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Air Methods Corp. (NASDAQ:AIRM)

Q4 2008 Earnings Call

March 10, 2009; 4:15 pm ET

Executives

Aaron Todd - Chief Executive Officer

Trent Carman - Chief Financial Officer

Christine Clark - Investor Relations

Analysts

Greg Williams - Sidoti & Co

Ryan Daniels - William Blair

Bob Labick - CJS Securities

Brett Hendrickson - Nokomis Capital

Rick Tortell - Columbia Management

Phil Johnson - Ares management

Bonnie Cybulko - Longbow Research

Kevin Campbell - Avondale Partners

Operator

Good afternoon. My name is Shinal and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Methods fourth quarter and fiscal year 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session (Operator instructions). That you

Ms. Clark, you may begin your conference.

Christine Clark

Good afternoon. I’d like to thank you for joining us today to review Air Methods fourth quarter and fiscal year 2008 financial results. As the Operator indicated, my name is Christine Clark and I’m with Air Methods Corporation. Also on the today representing the company are Mr. Aaron Todd, Chief Executive Officer and Mr. Trent Carman, Chief Financial Officer.

At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. This conference call includes certain forward-looking statements, which are subject to various risks and uncertainties.

Actual results could differ materially from those currently anticipated due to a number of factors including, but not limited to the size, structure and growth of the company’s air medical services and products markets, the collection rates for patient transports, the continuation and/or renewal of air medical service contracts, the acquisition of profitable product division contracts and other flight service operations, the successful expansion of the community-based operations and other matters set forth in the company’s public filings.

With that having been said, I would like to turn the call over to Mr. Aaron Todd, Chief Executive Officer of Air Methods Corporation.

Aaron Todd

Thank you Christine, and thank you everyone for joining us today. Trent will offer added details and insights into our fourth quarter financial results in a moment, including the financial details for each of segments. I want to focus my comments on the outlook for 2009 and the key assumptions driving our 2009 budgeted expectations.

Flight volumes during the first two months of 2009 are inline with our beginning of the year expectations. We anticipated high single-digit percentage declines in flight volumes to the second quarter and then stable volumes thereafter. This assumption presumes some moderation in weather during the first half of the year which we have indeed experienced thus far.

Although Same-Base Transports adjusted for weather would seem to indicate a greater reduction in demand during the first two months, we believe this is merely February arbitration. The prior year February reflected significant numbers of weather cancellation even though the overall flight volume was very healthy. We think this unusual prior year month is queuing [00:52-02] the comparative for the current year.

As evidence of this, January volume adjusted for weather reflected a 12% decline consistent with more recent month. While March to-date have been very strong and is currently reflecting growth in Same-Base Transports through the first nine days. As reported in the press release inclusive of the benefit of less severe weather Same-Base Transports were down 7% during the first two months of the quarter exactly inline with our beginning of the year expectation.

We have assumed that our price increases scheduled for 2009 will offset any deterioration in payer mix and collection percentages caused by increased unemployment and weaker economy. January collections and related improvement in net revenue for transport in January is very encouraging as we have not seen any deterioration at this point. I would caution however, that net revenue for transport rates can fluctuate materially from month-to-month. We have gotten off to very strong start however.

As you know 2008 results reflected maintenance expenses that were well above average expectations. We began to see moderation during the final months of 2008 and continue to see this improving trend line in the month of January. This line item is also subject to significant monthly variations, but again reflects a nice start for the year.

In quantifying the potential benefit to pretax earnings of the changes in fuel expense based on January 2009 costs for transport, we estimating net savings of over $8 million in 2009 as compared with 2008 volume adjusted. Our recently completed consolidation of programs in Atlanta is also expected to significantly improve earnings based on consolidated volumes net of earn out payments.

Due to the higher uncertainties the current economic conditions placed on our operations we do not believe it is in our shareholders best interest to get specific guidance on our projected results for 2009. Although, applying our key budget assumptions reflects a return to growth in earnings and cash flow in 2009. These assumptions are subject to large than unusual fluctuation in these current economic environments.

Speaking to other recent events, the NTSB hearings on air medical safety concluded in early February. I was very proud of our managers, which participated both as witnesses and panel members. While we are not aware of any additional regulatory changes contemplated that would have a material adverse effect in our operations, continued regulatory debates and possible congressional hearings could result in further changes to the regulatory landscape.

We continue to enjoy strong loyalties from our hospital customer base and have been successful in extending or renewing our contracts. We began a contractual relationship with our new customer in Alaska, in January with two new basis of operation.

Due to the slowdown in used helicopter sales, Air Methods will defer or cancel existing orders for aircraft deliveries scheduled after 2009 with a few exceptions. This is accomplished with little or no penalty associated with existing deposits. Air Methods does have the ability to part out certain models to liquidate the remaining book value of excess aircraft and thereby reduce spare parts purchasing activity direct from the manufacturer.

During the fourth quarter, Air Methods entered into a fuel hedge which protects our community-based operations from a greater than 20% price increase on approximately 70% of our projected fuel used for 2009. The company retains 100% participation in decreases in the price of fuel as it paid a premium for the full price increased projection.

In summary, our first quarter has gotten off to a very favorable start and we remain optimistic for improved results in 2009 as compared with the prior year. I’ll now turn the call over to Trent, for specific details on the fourth quarter results.

Trent Carman

Thank you, Aaron. As we reported in today’s press release revenue, net income and earnings per share for the fourth quarter were $118.9 million, $3.7 million and $0.30 per share respectively. Revenue in segment net income generated by our CBS division during the quarter were $67.8 million and $6.3 million respectively. This compares with $70.5 million and $7 million respectively for the fourth quarter of 2007.

During 2008, we close a net of 6 CBS basis. Revenue in segment net income generated by our HBS division during the quarter were $47.1 million and $1.5 million respectively. This compares to $48.5 million and $3.6 million respectively for the fourth quarter of 2007. During 2008 we closed a net of 12 HBS basis.

External revenue and segment net income generated by our products division during quarter were $4 million and $1.1 million respectively. This compares to a $3.6 million and $200,000 respectively for the fourth quarter of 2007.

Maintenance expense was $19.7 million and $21.2 million during the fourth quarters of 2008 and 2007 respectively. Aircraft rental expense was $12.4 million and $10.4 million during these same quarters. Fuel expense within our CBS division was $3.1 million and $3.7 million during these same quarters.

General and administrative expenses increased $900,000 during the fourth quarter as compared to the third quarter of 2008, partly due to the additional employer health insurance costs previously disclosed. Earnings before interest, income taxes, depreciation and amortization or EBITDA were $9.4 million and $13.4 million for the fourth quarters of 2008 and 2007, respectively.

On a trailing 12 month basis, our EBITDA is $50 million. You can reconcile EBITDA by adding interest expense, depreciation and amortization and subtracting gain on disposition of assets to income before income tax expense.

Our net current asset position, which is current assets plus current liabilities, was $116 million and our stockholders equity was $160.5 million at December 31, 2008. The company’s net debt position, which is the total of all indebtedness less cash, was $88.3 million and $90 million at December 31, 2008 and 2007 respectively.

During the fourth quarter of 2008, the company purchased its Denver headquarters for approximately $7.4 million, approximately $6 million of this amount was financed by a 10 year mortgage. At December 31, 2008 the company had approximately $29 million of excess availability under its revolving line of credit. Additionally, during 2008 the weighted average interest expense on our variable debt decreased by over 300 basis points compared to 2007.

The company generated $52 million and $27.1 million of cash from operating activities for the years ended December 31, 2008 and 2007 respectively. During 2008, the company received income tax refunds or offset income taxes payable by $20.7 million.

During 2008, we expended $61 million on the purchase of property and equipment, $10 million of this amount was used to purchase aircraft out from underneath leases for subsequent sale, $24 million was used to purchase aircraft and other assets which were subsequently refinanced and $13 million was used to purchase aircrafts out from underneath leases.

During 2008, we purchased approximately 228,000 shares of our stock on the open market for $4.9 million. As we have previously disclosed our Products Division is under contract for the production of 48 HH-60L units, 366 MEV units in various commercial interiors. Deliveries of these contracts are expected to be completed by the third quarter of 2010. The current backlog of revenue for all of these contracts is currently $30.2 million.

The company currently operates 307 aircrafts in its fleet, of these 178 are within our HBS division and 129 are within our CBS division. Company currently operates 101 community basis and 146 hospital basis. With that I’ll turn the call over to Aaron for his closing remarks.

Aaron Todd

We’ll open it up to questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Campbell - Avondale Partners

Kevin Campbell - Avondale Partners

Good afternoon. Thanks for taking my question. I wanted to know, if Aaron you could give a little more comment or color on the NTSB meetings and I know there were some specific recommendations. You guys are already compliant with and so I wanted to get a sense for (a) what was recommended and (b) if they were in fact put in place.

Aaron Todd

No, I believe it was late January operating specification, modifications by the FAA were put into place and essentially some of the key attributes of those changes included increasing the weather minimum from current minimum levels and Air Methods was already operating at the higher standards. So, that will have an impact on others who were operating at the minimum levels, but Air Methods was already compliant with that.

It also includes added procedures for free flight risk assessment associated with identification of hazardous on the route of flight and ensuring proper altitudes and certainly that’s been a part of our procedures for quite sometime.

In addition there are generally just speaking to the NTSB recommendation, as a whole there is a strong encouragement and pressure being brought to bare to bring regulatory requirements for enhanced technologies around night vision goggles, terrain avoidance warning systems etc. and as you know Air Methods is already been retrofitting it fleet for going on all about two and half years now. So, those have been some of the key attributes and we believe that we are already on the path that has being prescribed for enhancing margin safety.

Kevin Campbell - Avondale Partners

Where do you guys stand as it relates to retrofitting your helicopters for the TAWS or nigh vision goggles? What percentage of are you --?

Aaron Todd

We estimate that will be about 55% completed by the end of this year on the NVG. TAWS will lag a little bit behind that because of just the way that process works. I think we have nearly full retrofit within the next two, two and half years and of course some of that is just making sure that we are not going to retrofit an aircraft that is going to be replaced in the next six months with a brand new equipment.

So some of it is just how it works into the schedule, but it used to be that the bottleneck was getting the goggles, now it’s more just getting everybody trained.

