Earnings call transcript: Medical Facilities Q4 2024 sees revenue dip, operational income rise

Medical Facilities Corporation (MFC) reported its Q4 2024 earnings, highlighting a mixed financial performance. Facility service revenue decreased slightly, while income from operations and adjusted EBITDA showed growth. According to InvestingPro data, the company maintains a GREAT financial health score of 3.55, supported by strong profitability metrics. The company’s stock reflected a negative market reaction, with a notable decline in share price.

Key Takeaways

• Facility service revenue for Q4 2024 fell by 1.1% to $91.1 million.
• Income from operations increased by 10.5% to $54.7 million.
• Adjusted EBITDA rose by 7.3% to $71.4 million.
• The company’s cash reserves grew significantly, reaching $108.5 million.
• Stock price dropped by 2.77% following the earnings release.

Company Performance

Medical Facilities Corporation demonstrated resilience in its operational income and adjusted EBITDA, despite a slight dip in quarterly revenue. The company continues to focus on operational efficiency and patient care quality, as evidenced by its recognition in healthcare excellence awards. However, challenges such as reduced surgical volumes due to physician absences and temporary supply shortages impacted revenue.

Financial Highlights

• Q4 Facility Service Revenue: $91.1 million, down 1.1% year-over-year.
• Full-Year Facility Service Revenue: $331.5 million, up 1.1%.
• Income from Operations: $54.7 million, up 10.5%.
• Adjusted EBITDA: $71.4 million, up 7.3%.
• Cash and Cash Equivalents: Increased to $108.5 million from $24.1 million.

Market Reaction

Following the earnings announcement, Medical Facilities’ stock fell by 2.77%. Despite recent volatility, InvestingPro analysis shows the stock has delivered an impressive 85.39% return over the past year and currently trades near its 52-week high of $12.48. Based on InvestingPro’s Fair Value analysis, the stock appears undervalued, presenting a potential opportunity for investors. The broader market remained stable, suggesting company-specific factors influenced the stock movement. Discover more insights about undervalued opportunities at Investing.com’s Most Undervalued Stocks.

Executive Commentary

CEO Jason Redmond emphasized the company’s strategic focus on optimizing shareholder value and operational efficiency. "We don’t have a for sale sign on our assets. But if an opportunity arises that’s attractive to both ourselves and the physicians, then that’s something that the Board will definitely look at," Redmond stated, indicating openness to strategic opportunities.

Risks and Challenges

• Surgical Volume Decline: Reduced surgical case volumes due to physician absences and supply shortages could continue to impact revenue.
• Legislative Changes: Potential site neutrality legislation may affect operational dynamics.
• Market Position: Maintaining a stable competitive position amid industry changes remains crucial.

Q&A

During the earnings call, analysts inquired about the potential sale of facilities, specifically the Black Hills Surgical Hospital. The management confirmed there is no active "for sale" strategy, though they remain open to attractive opportunities. Additionally, questions about resolving saline shortages were addressed, with management confirming the issue has been resolved.

Medical Facilities Corporation continues to navigate a complex healthcare landscape, balancing operational improvements with external challenges. The company’s commitment to patient care and operational efficiency remains central to its strategy moving forward. With a strong free cash flow yield of 28% and a 21-year track record of consistent dividend payments, as reported by InvestingPro, the company demonstrates financial resilience. For comprehensive analysis including 10+ additional ProTips and detailed financial metrics, explore the full Pro Research Report available on InvestingPro.

Full transcript - Medical Facilities Corporation (DR) Q4 2024:

Conference Operator: Good morning, everyone. Welcome to Medical Facilities Corporation’s twenty twenty four Fourth 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 implied 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 and 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 Redmond, President and CEO of Medical Facilities.

Jason Redmond, President and CEO, Medical Facilities Corporation: Thank you, operator, and good morning, everyone. Joining me on the call is our Chief Financial Officer, David Watson. Earlier this morning, we reported our fourth quarter net earnings results. News release, financial statements and MD and A are available on our website and have been filed on SEDAR Plus. NSC had a very strong year in 2024.

We had solid increases in income from operations, adjusted EBITDA and net income for the year. There should be no surprise that the biggest highlight was a sale of Black Hills to Sanford Health in November. While we weren’t necessarily looking to sell Black Hills, the opportunity to enhance value for our shareholders and positions was simply too compelling. For MSC’s majority ownership position of Black Hills, we received cash proceeds of $96,100,000 net of transaction costs of $900,000 Additionally, we recorded a net receivable of $700,000 for working capital adjustments and escrow reserve, which was collected subsequently year end. The transaction also significantly strengthened our balance sheet.

