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Air Methods Corporation (NASDAQ:AIRM)

Q2 2013 Earnings Call

August 8, 2013 4:15 PM ET

Executives

Christine Clarke – IR

Aaron Todd – CEO

Trent Carman – CFO

Analysts

Bob Labick – CJS Securities

Kevin Campbell – Avondale Partners

Matt Weight – Feltl and Company

Dana Hambly – Stephens

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Air Methods Reports Second Quarter Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to. Ms. Christine Clarke. Please go ahead.

Christine Clarke

Good afternoon. And thank you for joining us today to review Air Methods’ second quarter 2013 financial results. My name is Christine Clarke and I’m with Air Methods Corporation. Also on the call 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 United Rotorcraft Division, the collection rates for patient transports, the continuation, expansion, conversion and/or renewal of Air Medical Services contracts, the acquisition of profitable United Rotorcraft Division contracts and other flight service operations, the final result of preliminary July 2013 flight volume, anticipated earnings results and anticipated weather and maintenance trends, weather conditions across the U.S., development and changes in laws and regulations, including, without limitation, the impact of the patients, protection and affordable care act, increase regulation of the health care and aviation industry through legislative action and revised, rules and standards, 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

Thanks, Christine, and thanks to all of you for joining us today. In addition to what Trent will highlight in a moment concerning our quarterly and year-to-date 2013 results, I wanted to draw attention to a few notable observations.

First, the percentage of insured patients transported has stabilized and seeing slight improvement on sequential basis in recent months, upon forward count verification December 2012 through February 2013 months we’re almost identical at approximately 31.5% of transports each month. March 2013 reflected an improvement of 33% and April 2013 which is mostly verified at this point reflects slightly higher than 33%. This would reflect only a 1% decrease over the prior year month.

Net revenue per transport in June 2013 exceeded $12,000 well above the quarterly average and certainly reflecting the full benefit of our price adjustments during the middle of the quarter.

Cash provided by operating activities during the first six months of 2013 was $50.7 million. $64.7 million was used by our previously leased aircraft with $25.5 million of this amount refinanced here new notes and leases.

We have reduced our exposure to variable interest rates by $37 million during the first half of 2013 leaving $320 million of floating interest rate debt as of June 30, 2013. We are often out to how severe the weather has been compared to previous quarters. The National Oceanic and Atmospheric Administration or NOAA, the climatic data sent for the lower 48 states reflects the weather second quarter since 1995 so certainly for the second quarter at least the higher weather cancellations would not be considered something to be expected every two, three years, but getting back over 100 plus years it’s about in every 18 year kind of occurrence.

Also, I wanted to offer some perspective on our maintenance expense. Maintenance expenses run hard during the quarter end and first half of 2013, a meaningful percentage of this increase was attributed to major inspections on the EC135 twin-engine fleet that caused more than anticipated at around $300,000 for each inspection. To give you a perspective on the level of this increased activity in the first six months of the prior year we had 14 such inspections through the first half of this year we’ve experienced 24, but the good news is for the rest of 2013 presently we only have scheduled two more and that that compared with 19 in the second half of 2012. So, hopefully that will have a meaningful impact on moderating the maintenance expense fourth quarter. The second quarter maintenance expense of 2012 was also the latest quarter we had so we had a tougher comp there as well.

Since our last conference call the following key events have occurred. We have opened three additional greenfield locations reflecting a total of 8 since the beginning of 2013, we anticipate four additional starts during the third quarter and two additional during the fourth quarter of 2013.

Hospital conversions to the community-based model have included four basis since the beginning of the year with one additional base conversion anticipated during the third quarter. Preferably an additional 8 additional hospital customers are actively considering outsourcing alternatives for their Air Medical programs.

Year-to-date we have closed five underperforming community-based locations with two additional plan for August. The hospital-based services contract with contracts with our Oregon and Tampa customers ended effective July 31, 2013 which included 16 basis of operation some of these locations will continue as independent community-based locations. We would anticipate minimal reduction in net income on the earnings anticipated as a result of these CBS locations creating an offset for the margins being received on those two contracts.

Our preferred provider relationship with Community Health continues to provide strength to our community-based transport volumes, during the second quarter of 2013 we completed 544 community-based transports for on their behalf. During the prior year quarter we completed only 223 CBS transports. Our whole liability insurance renewal effective July 1, reflected a slight decrease in rates for our Air Medical operations as well as a 23% decrease in our tourism operations.