Kevin Campbell - Avondale Partners

Okay, looking at that the deals which you guys announced with OmniFlight, maybe you could talk a little bit more about that, the opportunities that represents? What the real savings will be? Is it going to be upside on revenues or is more just cost savings etc --?

Aaron Todd

I think there is two ways you can look at it. One is that, if you look at the entire market pre consolidation there were 11 operating basis, they are now six. You can estimate very roughly that each base of operation has fixed cost associated with it in the $1.5 million range. So, if you reduce five basis you are looking $7.5 million to $8 million of potential savings that certainly would be share pursuant to the earn out provisions set forth in the agreement.

The other way to look at it is on the revenue basis and if you applied a basic average transport per base that we are seeing system wide throughout the country since we don’t want to disclose specifically, our flight volumes in a specific market for competitive reasons you can kind of back into it on the revenue side and kind of come up with similar numbers.

Kevin Campbell - Avondale Partners

Alright and if you look what you will be recognizing on your income statements, say for revenues and I know this agreement is structurally a little bit differently. Will you guys be recognizing all of the revenues associated with that and then there will be some sort of earn out payment paid to OmniFlight in a different line item or other revenues going to be split up at the front end and so you only be recognizing some portion of those revenues.

Aaron Todd

Earn out payments will be netted against revenue and so we’ll be showing 100% of the revenue less the portion of the revenue sharing that would be allocable to the seller. In addition, you’ll see a little bit of an increase in the operating expense; one, because we went from five bases to six; and two because we have contracted with them to operate three basis on or behalf for the aviation services at market rate. So, that’s kind of where it’s going to reside.

Kevin Campbell – Avondale Partners

Okay and then last question, I’ll jump back in the queue. Can you talk a little bit more; perhaps give some addition detail on the fuel hedge that you’d discussed?

Aaron Todd

You bet. Basically back in November when the price of oil was around $50 a barrel, close to where it is right now. We paid $360,000 to hedge roughly 70% of our monthly usage within our community-based operations through the end of 2009 and it protects us against any movement’s grater that 20%. It also hedges the crack spread, but just to keep it simple here that would give us protection should the price of oil go above $60 a barrel or the price of Jet A to include the crack spread goes above, I think it’s $2.35 on a wholesale basis.

So basically, that largely neutralizes the potential for another spike in oil prices in 2009, relative to the impact that it could have on our operating results, but again if the price per barrel goes down below $50 a barrel, which it has more recently we participate a 100% in net reduction.

Operator

Your next question comes from Greg Williams - Sidoti & Co.

Greg Williams - Sidoti & Co.

Thanks for taking my call. Couple of quick questions, Trent you spoke pretty fast with some of those line items per cost. I was wondering if you mentioned what the flight centers cost was for the quarter?

Trent Carman

Was your question, the flight center cost for the quarter?

Greg Williams - Sidoti & Co.

Yes.

Trent Carman

Just one second. $52 million for this year and $52 last year.

Greg Williams - Sidoti & Co.

Then just the tax rate, you had a little bit tax rates this quarters. I was just wondering if you can estimate on that and is 41% of good rate for you going forward?

Trent Carman

We had a benefit that we talked about in the press release for this quarter. We also had one last quarter if you recall and thus the rate that you would look at now it depends on the permanent items that you deduct for book or tax that you don’t get for the other book or tax, but right now what we’re looking at for 2009 is a rate that will vary between 40% and 41%. So, if you split the difference 40.5% would probably be a reasonable rate going forward.

Aaron Todd

So, you will have some reduction over historical rates as a result of the change in the state allocation.

Greg Williams - Sidoti & Co.

In the script, I think you just mentioned the aircraft prices in last few years have a shortage, is that shortage is sort of alleviating is that what you are alluding there?

Aaron Todd

There is no question as shortage is alleviating. There is greater availability of aircraft. I think in ’09 for certain miles you’d still have a hard time procuring a new aircraft, but even some of those backlog positions have started to breakdown and there is greater availability of aircraft and certainly greater availability of used aircraft as well. There is a fairly swift change in market conditions over the last six months, as you might have imagined.

Operator

(Operator Instructions)Your next question comes from Kevin Campbell - Avondale Partners.

Kevin Campbell - Avondale Partners

Can you guys talk a little bit about your thoughts about the use of cash going forward? Actually could you cover again the amount of stock that you repurchased in the quarter as well?

Trent Carman

Kevin, on the amount of stock we bought back was 228,000 shares, balance for the whole year.

Aaron Todd

That for the second half, I think it was --

Trent Carman

I got the number for the first half it was, we brought 100,000 shares at $2.9 million. So, it was a 128 for $2 million for the second.

Kevin Campbell - Avondale Partners

Okay and what are your thoughts about use of cash at this point?

Aaron Todd

Well, some of the use of cash that we may choose is that if we want to ensure that we can continue the modernization of the fleet, we may choose to use some of the access cash to buyout the older aircraft and be able then to part those out.

Certainly you get an offset there overtime with what you would have to purchase by way of routable parts from the manufacturer, but certainly some of the excess cash flow will be similar to this year buying out leased aircraft in order to give us greater flexibility and how we manage the fleet.

