Jeffrey Lozon – Interim Chief Executive Officer Tyler Murphy – Chief Financial Officer Rob Horrar – Chief Operating Officer Jim Rolfe – Chief Development Officer

Lennox Gibbs – TD Securities Neil Linsdell – Industrial Alliance Securities Prakash Gowd – CIBC Endri Leno – National Bank

Good morning, everyone. Welcome to the Medical Facilities Corporation 2017 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 Mr. Jeffrey Lozon, Interim CEO of Medical Facilities. Please go ahead, Mr. Lozon?

Thank you, operator and good morning everyone. Joining me today is our management team: Tyler Murphy, our Chief Financial Officer; Jim Rolfe, our Chief Development Officer; and Rob Horrar, our Chief Operating Officer. Prior to market opening today, we released our 2017 second quarter financial results. Our newest release, financial statements and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca and are also filed on SEDAR today. For today's call, I will start by discussing the results of the past quarter. Tyler will then review the financial performance. Rob will then wrap up with some comments on our outlook, after which we will open the call to questions. We are very pleased with the results of our second quarter of 2017, first, because we had growth across all financial metrics but also because it clearly demonstrates that we have an effective strategy in place to grow the company. As we have seen in previous quarters, we had strong growth in case volume. Compared to the second quarter of 2016, we had a 14.9% growth in total surgical cases. This is our 12th consecutive quarter of growth in surgical cases and the highest quarterly growth we've had yet. This growth reflects a same-store volume growth of 5.6%, combined with contributions from our new facilities. This volume growth demonstrates the market-leading position of our facilities. They are among the best surgical hospitals in the country and attract leading positions with extensive referral networks. In the quarter, we also had general improvement in case quality, resulting in higher revenue per case. And we saw a shift, with more complex procedures being delivered on an outpatient basis. Now let's look at the success of our strategy in the quarter. Last fall, Prairie States Surgical Center was acquired by Sioux Falls Surgical Hospital and made a department of that hospital. At the time, we stated that we expect that this combination would bring synergies for both facilities, particularly as the physicians from Prairie States joined the Sioux Falls team. This proved to be the case in Q2 with $2 million of revenue added to Sioux Falls' results by Prairie States, an increase of 8.5% over Q2 in 2016. As well, the new physicians on the Sioux Falls team helped to increase the overall case volume at the hospital, lifting the year-over-year revenue by 15.1%. The Unity hospital in Indiana also delivered strong results this quarter and added $11.9 million of revenue. While last quarter there was a decline because of an injury to a key surgeon, he has since returned to work at full capacity. In addition, two other surgeons have joined the team at Unity and contributed to revenue growth. What this show is – shows is that all three prongs of our growth strategy are effective and contributed to quarterly growth: First, a tuck-in acquisition to enhance an existing facility; second, adding a new hospital in a new market; and third, bringing new physicians onboard to increase capacity and utilization. Now before I hand the call over to Tyler, I would like to make a comment on our stock as it relates to our outlook. While MFC has seen a change in leadership recently, I will reiterate it has not changed our expectations for growth, nor our strategy. MFC continues to be focused on growth and is well positioned to execute on that strategy. As you are hearing today, that strategy is generating success. The board and management are committed to the success of the company; and to seeing that our investor benefits from that success, as reflected in their shareholdings. We have a normal-course issuer bid in place and have been exercising it. As of the end of Q2 2017, we have purchased 60,000 shares and we'll continue, as we feel the current share price does not reflect the underlying value. Also, we are actively engaging the markets by meeting with the investment community to ensure they understand the MFC story and our outlook. We are also very confident that our growth trends, supported by our solid balance sheet, ensure the stability and reliability of our dividends. In July, MFC shareholders received their 160th consecutive dividend since inception. That's a track record we are proud of and that we are dedicated to maintaining. Now Tyler will provide more detail and insight into our financial performance for the second quarter of 2017. Tyler?