While it is always difficult to predict quarterly results in our operations, we’re feeling optimistic to key growth drivers remain in place to include a continued buyers of hospitals that outsource their medical programs, a return to growth in net revenue for transport here in the second quarter with positively trending payer mix in the most recent month, a return to stable same-based transports after weather adjustment over the past two months and successful greenfield expansions as well as continuation in development of preferred provider and value-added service relationships with national healthcare service providers.

If we can finally give this operating in the Midwest and east would help greatly. And with that I will turn the call over to Trent.

Trent Carman

Thank you Aaron. I’ll start by providing some details on our operating expenses like I typically do. Flight center expenses for the second quarter of 2013 were $84.3 million, aircraft operating expenses were $40.5 million, cost of sales for United Rotorcraft were $4.4 million and Tourism operating expenses were $12.2 million. For the second quarter of 2012 the expenses were $78.6 million, $36.2 million, $5.9 million and zero, respectively.

Earnings before interest, income tax, depreciation, and amortization our BBITDA were $56.4 million and $77.2 million for the second quarters of 2013 and 2012, respectively. EBITDA for the most recent 12 months ended June 30, 2013 was $206 million. You can reconcile EBITDA by adding interest expense, depreciation and amortization, and adding or subtracting the gain on loss on disposition of assets to income before income tax expense.

On a three-month lag basis, as Aaron kind of alluded to before, the company’s payer mix for the three months ended March 31, 2013 was 32% insurance, 34% Medicare, 21% Medicaid and 13% uninsured. This compares to 33% insurance, 33% Medicare, 21% Medicaid and 13% uninsured for the three months ended December 31, 2012. For the 12 months ended March 31, 2013, the payer mix was 34% insurance, 32% Medicare, 21% Medicaid and 13% uninsured.

For the 12 months ended December 31, 2012, cash collections as a percentage of our gross charges was 76%, cash payments as a percentage of gross charge for Medicaid and Medicare were 9% and 20%, respectively.

The provision for uncompensated care our bad debt expense was 23% and 21% for the three months ended June 30, 2013 and 2012, respectively. The provision for contractual discounts which relates primarily to Medicare and Medicaid were 46% and 43% for the three months ended June 30, 2013 and 2012, respectively.

Year-to-date the company has entered into approximately 30 promissory notes for aircraft totaling $80 million. These promissory notes are typically 10 years in duration and have fixed interest rates throughout the term in our pre-payable with small prepayment penalties during the term. For the rest of 2013 we anticipate acquiring 7 new aircraft costing approximately $20 million most of these aircraft will be financed with new promissory notes in 2014.

The company currently intends to exercise early lease buyouts options on 15 aircraft during the remainder of 2013. The total cost of these buyouts will be approximately $37 million and we expect to finance approximately $27 million of the buyouts with new promissory notes.

At June 30, 2013 days sales outstanding calculated on an annualized three-month revenue basis were 99 days. This compares to 106 days at December 31 and 99 days at June 30, 2012. As we have previously discussed, we expected this days sales outstanding measurement to come down at the end of the quarter, due to the higher revenue generated during the second quarter as compared to the first quarter.

At June 30 the company operated approximately 400 aircraft in its Air Medical operations and 25 aircraft in its Tourism operations. The company operated 176 bases that generated patient revenue and 125 bases that generated Air Medical Services revenue.

With that, I’ll turn it over to Aaron for his closing remarks.

Aaron Todd

Thanks Trent. Certainly we are having the days sales come down that dramatically especially over the last 90 days from 128 days and 99 while the net revenue for transport increased is certainly a very positive trend and reflective of the continued strength that were driving from our price increases as in our collection efforts so, some reinsurance there for sure.

So anyway, with that, I will open it up to any questions we might have out there.

Question-and-Answer Session

Operator

(Operator Instructions) As our first question comes from the line of Bob Labick with CJS Securities.

Bob Labick – CJS Securities

Good afternoon.

Aaron Todd

Hi, Bob.

Trent Carman

Hi. Bob.

Bob Labick – CJS Securities

Hi. I just wanted to start with the days sales that you just ended there obviously a huge improvement particularly sequentially. Is there anything you’re doing differently there or how should, I had thought you had said in the last call may be getting down to the kind of 1:10 not the – not below 100 certainly?

Trent Carman

Like we’ve always said it always depends on what you’re using for your denominator measure, if on an annualized 90 day revenue basis you’re always going to have lower same DSOs in the kind of the, at the end of the second and third quarter than you might have at the end of the year or the end of our first quarter. If you look at on a day’s sales on a using an annualized year-to-date revenue number then we’re at like we’re slightly up from 1.09 at June 30, the year before to 1.15. So we’re within that range and certainly some of that revenue as we know was deflated because of some of the true-ups to the reserves that occurred in the first quarters that’s been previously discussed.