I think that as we start to see a return to EBITDA growth that ensures more long term stability. I think then, that gives us a little bit more confidence whether we continue with the buyback activity or not and certainly debt retirement has always been a part of our free cash flow usage when we typically devoted about half of our free cash flow to debt retirement.

Kevin Campbell - Avondale Partners

Can you talk a little bit about your debt and as it relates to what’s your covenants are, and where you stand relative to those?

Trent Carman

There are two financial covenants on our bank credit facility. Kevin, as you know we have a $100 million bank facility with the consortium of banks. There is a EBITDAR coverage ratio of four and there is fixed charge coverage ratio of 1.1. We have never been in violation of those covenants and we’re not at 12/31. We have to continue to monitor them going forward obviously every quarter.

Aaron Todd

As part of the audit, we also go through and review our forecast for the New Year to determine whether we would be anticipating a violation of those covenants and we went through that process and do not anticipate a violation of covenants. That doesn’t mean there couldn’t be, but based upon our forecasted expectations for 2009, we believe that we will be okay.

So, keep in mind that there is also incredible amount of assets underlying the leverage of Air Methods and we always have the option going back to more of an asset based lending vehicle that would give us equal or more capacity than we enjoy right now relative to our leverage without the specific covenants since they would asset driven.

Kevin Campbell - Avondale Partners

Okay, a couple other quick questions, patient mix. Could you talk about that, have you seen any shift there yet given that the falloff in the economy and I guess as a follow-up it sounds as it based on your preliminary comments that you don’t expect that will be a problem regardless because you will be able to offset that with rate increases?

Trent Carman

Well, what we have Kevin. I recently went through and looked at 2008’s payer mix versus, I do it on a trailing 12, I do it on a quarterly basis etc. We don’t have anything for 2009 as of yet obviously, but when I looked at the 930 trailing 12, when I looked at the 12/31 trailing 12 and I looked at them on a quarterly basis they are virtually identically than what we’ve been seeing historically. So, no there is not been a deterioration there.

Aaron Todd

I think the point is, is that our budget assumption Kevin has been that, we do not assume an improvement in that reimbursement per transport of what we are experiencing in the second half of 2009 from the increases that occurred in January and another one that would at least be expected in July, and basically in our budgeting process we said ‘let’s assume that whatever we realized from those price increases will be added cushion to offset the potential for deterioration and payer mix as unemployment rises,’ whether that will be a perfect match or not remains to be seen.

Through January we’ve already seen as we mention in our press release, that we significantly exceeded that average for the second half for the year and have yet to, if you will needed that cushion, but of course its dangerous to extrapolate one month.

Kevin Campbell - Avondale Partners

Have you guys heard anything as it relates to Medicare? Obviously there’s a lot of concern out there about providers having their rates cut. I know you’re a relatively small piece of the pie as it relates to what Medicare pays, so maybe they’re not really, wouldn’t pay attention to it to any great degree, but any commentary out of Washington right now about rates from Medicare?

Aaron Todd

I’m not aware of anything specifically in that regard. I think that the stimulus package certainly will help the Medicaid situation at the state level from cutting rates. We’re not expecting any windfall from that, but certainly that will benefit the ability to see existing levels of reimbursement on the Medicaid front. We’re not aware of anything on the Medicare front relative to proposed changes.

Kevin Campbell - Avondale Partners

Then last question, it looks like your receivables came down sequentially; was there any key driver there?

Trent Carman

Well, day’s sales have been fairly stable throughout the year. I think with revenue being pretty stable absent to CJ effect, I think you wouldn’t expect that to increase that much.

Kevin Campbell - Avondale Partners

But it seems actually came down from 3Q ’08 to 4Q ’08, so it looks like you had better collection in receivables.

Trent Carman

That could be if you’re looking at it from a quarterly point of view. I was just looking at it year-over-year and the days sales are pretty consistent.

Operator

Your next question comes from Ryan Daniels - William Blair.

Ryan Daniels - William Blair

Just a couple of quick follow-ups for you; Aaron you said in your prepared comments and I missed what this was related to, that there will be a savings of $8 million, is that related to the Atlanta basis with OmniFlight or was that something else?

Aaron Todd

That was related to the reduction in fuel expense, fuel prices. What I did is, I took our cost per patient transport within our two year based operations where we have responsibility for fuel expenses and then I apply that to our projected volumes and then compare that to the rate that we experienced for 2008.

The projected improvement over the 12 months if prices stay where they were in January would be roughly an $8 million number, excluding any variation in flight volume. So, that’s a reduced expense expectation associated with current pricing in the fuel markets.

Ryan Daniels - William Blair

Okay, perfect and then I notice a couple of other kind of one-time type items last year related to CJ systems and some of the base closures in swapping out the twin-engines for single-engines. Can you give us a feel for what that might drive in savings in addition to that $8 million there from the fuel?

Aaron Todd

That price to mention that, I know we’ve been discussing a quite a bit, but I think it’s worth mentioning certainly again at the beginning of this year. We did about eight locations, where it was in our community-based operations in 2008 we swapped from twins to singles; and then we estimate, we’re going to be roughly in that range again for 2009.

So if you get a half year benefit in ’09 and a half year benefit carryover from ‘08, you’re getting really a benefit of roughly eight locations, where you’re now operating at more efficient.