Thanks, Jeff. As on our previous calls, I would like to note that all of the dollar amounts expressed in today's call are in U.S. dollars unless otherwise stated. In Q2 2017, MFC had revenue of $96.1 million, a 25.2% increase over $76.7 million in Q2 of 2016. As Jeff mentioned, contributions from new facilities and case growth at our existing facilities were key factors in this growth. Also contributing to the increase were the new urgent care and ENT clinics at Black Hills, additional revenue from improved case mix, along with annual price increases. This is now the eighth consecutive year-over-year increase in quarterly revenue. As a result of higher caseload, operating expenses increased to $79.9 million in Q2 2017 from $62.9 million in Q2 2016, but as a percentage of revenue, we were essentially flat quarter-over-quarter at 83.1% and 82.1%, respectively. Impacting operating expenses in Q2 2017 was a $1.9 million transition charge related to our former CEO. Payer mix continued to have an impact on revenue, as we performed a higher proportion of cases paid for by Medicare. This was particularly the case at our Black Hills and Sioux Falls hospitals in South Dakota. However, this was offset by case mix and volume improvements across all centers, resulting in a 17.6% increase in income from operations to $16.2 million from $13.8 million in Q2 2016. To provide investors with a consistent way to track our progress, this quarter, we will begin to report EBITDA. EBITDA in Q2 2017 was $23.1 million, a 22.2% increase from $18.9 million in Q2 2016. Higher revenue and income drove the increase. EBITDA margin for the past quarter was 24.1% compared to 24.7% a year earlier. Cash available for distribution in the quarter was CAD12.1 million, a 14.5% increase from CAD10.5 million a year earlier. On a per share basis, our cash available for distribution was $0.39 in Q2 2017 compared to $0.34 per share in Q2 2016. The resulting payout ratio was 72.4% for the quarter compared to 82.8% in Q2 2016. With cash and cash equivalents of $67.3 million and about US$32 million available on our credit facility at June 30, we believe we are well resourced to execute on our growth strategy. For additional detail on specific results for each center, please refer to our MD&A. Now Rob will provide some comments on outlook, and then we will take your questions. Rob?

Thanks, Tyler. After a strong second quarter, we anticipate continued solid results for the rest of 2017. And I believe we are well positioned to achieve this from the strength of our management team, our focused growth strategy and the high quality of our current hospital base. MFC's management team has proven skills in financial leadership, operations, acquisitions and managing growth. I've recently come onboard with the responsibility of amplifying MFC's organic growth initiatives, improving operational efficiencies and supporting our acquisitions and development activity led by our Chief Development Officer, Jim Rolfe. As Jeff mentioned, organic growth remains a priority for MFC. And we continue to realize the benefits from these initiatives, such as the addition of Prairie States Surgical Center, opening new urgent care centers, adding and enhancing service lines and recruiting new physicians and bringing renewed focus to our supply cost management initiatives. In terms of acquisitions, the funding and reimbursement pressures that have been driving the consolidation trends in the health care sector still remain and many physician groups are looking for a partner to help them manage these challenges. With MFC's reputation and track record with physician-run hospitals, we are a partner of choice. As we have discussed in the past, our acquisition pipeline remains robust, and we are currently in advanced stages with a few of these opportunities. It is our belief that these discussions could result in an announcement by the end of the year. Finally, it's important to emphasize that our strategy is built on a solid platform of high-quality medical facilities. Our surgical hospitals are all top rated by national and local market surveys for quality and patient satisfaction. They have been a reliable source of stable distributions for our shareholders, and we expect that will continue into the future. With that, we would now like to open the line for questions. Operator?

[Operator Instructions] And your first question comes from the line of Lennox Gibbs with TD Securities. Your line is open.

Good morning, thank you. With respect to UMASH, can you provide more detail on the recent hires and some information around specialties, the specialties et cetera? Secondly, where does the total surgeon complement stand at UMASH? And where are you aiming to take that complement to in terms of numbers and in what time frame?

Thanks, Lennox. It's Jeff. I'm going to ask Rob to comment on your question.

Sure. We've added several neurosurgeons to that market, Lennox. And as we've said before, this UMASH, she has the chassis to grow. And we see tremendous opportunity to continue to add surgeons, both orthopedic and neurosurgical specialists, to this particular hospital; as well as opportunistic, other subspecialties here. It's got a good chassis to – we could build on. And we expect that development activity to continue.

