's simple. Having said that, would we look at other healthcare related things that are rather complementary? Whatever, we have one overwriting consideration and that's accretive for our shareholders among some other, you know very stringent criteria that we apply for looking at a buyable hospital or a surgery center. So I think, I would look at that. Now you brought in the point about geography. You know I think again, we have always said and if you look at the map of our facilities. We certainly are drawn to the Midwest. The Midwest Texas area, again I think as I've always had in presentations. Texas is one area on the map, where there is a lot of physicians run [ph] hospitals. So clearly that is, but again I would reiterate, we would look where it makes sense. Are there are some markets, you might like than others maybe, but I think more importantly on anything is the criteria, that we do look for, which is laid out in our presentations, that we do to the investment community because we want to be buying very solid units, cash generating that are producing good cash flow and that do give us that ability, if we can buy them at the right price to be accretive for the shareholders.

Okay, thank you very much.

And we have no further questions at this time. I will turn the call back for our presenters for closing remarks.

Thank you for participating on today's call and for your continued interest in Medical Facilities Corporation. We look forward to reporting on our progress in the next quarter and if you have any further you can contact Michael Salter, CFO and myself, the CEO. Thank you and have a great day.

Thank you, ladies and gentlemen.

And this concludes today's conference call. You may now disconnect.