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Rural/Metro Corporation (NASDAQ:RURL)

F1Q09 Earnings Call

November 10, 2008 11:00 am ET

Executives

Liz Merritt - Managing Director of Investor Relations & Corporate Communications

Jack E. Brucker - President, Chief Executive Officer, Director

Kristine B. Ponczak - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Analysts

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Lawrence Weiss - Citigroup

Kyle Smith - Jefferies & Company

Dennis Wurst - V Finance Investments

[Gabe Hoffman - Fipitor]

[Michael Souders] - Wells Fargo

Richard Fetterman - Fetterman Investments

Operator

Welcome to the Rural/Metro Corporation’s fourth quarter fiscal 2008 and first quarter 2009 earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Liz Merritt.

Liz Merritt

Prior to the opening of the market today Rural/Metro reported results for its fiscal 2009 first quarter ended September 30, 2008. If you’ve not received our news release, it is available on our website at www.ruralmetro.com. This call is being webcast and can be accessed at the Rural/Metro website where an archived replay will be available for the next 90 days.

We’ve also arranged for a recorded replay of today’s call which will take effect approximately two hours after the conclusion and remain in effect through midnight Eastern on Tuesday, November 11. Instructions to access the replay are contained in today’s news release. Please note that today’s call is copyright material of Rural/Metro and cannot be used without the company’s express written consent.

As a reminder, during the course of this call management may make projections or forward-looking statements regarding the company’s beliefs about its business prospects and disclosure about what management believes is affecting the company’s financial performance. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause results to differ materially from those expected are included in the company’s annual report on Form 10K for the period ended June 30, 2008 as well as the company’s press release and other filings with the Securities and Exchange Commission.

I will now turn the call over to Jack Brucker, President and Chief Executive Officer.

Jack E. Brucker

Thank you for joining us this morning for our first quarter fiscal 2009 investor conference call. With me are Kristine Ponczak, Senior Vice President and Chief Financial Officer, and Liz Merritt, Managing Director of Investor Relations & Corporate Communications.

We are pleased to report strong results for the first quarter of fiscal 2009. On a year-over-year basis revenue grew by 6%, EBITDA increased 20% and operating income was up 22%. Net income for the period was $0.8 million representing fully diluted earnings of $0.03 per share.

We were also very pleased to generate a positive year-over-year trend for average patient charge and days’ sales outstanding coming in at $361 per transport and 59 days respectively compared to $348 per transport and 64 days respectively in the prior year period. We emphasize the importance of these metrics as leading indicators of shifts in rates and reimbursement patterns, payer mix and transport volume.

First quarter consolidated net revenue was $124.4 million up by $7 million or 6% over the prior year. Of that $7 million increase $5.7 million was related to higher ambulance service revenue and the balance related to other services which includes fire protection. The increases were driven by improvements in APC and higher transport volume as well as new business from non-emergency contracts in our Tennessee and Washington markets. We also experienced year-over-year increases in revenue from fire subscriptions and master fire contracts.

To address our compensated care we were especially pleased to achieve a significant increase in APC in the first quarter compared to the same period last year and to come in slightly ahead of our expectations at $361 per transport compared to $348 per transport in Q1 of fiscal 2008. Of the $13 year-over-year increase, slightly more than half was due to the continued reductions in uncompensated care with the balance attributable to rate increases and changes in service level mix.

During our fourth quarter conference call we explained that a surge in collections on receivables older than 180 days was the driving factor behind fourth quarter APC of $367 per transport. We guided to a first quarter run rate in the mid- to high $350s and we were pleased to come in higher than that. Because APC represents our best approximation of cash collected per transport, positive trending in this metric is a direct reflection of improved collections due to reductions in uncompensated care, increases in rates and positive changes in service level mix.

On a year-over-year basis uncompensated care as a percentage of gross ambulance services revenue for the first quarter improved to 14.2% compared to 15.0% last year same quarter. We attributed this improvement largely to progress we have made during the past year to reduce denials and expedite collections from insured sources through our own internal initiatives. We have reduced DSO to 59 days in the first quarter compared to 64 days for the same period a year ago.

We believe we can drive additional improvements in these internal efforts and see opportunity as we look at denials from insured sources which include Medicare, Medicaid and commercial insurers.

Continuing to recap the income statement, payroll and employee benefits for the first quarter totaled $76.4 million or 61.4% of net revenue compared to $74.1 million or 63.2% of net revenue for the same period last year. Other operating expenses for the first quarter were $29.7 million or 23.8% of net revenue compared to $26.9 million or 22.9% of net revenue in fiscal 2008. The increase included $1.5 million in higher fuel expenses when compared to the prior year.