Single-engine levels versus twin, we estimate that can be anywhere from $500,000 to $700,000 of reduced operating cost or ownership cost at each of those basis. So, let’s be conservative and say that there maybe $4 million of improved pretax benefit from that.

Certainly yields, you can still have an extension of time for carrying cost of the aircraft that have been displaced and you have to bring a little bit backend for that, but those tend to not be overly burdensome because we typically have lower cost basis in those aircraft, but so your probably in the $3 million to $4 million range.

Ryan Daniels - William Blair

Okay and there was a couple of million in costs right, $2 million to $3 million from CJ to that…?

Aaron Todd

Yes, in the first half of 2008, we had significant retraining cost associated with retraining the pilots within CJ systems. That showed up in higher maintenance expense and fuel expense because of the training flights that were taking place on the aircraft, as well as overtime pay for the retraining of those pilots.

When we computed all of that, we estimated that during the first six months of2008, I think fairly going distributive, but maybe a little bit more weighted towards the second quarter, we had aggregate of approximately $2 million to $2.5 million of incremental cost.

Ryan Daniels - William Blair

This is the last question I’ll have on this, because I know you don’t want to get overly specific with guidance, but as you talk about that $2 million, should we be aggregate in these $2 million for CJ, $8 million for fuel, $3 million to $4 million on the twins to single or does the lower fuel for example, also assume don’t have the CJ training again in taking that down? So am I double counting that if you will?

Aaron Todd

No, fuel is directly a price issue, not a volume issue, so no; I don’t think you’re double dipping. You can absolutely add those together including Atlanta, and the thing you got to remember is you need to be subtracting roughly a 7% to 8% decline expectation in flight volumes through June as a reduction factor, because we’re not assuming that the economy is going to rebound to historical levels anytime soon.

Now March is encouraging, but through February we’re right at 7%, which is exactly where we thought it would be. March is looking more favorable than that certainly and indeed in February we were only down 2%. So, we’re encouraged, but for right now I think it would be very prudent to take the 7% and subtract it off.

The other thing is that for assuming no increase in net revenue per transport, we do have some inflation on the business. We probably have about 1.5% to 2.5% increase in comp. You’re going to have some inflation on the spare parts and those things that also have to be factored into the overall evaluation, but as I’ve indicated, although we’re not giving specific guidance, when you’ve kind of throw it all in the blender, we do see a return to growth in cash flow and earnings in 2009, but of course it’s based on those key assumptions that we have clearly discussed.

Ryan Daniels – William Blair

Then a couple of more quick ones, non-financial related. First, can you just talk about the fleet management program you guys signed in February? Maybe just discussing the impieties of that and the benefits and how many of your helicopters you’ll recover?

Trent Carman

That was with, well Bell Canada released press release.

Aaron Todd

Yes, it’s not a major factor. There is nothing that’s materially changed. It may have been a product with an engine manufacturer program, but there’s nothing major that’s changed in our fleet maintenance program.

Ryan Daniels – William Blair

Then two more and I’ll hop-off, the first one is other opportunities like Atlanta; are you seeing more pressure on the space given what happened last year, given the continuation in volume declines. Are you see those types of highly accretive opportunities opening up over the next few months?

Aaron Todd

I do. I’d probably discourage you if I told you how long we’d work on the Atlanta deal, but these thinks don’t happen overnight; sometimes they do.

I think rationalizing saturated markets I think is something the community’s embrace. It brings long term stability and viability to those markets and it takes some of the other challenges associated with highly competitive programs, but a way that can affect other things, service or safety and those kinds of factor.

So we do think that there is opportunities for that and will continue to be active and open to those possibilities as we know that there are several markets within the U.S. that have similar profiles to Atlanta.

Ryan Daniels - William Blair

The last one, just any update on the collective bargaining agreement. I know that I think it will be end of April this year, kind of what your thoughts or status update on that?

Aaron Todd

Well, we are definitely active in our negotiations. Certainly, we are seeking certain modification to the existing agreement as we have seen the unintended consequences of certain provisions and certainly our operating in an environment that is not the same as the environment when the original agreement was negotiated.

That expires on April 30; I don’t think that there is any reason to believe that we’re going to have a new agreement in place by April 30, but we are meeting on regular basis and right now there appears to be good dialogue taking place, but I think we’re ways away from getting to a new agreement at this point.

Ryan Daniels - William Blair

What would that do May 1, if you didn’t have an agreement?

Aaron Todd

What happens is everything continues as is. The pilots would still be entitled to a very modest step increase on their anniversary day, which is roughly on average about 1.5% and the existing benefits would stay the same.

On January 1, 2010, when they received a scale adjustment associated with the contract in ‘09 that would not occur in ‘10 absent a new contract. So, it really starts to have an impact on the pilots to the extent that agreement is not in place by the end of the year.

Operator

Your next question comes from Bob Labick - CJS Securities

Bob Labick - CJS Securities

Obviously, a lot of my questions have been asked already. I wanted to ask if you could elaborate a little on the drivers of volume. We’ve seen miles driven or at least a proxy for its fuel supplied flatting out in February. Aside from miles driven, you talk about the other key drivers for volumes and what you can do proactively drive volumes from your basis?

Trent Carman

Yes, it’s a great question. There are various things that I think have influence. I think one of the things to look at is ER admissions throughout the country. We know that relative to trauma related admissions into ER centers that those are down system-wide.

