Emergency Medical Services Corporation Q3 2008 Earnings Call Transcript

Emergency Medical Services Corporation (EMS)

Q3 2008 Earnings Call

October 31, 2008 11:00 am ET

Executives

Deborah Hileman - Vice President of Investor Relations

William Sanger - Chairman and Chief Executive Officer

Randy Owen - Chief Financial Officer

Analysts

Arthur Henderson - Jefferies & Company

Sudeep Singh - Deutsche Bank

Shelley Gnall - Goldman Sachs

Kevin Campbell - Avondale Partners

Dawn Brock - J.P. Morgan

Gary Taylor - Citi

Andreas Dirnagl - Stephens

David Bachman - Longbow Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Emergency Medical Services Corporation’s Earnings Conference Call. My name is Lacy and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference. [Operator instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’ call, Ms. Deborah Hileman, Vice President of Investor Relations. Please proceed.

Deborah Hileman - Vice President of Investor Relations

Thank you, operator. Good morning. I would like to welcome everyone to EMSC’s quarterly earnings conference call and introduce our presenters; Mr. William A. Sanger, Chairman and Chief Executive Officer, and Randy Owen, Chief Financial Officer.

Before we begin, I would like to read our Safe Harbor statement. Certain statements and information herein may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Forward-looking statements may include but are not limited to statements relating to our objectives, plans and strategies, and all statements, other than statements of historical facts that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Any forward-looking statements herein are made as of the date of this conference call, and EMSC undertakes no duty to update or revise any such statements.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in EMSC’s filings with the SEC from time-to-time, including in the section entitled ‘Risk Factors’ in the company’s most recent annual report on Form 10-K and subsequent periodic reports.

Among the factors that could cause future results to differ materially from those provided in this conference call are the impact on our revenue of changes in transport volume, mix of insured and uninsured patients, and third-party reimbursement rates and methods, the adequacy of our insurance coverage and insurance reserves, potential penalties or changes to our operations if we fail to comply with extensive and complex government regulation of our industry, both as it exists now and as it may change in the future, our ability to recruit and retain qualified physicians and other healthcare professionals, and enforce our non-compete agreements with our physicians, the loss of one or more members of our senior management team, the outcome of government investigations of certain of our business practices, our ability to generate cash flow to service our debt obligations and fund the cost of capital expenditures to maintain and upgrade our vehicle fleet and medical equipment, and the loss of existing contracts and the accuracy of our assessment of costs under new contracts.

I will now turn the call over to our Chairman and CEO, Bill Sanger.

William Sanger - Chairman and Chief Executive Officer

Thank you, Deb, and good morning to all. Q3 of 2008 was another successful quarter for EMSC. Net revenue of $679 million was 28.2% greater than the same quarter last year. We achieved earnings per share growth of 96%, produced $65.5 million of free cash flow, and we adjusted EBITDA of 73.5 million.

There have been a number of noteworthy events in the quarter. Recently under our FEMA contract, we completed the largest EMS deployment in the US history to repose of Hurricanes Gustav and Ike. Our response reinforces not only the unique scale of our scope of services, but also reflects the work done by the management team that unsurpassed the scale of an expertise. Working with our expanded network of providers, we deployed in the affected regions for over five weeks with 1,000 personnel and more than 600 ambulances and 50 aircraft.

Our revenue growth during the quarter was strong. Even excluding the change in hurricane, we generated combined revenue growth in the quarter of 11.1% compared to the same quarter last year. Although lower hospital census and the impact of the hurricanes on our base operations contributed to lower than expected inter-facility transfer volume and revenue growth excluding the FEMA deployment was 7.6% greater than the same period last year.

During the quarter, at AMR, we started two new 911 contracts and 53 new inter-facility agreements with expected combined annual revenues of $12 million. Moreover, we are well position to response to several large 911 contracts that we expect to go out to bid in early 2009. On the managed transportation front, our services continue to expand to meet the need of this growing business volume for AMR.

EmCare had 16.1% revenue growth and adjusted EBITDA growth of 26% excluding the impact of prior period insurance adjustments. EmCare’s revenue growth reflects an extraordinary successful sales year. In the quarter, we started 18 new contracts including two of our new anesthesia division for expected annualized revenues of $31 million. At the same time, we exited 25 contracts during the quarter, the majority of which were not meeting our financial expectations.

So far this year at EmCare, we have started 20 new contracts under our national agreements with HMA, CHS and Universal Health Services. We have also positioned ourselves to further expand our affiliation with these customers through additional service volumes and enter new relationships with other health systems and health science.