During the first quarter we also increased our reserve related to ongoing negotiations with the State of Ohio regarding certain Medicare claims by an additional $1 million of which $600,000 was recorded to continuing operations and $400,000 was recorded to discontinued operations. This audit covers the time period of 1997 to 2001 for four provider numbers in the State of Ohio.

Under contract activities related to renewals we are very pleased to have secured a second three-year extension of our exclusive 911 ambulance services contract in Knoxville County, Tennessee. The unanimous vote of the Knoxville County Commission extended the contract through June of 2013. It is noteworthy that the County Commissioners voted for the extension nearly two years in advance which we believe demonstrates the high level of confidence Knoxville County decision makers share in our ability to continue to provide the highest quality of services for their residents.

In addition, during the first quarter we renewed our exclusive 911 ambulance service contract with the City of Tacoma, Washington. This renewal also was awarded on a unanimous vote extending the agreement for an additional year. Rural/Metro was first awarded the Tacoma 911 contract in 2004 following the city’s decision to consolidate its ambulance services under one provider.

On the new contract front we were pleased to win the contract to become the exclusive private ambulance partner for 911 services in Littleton, Colorado. The City of Littleton provides a natural extension for our metro Denver market. This is an excellent opportunity for us to leverage on our resources to create same service area growth in the future.

The contract was awarded on a unanimous vote of the Littleton City Council in a competitive bidding process that included our primary national competitor. The contract began November 1 and is expected to initially generate $1.5 million in net annual 911 revenue with market expansion opportunities in the non-emergency area.

In addition to these contracts we are currently focused on four to five new emergency ambulance RFPs in communities that we have determined would be complementary to our business as well as five to eight significant new non-emergency ambulance contracts that will allow us to further leverage our presence in existing regions over the next two to three years.

We will now turn to the economy and the potential impact it may have on our business. We believe our steady revenue and profit margin growth, gains in market share through new and renewed contracts, and the ongoing success of our strategies have demonstrated our ability to operate in this challenging economy.

Our cash flows remain strong at $12.6 million of cash flow from operations in the first quarter and $35 million for the fiscal year ended June 30, 2008. We’ll continue to support our goals to reduce debt and enhance long-term value of the company for our shareholders. As we monitor the financial markets we are also comfortable with our liquidity position given our $20 million revolving credit line remains undrawn, ample room under our term loan B covenants, and no debt maturities in the near term.

While we contemplate the state of the economy and the demand for ambulance transportation and fire protection services, our expectation is that demand for our services will continue to steadily increase. Our core business is fueled by a number of factors including aging population, a general trend toward outsource of hospital ambulance transportation services, partnership opportunities with public systems as city and county budgets continue to come under pressure, and demographic growth in many of the communities we presently serve.

We believe our ambulance transportation volumes are generally less affected by a weakened economy primarily due to the medical need component within the demand of our services. We would characterize this as somewhat different from the broader health care sector.

At the quarter end we continue to be successful in reducing the uninsured portion of our transport mix down to 10.2%. In addition we have been successful in reducing our allocation of uncompensated care write-offs related to the underinsured which relates to co-pays and deductibles down to 7%.

Although we are not seeing an impact at this time and believe we have measures in place to promptly identify negative trends, we do recognize a weakened economy may shift our current payer mix to a higher uninsured and underinsured volume mix. If this occurs, we may see higher uncompensated care write-offs as a result of reductions in collections based on historical trends for this payer mix which would in turn impact our cash flows from operations and overall liquidity.

When it comes to pricing we expect the overall environment for Medicare ambulance rates and reimbursements will be slightly improved. As you may recall Congress recently passed across-the-board Medicare rate increases of 2% and 3% respectively for urban and rural ambulance transports. These increases took effect July 1 on approximately 40% of our total transports that are provided to Medicare patients.

Since that time CMS has announced a 2009 Medicare ambulance inflation factor of 5% effective January 1, 2009. This inflationary increase is based on the urban consumer price index and is somewhat higher than the 2% to 3% increases assigned in the past.

We believe our first quarter results demonstrate the growing strength of our operations with positive trends in each of our key metrics including APC, DSO and cash flow from operations.

Today we have also confirmed our guidance for fiscal 2009 of $54 million to $58 million in EBITDA and $15 million to $18 million in capital expenditures. We are pleased with these results and look forward to reporting further progress in the future.

