Medical Facilities Corporation (OTCPK:MFCSF) Q3 2022 Earnings Conference Call November 10, 2022 8:30 AM ET
Company Participants
Jason Redman – President and Chief Executive Officer
David Watson – Chief Financial Officer
Conference Call Participants
Endri Leno – National Bank
Paul Stewardson – iA Capital Markets
Sahil Dhingra – RBC
Operator
Good morning, everyone. Welcome to Medical Facilities Corporation’s 2022 Third 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
Thanks, operator. Good morning, everyone, and welcome to our third quarter earnings call. Joining me today is our Chief Financial Officer, David Watson. We reported our third quarter 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. During the quarter, our surgical case volumes were up 3% as they continue to recover towards pre-pandemic levels. The higher volumes contributed to a 6% increase in facility service revenue for the quarter. Our facilities did not receive any additional government stimulus income in the quarter, whereas they received $2.7 million in Q3 of last year. While we were pleased to see the continued strengthening of case volumes, inflationary pressures also continued to impact our operating expenses. Like others in our industry, we remain focused on attracting and retaining talent, and we’re subject to market wage pressures, including those resulting from the overall shortage of nurses.
Those pressures and planned annual salary increases led to a $2.4 million rise in clinical and non-clinical wages for the quarter. Our case mix on the higher surgical case volume contributed to a 12.9% increase in the cost of drugs and supplies for the quarter. We also had a 30.5% increase in our general and administrative expenses. The combined impact of higher operating expenses and a decrease in government stimulus income exceeded the increase in facility service revenue. Regardless, our balance sheet remains strong, and with our strong cash flow, we are well positioned to drive financial performance and unlock additional shareholder value.
During the quarter, we purchased 426,800 shares for just under CAD4.1 million under a Normal Course Issuer Bid. Since the start of last December through our NCIB and the recently completed substantial issuer bid, we purchased approximately 4.8 million shares at a cost of approximately CAD50 million. Another news I’m pleased to share with you with three of our hospitals, Arkansas Surgical Hospital, Black Hills Surgical Hospital and Sioux Falls Specialty Hospital recently received Specialty Excellence Awards from Healthgrades. These awards recognize hospitals that deliver superior quality care and superior patient outcomes. Healthgrades is a leading online database platform in the U.S., dedicated to helping people make more confident health care choices, whether it’s choosing the right doctor, hospital or treatment. These are just the latest accolades for our award-winning facilities, which have a long track record of placing high-end surveys and studies of patient satisfaction.
With that, I’d like to turn the call over to David to review our financial results for the quarter. David?
David Watson
Thank you, Jason. Good morning, everyone. I would like to start by reminding everyone that all dollar amounts I’m about to discuss are in U.S. dollars unless stated otherwise. Total revenue and other income for the quarter increased 3.2% to $102.2 million as facility service revenue increased by $5.8 million or 6%, primarily on higher surgical case volumes. Facility service revenue also benefited from changes in case and payer mix and from ASH moving its anesthesia service and related billing in-house in the current year. However, total revenue and other income for the quarter did not include any government stimulus income, whereas the same quarter of last year included government stimulus income of $2.7 million. As Jason said earlier, total surgical cases were up 3% compared to Q3 of last year. Our outpatient cases increased 3.5% and observation cases increased by close to 32%. Inpatient cases were down 12.4% for the quarter.
Looking at the expense side, operating expenses for the quarter were up by $9.3 million or 11.2% to $91.7 million. As a percentage of total revenue and other income, operating expenses increased to 89.8% from 82.3% in Q3 of last year. Consolidated salaries and benefits increased by $2.4 million or 8%, mostly due to increases in both clinical and nonclinical wages and salaries as a result of annual increases in market due to the industry-wide shortage of nurses and other staff.
Consolidated drugs and supplies costs increased by $4 million or 12.9%, largely attributable to case mix volume and pricing as well as a gain of $2 million recorded in the prior year on the exchange of implant inventory as part of a new vendor agreement at Black Hills. Our general and administrative expenses were up by $4.5 million or 3.5%. $1.4 million of the increase was attributable to the impact of Arkansas Surgical Hospital moving its anesthesia service and related billing in-house in the current year. Another $0.8 million was related to the reclassification of Sioux Falls Specialty Hospital accountable care organization cost to G&A expenses. We also had increases in administrative and facility-related expenses, billing and contracted services and various other G&A costs.
Our income from operations for the quarter was $10.4 million, which was down $6.1 million or 37% from the same quarter of last year. The difference includes the $2.7 million in government stimulus income in Q3 of last year and a $2 million gain on inventory. EBITDA for the quarter was $15.6 million or 15.3% of revenue and other income, down from $23.3 million or 23.6% of revenue and other income in Q3 of last year. The loan receivable from Unity Medical and Surgical Hospital was fully written off this quarter with a further $9.4 million impairment loss on top of the $4 million earlier in the year. In addition, we wrote off $300,000 of other receivables from Unity that were reflected in G&A expenses.
In the third quarter, we generated cash available for distribution totaling CAD3.8 million, resulting in a payout ratio of 61.5%. At the end of September, we had consolidated net working capital of $56.1 million, including $44.3 million of cash and equivalents. This compares to working capital of $67.4 million, including cash and equivalents of $61 million at the end of 2021. Total cash includes about $900,000 in Medicare advances, which will be recouped by year-end. During the quarter, we also extended the maturity of our existing corporate credit facility by 2 years to August 31, 2025, while amending the limit down to $75 million from the previous $150 million. At the end of the quarter, we had $21 million outstanding on our corporate credit facility. Inclusive of lease liabilities, our net debt to equity stands at 0.52, which remains well below that of our U.S. listed peers.