Recently we announced expansion of our service offerings by acquiring the management services entity of Clinical Partners, our anesthesia service provider in Templeton Radiology. Since entering our new arrangement with Clinical Partners in August, already we have signed four new anesthesia agreements.

Our acquisition of Templeton Radiology further positions our radiology division, RadCare, as one of the largest final read providers to the nation. Combined with our outsourced radiology management services, we believe our value-add for hospital radiology services is now without peer in the industry.

These events notwithstanding, we continue to look for ways to improve value and service offerings to our clients. Our recently announcement of our strategic relationship with Advanced ICU, the electronic [Intensivist] program has positioned our in-patient service division to expand its continuous care and further differentiate us in the marketplace.

And today, we are announcing two additional two additional strategic relationships that enable EmCare to assist its emergency department clients in the area of specialist care, on-call reach in each universal management. Our new partners which include EA Health was revised on-call specialist coverage for emergency departments and Blue Jay Consulting, which provides ED nurse management staffing. These two areas of on-call coverage and nursing management have historically been challenging for our hospitals. Together, these two new partnerships will add growing suite of services offered by EmCare to its clients.

Now before turning the call over to Randy, I will like to thank our employees and our network providers for their extraordinary work during the recent hurricanes. In the face of catastrophic property damage on the Gulf Coast, our deployment during Hurricanes Ike and Gustav (inaudible) assuring that thousands of residents and the patients we have were out of farms way.

I will now turn the call over to Randy. Randy?

Randy Owen - Chief Financial Officer

Thank you, Bill. As I discuss our performance, I'll be referring to certain non-GAAP measures such as adjusted EBITDA and free cash flow, which are not considered measures of financial performance under Generally Accepted Accounting Principles. Therefore, I direct you to the reconciliations included in our earnings release and on our website. Unless otherwise noted, all comparisons will refer to the third quarter ended September 30, 2007.

EMSC's consolidated net revenue for the quarter was 679.3 million, an increase of 28.2% or 11.1% excluding the change in FEMA deployment revenue. AMR net revenue was 425.3 million, a 36.8% increase, again impacted by the FEMA deployments for Hurricanes Gustav and Ike. FEMA deployment revenue was 101 million, an (inaudible) transports for the quarter. Even with the impact of FEMA deployments, our revenues were up 7.6%.

Our revenue for transport increased 8.2%, offset by 0.6% decrease in transport volume. Revenue for transport increases were from rate increases and from the July 2008 increase in Medicare reimbursement. Annual transports including acquisitions increased by 17,500, offset by a reduction of 19,300 transports in markets that we have exited since last year. Same market, ambulance transports increased 1% over the prior year.

EmCare’s net revenue was $254 million, an increase of 16.1%, it includes 11.4% revenue increase from the addition of 74 net new contracts since June 30, 2007. And out of 74 net new contracts, 45 were from our acquisition of management services entity of Clinical Partners in August of this year with related management fee revenue in the quarter of 1.1 million. The revenue increased 5.3% at our EmCare same-store contracts as a result of increases in patient encounters of 2% and growth in net revenue for encounter of 3.3%.

EMSC’s adjusted EBITDA for the third quarter was 73.5 million, an increase of 38.6%. The improvement is driven primarily by the FEMA deployment at AMR and the net impact of higher rates and volumes on existing contracts, increased volumes for the net new contracts and acquisitions, but partially offset by higher provider compensation insurance expense and fuel cost. Insurance expense increased 11.6 million primarily due a change in development for our prior-period reserves.

AMR’s adjusted EBITDA for the third quarter of 2008 was 47.2 million, an increase of 81.4%. This increase was attributable primarily to the impact of the FEMA deployment and higher revenue for transport in existing markets, offset by lower anticipated non-emergency transports, increased fuel and insurance cost.

Excluding FEMA related fuel cost, fuel increased by 3.7 million. And the increase in insurance of 3.9 million was primarily from a reduction in favorable prior-period adjustment of 3 million.

EmCare has generated adjusted EBITDA of 26.3 million, a decrease of 2.6% compared to prior year, primarily from an increase in insurance cost. The insurance expense in the quarter was impacted by prior-period unfavorable development of 3.9 million compared to prior period’s favorable development of 3.1 million in 2007, resulting in a $7 million change year-over-year.

The impact of prior period insurance adjustments in both quarters, EmCare’s EBITDA increased 26.3% from last year. With the prior period insurance development in third quarter of 2008 was not consistent with our historical experience and we do not believe this level of adjustments is indicative of an ongoing trend.