To add to that, Lennox. The first places that we'll look are our bread-and-butter neurosurgery, which we've added two orthopedics, which we're contemplating as the next area of growth. And the facility itself has capacity for capital redevelopment that would increase our operating rooms. And as we get there, we'll make those capital investments to allow those people to do their work in an excellent market.

And how should we think about – can you tell us, what are your targets, like in terms of returns on a hire – a neurosurgical hire, perhaps in terms of revenue per surgeon? How should we look at that? How do you think about that?

Jim, I’ll ask Jim Rolfe to talk to that, Lennox.

Yes. Lennox, back at my previous job at a consulting firm, typically an ortho will bring in on average, on industry average, around $2 million to $2.5 million in revenue. And like Rob said, our chassis is already built. And so again that contribution margin on that $2 million to $2.5 million is probably going to run 35% to 40% margin because we already have the staff in place to handle that volume.

Excellent. And then one last question. There appears to have been broad-based strengths on the quarter. Are there any broader market dynamics or internal initiatives that you would want to point to or emphasize that might help explain the strengths and then also speak to sustainability as well? And I'll leave it there.

Well, I think I'll make a few comments on it. I think what we're seeing is we're seeing a very good sort of set of facilities who have fought through their local strategies quite well and who are being enabled by some expertise based in Nashville. So we don't see really any big clouds on the horizon, Lennox. We're seeing mostly good opportunities to grow in market. We have a series of initiatives that are underway in virtually every one of our centers. And in addition to that, as I think Rob mentioned, we've got a pretty robust pipeline that we're closing in, de novo things. So if there were some negatives on the horizon, I would be talking about them, but we just don't see any at the present point in time.

Thanks very much.

Your next question comes from the line of Neil Linsdell with Industrial Alliance Securities. Your line is open.

Hey, good morning guys. Congratulations on a quarter.

Thanks, Neil.

Thank you.

Just on the spine surgeon at Unity, was there any kind of catch-up in the quarter from his absence? Or was it all just normal course?

Well, Neil, this is Rob, and I'll answer that. I think we do – we did see some catch-up. Again, the procedures here are elective in nature, not emergent. So there will be continued catch up. I think we'll see that play out through the next couple quarters, but there's some catch up to that. And hopefully, we didn't lose a whole lot of that from the first part of the year…

Okay. And then just on a broader view of what's going on in the industry, are you seeing any changes in attitudes or policies at the insurers right now which are changing anything, as far as the deductibles and co-pays and altering the demand for the types of procedures, that may be working in your favor or against you?

Clearly, the trend has just continued in that there's more employers that are adding high-deductible health plans and increasing – nothing unusual that you haven't seen, we haven't seen on a national basis. And again we've got a preponderance of good – of commercial payers in our payer mix. So there's really not been any aberration there. It's just a continuation of the same trend.

Neil, I wonder if I could interject because I think there is something that Lennox asked about in terms of the future that I think maybe I should comment on. I forgot when I was answering it the first time. I think the continuing uncertainty in the U.S. health care system is something that's hard for Canadian investors to understand, and that's just a dynamic that we live with on a day in and day out basis. It has, as you can see from our case volumes and from our – the demand for our facilities, not really affected our business. And so we look at the underlying business as very strong and as very positive and at – going at a very good momentum. The challenge, of course, is a Canadian investor to understand all of the rhetoric that's going on around health care reform and to see how that plays itself out in the U.S. health care market. And I think that's not really a storm cloud, but it's a factor that we have to deal with and we have to explain and so looking forward to the opportunity to say that, notwithstanding all of that white noise, I mean, there is very good value and very good productivity at this corporation in the health care system in the United States.

Yes, agreed. And on the specializations that you have in your different hospitals, it looks like you're adding some diversity with additional capabilities looking at maybe cardiology and such. How much of what you are looking at doing driving the business forward comes from diversifying the mix of cases? And how much of that can you do, say, organically adding surgeons to existing facilities? And would you look at, say, buying hospitals in overlapping geographies where your already operate but with different specializations?