But certainly if you look at our cash flow from operations for the six months ended June 30, 2012, versus the cash flow from operations for the six months ended June 30, 2013, those numbers equal or in some cases exceed our net income plus depreciation and amortization which is our largest non-cash expense. So, I think the cash flows are tracking with the earnings of this company extremely well.

Bob Labick – CJS Securities

Okay. And then you would indicate a very strong that revenue for transport in the June month I guess it’s off a preliminary mix or how, what’s that?

Aaron Todd

Bob, keep in mind June when we originally set the reserve was based upon what March’s estimate was excuse me, what three months later so it would be March three months to June would have been yeah it would have been March. So as a result, when we originally set that reserve we set it that for 31.6% which was based upon what we knew which was the January actual, March actually came in at 32.8% so it trended stronger we still have now that will be trailing up April which was its reserve would have been set at that, at the 31.6% which was January’s actual as now April’s as we know that’s trailing up in July as actually coming in at over 33%.

So, there, we’re starting to, our reserves became very conservative based upon the weakness we experienced in the summer and now we’re seeing some strengths returned in those in that payer mix. So that’s part of the reason why you’re seeing higher net rev but also the price increases that we put into place in May and another that followed in June to bring more balance to our nationwide pricing those have all also contributed to that strength.

Bob Labick – CJS Securities

Okay good. It’s nice to see that the recovery in patient mix and it sounds like Q3 should then potentially have a good true up in there as well as oppose to the true down in…

Aaron Todd

Yeah as you know we thought that weather might have been causing that severe drop that 4% drop in percentage of patients that were insured. And, but we knew that when you’re looking at a 12 month period of time we estimate you’d lose about eight tenths of a percent of patients with private insurance because of those that are retiring and becoming entitled that in Medicare and these numbers are starting to bear that out that perhaps we are looking at a late winter seasonality factor. And we’re right now trending right where we thought we would about 1% below the year before.

Bob Labick – CJS Securities

Okay great. Last question I’ll jump back in queue just could you just give us a comment about that you talked a little bit about the CHS relationship obviously CHS I guess bought HMA may be had an opportunity to look at any overlap you might have or how that may impact you on a go forward basis?

Aaron Todd

What it’s obviously too early that they’re obviously both of those organizations are dealing with the primary factors associated with that business combination. But I can assure you that we already have enjoyed some very nice relationships with many of the HMA or affiliates we are beginning the discussions with the stake holders to determine how to serve this now combined organization well hopefully under the auspices of our preferred provider relationship with Community Health and well I can’t quantify what all that means I think at this point in time we would certainly consider this to be a very positive development.

Bob Labick – CJS Securities

Great thank you very much.

Operator

Our next question comes from the line of Ryan Daniels with William Blair.

Unidentified Company Speaker

Hi Ryan.

Unidentified Analyst

Hi this Nick in for Ryan. So I was wondering this May preferred that is big price increase and I was wondering what the general payer response was and if you’re seeing any negative reaction or collection issues there or is it still too early to tell?

Aaron Todd

This is kind of hard to explain because it can be a little bit confusing but in order to get a sense for whether – more recent price increases have created any kind of a push back factor. We looked at for a 90 day period ended on March 31, December 31, 2012 and September, 30, 2012 we looked at collections to-date for those periods through the most current date that’s when we did this measure and said what was the percentage that we collected on those closed accounts during that period of time. And compared it to the exact same points in time a year before and for the, for nine months ago the percentage actually went up six months ago the percentage actually went up and more recently it went down just slightly. So we’re not seeing anything that would indicate a push back on the participation in paying against a similar percentage to the historical rate.

Now whether or not and to what extent price any price increase effects utilization is extremely difficult to say. What I can tell you is this. Our hospital based customers that many of them charge much different pricing and some of them dramatically lower than we do they experience the exact same almost identical percentage decreases year-to-date and for the quarter ended June 30, 2013 almost identical decreases in their same based transport volume as we did which is an indication that pricing is not a primary factor do we believe in the weakness but that in deed whether which is specifically if we’re able to identify in the last 60 days it’s been the primary factor in the weaker volume.

Unidentified Analyst

Okay great. Thanks that’s really helpful color and then one thing we were wondering there has been a lot of noise in the ground ambulance space lately with all the rural metro issues. Do you think there are any opportunities to participate more actively in that market or is that something you consider investing in as well?