EMSC net income for the quarter was $28.6 million or $0.66 a share, compared to net income of $14.7 million or $0.34 a diluted share. The improvement was primarily due to an adjusted EBITDA increase of $20.5 million, lower interest expense and offset by higher income tax. Diluted earnings per share increased $0.32 or 96%.

Our free cash flow, which we define as cash flow from operations, less cash from non-acquisition related investing activities, was $65.5 million during the third quarter, compared to $24.9 million in the same period last year. Excluding the impact of FEMA deployment, improvements in operating cash flows were primarily driven from improved cash collections in both segments.

Excluding that FEMA impact, EMSC has four days sequential decrease in DSO in the third quarter, again driven by improved collections at both AMR and EmCare. Of the four day decrease in the EMSC, AMR had a DSO decrease of three days and EmCare had a DSO decrease of four days in the quarter.

Net cash used in investing activities was $17.9 million for the quarter, compared to $87.9 million used in the third quarter of 2007. The change is due to a decrease in acquisition related funding of 66.8 million, a 5.4 million reduction in net insurance collateral requirements, offset by an increase in net capital spending of 2.6 million.

Net cash provided by financing activities was $5.5 million for the quarter, compared to $43.1 million for the quarter last year. The change is primarily due to net debt repayments of 1.3 million for the three months ended September 30, 2008, compared to net borrowings of 37.9 million last year for acquisitions. And at September 30, there were no amounts outstanding under our revolving credit facility.

We are increasing our 2008 diluted EPS guidance to an expected range of $1.90 to $2 from our previous range of $1.72 to $1.75, and adjusted EBITDA guidance increase to an expected range of 240 million to 245 million from our previous range of 227 million to 232 million. Bill?

William Sanger - Chairman and Chief Executive Officer

Thanks Randy. Operator, we’d now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question will come from the line of Art Henderson with Jefferies & Company. Please proceed.

Arthur Henderson

Hi, good morning. Thanks for taking the question. Very nice quarter. Couple of financial questions for you, Randy. First, you guys are continuing to degrade low, bit of DSOs down. How much more should we think about in terms of opportunity to take that down further? Is there any kind of guidance you can give us on that?

Randy Owen

I think Art, what we talked about in the past and continue to think is that there is definite improvement opportunity over the next couple of years and I think before we’ve said that we believe we can we still see another three to five days a year over the next couple of years on that.

Arthur Henderson

Okay. And then fuel cost -- I am sorry if you said that, but fuel cost as a percentage of revenue this last quarter was what percentage?

Randy Owen

Well, if you look at fuel cost in the quarter were about – if exclude some of the FEMA deployment related fuel.

Arthur Henderson

Right.

Randy Owen

For the base operation, it was about kind of 12.7 million in the quarter.

Arthur Henderson

12.7, okay. Okay, thank you. And Bill, I guess more a question for you. You had some unbelievable success with winning these national hospital contracts, you’ve clearly gotten some traction there. Could you talk a little bit more about where -- what kind of services those individual hospitals may be seeking from you, also what the opportunity and radiology services may be?

William Sanger

Sure, Art. If you recall, for many of the national contracts we have signed, it included a suite of services, not only ED services, but also radiology and we have most recently added anesthesia to some of those national contracts. It is our expectation on go-forward basis that we will do additional cross-selling and particularly in those two services through the national contracts. Clearly, the addition of Templeton Radiology positions us very well with the radiology services that’s been a challenge for a lot of the national contractors.

Arthur Henderson

Okay. And then last question. On the insurance, the unfavorable prior period insurance adjustment, could you expand a little bit what's going on there and how we should be thinking about that going forward?

William Sanger

Yeah. I think what I mentioned, which I guess refer you back to the development that we had in the third quarter we thought was unusual and as we look at that our trends and frequency and severity, we really don’t expect that trend to be ongoing.

Arthur Henderson

Okay. Last question and I will get back in the queue. Bill, what’s your outlook as far as -- with the economy weakening, how that might impact your business and any sort of thoughts on the Presidential Administration, that may benefit or challenge your industry? Thank you.

William Sanger

I am not sure what benefit there will be on the Presidential Election, because I don’t know who is going to [veto]. But we do believe that there will challenges for communities particularly on tax base, so we did expect to see more 911 outsourced contracting on a go-forward basis. We also expect to see hospitals seeking ways in which they can decrease the overall subsidies that are related to the outsourced physician services. I believe that this is where we provide a distinct advantage in the marketplace by offering a full suite of services, so we can lower the overall subsidies that you see that generally occur individually with the segment, components of the outsourced services. As relates to overall healthcare, it's really hard to say. I do believe that there will some attempt to increase access and do something for the uninsured, which should benefit us, but it’s too difficult for us to look through that crystal ball at this point.