It resulted in the elimination of the exchangeable interest related to Black Hills in the amount of $17,000,000 and drove our year end cash balance to a record high of $108,500,000 enhancing our ability to return capital to shareholders, while allowing us to refine our focus on the remaining core assets. Throughout the year, we continue to prioritize shareholder returns and under our normal course issuer bid, we repurchased approximately 1,700,000.0 common shares or about 6.9% of the total shares outstanding we have at the start of twenty twenty four, returning $16,600,000 to our shareholders. We also continued our substantial debt repayments. In 2023, we repaid $20,000,000 on our corporate credit facility, which reduced the balance to $16,000,000 by the start of twenty twenty four. This past year, we repaid the entire $16,000,000 in full, bringing the balance to zero.

In addition, at the close of business yesterday, we announced the results from our substantial issuer bid, which we initially launched in January of twenty twenty five. Under the SIB, we repurchased approximately 3,400,000.0 shares for an aggregate purchase price of CAD60.7 million. The shares repurchased under the SIB represented approximately 14.7% of our issued and outstanding common shares on a non diluted basis as of 02/24/2025, when the revised terms of the offer were announced. Now that the SIB has concluded, any remaining cash not utilized to repurchase common shares will be distributed to shareholders by way of a special dividend. We are very proud to report that following the closing of this SIB, since 2022, MFC has been able to return $126,200,000 to our shareholders through a combination of SIBs, NCIBs and dividend payments.

Looking ahead, we remain focused on operational excellence and delivering the highest quality of care to our patients, while continuing to evaluate options to optimize shareholder returns. And briefly on the topic of quality of care, I just wanted to give a quick shout out to the team at Arkansas Surgical Hospital for recently receiving the 2024 Press Ganey Human Experience Guardian of Excellence Award for the fifth year in a row, placing them on the top 5% of hospitals across The U. S. For outstanding patient experience. Additionally, our Arkansas and Sioux Falls facilities were recently recognized as among the top orthopedic hospitals for women in The U.

S. By marketing research company, Women’s Choice. I would now like to turn the call over to David to review our financial results for the quarter. David?

David Watson, Chief Financial Officer, Medical Facilities Corporation: Thank you, Jason. Good morning, everyone. Please note that the income statement variances that we’ll be discussing this morning exclude the results from Black Hills Surgical Hospital, which was sold during the quarter and included in discontinued operations, as well as the divested MSC Nueterra ASCs, dollars 12,000,000 of government stimulus income and non controllable, non cash corporate level charges related to share based compensation plans. As usual, please note that all dollar amounts that follow are in U. S.

Dollars unless otherwise specified. As Jason mentioned, we produced solid financial results in 2024. Full year facility service revenue was up 1.1% to $331,500,000 Income from operations grew 10.5% to $54,700,000 when excluding impairment of goodwill and adjusted EBITDA increased 7.3% to $71,400,000 However, as usual, I will focus mostly on the results for the quarter. Fourth quarter facility service revenue was down $1,000,000 or 1.1% to $91,100,000 This is mainly due to slightly lower surgical case volumes, which were impacted by both physician absences by the temporary and industry wide intravenous saline fluid shortage caused by hurricane Halloween last fall. Lower surgical case volumes were partly offset by favorable case and payer mixes.

Total surgical cases were down zero point two percent with inpatient cases decreasing five point three percent and observation cases decreasing four point three percent, partly offset by a two percent increase in outpatient cases in the quarter. Pain management cases were up two point four percent in the quarter. Total operating expenses were essentially flat declining $100,000 as higher consolidated salaries and benefits were mostly offset by reductions to drugs and supplies and G and A expenses. Consolidated salaries and benefits were up 4.8%, mainly due to higher clinical and non clinical salaries and wages resulting from annual merit increases, full time equivalent increases and market wage pressures, as well as higher benefit costs from increased health plan utilization and a one time cash settlement of stock options in the current period. Drugs and supplies were down 4% largely due to less orthopedic and spine cases and improved implant cost savings at certain facilities.

Lower surgical volume and higher vendor rebates also contributed to the decrease. Lastly, G and A expenses were down 1.2% when excluding the $500,000 increase in corporate level costs related to the mark to market adjustment on share based compensation plans, driven by the increase in our share price in the quarter as compared to Q4 of the prior year. Although not included in the total operating expense variance just discussed, during the quarter, we recorded a $2,300,000 impairment charge against goodwill related to our Newport ASC to reflect a continued competitive environment and local dynamics. As a result of the items I’ve noted, income from operations was down 4.9% to $17,400,000 and adjusted EBITDA was down 2.8% to $21,700,000 Turning to our balance sheet, at the December, we had consolidated net working capital of $76,400,000 and cash and cash equivalents of $108,500,000 compared to net working capital of $19,800,000 and cash and cash equivalents of $24,100,000 at the end of twenty twenty three. The increases in net working capital and cash and cash equivalents were primarily driven by the sale of Black Hills.