Operator, I will now turn the line back to you so that we can take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Robert C. Wetenhall, Jr. - Royal Bank of Canada.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Could you talk a little bit about why payroll and employee benefits as a percentage of sales declined so much?

Kristine B. Ponczak

From a payroll perspective I think as a percentage of revenue the biggest driver behind the percentage coming down I think is attributable to the improvements around uncompensated care and that inherent growth in revenue as a result of that. As that revenue number is moving up and those uncompensated care dollars are falling down to the revenue line, it’s helping us bring that percentage down. In addition to that, during the first quarter we did have a $700,000 positive adjustment due to lower runoff claim payments from the prior year that we were able to record in the quarter so that also assisted.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Is any of the improvement in DSO related to the rollout of the EPCR system or is it just better collections on a more aggressive basis?

Kristine B. Ponczak

I would say that we have about four markets that we have rolled the EPCR out in at this point. We are not attributing any of the reduction in DSO at this point directly to the EPCR rollout. We want to give that a bit more time. So I would characterize the five-day reduction as more just the initiative focused around collections of the old receivables and processes around the collection of AR in total.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Is that $360+ APC cash number kind of sustainable do you believe for the rest of the year?

Kristine B. Ponczak

From an APC perspective, yes. I think as Jack said we were pleased with $361. Over half of that $13 improvement was a result of improved collections which we certainly believe are sustainable and expect to continue that going forward. We have a couple of things happening in APC.

Of course the primary components driving APC are uncompensated care and rate increases, and we’ve spoken about the initiatives around uncompensated care and what’s driving that. But also with regard to rate increases, exclusive of other factors that are occurring, drivers behind it are that we as Jack mentioned received two positive ambulance reimbursement buyer notifications, both of which will continue to we believe propel APC.

Those have to do with the Medicare improvement for patients and providers at that 2% to 3% rate increase for the next 18 months plus as Jack mentioned CMS announcing the calendar 2009 Medicare ambulance inflation factor of 5% which is almost double the inflation factor that was issued last year. So we believe those will certainly assist us in propelling APC.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

So you have a second half pricing benefit of 3% followed by second half on a calendar year basis and then during the first six months of next year that’s going to go up by another 5%, correct?

Kristine B. Ponczak

That’s correct.

Operator

Our next question comes from Lawrence Weiss - Citigroup.

Lawrence Weiss - Citigroup

You guys have done a fantastic job on the uncompensated care portion of this. Are you guys seeing any specific geographies that are worse or better than others and any details around that would be helpful?

Kristine B. Ponczak

As we mentioned, certainly uncompensated care is a fair question and one that we as management spend a great deal of time analyzing and monitoring. As Jack mentioned earlier, we recognize that the economy may shift some of our current payer mix to potentially a higher uninsured volume which in turn we may see higher uncompensated care write-offs. But having said that, it might be helpful for me to just give you some visibility into the opportunity that management believes we have to reduce uncompensated care.

In Q1 uncompensated care write-offs related to commercial Medicare and Medicaid denials represented 29% of our total write-offs which is about $8.9 million. We believe that’s our opportunity. That’s where our continued billing initiatives are targeted and what we’re focused on. At this point we are not seeing an increase in our uninsured or self-pay transport volumes. Again as Jack mentioned, we were able to bring that down to 10.2% of transport and we do continue to focus on reducing denials on the commercial and Medicare components. We believe that those factors are helping us drive uncompensated care down.

Lawrence Weiss - Citigroup

In negotiations with some of the locales, are there any trouble spots in terms of geographies, in terms of states and local areas that either you’re kind of just not bidding for business or you’re putting into your contracts a stiffer uncompensated care provisions that would let you collect from the locales? I’m trying to get specific geographies.

Jack E. Brucker

We did request a significantly higher subsidy in the metro Memphis renewal which was recent and the county was able to get that approved for us. So I think that that’s one where we were expanding our service level and were able to get an increased subsidy for that.

Not directly related on uncompensated care but I did want to put two names of two of our smaller markets just out there. This is not exactly an answer to your question but we have mentioned these names before but we’re looking at our Columbus, Ohio market.

We are not the 911 provider there. It’s very competitive and City of Columbus Fire Department has the 911 locked up. Also in the metro Cincinnati area we do not have a 911 presence there and it’s a very crowded competitive market for the non-emergency business. Those are two markets we’re looking at. I would say that Columbus, Ohio has a bigger payer mix in general, the market we address. Cincinnati in addition to not having the 911 has a more difficult payer mix for the market that we address.