Aaron Todd

This company has always been pretty vocal in saying that vertical integration of ground and air could have very positive benefits as part of a longer term strategy. With the number one and number two ground ambulance companies having been privatized just two years ago it kind of made it a kind of a transition time where conversations couldn’t take place. As some of these investments start to get out and balance sheet start to get restructure by all means we’re always open to discussing possibility of becoming more integrated vertically and we’ll continue to pursue any opportunities like this that may come by.

Unidentified Analyst

Okay great. Thanks, I’ll jump back in the queue.

Operator

Our next question comes from the line of Kevin Campbell with Avondale Partners.

Kevin Campbell – Avondale Partners

Good afternoon wanted to ask just real quickly what your thoughts were on pricing. I know you pulled forward obviously the price increases for third quarter and fourth quarter to do all and May but do you have any plans may be to implement additional prices increases in the third or fourth quarter or is May going to be at fourth this year?

Aaron Todd

It’s a great question Kevin and I can’t definitively give you an answer here and at this point. When we’re seeing that the softness in volume appears to be weather driven then you always – you don’t necessarily want to do a supplemental increase for something that should be very temporary in nature. If for some reason we start seeing August and September and weather just kind of continuing to coming like a line and go out line then certain we would probably consider a kind of a beginning of the fourth quarter adjustment to kind of compensate for that.

On the other hand the bigger concern that perhaps the payer mix deterioration was going to be more permanent or perhaps deteriorate further we’re feeling much better about and so I don’t think we would feel the need to do a supplemental increase relative to payer mix trends at this point. So I guess a long way to say that is that if we don’t see kind of a nice return to kind of more normal results for the remainder of the for – for the third quarter then we might consider a supplemental increase just to offset some of those factors but not presently are we planning that.

Kevin Campbell – Avondale Partners

Great and you mentioned in your, in the press release the liability the hull and liability insurance retention expense and you just kind of call that out and what exactly is that and why did you call it out as may be being a little bit different?

Aaron Todd

Yeah it was kind of hard to explain in the press release so we just wanted to make sure it was highlighted. What happened is last year because of all the investments we’ve made in night vision goggles and the ability we believe it will over the long term to mitigate our exposure to control flight and the train accidents. We went back in and determined that we wanted to participate in the savings associated with a corridor retention. So basically the actual number was for claims between $10 market I and $12 million as the example in fact that’s pretty accurate that if plains went above that threshold for our entire fleet will hull and liability that we would retain that $2 million corridor.

In June we had a training hard landing everybody was fine but it damaged an aircraft and pushed the annual claims into that corridor retention and therefore we ended up having to expense that because of it being retention. So had to consider a deductible that doesn’t kick in until you hit that higher threshold.

Kevin Campbell – Avondale Partners

Okay so essentially before on your interest expense you didn’t really have a significant deductible and you…

Aaron Todd

Yeah I guess as we might say we shared the risk some of the risk this year and in this case it didn’t work out for us but we’re still big believers that the investments we made are going to have dramatic decreases on our historical loss history because a great percentage of the more major losses were associated with loss of situational awareness in climate weather or night blind conditions and now that we’re 100% NVG equipped our exposure to that is not zero but its greatly minimized and reduced.

Kevin Campbell – Avondale Partners

And Trent what were the maintenance and fuel expense for the second quarter?

Trent Carman

Do you want them without the…

Kevin Campbell – Avondale Partners

Including everything.

Trent Carman

You want Sundance in there or what…

Kevin Campbell – Avondale Partners

Sure.

Trent Carman

Hold on one second here, year-to-date for Air Medical it was $12.5 million and for the March quarter Kevin it was $5.9 million so that excludes Sundance there.

Kevin Campbell – Avondale Partners

Okay, and that’s maintenance rate?

Trent Carman

Yes.

Unidentified Company Speaker

That’s Fuel.

Trent Carman

That was just, that was fuel.

Kevin Campbell – Avondale Partners

Okay, I am sorry and what was maintenance for the quarter and was the 5.9 you said the March quarter so the…

Trent Carman

That was the March, yeah that was the March quarter.

Kevin Campbell – Avondale Partners

The June quarter…

Trent Carman

Extracting here well I add up a couple of number here for you Kevin.

Kevin Campbell – Avondale Partners

Okay.

Trent Carman

If there was something else go ahead and ask.

Kevin Campbell – Avondale Partners

Yes, okay. So you also, the losses in Tampa and Oregon may be you could touch on what sort of drive the hospitals that got with different vendors and then I also wanted to confirm Trent that’s the base numbers that you gave include the 176 and the 125 include those changes already or if we need to reduce that was even further?