We believe that is certainly related to the partially miles driven, but there’s just a general reduction in activity levels in the American population. Not as many going are skiing, not as many are getting involved in highly active activities if you will. I think that’s one thing to look at, certainly miles driven is relevant.

I think that certainly the just the safety record of the industry and the scrutiny that it can bring on appropriate use can in certain specific market sometimes have an impact. It’s been extremely difficult for us to isolate it to any single driver, other than just we know that the volume decrease on the community-based side is very consistent with the decrease in volume we’re seeing within our hospital based operations, which would indicate that our pricing policies are not a major factor in the volumes fluctuations that we’re seeing. Otherwise, we would expect to see some variation between the two.

So, I know that’s a vague response, but frankly it’s difficult to make it more specific than that. I think that we’re mildly encouraged that we’re seeing some improvements in February and March to-date, but again just too short of a time to declare our return to normalcy at this point.

Bob Labick - CJS Securities

Okay, great and then as it relates to the environment as well and hospital outsourcing, are you seeing an increase in hospitals wanting to outsource their program or can you also talk about what you expect your base count in general for HBS and CBS at year-end?

Aaron Todd

We’re seeing some customers that are following the same patterns. They’re looking at maybe going from twins to singles. We’re seeing some that are talking about outsourcing, others that are looking for risk sharing on base expansions. Occasionally we’re looking at some that are looking to consolidate locations and so kind of they’re following kind of the same patent we are and that’s great.

One of the positive things that I think we’re seeing is that because Air Methods is strong financially and its reputation has remained very strong through some of these more recent channels, is that we continue to be able to get these contract renewed at fair pricing and have not seen an impact yet of any excess aircraft having an impact on our ability to get fair pricing negotiated on these renewals and so we’re encourage by that.

We were worried about a couple of contracts and our ability to get them renewed more recently and yet they’ve recently notified a severe desired to extend with us. So, we’re cautiously optimistic there.

I think the other thing that continues to be another relevant factor on the volume and revenue question is that, it is possible that some of the decline in flight lines that we’ve experienced since last June, are disproportional to those patients that would have been in a payer class that would have had lower reimbursement such as Medicaid or uninsured, as a possible explanation as to why our reimbursement has remained very healthy, despite to decline in flight volumes.

I mean we’re still collecting $23 million to $25 million a month from our community-based operations, despite the fact that our volumes are down 7% to 10%. So, we’re cautiously optimistic that perhaps some of the flights that are no longer taking place would have been low reimbursement flights to being with.

Operator

Your next question comes from Brett Hendrickson - Nokomis Capital

Brett Hendrickson - Nokomis Capital

I just want to follow-up on the aircraft availability question. I think it cuts per flight to the one in your opinion and I’d previously kind of taken some comfort back when the availability is real, real constrain, that your competitors won’t be able to get craft and you would be due to your relationship and the fact that you’re in the backlog queue etc., but net-net is this a positive for you now; its more availability because you can negotiate better pricing on leases and so forth or what do you think?

Aaron Todd

I would say that whatever advantage was there is not an advantage anymore and no, I don’t think it’s a positive thing, because it can effect in part the long term valuation of the used helicopter fleet. Now typically you don’t see a huge variation in valuation of aircraft, but it can’t slowdown the pace in which you can dispose the aircraft, but no, I would not see that as net positive to Air Methods.

Brett Hendrickson - Nokomis Capital

Then I just want to hear; a couple of questions to ago you said something, so the collective bargaining agreement is coming up and you said the pilots would be in a bad position, is it because they only get the 1.5% step up, you said something about scale?

Aaron Todd

No, because the original agreement had essentially, I think it had four step increases within it or three steps, with the last one being January of 2009. If there is not a new agreement then there would not be that annual step increase in January 2010. So, that becomes the point of negotiation, but they’re still getting anniversary date increases for years of service.

So, its not that they’re in bad position; it’s just that the agreement lapsing on April 30, through the end of the year does not have a material effect as to what the pilots would be paid and what their benefits would be, if an agreement’s not in place on April 30.

Brett Hendrickson - Nokomis Capital

So, what you’re saying is they don’t really have an incentive to sign at the bottom line until say, as long as December?

Aaron Todd

No, I mean that’s possible, but I think everybody has to negotiate in good faith, because we can seek arbitration to resolve the matter and if we’re released from negotiations under the provisions of the Railway Labor Act, then we can put into place our last offer, which could make certain adjustments to the current contracts.

Operator

Your next question comes from Rick Tortell - Columbia Management.

Rick Tortell - Columbia Management

I actually just have a few follow-ups and then maybe one that hasn’t been mentioned yet. Somebody asked about the opportunity for Atlanta, like combinations and you guys said there are other potential ones out there and you took a long time to negotiate on the flight one. Is there anything, are there active dialogues going on with those kinds of opportunities or is it just more of a wish list?