Lawrence Weiss - Citigroup

Previously we discussed your thoughts on the Hold Co and refinancing and obviously the markets are where they are, so do you have anything to say on that?

Kristine B. Ponczak

I would respond to that by saying that we certainly recognize that’s out there. I think we are monitoring the markets to see when we can go out and clear that piece of debt out and get us just a little bit better cost of capital, more attractive cost of capital position. But at this time we’ll just continue to proceed forward, continue to pay down the term loan, the debt as we have communicated and focus on that in the mean time.

We don’t go current pay on the senior discount notes until I think the first interest payment would actually be 9/15 of 2010. So we’ve got some time before we have to address that and we’ll certainly get out there in the market as soon as we deem it’s possible to do that.

Operator

Our next question comes from Kyle Smith - Jefferies & Company.

Kyle Smith - Jefferies & Company

You said that you were in compliance with your covenants. I know there was a big step-down in those at the end of the quarter. Could you tell us how much your headroom was?

Kristine B. Ponczak

We did have a big step-down. We went from 4.0 on debt leverage on Q4 to 4.25 at Q1. Our actual came in at 3.66 which under that we have about $8 million in room.

Kyle Smith - Jefferies & Company

You mentioned in the prepared remarks there was $600,000 that hit continuing ops from a Medicare reserve in Ohio and then I think you also mentioned that there is a $700,000 positive adjustment related to claim payments. Did both those items hit your revenue line? I just want to know how to approach the adjustments.

Kristine B. Ponczak

The Ohio item actually hit in operating expenses; that $600,000. Again the addition to the contingency was $1 million for the quarter of which $600,000 hit operating expenses and continuing ops; $400,000 went to disc ops; then the $700,000 positive adjustment for health insurance hit the payroll line.

Kyle Smith - Jefferies & Company

Is the Ohio Medicare issue something that’s ongoing that we might see more charges related to that or is it largely behind us?

Kristine B. Ponczak

We are continuing to cooperate with the government as we look at this matter so it is not closed yet. But we continue to move forward positively.

Kyle Smith - Jefferies & Company

The $300,000 improvement in your general and auto liability insurance, is it fair to annualize that and look for maybe $1.2 million savings in fiscal ’09 versus ’08?

Kristine B. Ponczak

We typically do not have any actuarial adjustments in Q1 so you can look at that as sort of a premium in claims kind of run rate off of prior year.

Kyle Smith - Jefferies & Company

Tacoma; is there any reason that was just a one-year renewal? Is it just a one-year contract or did they intentionally go with a short period on the renewal for some reason?

Jack E. Brucker

It was what was contractually allowed. That started in 2004 and this was a one-year tail on the original award in 2004. So we expect the full bid in the next year or two which would start the process over again. It was a 3, 1 and 1 as I recall.

Kyle Smith - Jefferies & Company

In terms of thinking about some of the positive momentum that you’ve been building in the business and how that comes into play with the guidance, if I sum up your last four quarterly EBITDA from continuing ops results, I get to about $56 million or so which is right at the midpoint of your guidance range. I just want to make sure that you’re not guiding for flat comps for the next three quarters. I know that the actuarial adjustments will be getting smaller and that masks a little bit of growth, but is there anything else that we should be thinking about relative to the guidance?

Kristine B. Ponczak

Do you mean in comparison to the $56 million that you quoted sort of on an LTM basis?

Kyle Smith - Jefferies & Company

Yes. If you get the $56 million number versus you’re guiding for $54 million to $58 million that would normally suggest that you’re looking for flattish +/- comps for the next three quarters. But I don’t think from the color that you’ve been giving on trends that that’s really what you’re looking for. I just wanted to maybe put a finer point on that.

Kristine B. Ponczak

What I’d guide you to are a couple of items. One, I would take you back to Q4 for a moment and remind you that in Q4 we did speak about that in uncompensated care we had seen an upsurge in receipts and collections on accounts over 180 days and therefore in Q4 we did recognize a pickup in Q4 related to our opportunity to reduce our provision for uncompensated care as a result of that. In Q4 we had discussed that that was about $3 million.

In addition to that, as we go forward in ’09 in our guidance we have made some assumptions with regard to fuel costs although positively we are seeing diesel prices come down. I think right now we’re seeing nationally they’re a little over $3 per gallon which is positive news for us. But we had taken some of that into consideration as well in addition to the insurance adjustments in our assumptions, as you noted that those will continue to start coming down.

