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Envision Healthcare Holding’s (NYSE:EVHC)

Q3 2013 Earnings Conference Call

November 13, 2013 17:00 ET

Executives

Craig Wilson - SVP & General Counsel

Bill Sanger - CEO

Randy Owen - CFO

Analysts

Brian Zimmerman - Goldman Sachs

Kevin Ellich - Piper Jaffray

A.J. Rice - UBS

Josh Raskin - Barclays

Andrew Schenker - Morgan Stanley

Joanna Kornacka - America Merrill Lynch

Darren Lehrich - Deutsche Bank

Ryan Daniels - William Blair

Kevin Campbell - Avondale Partners

Frank Morgan - RBC Capital Markets

Operator

Welcome to the Envision Healthcare Holdings Third Quarter Earnings Call. (Operator Instructions). Today’s conference is being recorded if you have any objections you may disconnect at this time. Now I will turn the meeting over to Craig Wilson, Senior Vice President and General Counsel. You may begin.

Craig Wilson

Thank you operator. I would like to welcome everyone to Envision Healthcare’s quarterly results conference call and introduce our presenters Bill Sanger, CEO and Randy Owen, Chief Financial Officer. Before we begin I would like to read our Safe Harbor Statement. Certain statements and information herein may be deemed to be forward-looking statements within the meaning of within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, and all statements other than statements of historical facts that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Any forward-looking statements herein are made as of the date of this conference call and Envision Healthcare Holdings undertakes no duty to update or revise such statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in Envision Healthcare Holdings filings with the SEC from time to time. Including in the section entitled "Risk Factors" in the Envision Healthcare Holdings Registration Statement on Form S-1 and in it's periodic filings.

As we discussed our performance we also be referring to certain non-GAAP measures such as adjusted EPS, adjusted EBITDA and adjusted free cash flow which are not considered measures of financial performance under generally accepted accounting principles. We direct you to the reconciliations included in our press release which is also available on our website unless otherwise noted all comparisons referred to the third quarter ended September 30, 2012. I will now turn the call over to our CEO Bill Sanger.

Bill Sanger

Thank you Craig and good afternoon everyone. Q3 was the first reporting quarter for Envision Healthcare since we reentered the public market. I’m pleased to report that the company produced outstanding results. Revenue increased 16.5% and adjusted EBITDA improved by 17.6% when compared to the same quarter last year.

Our growth was highlighted by EmCare which had a 24.5% increase in revenue driven by 16.4% organic growth of which 13.1% was from net new contracts. This record revenue growth resulted in 19.3% increase in adjusted EBITDA. On a year-to-date basis net organic contract within EmCare are projected to drive approximately $260 million in new annualized revenues. This includes a record number of new contract starts in the third quarter a majority of which were integrated to services.

Approximately 35% of contracts started since Q3 of last year were for additional services at existing facility relationships. As important our contract retention rate in the quarter was 98%. We believe these outstanding results at EmCare are driven by our unique value proposition in our integrated multiple service offerings. We also believe our integrated service strategy combined with our shared customer governance model has resulted in industry leading metric improvements, cost controls and improved patient outcomes.

Notwithstanding all of our growth in our integrated service offerings, as of the end of the third quarter only 20% of our facility relationships had multiple service lines. This provides us with unique pipeline and sufficient [ph] cross selling opportunities for the future.

At AMR we’ve seen an improvement in 911 contract win rates in the same store revenue increases resulting in net revenue growth of 4.8%. We’re seeing the benefits of our emphasis on clinical excellence under the leadership of our AMR, Chief Medical Officer Dr. Ed Racht. We have established best of free field practices which have resulted in industry leading 911 patient survival rates.

We believe that the combination of our clinical excellence and our financial stability is the basis for our recent 911 contract wins. These include Shelby County, Tennessee, DeKalb County, