Medical Facilities Corporation

Good morning, everyone. Welcome to Medical Facilities Corporation's 2025 Second 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, except as required by applicable law. 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.

On the call with me is the Chief Financial Officer, David Watson. This morning, we report our second quarter results. Our news release, financial statements, and MD&A are available on our website and have been filed on CDART+. As usual, please note that all dollar amounts that fall are in U.S. dollars, unless otherwise specified. During the second quarter, we continued our focus on improving operating performance and returning capital to shareholders. Unfortunately, our consolidated results were negatively impacted by the headwinds at Sioux Falls Specialty Hospital. The relocation of the primary physician group's clinic, which is the hospital's largest orthopedic referral base, impacted surgical case volume along with case and payer mix in the quarter. In particular, the case mix at the hospital reflected fewer complex surgical cases, partially offset by an increase in lower acuity cases. Although this affected both facility service revenue and income from operations for the quarter, we look forward to Sioux Falls' return to more normalized operations in the back half of the year. In addition, I'm pleased to call out that Sioux Falls continuously recognizes Best in Class, In May, Sioux Falls was one of just 66 hospitals across the United States and one of only two in South Dakota to receive both the 2025 Outstanding Patient Experience and Patient Safety Excellence Award from Healthgrades. This was the third year in a row for Sioux Falls as a testament to the exceptional care delivered by our dedicated partners, and we couldn't be prouder of this recognition. Elsewhere, our other hospitals made strong contributions in the quarter and year to date. delivering improved profitability on the back of higher volumes, favorable case and payer mix, and payer rate increases. On the capital allocation side, we returned $6.9 million to shareholders with a repurchase of 609,100 common shares and a quarter under a normal course issuer bid. In the first six months of the year, including our normal course issuer bid and our substantial issuer bid, we repurchased approximately 4.2 million shares, returning $52.2 million to shareholders and reducing our outstanding shares by 18%. And lastly, subsequent to quarter end, we finalized a new three-year, $40 million credit agreement with CIBC on favorable terms. This agreement provides us with enhanced flexibility as it includes an option to increase the credit facility by up to $25 million, subject to certain conditions being met. With that, I would now like to turn the call over to David to review our financial results for the quarter. David. Thank you, Jason.

Good morning, everyone. Please note that the income statement variances I will be discussing this morning are for continuing operations and exclude Black Hills Surgical Hospital, which was treated as discontinued operations in the financial results for the three and six months ended June 30th, 2024. Facility service revenue for the quarter was down 1.3% to $80.6 million. with the decrease being attributable to the headwinds at Sioux Falls, as Jason already discussed. Excluding Sioux Falls, facility service revenue increased 6.5%, as our other hospitals contributed higher volumes and benefited from negotiated payer rate increases and favorable case and payer mix. Surgical case volumes were down 0.9%. However, when you exclude Sioux Falls, they were up marginally, or 0.1%. Overall inpatient cases were down 8.6%, and observation cases decreased by 1.8%, while outpatient cases increased by 0.7%. Pain management cases were down 4.5% compared to the same period last year, mainly due to a decline at Arkansas Surgical Hospital following the departure of a pain doctor in Q4 2024. However, the recruiting process at IASH remains strong, with a new pain doctor beginning this month in addition to a new spine surgeon joining a referral group's practice in September of 2025. Total operating expenses were down half a million dollars. Higher consolidated salaries and benefits were more than offset by reductions to drugs and supplies and GMA expenses. Consolidated salaries and benefits were up 3.9%, mainly due to annual merit increases, market wage pressures, and higher benefit costs from increased health plan utilization. This increase was partially offset by a corresponding reduction in salaried physicians, with one of the formerly employed physicians opting to become a full owner. Drug and supplies were down 2.4%, reflecting the lower surgical case volume and lower acuity procedures in a quarter, as well as the improved cost savings of certain facilities. Finally, G&A expenses were down 3.4%, mainly due to lower corporate-level costs related to share-based compensation plans, as well as lower contracted service costs. These decreases were partially offset by higher professional fees and various other facility-related expenses. Looking at our profitability for the quarter, income from operations was down 5% to just shy of $12 million. However, when excluding Sioux Falls, income from operations was up 98.9%. EBITDA for the quarter was $16 million, which was down 4.7% from the prior year period. Turning to our balance sheet, at quarter end, consolidated net working capital stood at $36.6 million, with cash and cash equivalents totaling $49 million. This compares to net working capital of $76.4 million and cash and cash equivalents of $108.5 million at the end of 2024. The decline in consolidated net working capital was primarily driven by the completion of the which reduced cash and cash equivalents by $43.7 million. Other significant drivers were the $14.4 million in tax payment in April related to the gain on the sale of Blackfield Surgical Hospital and repurchasing $9 million worth of shares under our normal course issuer bid. We continue to have no corporate-level bank debt after retiring the balance on our corporate credit facility near the end of last year. As Jason highlighted, On August 6, we executed a new credit agreement with Canadian Imperial Bank of Commerce for a $40 million revolving credit facility that matures on August 4, 2028. The agreement includes an option to increase the facility by up to $25 million, contingent upon meeting specified conditions. The agreement supersedes our previous $50 million credit agreement with National Bank. The facility is secured through general security agreements, securities pledge agreements, and guarantees issued by MSC and each of its whole land subsidiaries. This concludes our prepared remarks.