Kyle Smith - Jefferies & Company

In terms of thinking about your exposure to recession in terms of magnitude and timing of the sensitivities, what are the moving parts that we should be thinking about and how should we be thinking about lag effects between when people lose their jobs and Cobra runs out and you start to see the actual surge in self pay going forward?

Kristine B. Ponczak

That’s certainly a fair question. We’re monitoring it very closely. We’re monitoring market-by-market in terms of what we’re seeing out there from an industry perspective and how that might impact our markets. As we said we haven’t seen it yet although we do recognize that a weakened economy could increase that uninsured group, that self-pay group, but we have a lot of sophisticated analysis in place to identify it early so we believe that as we’re seeing that we should be able to identify that within the quarter that that is occurring and be able to communicate that.

Kyle Smith - Jefferies & Company

I do appreciate that you have a lot of tools that you identify and respond to this, but what I’m trying to get at is if we see a big spike in unemployment during the fourth calendar quarter of 2008, is that something where you start to see the negative impact on your business immediately or does it take a quarter or two before you actually see your numbers affected? I’m just trying to get a sense of what the lag affects are.

Kristine B. Ponczak

We would not see an immediate impact certainly partly by the nature of our collection cycle being 12 to 15 months. It’s going to be at least six to nine months before we would start seeing an impact to something like that.

Operator

Our next question comes from Dennis Wurst - V Finance Investments.

Dennis Wurst - V Finance Investments

I just wanted to ask about the accrued liabilities. It looks like it’s up about $6.7 million the last three months and I wondered where that’s coming from.

Kristine B. Ponczak

That is almost entirely driven by the timing of wage accruals.

Dennis Wurst - V Finance Investments

You just said September, I thought it was March. I was at one of the conferences in Phoenix and Kristy Ponczak said that she was hoping to refi the [012.75] step up at least 12 months before the thing went cash pay. I thought that would make it March of ’09 or six months away. It’s September?

Kristine B. Ponczak

No. You are correct. We go current pay in March of 2010 but the first actual interest payment is not due until September 15 of 2010.

Dennis Wurst - V Finance Investments

I was just curious. Not to beat a dead horse but have you been talking to bankers about that? Have you secured people interested in taking this on? The 9⅞ were offered at 84.5 and I’m a little worried.

Kristine B. Ponczak

We are certainly working with our investment advisors all the time in terms of monitoring the market but we do not have anything right now. We are just monitoring at this point.

Operator

Our next question comes from [Gabe Hoffman - Fipitor].

[Gabe Hoffman - Fipitor]

Could you just remind us Kristy what your assumption was for fuel cost when guidance was issued, your assumption for fuel cost that is for the average of fiscal ’09 and what your average fuel cost actual was in Q1?

Kristine B. Ponczak

When we were issuing guidance at that time going out of Q4, our fuel was running at about 3.5% of revenue. In Q1 it had increased to about 3.6%.

[Gabe Hoffman - Fipitor]

If we took current prices and just assumed that they would stay the same for the balance, at current fuel prices what percentage of revenue on a run rate basis would that represent?

Kristine B. Ponczak

Right now the diesel fuel nationally is running a little over $3, $3.8 was the last time I looked at it. If that was the steady run rate, it would drive it down to probably more around 3%.

[Gabe Hoffman - Fipitor]

I guess given the volatility in fuel prices, if you have an opportunity to lock them in if you will at a price that is lower than what you’ve contemplated in your financial plan, have you thought about going out and hedging your fuel costs for the rest of the fiscal year?

Kristine B. Ponczak

That’s a good question. We’ve actually looked at that and looked at various opportunities with regard to that, and it’s difficult in our industry to hedge fuel primarily due to the nature of where we buy fuel. We’ve got a fleet on the ground that has a need to just stop in at the local gas station so from a hedging perspective and storage perspective it’s a bit challenging. But what we do do is that we negotiate and have effectively negotiated some discount programs across the country which gives us really cents off the dollar. We have done that and continue to monitor those and try to negotiate better discount programs as we monitor fuel prices.

Operator

Our next question comes from [Michael Souders] - Wells Fargo.

[Michael Souders] - Wells Fargo

My question is related to the San Mateo contract and the issues that you guys had there and if you see those continuing as you compete for more contracts throughout the United States?

Jack E. Brucker

Just to give you a touch of background, after the RFP was submitted there was an eight member selection committee that were people outside of the county administration, some hospital executives, some fire chiefs outside of the county area, some academic people. It was a very deep selection panel. Rural/Metro was awarded the contract 8-0 from that selection panel and the county actually pending protests awarded the San Mateo 911 contract to us.