Trent Carman

Yeah those numbers I gave are as of June 30th and we have not lost, we hadn’t lost the Portland at that point in time.

Aaron Todd

Those wouldn’t affect fuel because these are HBS contracts and fuel strike pass there is sort of the more of a maintenance adjustment. But on the bigger one which is the Oregon customer where we had 11…

Trent Carman

12.

Aaron Todd

Yeah 12 basis of operation this was they had made the decision a while ago to go to their own part 135 and gave us notice based on that and then it became apparent that they weren’t going to be able to get their 135 in time. And they were also purchasing a brand new fleet 119 Agusta single engine aircraft to operate as a – a standalone part 135 operation. We were – we didn’t know whether they were going to need an extension for the portion of it or all of this and so we always wait until we’re sure that the relationship is going to end before we publicly disclose that and indeed they what they ended up doing is for an interim basis they’ve gone with another vendor that has experience – a lot more experience operating Agusta 119s until and then about half of their fleet has arrived and I assume the other half will arrive shortly and then I assume that as soon they get their own FA certificate that they’ll become a standalone operation.

Within the Tampa market place we have two, we’ve always had two for many years hospital based customers and the competitiveness between the two customers have gotten pretty severe. And so what we always try to maintain a neutral switch or unlike approach to serving two customers we were kind of given the ultimatum by one to chose, one or the other and so that kind of forced our hand. And as I said although it combined represent 16 hospital basis the amount we are making on the all 16 was a fairly, I am not going to give the exact number but was not very significant to our overall profitability as an organization. And we believe that there are few locations where we will continue to provide services under an independent provider model that should hopefully closely offset what the lost earnings will be but with far few aircraft operation.

Kevin Campbell – Avondale Partners

As we think about going forward the number days we’ll take that 125 down by that 16 effective sometime in the market in the third quarter.

Trent Carman

It was, they were both effective on the same day July 31st with the last day of operations under the hospital contracts.

Aaron Todd

Kevin on your, the maintenance for the quarter was 27.9 and don’t recall it I said for fuel but its 6.6 those are the quarterly numbers there.

Kevin Campbell – Avondale Partners

And that’s for the Air Medical alone?

Trent Carman

Yes sir.

Kevin Campbell – Avondale Partners

Okay great. And so maintenance obviously has been volatile what do you expect maybe for the full year how should we think about that in the back half of the year, should we think it about coming down I guess is the question?

Aaron Todd

Yeah well one of the things is we were, as you know our maintenance was heavily weighted towards the second half of last year and I guess we’re hoping for the reverse this year. The budget variance for the year-to-date period and this is on a consolidated basis so this would include Sundance was is about $4.6 million to the high side and I would hope that we would recover that in the second half of the year based upon the outlook for the, I mean if you figure we’re going to do 22 fewer inspections on EC135s at 300,000 a pop that is my math is correct is over $6 million in reduced expenditure activity on that alone.

Kevin Campbell – Avondale Partners

Okay great. Thank you very much.

Operator

(Operator Instructions). Our next question comes from the line of Matt Weight with Feltl and Company.

Matt Weight – Feltl and Company

Good afternoon. Aaron can you just let me know what was the actual May price increase and then let market, I think I just heard you did you mention that you’ve added June increase as well?

Aaron Todd

Yeah what happened is we, in May we did, we did a 9% in the markets where we could an increase without giving notice or getting approval in the community. But it averaged out to be about 7% when you averaged it across all the basis. And then when we did our supplemental adjustment in June where we found that there were many of our basis that for whatever reason we’re more than a standard deviation below the mean. We brought those up to a – up to, not to the average but at least to a standard deviation from the average and that added another I think was 2% lead giving essentially a cumulative of 9% with 7% really triggering May 1st and another 2% on June 1st.

Matt Weight – Feltl and Company

Okay. And then for this quarter the net revenue per transport can you help me connect with that, when I looked at the Q1 – I know you have the negative that came back and that was in a little bit above 700 and then sequentially it still seems fairly a big step up was there a positive adjustment then?

Aaron Todd

No I mean, well I mean here is how it trended I mean we were at what we booked in April was just under 10,000 we were about mid like 10.5 in May and then just a little over 12 at June. And so some of that is clearly a function of an improving payer mix profile a double percentage points makes a huge difference and then the price increase. So I am not good at predicting this stuff obviously and I can’t a couple of percentage points move in payer mix and shift is one way or another but using the June number of 12,000 would be as good as estimate as any.