Arthur Henderson

Thank you very much.

William Sanger

Thanks Art.

Operator

And our next question will come from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Sudeep Singh

Hi. It’s actually Sudeep Singh calling in for Darren. Thanks for taking our question. I guess the first question I had was I was curious if you can give thoughts on cross-selling opportunities, in particular existing customers and EmCare are interested in either anesthesia, anesthesiology or radiology. How do you typically restructure an existing contract like that and would you employ discounts to entice customers to kind of beat into the cross-selling channel?

William Sanger

Well, the cross-selling generally are individual contracts. However, the value to a particular client is really three fold. Number one, if you are dealing with a single outsource provider for issues related to the whether it’s ED, radiology, anesthesia. Secondly, many of these are subsidized. We are able to provide the suite of services and lower their subsidy because the scale of leveraging our overhead, so that’s an advantage to them. I think thirdly, it’s the coordination of care as relates to the patient flow throughout hospital that provides a third advantage when you have the full suite of services. So we do feel encouraged by the ability to cross-sell these services to our existing client base as well as new client base based on the suite of services we offer.

Sudeep Singh

Okay, great. And then just question on Templeton, are you doing any preliminary reads in that business and if so what is the percentage mix between preliminary and final?

William Sanger

Well, we have above 30% prelims and about 70% final reads.

Sudeep Singh

Great. Thanks a lot guys.

Operator

And our next question will come from the line of Shelley Gnall with Goldman Sachs. Please proceed.

Shelley Gnall

Hi. First congratulations on really exceptional quarter. My first question, Randy, just I am wondering if you can give us some breakdown of sort of run rate operating cost if you strip out the benefit from the FEMA business, which looks like it was pretty attractive on your margin business. I am wondering if you can give us either absolute or as a percentage of revenue, how we are going to think about framing the compensation and benefits, SG&A, insurance and operating expenses?

Randy Owen

Yeah I think Shelley, when I am going through each of the specific items without going through specific – we don’t go into obviously contract margin specifics, but I think if you look at obviously the FEMA deployment was beneficial. But I think outside of that, we have been pretty consistent when you look at sort of the operating trends and some of the expenses based on the volume and revenue, so I think you can look at that as generally being consistent from what you’ve seen before.

Shelley Gnall

Okay. Then so my follow up to that is, can you tell me - it looks like the fourth quarter guidance is actually broadened, what are the swing factors there?

Randy Owen

Well, I think on the guidance, we just -- from an EBITDA perspective I think we left it at a similar range. The EPS guidance really reflects probably a better range of the impact of that $5 million range in EBITDA.

Shelley Gnall

Okay. So there is no real change to your assumptions in your guidance.

Randy Owen

Yeah.

Shelley Gnall

Then I was wondering if I could get maybe anecdotally a little bit more about what happened to your sort of routine AMR business during the FEMA deployment you had 1,000 personnel and 600 ambulances out in hurricane affected areas. I think I heard Bill say that that impacted -- and that’s part of the reason to the lower than expected inter-facility transports? Can you just us a little bit more about what actually happened during that time?

William Sanger

Well, really we think it’s a combination of two factors that we all know that hospital census has been lower than expected for the hospital industry. But as we deployed many of our individuals out of the markets, we obviously maintained our contractual commitments to the 911, but there are many opportunities that we miss on their facility. And as such, our competitors were able to pick up some of those incremental transports that we did not have the personnel to respond to, but I must say that we have been picking those back up just as we enter back into the markets.

Shelley Gnall

So you don’t think it caused any sort of long term changes in patterns that would impact your business on a go-forward basis?

William Sanger

Additionally, the hospitals that were in the affected hurricane region, obviously were not doing inter-facility transports.

Shelley Gnall

Right. That's a good point. Okay then just a -- I will just follow-up on the outlook. If we do see more 911 contracts, can you just give us directionally the margin on 911 versus inter-facility?

William Sanger

Generally, it's about 200 basis points better on the 911 than the inter-facility contract, generally speaking, but it really depends upon the area of the country.

Shelley Gnall

So if you actually saw more growth in the 911 contract that will be pretty good news for you.

William Sanger

That is correct.

Shelley Gnall

Okay. And then thanks for taking my questions. I do have a couple other, hopefully smaller ones. You talked a little bit about exiting some contracts for EmCare. I think you 24 on a less favorable pricing terms or mix terms, can you tell me a little bit more about what contracts – how many contracts were exited and why?