Then there was a protest that was filed to the county based on not necessarily what was in the RFP but a general depth of ability to access credit lines is the best way I can summarize it in the way the whole discussion boiled down. It ended up being who had a larger or deeper access to credit. It sort of went beyond what the RFP addressed as being qualified or able to perform and they got the county controller to simply do a quick and current ratio as to whose was better.

AMR and EMS and their majority shareholder all had more access to current credit although it was well outside the RFP. So the decision to award to Rural/Metro was reversed based on that simple test of who has more. We were clearly the winner on quality and service and reputation and ability to perform the contract but in terms of having a larger balance sheet is maybe another way to say it.

[Michael Souders] - Wells Fargo

I thought their whole argument was ridiculous so I’m just trying to understand. I mean, anyone who’s paying down debt like you guys are is obviously a pretty good reflection of your liquidity position.

Jack E. Brucker

The evaluation relative to the terms in the RFP with regards to financial ability to perform, Rural/Metro scored equal and then we were better on the other three factors I mentioned: Service, quality and service to other communities. But San Mateo was having their own issues. The county was having some of their own issues with some of the things happening in the economy and on Wall Street at that time. They simply made a decision.

It’s hard for us to characterize all the things that happened in a few short sentences here but I think that they just sort of revisited their thoughts on having someone that was qualified as opposed to simply selecting the one that had the biggest balance sheet.

We do not expect this going forward in other markets, at least the ones that we’re currently looking at. We’re currently looking at four, five or six 911 markets that are in different stages. I would not anticipate this issue at any of these markets up to the six markets we’re currently tracking to respond to. I think there were some unique situations in San Mateo that we don’t see being repeated.

That’s good enough for now.

Operator

Our next question comes from Richard Fetterman - Fetterman Investments.

Richard Fetterman - Fetterman Investments

Kristy, I didn’t recall. Did you make a $5 million or a debt payment on the term loan just after the end of the fourth quarter? I saw the long-term debt is down here in the first quarter.

Kristine B. Ponczak

We did. We made a $7 million voluntary principal payment on September 15.

Richard Fetterman - Fetterman Investments

Do you based on your estimated EBITDA for the year have an idea as to what the magnitude of the debt reduction might be this year?

Kristine B. Ponczak

For Q1 we did have cash flow from operations as Jack said of $12.6 million. If you generally look at our guidance of $54 million to $58 million and you take off our cap ex guidance of $15 million to $18 million. As you look at the balance sheet and the statement of cash flows you can see our cash interest runs approximately $20 million to $21 million and our cash taxes run about $2 million so that would drive a free cash flow of towards $20 million. As we have committed we certainly look to use our excess cash flow to pay down debt.

Richard Fetterman - Fetterman Investments

Is there any simple reason that the income tax provision was so much higher in this quarter?

Kristine B. Ponczak

That’s a good question. The driver behind that is primarily related to the impact of state taxes which also is the primary driver of our increase in cash tax payments. We’ve got a couple of the states that we operate in, New York primarily, where we are seeing an increase in our state cash tax payments which is driving that up a bit.

Operator

Our next question comes from Robert C. Wetenhall, Jr. - Royal Bank of Canada.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Just to confirm that. Cash interest is $21 million; cash taxes are expected to be $2 million?

Kristine B. Ponczak

That’s correct.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

And the midpoint of your cap ex would be $16.5 million, correct?

Kristine B. Ponczak

Correct.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Do you expect working capital to be a source of funds this year?

Kristine B. Ponczak

Certainly in the first quarter it was as we continued to reduce our receivables.

Robert C. Wetenhall, Jr. - Royal Bank of Canada

Do you think it’s reasonable to pencil in $60 million for an end balance on your term loan by the end of the year?

Kristine B. Ponczak

As we said, we are certainly committed to using excess cash flow to pay down debt. I think we are certainly monitoring the economy as many companies are and are evaluating that as we move forward. We certainly plan to continue to pay down the term B as we have.

Operator

At this time I’ll turn the conference back to Jack Brucker for any additional remarks.

Jack E. Brucker

Thank you all again for joining us today and for your continued interest and investment in Rural/Metro Corporation. As a note I want to remind you that we have announced our Annual Meeting of Stockholders for December 16, 2008 and we look forward to seeing many of you there at our meeting. We also look forward to updating you on our progress during our second quarter earnings call in February. Thank you all very much.

Operator

That concludes today’s conference. We thank you for your participation.

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