Aaron Todd

Well, I’m not sure I’d get specific which you want that. I think there’s always active discussions’ talking place on the opportunities for acquisitions for consolidation; sometimes those are with our customers where in an outsourcing model sometimes those are with a competitor, but I can just tell you that we would expect to remain active in our efforts to look for those kinds of opportunities

Rick Tortell - Columbia Management

Just from the standpoint, I would think the motivation might be a little higher today. If you guys aren’t unique in your volume falloff and others are experiencing the same thing and they’re operating at pick a number, 25% of capacity, it can’t be much fun for them and maybe that kind of pushes you. There is more catalyst to push it together, would you say that that’s true.

Aaron Todd

I would. I think that in an environment where you’re not seeing growth and same-base transports as we have seen historically and you come off of several years of high growth that certainly, I think that would be true not just of our industry, but of many industries where there is potentially more capacity and ability to increase utilization on existing capacity.

Rick Tortell - Columbia Management

Are there other operations out there that maybe of similar size to OmniFlight that, for whatever reason might have a materially lower cost per base than you guys operate? I don’t know what you’re seeing when you look around. Again another reason, if they are higher cost than you guys, I would think that would encourage them to seek a partner, but are you seeing others out there that don’t have as high a cost of operation as you guys do.

Aaron Todd

I think it’s specific to each market. I mean if we are operating twin-engines in a given market and our competitors are operating single-engines, it’s very likely that they have a lower cost, but it also possible they have lower flight volume as well, because sometimes twin-engines drive higher flight volume because of their unique capabilities.

I don’t think Air Methods has ever described itself as the low cost company out there. I think we feel that we have good value because of the economies we enjoy and what we’re able to accomplish in the level of investment and safety that we’re able to do because of that economies of scale, but Air Methods has really tried to position itself as the low cost provider in any market it operates.

Rick Tortell - Columbia Management

Okay, just that you guys probably have this data, so it will be helpful to here. When you quote the community-based decline, how is that comparing to the hospital-based declines; are they similar or same base kind of…?

Aaron Todd

They are similar. In a given month or quarter they can flip flop, but I think if you look at it overall they’re very similar in that kind of high single-digit. We can only show net-net, we can’t show it ex weather factors, because we don’t have that kind of data, because that’s kept within the comp centers of our customers, but overall we track that in the high single-digit; it’s similar to what’s they have seen as well.

Rick Tortell - Columbia Management

Okay and then one of the earlier questioners sort of accrued a list of year-over-year benefits in different line items; one thing that wasn’t broken out was maintenance, which was very high last year. So, what are your thoughts on that line?

Aaron Todd

Well, we’re expecting moderation in there, but I don’t think we have attempted to quantify. I could absolutely do that, but not comfortable in just giving a quotation or whatever budget of maintenance expenses for 2009, but it is certainly more moderate on a per flight hour basis.

Rick Tortell - Columbia Management

Okay and then my last one is that the Maryland state outsourcing opportunity; is there any progress there, what’s the status there?

Aaron Todd

Well, we have been having active discussions with the politicians and others who are involved in making that decision. We are encouraged that there may be an opportunity there. I would say that trying to give that a probability would be difficult to do and so I would describe it as active.

It’s my understanding that if there is no decision that has made towards some degree of privatization of that service in that state, before the end of the second quarter, then it’s likely nothing will likely happen in 2009.

Rick Tortell - Columbia Management

Remind me, what the motivations were for them? Do they have a big CapEx that they’re looking at?

Aaron Todd

They’re operating some older model aircraft and they’re looking to basically modernize that fleet which is, I’m remembering that to be somewhere in the couple of $100 million range or $150 million and it is not a low cost service.

It’s paid for, through licensing fees, capitation by tax payers and I think that combined with the scrutiny that was brought to whereas the result of their accident in September, I think has combined to create a reevaluation of other protocols for using the service appropriate, what kind of aircraft do they need and should it continue to be a burden on the tax payers of Maryland.

Rick Tortell - Columbia Management

I would think you guys are in a unique position given your size and your access to aircraft that you currently you have on option right and…

Aaron Todd

We believe, certainly with appropriate commercial aircraft solutions that we could certainly be very helpful to resolving some of those issues, but of course we have to be invited to do so before anything is going to happen.

Operator

Your next question comes from Jeff Moore - Ares management

Phil Johnson - Ares management

Hi, this is Phil Johnson sitting in for Jeff Moore. We wanted to get your view on, what is happening from a competitive perspective in your environment relative to your regional competitors in term of base openings, are you guy seeing less or more?

Aaron Todd

We saw I think the high water markets back in 2005. I think the number of net new basis in 2008 would have been very minimal. So, clearly there has been a slowdown across the board in base expansions. Now that doesn’t mean that new base openings aren’t recurring. A lot of times there are repositioning of aircraft of one market to another, but I thing net new is at a very slow pace.

Certainly Air Methods growth opportunities are not contingent upon having an expanding U.S. air medical fleet, with hospital-based programs choosing to outsource combined with improving utilization within existing markets we believe is the greater opportunity to grow top line and bottom line, but I would characterize the rate of expansion as greatly slowed from what it was two, three years ago.

Operator

Your next questions comes from Bonnie Cybulko - Longbow Research

Bonnie Cybulko - Longbow Research

I wanted to ask you a little bit about the cost applications of your retrofitting of the aircraft. You mentioned that you expect about 55% completion by the end of 2009. Can you give us an idea of where that might impact you?