William Sanger

We actually exited 12 because of financial reasons. Eight were not meeting our particular threshold. Four had filed a bankruptcy. Then we exited some for reasons of service related and others were lost to competitors. Of those that were lost to competitors, I would say many of those are coming back to us in the next quarter.

Shelley Gnall

The total number is 24 exits?

William Sanger

25.

Shelley Gnall

25. Okay thanks. Then the new partnership you spoke about, is that details that we can get in your K filings that’s going to be coming?

William Sanger

I am sorry.

Shelley Gnall

Can we get – where can we find more detail on the new partnership you are just speaking to?

William Sanger

We will be releasing that on our 8-K.

Shelley Gnall

Okay, great. And then finally, just wondering if I could get your thoughts on the physician fee schedule rule out last night?

William Sanger

We haven't seen it yet.

Shelley Gnall

Okay, fair enough. Thanks very much.

Operator

And our next question will come from the line of Kevin Campbell with Avondale Partners. Please proceed.

Kevin Campbell

Thanks. I think most of my questions have all been answered, but still I have a couple for you. I know somebody asked earlier about the insurance expense and you guys have said that you didn't expect it be a trend here, the switch that we saw in the quarter, but can you help us understand what impact that number and why it might have gone up this quarter versus prior periods so we have a better understanding of what happened here?

Randy Owen

Yeah Kevin, it's Randy. Ultimately what happened is that we had some unusual movement develop on relatively small number of cases from prior periods that we typically not seeing. So we had a handful of cases that had a negative impact of what we have typically seen in terms of insurance trends.

Kevin Campbell

Okay. So we should expect though – if I look also sort of at last year – so it’s not really related to – I mean, historically I feel like we've seen insurance sort of tick down in the back half of years, whereas in this case it picked up here in the third quarter relative to the first half. Do you – should we expect sort of 4Q ’08 to be a more normal figure it’s a little bit lower than you might have seen in the first half as we’ve seen maybe historically?

Randy Owen

Well it could be, but remember Kevin one of the things that we talked about at the first of the year is that we clearly anticipated a reduction in those favorable prior period adjustments. So we expected those to go down overtime and talk earlier in the year, but those this year even being about half of what they were last year. So our trends are still positive in our program from when we look at frequency and a severity of claims and risk management programs. But we do expect as we said before some of those favorable adjustments to go down over the next couple of years.

Kevin Campbell

Okay. And then looking at the same store volume figures, you know, for EmCare I think you said it was plus 5.3% is that correct.

Randy Owen

Yeah 2% volume and you know, 3.3% rate.

Kevin Campbell

But it seems a little bit low just from where you guys have been historically and EmCare I feel like has been more closer to mid to upper single digits and even in the lower double digits. Is there anything that’s driving that here?

Randy Owen

Kevin, sometimes I mean if you look at the volume, a 2% year-over-year was still good growth. We have seen some volumes as high as you know, 3 or 4% kind of growth at existing contract. So volume I think was a little lower than we originally anticipated relative to you know, exiting contracts. So positive year-over-year, but maybe not quite as much as we have seen. We have seen that from time to time at different quarters bounce up and down. So I don’t know that we can call that a trend you know, at this point and also that didn’t include the impact of new stores.

Kevin Campbell

And then anything with pricing being only up 3.3%?

Randy Owen

No I don’t think so. I think we will continue to feel good about our ability to improve our yield per encounter. Obviously, if you look over the last three years we have done a lot to that yield. I think there is still opportunities, so I don’t think that you can necessarily assume that this sort of a new baseline.

Kevin Campbell

Okay. And what were -- I missed some of the details on EmCare, I know you said exit 25 contracts, what were the new contracts you entered and what was the difference in revenues, I think that’s usually a figure you guys derive?

Randy Owen

Well what we did as we talked about Kevin that we had 31 million of new revenue from contracts that we added in the quarter, okay.

Kevin Campbell

Yeah.

Randy Owen

The ones that we exited I think were -- cannot remember exactly that number was, it was a little larger than that number, I think it was maybe 40 million, just over 40 million on the contracts that we exit from a revenue perspective. Obviously from a margin perspective, it’s a different story, because those were below our sort of acceptable threshold. So we will have a margin improvement on that, but a slight revenue decrease related to those starts and stops.

Kevin Campbell

Okay. I think that answers my questions.

Randy Owen

Thanks Kevin. Thanks a lot.

Operator

And our next question will come from the line of Dawn Brock with J.P. Morgan. Please proceed.

Dawn Brock

Good morning guys. Great quarter.