Matt Weight – Feltl and Company

And that June over 12,000 for June was that based on March’s 32.8%?

Aaron Todd

That was based on the 32.8% true up in March that’s correct. And as you know I didn’t use to do this but with some of the volatility I asked for a sneak preview on where the verifications were coming in for April which as you know was booked at the 31.6% rate and its coming at over 33% so it’s actually coming stronger than March.

Matt Weight – Feltl and Company

What percent of April…

Aaron Todd

April was 32.8%....

Right but I mean is that 95% verified….

Aaron Todd

It was booked at 31.6% and verified at 32.8% insured and April was booked at 31.6% and its coming in north of 33%.

Matt Weight – Feltl and Company

Okay. So now that you’ve had a little bit more time to comb some of the data here the job impairment it sounds like some of that that’s been coming back and kind of believe that was a weather function or still a 200 basis points below that, do you think you could get all the way back there? And are you how confident are you that it really was basically almost all weather?

Aaron Todd

Well 4% I mean remember just looking at the trued up month so this is after full verification. You were at for August and September you were at 36.4%, 35.4% and then 33.8% and then it just fell off the cliff 32.3%, 31.6%, 31.6%, 31.7% now you’ve got 33ish and above for a couple of months so I’m not ready to declare victory but the fact that there is nothing going in the broader economy that would suggest that there should be a material long-term deterioration here. So I’m content to say that my best estimate would be to take whatever the prior year percentage was at least through the third quarter as they verified, and subtract 1% from it to give consideration to the increase in Medicare recipients. And then, then it’s a question of we’re no better next winter if it’s, more moderate and we don’t see as big of a drop off then we’ll, know that weather was partially a factor if it does drop off then we may have a greater seasonality factor than we’ve experienced in the past.

Matt Weight – Feltl and Company

Okay. And do you think at all that the acquisition now of Omni being some of the state is amplifying that seasonality…

Aaron Todd

Yeah this is where the things that create confusion on a couple of footways. We, Air Methods always collected in the high 70s and in some cases as high as 80% after which insured accounts and then more recently we’ve been in the 73%, 75% the primary reason for that is when we acquired Omni, Omni’s collection percentage was 68% uninsured accounts and there were lot of reasons for that. But that’s what we’ve blended into our collection rate in over the years they blended which diluted our percentage down to 75% and then in winter months 73%.

But those, that percentage has come up since we’ve acquired them on the Omniflight and ours has stayed pretty stable. So a 75% blended rates seem to be pretty, a pretty stable number to baseline of relatively to the effect of Omni on seasonality I mean, obviously they had more basis in the southern states and they had a lower tier mix profile by about 5 percentage points, 5 percentage points to 6 percentage points. So, if you get weather severity in one of the country where you have a higher payer mix then you’re doing the other by certainly that can have an effect, but again if we were able to perfectly isolate that we would have certainly provided that in our first quarter call and we just couldn’t, we couldn’t give a perfect correlation.

Matt Weight – Feltl and Company

Okay. And then one other question as we often get from investors is, discussion around why ATM operates as in other network provider effectively with insurance company. So, Aaron I wondered if you just spend some time and just talk about the dynamics there and why you think that’s going to be sustainable over the longer-term as a business model?

Aaron Todd

Well I mean some of the, no one knows for sure until you do a price increase and see how you collect against it and, whether or not it affects demand for service you don’t know. We’re not the price leader in the industry there goes that in some parts of the country charge dramatically higher than we do. And I don’t know what their collecting offer that per say, but I least know that we’re not the frontiers then of as the price leader.

The other reason why these tend to be appropriately out of network is the flipside to that and that is we provide services 100% at the time irrespective of one’s ability to pay. So because time is always at the essence whether it’s our inter-facility transports or responding to the scene of an accident a helicopter would not be deployed at speed and high level of ambulatory healthcare services to be provided in transport were not critical then we wouldn’t be called in the first place. So in network and out of network negotiations with third-party payers are usually leveraged based upon access to patients. Well third-party payers can’t promise that they can steer their patient’s mind direction if I give them a deeper discount and nor can they take them firmly if I don’t. so as a result, we’re content to provide services to many who can’t pay for the service and offset the cost of that to base upon pricing adjustments.

The other things that’s been increasing the need for price increases is, utilization that the U.S. fleet has gone from probably 400 13, 15 years ago to over 900 today, well that gives incredibly good access to the American population it comes at the expense of a higher cost per transport because you might only be transporting 30 patients per month instead of 45 or 50 per month and when 82% of your cost structure is fixed, then that, then that has to be made up in your gross charge structure.

