Medical Facilities Corporation

Good morning, everyone. Welcome to Medical Facilities Corporation's 2022 Fourth Quarter Earnings Call. After management's remarks, this call will include a question and answer session whereby a qualified equity analyst will be permitted to ask questions. Before turning 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, the law of risks and uncertainties and underlying 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.

Thank you, Operator, and good morning, everyone. Joining me today is our Chief Financial Officer, David Watson. We reported our fourth quarter and year-end results earlier this morning. Our news release, financial statements, and MD&A may be accessed through our website at medicalfacilitiescorps.ca and have also been filed with CDAR. The fourth quarter was highlighted by the continued strength of our core business. Our facilities service revenue reached an all-time high for the quarter due to a more favorable case and payer mix, combined with a 5.7% increase in surgical volumes at our four specialty surgical hospitals. In the quarter, we returned additional capital to shareholders through a substantial issuer bid as well as our normal course issuer bid program. Under our SIB, we purchased 3.1 million shares at an aggregate purchase price of $25.5 million. Additionally, under our NCIB program, we purchased 433,300 shares at an aggregate purchase price of $2.5 million. Combined, we purchased just under 4.9 million shares, or about 16% of our total shares in 2022, representing a significant return of capital. We continued to pursue opportunities to reduce expenses, including overhead cost reductions. During the quarter, we concluded a separation agreement with MSC's former CEO, and this, combined with retirement of our former COO, will result in significant savings in salaries and benefits on a prospective basis. We also dealt with one-time items that negatively impacted our results for the quarter. We reversed $12.3 million in Paycheck Protection Program, or PPP, loans from government stimulus income. This amount consists of all PPP loan balances for facilities whose forgiveness applications have been denied or under review. Nonetheless, we are pursuing all reasonably available channels for reversing any denials. Any loans that are subsequently forgiven will result in a recognition of income. We recorded a non-cash impairment charge of $16.5 million related to the continued underperformance of the MSC Natera ASCs. This was a non-cash item, and it is important to highlight that these ASCs do not contribute materially to our results. In December, we sold our remaining 31.7% interest in Unity Medical and Surgical Hospital and settled the associated loan receivable for gross proceeds of $2 million. Before turning the call over to David, I'd like to give a shout-out to our hospitals, which continue to rank among the best hospitals in the U.S. for high quality of care. In fact, Sioux Falls Specialty Hospital, Black Hills Surgical Hospital, and Arkansas Surgical Hospital were each recognized by health grades as one of America's best hospitals for joint replacement surgery in 2023. A little over a month ago, Black Hills Surgical Hospital was ranked as the number one hospital in the United States for major orthopedic surgery for medical excellence by care checks, which also ranked Black Hills as the number one hospital in the market for overall hospital care, overall surgical care, and general surgery for 2023 in both medical excellence and patient safety categories. Around the same time, Arkansas Surgical Hospital was named the 2022 Human Experience Guardian of Excellence Award winner by Press Ganey for the fourth year in a row. This award is part of an annual ranking of the top hospitals in the country and is based on direct feedback from patients. ASH was the only hospital in Arkansas to receive this award. With that, I'd like to turn the call over to David to review our financial results. David?

Thank you, Jason. Good morning, everyone. I'll discuss our financial performance for the quarter and provide an update on our balance sheet and liquidity. I would also like to remind everyone that all dollar amounts expressed in today's call are in U.S. dollars unless stated otherwise. Facility service revenue for the quarter increased 7.9% to $119.4 million compared to Q4 2021. As Jason mentioned, each of our specialty surgical hospitals experienced higher volumes for the quarter with their combined case volumes increasing 5.7% compared to the fourth quarter of the year before. and 1.5% when compared to the fourth quarter of 2019. The higher facility service revenue was also attributable to the combined positive impact of case and payer mix, as well as $1 million related to ASH moving its anesthesia service and related billing in-house earlier in 2022. Total revenue and other income decreased by $9.3 million to $107.1 million for the quarter. the 8% decrease was primarily attributable to a reduction in government stimulus income driven by the one-time reversal of $12.3 million in PPP income recognized in prior years. On the expense side, consolidated salaries and benefits were up 6.1% over Q4 of 2021. Contributing to this was a combination of annual merit increases, full-time equivalent increases, and market wage pressures due to the shortage of nurses, as well as the separation cost for our previous CEO. This was partly offset by the forfeiture of stock options by former executives, lower incentive pay at the corporate level, and decreased health plan utilization. Consolidated drugs and supplies grew 10%, mostly due to case mix and higher surgical case volumes at the surgical hospitals and inflationary pressure on prices. This was partly offset by the reclassification of costs pertaining to Sioux Falls' Accountable Care Organization. in 2022. Consolidated G&A increased by 11.1%. The $1.7 million increase was mainly attributable to $1.4 million in costs pertaining to Sioux Falls' accountable care organization being mostly reclassified from drugs and supplies into G&A, combined with the $1.3 million impact of Arkansas Surgical Hospital moving its anesthesia service and related billing in-house. This is partly offset by lower corporate-level costs, a reduction in lease-related costs, and the gain recorded on the sale of the remaining equity in Unity. It's important to note, when adjusted for the impact of the impairment charge and reversal of the PPP income, our income from operations was $22.3 million, and adjusted EBITDA was $27.6 million for the quarter. In comparison, in Q4 2021, We had an income from operations of $25.5 million and adjusted EBITDA of $32 million. As Jason mentioned earlier, the fundamentals remain strong in our four hospitals. In the quarter, we generated cash available for distribution totaling $9.9 million Canadian dollars, resulting in a payout ratio of 21.2%. At the end of December, we had consolidated net working capital of $32.5 million, including $34.9 million of cash and equivalents. This compares to working capital of $60.9 million, including cash in equivalence of $61 million at the end of 2021. At year end, we had $36 million outstanding in our corporate credit facility, and the $12.3 million reversed from government stimulus income was reported as a liability under payer advances and government stimulus funds payable. Any PPP loans subsequently forgiven will result not only in recognition of income, but also a reversal of the corresponding liability. Inclusive of the lease liabilities, our net debt to equity stands at 0.94, which means well below that of our U.S. listed peers. This concludes our prepared remarks. At this time, we would like to turn it back over to the operator to open up the call for questions. Operator?