William Sanger

Thanks a lot.

Dawn Brock

Randy AMR, I mean, I am sure we are all going to be asking all of the same questions, but AMR volumes was a little bit soft and you have gone into a lot of detail around that? Was there any contract disposition in there from the year ago that could have also impacted it?

Randy Owen

No, as we said Dawn, there were some markets that we exited at the end of last year and the first of this year. I think I mentioned it’s 19,700 trips that were lost relative to market that we have exit, so we did provide that information. But outside of those that we exit last year or early this year, there really weren’t any other real contract changes.

Dawn Brock

Okay, that’s helpful. And then on the insurance expense, again you have gone into a lot of detail I just want to make sure I mean was there something more isolated like this booking class action or something like just kind of running then and that’s why you don’t think that its going to be a trend?

Randy Owen

Well there wasn’t anything that you would call class action or so. But there were a few cases that ended up developing at different rates and much higher rates that what we had anticipated. So I think when we have looked back at it and looked at those we have been able to look at our overall trends and looked at those and feel comfortable that we are not going to see that that kind of a trend as an ongoing trend.

Dawn Brock

Okay. Moving on to EmCare for a second, now that you have got the management contract, how should we be looking at kind of net new contracts and kind of the revenue distribution between the management contract and the service contract?

William Sanger

You are talking about relative to anesthesia or the overall book of business?

Dawn Brock

I am talking relative to anesthesia right now? I mean I know it’s very, very small as only a million in the quarter, but I guess if they were 40 type contracts associated with that I guess I am just wondering how you are going to break that out?

William Sanger

Sure.

Dawn Brock

Go ahead.

William Sanger

I am sorry. One of the things Dawn that we did as the part of that acquisition again originally bought the management, so therefore your management revenue obviously is a lower base. Go forward as we enter into new anesthesia contracts, we will use that infrastructure and that expertise that we have, but those will come on as impure contracts, so that you will have what you typically on our other ones, is that we will have patient revenue and provider and other related contract cost like you have seen. So I think going forward what we expect on those areas is a more typical looking contract picture like you see in the other hospital based services.

Dawn Brock

So that there is a that small piece of management contract of revenue looked kind of joining to EmCare and may just have to live with that for a while and it might skew numbers a little bit, but will just live with it?

William Sanger

Yeah, look it’s a small number, and we do have some small amount of contracts that are service agreements that are already embedded in our book of business, but that tends to be the exception. And I think again from a growth standpoint, you can look at it as you might other impure contracts and in terms of looking at patient revenue and related contract cost.

Dawn Brock

Okay. No that’s there. And the last thing is you know, in this kind of environment could you just refresh us on the revenue stability that’s inherent in the hospital contracts on the EmCare side. And what I mean is just regarding subsidy and potential resistance to bad debt and things that people could be concerned about?

William Sanger

Well I think there are couple of things, one, if you look at bad debt and payer mix, we have really not seen any significant change in payer mix at this point. And I understand that maybe concerns are out there our ability to pay realization on bad debt if that were to increase or payment of co-pays and the doctor bulls in any risk there. So if you look over the long-term now we have not seen a lot of movement in the self pay or realization of that. We have tended to see a little bit of movement every year, maybe 50 basis points or so a year in the self pay. And we have been effective in either through rate increase as we look at that and managed care negotiations, or whether we go par and non-par with the carrier and in some cases subsidy if its needed. We have different mechanisms that we have been able to use in the past. That’s not end -- I think we will be able to do in the future.

Dawn Brock

Okay, that’s great. Thank you so much.

William Sanger

Thank you Dawn.

Randy Owen

Thanks Dawn.

Operator

And our next question will come from the line of Gary Taylor with Citi. Please proceed.

Gary Taylor

Hi, good morning. I just had a couple of questions. Maybe more broadly just thinking about the FEMA business which is obviously a big chunk of business this quarter. Should we just you know, obviously that’s not recurring into the fourth quarter, but have you I guess expanded your relationship with FEMA in such a way that you know, as we head into Hurricane season every year, it’s almost a call option for you guys in terms of revenue and earnings more so than has been historically?

William Sanger

Well we announced the relationship with FEMA two years ago. And earlier part of this year Gary, we announced that FEMA now has the right to expand us to other geographic regions and they define throughout the country. So clearly we have expanded the relationship. It’s really up to them whether or not they are going to deploy or activate an event of natural mandate disaster. For the last several years we have responded the hurricanes, we do expect in the future we will respond to hurricanes. Obviously, it’s difficult modeling that on a go forward basis, but we do see that’s part of our ongoing business.