Matt Weight – Feltl and Company

Okay, that’s helpful. Last question and I’ll jump off. Can you just kind of walk us through little bit when you look at the priority of cash a year ago you acquired the Sundance tour operator which I guess there is some synergies there the value of the aircrafts et cetera but ATM has its higher fragmented at least at the top or highly consolidated at the top end there. so how are you thinking about M&A, is there other areas that you want to invest in just kind of walk us through that Mike.

Trent Carman

Well right now this is Trent. The primary uses of cash are to deploy it against the lease fleeting exercise the buyouts that’s a great return on the cash, we’ve got as I mentioned previously, 15 more aircraft with about $37 million now some of those will refinance with promissory notes others were going to use cash for, but right now that’s the primary use of cash and as Aaron mentioned previously, to the extent there is M&A opportunities we would pursue them but we wouldn’t have any comment on any of those right now.

Aaron Todd

Matt, we’ve always kind of felt like a good leverage range for a public-traded company in the sector is between 2 and 4 times we’re kind of in the middle of that range certainly there many of our competitors that are well above that at our upper range. So, it’s always a matter of perspective but with the free cash flow of the business absent a present M&A opportunity reducing our exposure to variable debt and a de-leveraging the lease fleet by which gives us immediate access to re-lever those assets if necessary for growth purposes is a really nice combination. In addition, by buying out the lease aircraft and with cash or with prom note financing we get to accelerate the depreciation which dramatically reduces our cash income tax liability in fact, year-to-date we’ve reduced the cash income tax payments as a percentage of pretax income by 5 percentage points so that’s no small amount just from the activities we’ve already been doing.

Relative to M&A, as we remain very interested in further expensive opportunities with the Tourism space, and we’ll continue to pursue opportunities in that area. We continue to be very open to looking at opportunities to acquire regional or local programs either hospital-based or otherwise within the Air Medical sector and that’s clearly where we are focusing our capital on the M&A front at this point.

Matt Weight – Feltl and Company

Thank you.

Aaron Todd

You bet.

Operator

Our next question comes from the line of Dana Hambly with Stephens.

Aaron Todd

Hi Dana.

Dana Hambly – Stephens

Yeah hi good afternoon and thanks. Aaron, just on the collection rate you’re talking a blended rate of 73% to 75% on the insured, is, but it with 76% for the six months lag is that right?

Aaron Todd

Well hold on here I’ll just give you an exact number.

Dana Hambly – Stephens

Yeah.

Aaron Todd

I just got to do it up here (inaudible). You’re right I mean rounding even a percentage can be relevant in these days so let me just give you what I just recently been given hold on here. What we had is and this is for again I’ve got to do this from August 1, 2011 to December 31, 2011 Rocky, or Air Methods excuse me was at 75%, Omni was at 65% we combined for 72%. For January 1, 2012 to December 31, 2012 Rocky was at excuse me, Omni, Air Methods excuse me, was at 78%, Omni was at 68% for a combined 76%. So I apologize I said 75% that was actually 76% which is the current run rate, I know Trent do you have anything up-to-date for now.

Trent Carman

I have the trailing 12 which was 76% as of December 31…

Aaron Todd

So 70, 76% is what would have been for the year ended December 31, 2012 and updated more recently.

Dana Hambly – Stephens

All right. So 76% as on right now here you’re fairly comfortable that that is a pretty good run rate going forward.

Aaron Todd

I’m comfortable that that number has not changed today.

Dana Hambly – Stephens

Okay.

Aaron Todd

And we update the percentage every month based upon a period of time that has ensured that all accounts have been closed out.

Dana Hambly – Stephens

Okay.

Trent Carman

Then on the numbers I disclosed it’s been 76% for the, this quarter and then the prior two quarters as well that’s been fairly consistent there.

Dana Hambly – Stephens

Okay, all right. And just on the last quarter you had talked about there is competition in a couple of different markets and you were doing some things closing basis, and how has that worked you feel like you’re more competitive in those markets now?

Aaron Todd

Yeah it’s the problem is it’s kind of hard to say for sure because the weather has made altogether a true baseline, but I wouldn’t characterize recency of competitive threats being material from what they were 90 days ago.

Dana Hambly – Stephens

Okay. That’s good. On the last quarter you talked about the weather cancellations seems to have driven all of the July decline and you talked about it, one of the things your current measure was the lack of coal volume. Do you still have a sense of that’s out there or provides always be out there or how you mitigate, can you mitigate that?