We would now like to open up the call for questions. Operator?

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star 2. If you're using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question. Your first question comes from Sahil Dhingra of RBC. Your line's already open.

Hi. Good morning. This is Sahil for Doug. Thank you for taking the questions. My first question is on the impact at Sioux Falls. Can you quantify how much the impact was?

Hi, Sahil. Thanks for the question.

You know, if you look at the impact just on the revenue overall, it was certainly down about $3.9 million a quarter. It's really driven by the combination of the case and payer mix, predominantly driven by a decrease in the higher acuity cases.

Okay. And do you anticipate some impact in Q3 as well before fully normalizing?

No.

So, no, I think at this point in time, we think that the relocation impact is behind us. Most of that was felt in the early part of the quarter. Obviously, when you transfer a clinic that's been in operation for over 20 years since a new facility and impacting almost in excess of 20 physicians, that has a significant impact in the quarter. But that impact is primarily behind us now.

Okay. Okay. That is helpful. And then in terms of this new credit facility, can you remember, Elaborate a bit more on the previous credit facility. Why are we, what is the need for the new credit facility is what I'm trying to ask.

So, the current credit facility was expiring at the end of this month. So, we needed to either renew or replace that credit facility. So, it's really just making sure that we've got adequate access to capital.

with continuing line. Okay. Okay.

Great. And then I have a few more. I'll lump them together. One is if you can provide us an update on the competition. And the second one I have is on the any risks that you're monitoring as it relates to reimbursement under the current administration. And I'll leave it there. Thank you.

Yeah, so let me, so in competition, is there any specific market that you're referring to?

Yeah, Arkansas, I was wondering more about that.

Yeah, so in Arkansas, nothing, no impact that we're seeing right now. That's always been a very competitive market. We've had discussion before. We monitor that closely with the St. Bats and St. Vincent, and we haven't seen any significant impact on operations. You know, see the performance of ASH continues to improve. It has an improvement over time. We continue to recruit doctors, as David mentioned. So, we haven't seen any so far.

Okay, great.

And then, any update on reimbursement, any risk that you're currently monitoring?

Yes. I'm assuming your question is with respect to impacts on Medicaid. And I, you know, first off, I guess I'd say that the, you know, Medicaid ramifications have been pushed out to, you know, the end of 27, or perhaps early 28. We do realize that those would actually take effect. And with respect to the impact on our business, Medicaid really represents an immaterial portion of our business. And that said, we'll continue to monitor the situation closely and, you know, and see how that evolves.

And there is no update on that site neutrality legislation, correct?

No, that's correct. You know, it's a topic that's been floated for a number of years, but we really haven't seen, you know, significant move in all yet.

Okay, great. Thank you again so much for taking my questions.

Thank you.

Ladies and gentlemen, as a reminder, if you have a question, please press star one. There are no further questions at this time.

I would hand over the call to Jason Redman for closing remarks. Please go ahead.

Thank you, operator. And thank you to everyone joining us this morning. We appreciate continued support and look forward to updating our progress throughout the balance of the year.

Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.