Sure. I'll let Rob talk about that, but I would just maybe put a point of clarification on kind of what I would consider to be the adjacencies to our core markets, which are neurosurgical and orthopedic. So the correct adjacencies there or the best adjacencies there are things like general surgery and other procedure-based activities. Cardiology is like a little bit of a step removed, but Rob, maybe you want to comment.

Yes. So clearly, our bread-and-butter in the preponderance of our cases are neurosurgical and orthopedics. We'll continue to look for growth opportunities there. And as Jeff said, complementing that to – but to a lesser degree but also providing us opportunity are things like GI, general surgery, pain.

ENT.

ENT is correct, services. So I – we see those as good, organic and again and – strategies, where they're complementary. We've got capacity. And to your point, if there's acquisition opportunities that are complementary, you've seen that we've added an ASC in a market, we're certainly ready to do that where it makes sense. It's a part of our growth strategy.

Jim?

Yes, and Neil, also in all of our markets, we are also trying to expand our access points. And we're also trying to expand our affiliations with primary care. And to have that affiliation, you need to offer other services than ortho and neuro, right? So in a lot of our hospitals we are looking at trying to add some additional and expand some service lines to help out with our affiliations with primary care.

Okay, great. And I think maybe you touched on it in your initial comments. I think it might have been Jim. Are you seeing any attitude shifting with the acquisition targets with the surgeons that you're looking to try to bring into your current facilities; as far as uncertainty in the market, it's becoming easier conversations?

Easier conversations on bringing in surgeons, or acquisitions?

Both.

Okay. No, not really. Again, we have a model that you – you can't replicate. We have that – a physician alignment model that you can actually do your inpatient cases. So no, nothing's changed on that. And as Rob mentioned, our pipeline is still very, very robust. And actually, the recruitment of physicians is also robust too. So I – there's been no change. Actually, to the positive, it's changed a little bit, but no, no change at all in that.

Okay, great. I’ll leave it there. Thanks.

Your next question comes from the line of Prakash Gowd with CIBC. Your line is open.

Thanks very much. Good morning gentlemen. I have a few questions. First you've touched on this a little bit. I'm just wondering if we can maybe go into a little bit more detail. You've reported a strong quarter in what appears to be a very challenging environment where a lot of your larger peers have been experiencing a lot of difficulty, maintaining little on growing surgical volumes. And they are attributing much of this to higher-deductible plans and higher proportion of government pay cases. Can you give us your perspective on those specific issues; and how you're, I guess, preemptively managing the risks where others have not fared so well? And do you think you're really insulated from those issues despite the higher quality of your facilities?

Thanks, Prakash. I'll let Rob speak to that.

Again I think this is a good reminder about our model. Our model is mostly elective cases, so we don't have emergency rooms. And we don't have the same types of payer mix that you see in the acute care side, some of the exposures that they have on their exchange products and Medicaid movements back and forth. So I think keep in mind, though, a lot of – most of our cases are elective in nature. And I wouldn't say that we're insulated. We do – we made a comment that we've seen some more Medicare, but I'll think that's more of a demographic trend than anything that’s programmatically occurring. So we're going to see again some degree of exposure there, but again our model, our centers and success is rooted in the high-quality physician groups that we're aligned with in the communities for a very long period of time. And these are well established physician groups that maintain very high quality on outcomes with patient satisfaction and reputations. And that's not easily replicated. And so that's the…

Yes. I will just add, Prakash, that no one is immune to big trends. So you can't – you're not going swimming upstream on those things, but I think really the strength of the facilities, the quality of the referral relationships, the quality of the outcomes, the quality of the facilities themselves allow us to continue to prosper and to grow in a tough market, but it means that we have to continue to be sharp. We have to continue to look at organic growth opportunities, so it's not a status quo in any way, shape or form.

Okay. Then just a couple of questions related to CMS. I understand, in terms of proposals for 2018, they've added a 1.9% rate adjustment for ASCs. And I wonder if you can explain how that works. And is that just simply an inflation adjustment? And is there any potential read-through to specialty surgical hospitals?