Gary Taylor

But what was different about this quarter that the deployment was so large? Was that across the industry or they specifically selected you differentially or I am just trying to understand that?

William Sanger

Well, what was unusual about this particular deployment is you had one hurricane directly after another. And so our readiness revenue was higher than we would expect because we had Hurricane Gustav and immediately then Hurricane Ike, which I think is unusual to have them that close together. I think that would -- I would categorize that as the unusual event as relates to that hurricane deployment. Now, we may have two hurricanes, one after the other, next year. We may have one. I don't know.

Gary Taylor

Right. No, certainly not disputing. It's a good piece of business for you. How do we -- how would you say if you took out the FEMA deployment, looks like revenue would have been in line. I'm not sure if you've implied the incremental margins a little better than your consolidated margin, but with a little bit softer inter-facility transport in AMR, would your core business, or did your core business perform essentially in line with your expectation? Was it better? Was it worse?

William Sanger

Generally speaking, AMR performed inline with our expectations.

Gary Taylor

Okay. And then a little help on the revenue side maybe, Randy. Can you tell us year to date for both AMR and EmCare what the net annualized acquired revenues are, if that makes sense? So for new contracts you've signed or acquisitions you've made, the total annualized revenues net of what you've exited?

Randy Owen

Gary, let me try to give you some of that data that I may have. Some of it I may not have in front of me. But when you look at AMR, Gary, the only real acquisition that we've had earlier in the year was River Medical, which was the one in Arizona that we did back in February. And it was about $40 million of I guess annualized revenue that you might expect from that acquisition. And -- no, I'm sorry, it's not 40 -- $10 million from River Medical -- sorry about that -- that came through -- that would come through in terms of the year for AMR. On the EmCare side, we really had sort of two recent obviously acquisition. When you look at the CPPA, we talked about that are being $7 million in sort of estimated revenue on a management fee basis and then Templeton will have another 20 million or so in annualized, if you look on annualized revenue. So I can give you those on the acquisition side, I don’t have specific data in front of me, specific contracts.

Gary Taylor

Okay, that’s fine. And then just finally, I think you already said this. I was listening and I don’t know how I wrote it down. But you had said on EmCare this quarter 18 in contracts, 31 million annualized revenues, exit 25 and I think you did gave what the annualized revenue lost was?

Randy Owen

Yes. I didn’t have the specific but I think it’s just over 40 million, Gary.

Gary Taylor

Okay. And you had said marginally better than revenues, revenue is down from that – that the margin would be better from that transition?

Randy Owen

Yeah, just on the quarter now. Now, I think if you look at the first two quarters and then, I think, where we think we'll be in the fourth quarter, there's no doubt that we'll have a net addition of contracts year over year, not unlike what we've seen before. So -- but yes, for the third quarter that's right.

Gary Taylor

Okay. And I guess -- okay I will add one more question, last question. Just going back to the mix issue, our economists at Citi are forecasting unemployment going to 8.5%. We're anticipating increased shift to self-pay. And your view is still that you guys are largely insulated on both pieces of business because of the community rate setting on AMR and because of subsidy on the hospital side?

William Sanger

I don't know if I would say largely insulated. I think we're unique in our ability to go back and offset changes in payor mix due to our customer relations with communities and also hospitals.

Gary Taylor

Is the offset faster on AMR than it would be necessarily at EmCare?

William Sanger

Probably about the same. There’s a lag where we see – and if we see an increase in the self-payor, change of payor mix then we would go back either to the community of the hospital that demonstrate there has been a change that we believe is a trend. If you have a one month blip, it’s really not enough to go back and argue the need for additional subsidy or a subsidy.

Gary Taylor

Okay. Thank you.

William Sanger

Thank you.

Operator

And the next question will come from the line of Andreas Dirnagl with Stephens. Please proceed.

Andreas Dirnagl

Yeah, good morning guys. Great quarter. Most of my questions have been answered, but just maybe a couple of different things. Randy, I know that you are sort of load to give you the direct margin impact of the FEMA. But if I think sort of what you said, it’s sort of one valid way of maybe looking at how we can analyze this to take maybe sort of the average of the last four rolling quarters of your EBITDA margin and use that on the non-FEMA revenue to kind of figure out what a normalized EBITDA would have been?

Randy Owen

Yeah, Andreas, you can do that, or further something that we -- obviously we have seen improvements in our AMR margin on that base business and we continue to do that. But I think if you look at – I don’t have exact number, if you look at the last couple of quarters to kind of do some of that. That’s not a – that maybe a reasonable proxy to have a look at that.