Aaron Todd

It’s hard to say but it’s interesting for example, in June our same-based transport were down 791 transports but weather cancellations were up 730 so almost been identical measure. Frankly sets mid-May about May 15 the decline in flight volumes has been corresponding directly to an increase in weather cancellations. I continue to maintain the premise that from February to April where you didn’t see, we saw almost no change in weather cancellations but significant decreases in call volume that that was an indirect effect of more severe weather and for May 15 through July 31, that seems to be playing out but the actual was causing it because the call volume has returned and the reason why weather might not have as much of an indirect impact in the summer months as you’re dealing with cloud cover precipitation but you’re dealing with those IC conditions was blizzards the things that keep people endorse and less active. And again that’s an anecdotal hypothesis but I think it’s a well-educated one and seems to be playing out here in the last 75 days.

Dana Hambly – Stephens

Okay is there anything you can do just you kind of from an education standpoint does, well will be afraid to call if the weather is like this.

Aaron Todd

Well I don’t think it’s an issue out there afraid to call I think the issue is that the need for the transport isn’t as great I mean, they if half of our 40%, 50% of our transports are common-driven and people are kind of locked up indoors you just have a lot less people getting in harm’s way and so that’s part of it now could we call a hospital and say I know we’re down but just that we can have good tracking numbers could you call us each time you would have had a, patient but we still can’t go to the weather. I just don’t think we want to make and make calls just for. If they made a call in the midst of the blizzard and we said we can’t respond to the blizzard and two hours later the blizzard still raging and they have another need for transport I don’t feel like it would be a good thing to ask them to call or just that we can track our, missed flights.

Dana Hambly – Stephens

Right, and that makes a lot of sense. And then just last one from me. Aaron you were going through the payer mix and then kind of the natural shift to Medicare and you may be think about of one per, or maybe it was 0.8% lower than it was the year before as that I’m sorry, where you take an issue we think about that longer-term or that is may be in the second half of the year.

Aaron Todd

Let me offer this to, one of the Big Four accounting firms issued a report PWC that we had a copy shared within hope them not violating any of the copyright attachments but I’m giving you credit for this mainly because I wouldn’t want to but here is what they came up with just on all of them they’ve got, they had that within the Obamacare you kind of have the five categories and for Medicaid there are 36 million Americans on Medicaid and they estimated about $11 million increase in Medicaid over two years $8 million more in 2014, and $3 million in 2015. and then on employer-sponsored insurance they said there is a $158 million presently that are under employer-sponsored insurance and they showed no change in 2014, $2 million fewer in 2015 and $4 million fewer in 2016, but then for the exchanges which as far as we can tell for emergency services will behave very much like regular insurance.

Dana Hambly – Stephens

Okay.

Aaron Todd

Estimate an increase of, that obviously there was zero in 2013, we estimate $7 million more in 2014, $6 million additional above that in 2015, $9 million additional above that in 2016 and $2 million additional in 2017 and flat thereafter for a total of $24 million additional that would be covered under exchanges over four years. For Medicare which was your question, there are $52 million under Medicare right now and they estimate that’s going to be pretty linear I’d kind of peaks it after a few years but that readily increased by $18 million over 10 years. And then the uninsured which is $55 million they are decreasing by $23 million over three years.

So, that would tell you that while the Medicare growth is going to be there fairly consistently for quite a while you’re going to have some offset with the uninsured are going to be moving into the exchanges and the Medicaid being expanded will create some more than trade offset to that. So, anyway I ran the math on that and it’s pretty much in line with kind of the, if all this came to fruition kind of that $50 million peak when it’s fully implemented kind of benefits the Air Methods’ EBITDA but again, that’s these are all very broad estimates nobody knows what kind of how quickly they’re going to implement whether this is going to work or not, but some of the estimates out there kind of in that range and this would kind of be supportive of that if it came to fruition.

Dana Hambly – Stephens

Okay, we’ll stay tuned on that then. Thanks.

Aaron Todd

You bet.

Operator

And presenters, there are no additional questions at this time. I turn the call back over to you.

Aaron Todd

Very good, well thank you very much and for the others who would like to contact Trent or I directly we’re actually out of town at just wrapping our board meeting so if some of you need to get a hold of me call me on my cell phone I know most of you have it otherwise I will be in the office first thing tomorrow morning to answer any questions you might have if you need to call us. Take care. Thanks.

Operator

Ladies and gentlemen, that does conclude today’s call. You may now disconnect.

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