This concludes our prepared remarks. At this time, we’d like to turn it back over to the operator to open up the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question will come from Endri Leno with National Bank.
Endri Leno
Hi, good morning. Thanks for taking my questions. The first one I have is for Jason. If you can share us a little bit – I mean since you started like kind of your vision for Medical Facilities? And what – to the extent that you can share, obviously, what steps going to take you to drive financial performance?
Jason Redman
Well, thank you, Endri. I appreciate the question. So at this point, I mean there’s not much more that I can add apart from the press release that we had issued in roughly mid-September. I mean, obviously, our focus is going to be on looking at the noncore assets of the business that we have, looking at all possible ways to maximize shareholder value, and looking at the overall cost structure of the business and making sure that the costs are in line with the business going forward. So at this point, I’m focused on making sure that we look at every opportunity to maximize shareholder value and return capital to the shareholders.
Endri Leno
Okay. Fair enough. And in terms of the divesting the noncore assets, I mean is there any insight you can share as in how does the market look for them out there? Or which one of those noncore assets could be – is it all of the fees are going to be involved any of the hospitals or anything like that?
Jason Redman
No. Obviously, we can’t speak to any specific transaction. I’m going through – I mean we’re going through as a team reviewing all the assets that we have and look where it makes sense to, if it’s a noncore asset. I mean I can’t say, it’s been a certain facility, obviously. But if there’s opportunities out there to realize value in these assets, we’ll look at them. If the end of the transaction make sense then we’ll pursue it.
Endri Leno
Great, okay. Makes sense. Next question is a bit more kind of operational in nature. And if you can share us any insight in terms of how are you seeing case volumes in Q4? I mean it’s a seasonally strong one anyways, but how are you seeing that trend? And more importantly, expenses. Have they stabilized in Q4? Are they increasing, decreasing? Any color there? Thank you.
David Watson
Yes. Hi, Endri. It’s David. As you said, Q4 is typically the strongest quarter, and we don’t see any reason for that to be different this year. With respect to expenses, we, like most in our industry, continue to experience the impact of inflationary pressure, whether it’s wages and benefits or supplies costs. So we are – will continue to be subject to the same inflation that everyone else is.
Endri Leno
Okay. Thank you. And the last one for me. Have the CMS rates, the final ones that have been published yet? And if you can share, how do you expect them for 2023?
David Watson
They published the outpatient rates. I think the across the board increase is roughly 3.8%. I don’t recall what the – I haven’t seen the inpatient rate impact yet.
Endri Leno
Okay. Okay, thank you. That’s it for me.
Operator
And next, we will hear from Paul Stewardson with iA Capital Markets.
Paul Stewardson
Good morning gentlemen. Thanks for taking our questions, just calling in for Chelsea. First question. Just in terms of the new vision as well, can you talk about kind of what your targets might be in terms of where you could take the dividend, where you could take leverage ratio and what you’re comfortable with, especially on the leverage side?
Jason Redman
So in terms of dividend, we haven’t made any decision with respect to increasing dividend yet. I mean it’s something, obviously, that we’re looking at, at all different ways of returning capital. I mean we’ve used the NCIB in the past. We’ve used the SIB. And to the extent that there is additional free cash flow in the business, then we’ll look at opportunities for returning that cash flow, but nothing specific right now to announce.
Paul Stewardson
Okay. And just on the leverage side, do you have any targets now that you’ve returned some of the capital? How can we look at leverage going forward?
David Watson
Yes. Hi, Paul. Our leverage continues to be very manageable, and I think the expectation is, we want to keep it manageable. And I would say, that’s somewhere below three turns.
Paul Stewardson
Okay, thanks. That’s all for us.
Jason Redman
Okay. Thank you, Paul.
Operator
Thank you so much again. [Operator Instructions] We will now go to Sahil Dhingra with RBC.
Sahil Dhingra
Hi, good morning. This is Sahil for Doug Miehm and thank you for taking the questions. My first question is, were there any one-time costs that impacted adjusted EBITDA in this quarter? And the second one is, on the inflationary pressures, are you still seeing those pressures? Or – because I recall at the last call, you said – do you expect a moderation going into the second half of the year? If you could please elaborate on that a bit. Thank you.
David Watson
Yes, Paul – Sahil, no, there were no one-time costs that we’d call out in the quarter other than the impairment charge on Unity, which ran through finance costs with the $300,000 that ran through the G&A. With respect to inflationary pressure, we continue to manage that as best as possible. We’re having to remain competitive in our markets on the salaries and wages perspective to entertain our staff, which we’ve done – our facilities has done a very good job of. And we’ve got a group purchasing organization that we work with on pursuing other supply. So we continue to make every effort to control those costs, but we’ll continue to be subject to the inflationary pressure.
Jason Redman
Sahil, does that answer your question?
Sahil Dhingra
Yes, sir, it does. I have one follow-up. Are you seeing more cost pressures on the nurse side? Or is it on the doctor side?
David Watson
Well, as you may recall, we don’t typically employ physicians. We’ve partnered with them. So, most of our labor costs are on the nursing, other clinical staff and non-clinical staff.
Sahil Dhingra
Okay. Thank you. That is really helpful.
David Watson
Sure, thank you.
Operator
And with no further questions in the queue, I’d like to turn the call back over to Mr. Redman for any additional or closing remarks.
Jason Redman
Thank you, operator, and thank you, everyone, for joining our call this morning. We look forward to updating you again next quarter. Take care.
Operator
And once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.
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