Other notable variances included an increase in the primarily non cash obligation for the purchase of common shares under our NCIP, partly offset by $12,000,000 decrease in government stimulus funds repayable. During 2024, we paid $6,100,000 in dividends, retired the balance on our corporate credit facility, including the 4,000,000 repayment in the fourth quarter and returned $16,600,000 to shareholders through our NCIB, including $5,300,000 in the quarter. This concludes our prepared remarks. We would now like to open up the call for questions. Operator?

Conference Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. There are no question at this time. There’s the first question from Sahil Dhingra from RBC. Please go ahead.

Sahil Dhingra, Analyst, RBC: Hi, this is Sahil Dagni. Thank you for taking our questions. My first question is on the sale of the Black Hills Surgical Hospital. I think in the prepared remarks you said you were not actively looking for the sale. Could you please provide us with some more information how did the process came to fruition?

And what is and how is the company thinking about the other facilities? Are you planning to sell those as well?

Jason Redmond, President and CEO, Medical Facilities Corporation: I’ll take that one. Hi, Suhil. How are you doing? Yes, to answer your question, I think we’ve always maintained that we don’t have a for sale sign on our assets. But if an opportunity arises that’s attractive to both ourselves and the physicians, then that’s something that the Board will definitely look at.

And that’s what happened with the Black Hills transaction, which is discussions that culminated over time. And it was very attractive offer and something that the Board and the doctors wanted to pursue.

Sahil Dhingra, Analyst, RBC: Okay, great. Thank you. That is helpful. And then my second question is, I noticed like Q4 had some one time impact like you said like position absence and also VIP shortages. So is it fully resolved now or do you see any further impact in Q1?

David Watson, Chief Financial Officer, Medical Facilities Corporation: Yes. On the saline shortage, so that does appear to be resolved. The manufacturer is back online and other sources have also made themselves available. So we don’t anticipate a significant impact from that going forward. With respect to physician absences, that really varies on a quarter by quarter basis depending on vacation schedules and that one’s difficult to predict.

Sahil Dhingra, Analyst, RBC: Okay. And then as it relates to your corporate expenses, are you fully optimized there or do you see room for further savings? And I also noticed the corporate expense was higher year over year. Can you comment on that please as well?

David Watson, Chief Financial Officer, Medical Facilities Corporation: So with respect to the corporate expenses, there was a the impact the non cash impact of the mark to market adjustment for share based comp of about $500,000 and that was the most significant factor on that front.

Jason Redmond, President and CEO, Medical Facilities Corporation: And then just to answer the other part of your question, Seil. I do think from a corporate perspective, I mean, we’ve done a very good job over the last couple of years, rightsizing our expenses for the business that we have. But I don’t see a lot of opportunities going forward. We will obviously continue to focus on it and we have been focusing, but the majority of the corporate cost savings have already been realized.

Sahil Dhingra, Analyst, RBC: Okay, great. And then the last question is, if you can speak to any changes in competition for any of the facilities. And then also, do do you see any potential impact from like the site neutrality legislation or any other policy from the new administration? Thank you.

Jason Redmond, President and CEO, Medical Facilities Corporation: Thanks. So in terms of the competitive environment, we haven’t seen any material change amongst our facilities. So relative stability there. On the site neutrality, it is something that we’re watching very carefully. This has been floated around for a number of years.

It’s not new. But it’s something that we ourselves and our local facilities are trying to monitor. And so that’s what the impact could potentially be going forward. I think it’s too early to predict what that impact is because no one knows what the legislation could be, but it is definitely is on our radar.

Sahil Dhingra, Analyst, RBC: Great. Thank you so much for taking the questions.

Jason Redmond, President and CEO, Medical Facilities Corporation: Thank you,

Conference Operator: At this time, we have no other questions. I will turn the conference back to Jason Redmond for any closing remarks.

Jason Redmond, President and CEO, Medical Facilities Corporation: Thank you, operator, and thank you all for joining us this morning. We appreciate your continued support and look forward to updating you on our progress in the coming quarters. Have a great day, everyone.

Conference Operator: Ladies and gentlemen, this concludes the conference room. You may disconnect your lines.

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