Tyler, do you want to address the CMS initiatives?

Yes. So the outpatient pay rates is the increase you're talking about. So obviously, we do a number of outpatient cases in our facilities, so that is attributable to us, and that will help offset some of the other costs and everything. There are some other proposals on the table right now at CMS, but they're still in their comment stage. The final, final proposals have not come out yet. So we will continue to monitor those, and we'll have – obviously have additional information when we get to our next quarter call.

Okay, but CMS is also proposing adding three additional procedures to the covered procedures list, total knee, partial hip and total hip. Can you comment on how that might positively impact your business in 2018 and forward are those procedures that are already being done on a regular basis? Or do you see that as upside to your business?

Tyler?

Yes, we are doing those procedures on an inpatient basis now, so we wouldn't expect to lose anything – lose those procedures because the physicians that are doing them are obviously the ones practicing in our facilities. We do have some risk there that – if they flip to the outpatient rate from the inpatient rate, that we will lose some of the top line revenue. That number has not been – we haven't forecasted that number yet, but there is some risk there from not losing the cases but just having lower reimbursements for those actual codes.

Okay. Thanks. And just lastly, any status update on the CEO search? And any specific time line you could attribute to concluding that search? Thanks very much.

As I think I mentioned, Prakash, when we did our initial tour of the analyst community, we foresaw the search accelerating faster than previous examples – previous searches we had, and that's being proven out. Russell Reynolds Associates are in the market now scanning internal and external candidates. So we're pleased with the progress of this search, and I think we're well positioned to make it a much shorter runway than we've had in the past.

Does that mean you'll have somebody in place by year-end?

That would be – yes, that would be my anticipation, we have somebody in place by year-end.

Great. Thank you very much.

Your next question comes from the line of Endri Leno with National Bank. Your line is open.

Hi, good morning and thanks for taking my questions. I have a couple, actually. First one, on your cost-saving initiatives. I was wondering. Have they already been implemented? And if you can comment on their progress and what you estimate is – was their impact in the quarter.

Thanks, Endri. I'll let Rob talk about group purchasing initiative and other related activities.

Yes. So primarily organizing around our supply and purchasing initiatives. So we have enhanced those strategies. We have made some progress, and we've identified even more so. So I think that we'll see continued progress with our supply costs both on the drugs, medical supplies and implants going forward. So we do have more to go. And we've seen some good progress in collaboration with our centers and their leadership and physician groups.

Thanks very much. And another quick question is on you have a $1.9 million CEO transition charge. I was wondering, is that it? Or is there going to be a little bit more of in coming quarters?

Yes, that's a book number which we've accrued for. It's not resolved yet, so that number could go up, could go down a little bit. But we went and booked it ahead and our auditors have given as a sign-off on that. So we think it's a ballpark.

Okay. Thank you. And the last question is more of a general comment. If you can provide your insights on the KKR acquisition of the Covenant Surgical Partners, particularly in terms of the multiples. And what does it imply for your acquisition strategy?

Endri, it's Jeff. There's a lot of kind of nodded progress because I don't think we actually understand the question.

Right. So I'm saying, KKR, they acquired Covenant Surgical Partners. I mean it's not directly related to orthopedics and neurosurgery. I mean they also do a lot of GI surgery in ASCs. I was wondering if you have any commentary in terms of multiples or if it implies anything on your acquisition strategy at all.

Specifically, we don't. We have a pretty frothy marketplace that we're operating in. We have a good handle on the multiples, but I can't really comment on that specific deal, Endri. Sorry.

Okay. Thank you. That’s all the questions I had. Thank you very much.

Okay. Thanks for your questions. Appreciate it. That’s it?

There are no further questions. I will now turn the call back over to Jeff Lozon for final remarks.

Okay, first of all, I'd like to thank our doctors, our center executives, our nurses and all of our employees, who deliver outstanding care to our patients every day. They're the people and they're the engines for Medical Facilities Corporation going forward. I'd also like to thank all of you for participating on today's call and for your continued interest in our company. We look forward to reporting on our progress in the next quarter. Thanks very much, operator.

This concludes today's conference call. You may now disconnect.