Andreas Dirnagl

Okay, great. And then maybe for Bill. Bill, question on the EmCare side. With some of the contracts that you have been exiting more recently, would you say to characterize those as sort of being similar to the reasons that you exited the last round where you did the restructuring that was about 18 months ago, a year ago now. Or is there – are you seeing any sort of trend in which you are seeing for example bad debt at emergency rooms creeping up, and as you approach the hospitals for higher subsidies they are basically declining?

William Sanger

I don’t know that we have seen anything dramatically different and it’s only one quarter. So it’s difficult to try to assess whether or not that’s a trend. You have seen the fact that four of our hospitals that filed the bankruptcy which is similar to high we would see in a quarter, but outside of that we have not seen any real trend changes as of yet.

Andreas Dirnagl

Okay. And then in the past, you have often said on the AMR side of business when it came to bad debt, but you weren’t necessarily finding yourself trend reporting a significantly larger number of uninsured patients rather it was that the uninsured patients that you were transporting, a larger of percentage of them were actually getting admitted. Is that trend sort of still holding true?

William Sanger

I am just trying to understand your question. You are talking about AMR and the patients being admitted?

Andreas Dirnagl

Correct. In the hospitals there?

William Sanger

I think – let’s separate AMR. When talking about emergency department, we had speculated anecdotally that we are probably seeing more sub being admitted and that’s maybe the reason why hospitals complain about EDs bringing themselves pay. And specific to AMR and EmCare in hospital admissions, so perhaps that’s what you were referring to.

Randy Owen

Andrea, one thing I would mention is that even on the AMR side, we have seen – similar to EmCare, which is not surprising that we have seen self-pay on a volume basis. So, on a transport basis, when we talk about 40, 50 basis points a year over the last several years, so we’ve not had an explosion but we have seen slight increase and most of that from the 911 side of the business.

Andreas Dirnagl

Okay, great. And then final question. I did miss the other part of your comments that if you say anything forgive me, but are there any comments that you make on the recent shelf filing that you put out? Is that something that you would expect to be using for yourselves or is that something that’s in effect being filed on behalf of ONYX?

William Sanger

Well obviously, we can’t go into that type of detail, but we filed a registration, Andrea. Personally, there have been events that either company or shareholders decide to do an offering in the future, we have made no decision beyond that point.

Andreas Dirnagl

Okay, great. Thank you very much.

William Sanger

Thanks Andrea.

Operator

And your next question will come from the line of David Bachman with Longbow Research. Please proceed.

David Bachman

Okay, great. Thanks and very nice looking quarter. Just a housekeeping thing upfront here. What were the DSOs in the quarter? I know it was down, but what was the number?

Randy Owen

We were down only – EmCare side down to 72 I think and on the AMR side we were down to 83 I believe – yeah, it’s 83 excluding sort of the FEMA impact, base business.

David Bachman

Okay, great. Thanks. That’s helpful. And then you mentioned that there maybe a pickup in – or potentially a pickup in 911 contracts with pressures on counties and cities. Can you comment if you are seeing more RFPs out there? And if so, I mean is there certain areas of the country where there seems to be more pressure.

William Sanger

We clearly are seeing more cities consider outsourcing their 911 backup. There is no particular area of the country. From California to Colorado all the way to the East Coast we are seeing communities that historically were fire-based services looking at outsourcing that, more so than we have in the past.

David Bachman

Okay. Another housekeeping question. Just on – and I missed part of the – the first of the call as well. But what are the year-to-date numbers on HMA, UHS, and Community Health on those contracts?

Randy Owen

We think about 20 contracts are under those national agreements since we sign those agreements.

William Sanger

And keep in mind those were signed – the first one was signed January, effective February this year and the others were signed this summer.

David Bachman

Just this summer?

William Sanger

Right.

David Bachman

Okay. And just one other kind of background question and for my benefit here, are there any regulatory issues or concerns at all about areas where you may overlap with AMR services and EmCare services in terms of having a 911 contract and then managing an ER in that same footprint. Are there any issues at all?

William Sanger

No. There are very strict guidelines as to where patients that are picked up on an ambulance are brought to. Those guidance by established by each community and we follow those to the T.

David Bachman

Okay. That’s what I thought. I just want to make sure. Again, congratulations, looks great. Thanks.

William Sanger

Thanks.

Operator

Thank you. This concludes the question and answer portion of today’s conference. I would now turn the cal back over to Bill Sanger for any closing remarks.

William Sanger

Thank you, operator, and again thank you everyone for your support of EMSC. We look forward to continuing to meet expectations. Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day everyone.

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