Aaron Todd

A lot of these aircrafts are new aircrafts that have been retrofitted for NVG use, so that CapEx if you will is already embedded in the aircraft purchase. The goggles in sales I think were those that would be included this year. I think you’re looking about 500,000 that is yet to be procured for the rest of the year, so it’s not a huge amount.

Certainly there is also a training cost associated with that, but a lot of that can be incorporated into the other recurring trend that has to take place.

Bonnie Cybulko - Longbow Research

Okay, so you don’t perceive that in terms of the training, having the situation you had last year with additional overtime and so forth associated with the training for these.

Aaron Todd

Certainly not to that degree; I mean keep in mind that 40% of our pilots were being retrained within a matter of a few months in order to consolidate them under our operating certificate. There’s a much less training associated with an NVG program than bringing a pilot onto a new certificate and that would mitigate it. So as far as the numbers and the amount of training that’s required they’re not comparable.

Bonnie Cybulko - Longbow Research

Okay and then looking ahead into 2010, do you expect the completion of the majority of your fleet by that point or is it too soon to get a read on how long it may take for your nearing 100% equation?

Aaron Todd

We have a specific schedule and we should be over half by the end of this year and you will continue to see that probably in the 20%, 25% annual rate of conversion in the following years.

Bonnie Cybulko - Longbow Research

Okay, thank you and one other question then on the cost items, your liability insurance for 2009, I don’t know if that had been discussed at this point, but given and just NTSB hearings and just annual inflationary increases and so forth, anything unusual going on there that we should be thinking about?

Aaron Todd

Well, keep in mind that roughly 55% to 60% of our fleet operates within our hospital based operations and any changes in insurance pricing is a pass through to the customer. Of the 40% to 45% that operates within the community-based model, we’ve retained that risk.

We did see a larger increase within the composite rate for insurance that we paid for the hospital base sides versus the community-base side, because the accidents that occurred in 2008 were within the hospital based operation and that’s where the liability risk was greatest.

We still see that there is good capacity for rotor wing placement within the marketplace. Certainly a lot can change between now and the end of the second quarter, but believe there is still good appetite for the risk. I think we’ll see some modest increases, but probably not to the extent or slightly less than what we saw last July 1.

Bonnie Cybulko - Longbow Research

Okay, so modest increases, but nothing out of the ordinary than likely?

Aaron Todd

Well keep in mind we’ve had four years with double-digit declines followed by one year of net double-digit increases. I guess I don’t want to alert the underwriters as to what I may have included in my budget or become a self-fulfilling prophecy. We believe that there would likely be some modest or slight increases in the July 1 renewal.

Bonnie Cybulko - Longbow Research

Okay great thank you, and just one final question on the hospital-based operations. Given what’s happening in the current economy and the way the hospital budgets especially CapEx and so forth are being pinched right now.

Do you see that impacting as you go through the year your contract renewals with more of your hospital cliental in terms of gaining the pricing that you need to be covering these kinds of increases and insurance and so forth? Are you seeing any pushback right now from your hospital clientele in terms of pressure that they’re feeling because the admissions are down and that sort of thing?

Aaron Todd

Well our hospital customers are always price sensitive, but they also acknowledge that quality and a record of safe operations is also something that you don’t want to compromise on. Air Methods has never positioned itself again as a low cost provider service within its hospital-based operations.

I think the tight capital markets I think to some extent favor the service which we provide. Since we can take away that requirement for them to utilize capital procure aircraft to operate their programs, we were able to provides that to them as part of our service and I think that adds to the inherent value of these relationships, but obviously there is always price sensitivity, but I wouldn’t characterize, it as being any higher, any lower than what it was a year ago.

Bonnie Cybulko - Longbow Research

Okay, so then in terms of looking at 2009, you don’t anticipate seeing any unusual decline say in your revenue per base, on a hospital-based system given what’s going on the economy?

Aaron Todd

Only to the extent that their volume is down similar to ours during the first half of the year as we would anticipate.

Operator

Your next question comes from Kevin Campbell - Avondale Partners

Kevin Campbell - Avondale Partners

One quick question on the aircraft rental; if I heard correctly, that was $12.4 million in a quarter, is that right?

Aaron Todd

Yes

Kevin Campbell - Avondale Partners

Okay and that’s only about $100,000 increase from the prior quarter. The first, second and third quarter was growing $500,000 to $600,000 sequentially. So maybe, what should we expect looking out into 2009, particularly given that you maybe delaying some of the new aircraft deliveries and that might have some impact on that as well.

Trent Carman

Kevin, it won’t be growing, I don’t believe. We bought out a number of aircrafts as I mentioned during my script, during 2008, so those were no longer leased aircrafts. We do have some new ones coming on. Obviously you’ll have a full-year effect of those, but I think it’s going to be plus or minus just the little bit, but I think the 204s have a pretty good proxy going forward.

Operator

There are no further questions at this time.

Aaron Todd

Very good. Well, again appreciate your participation. Trent and I are always available to respond to your questions. Call us any time and we’re happy to try to give you added understanding of how our things are coming out. The 10-K should be available if not sometime tomorrow at the latest on Thursday and you will be able to get added details on the fourth quarter and I appreciate again your participation.

Operator

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

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Source: Air Methods Corp. Q4 2008 Earnings Call Transcript
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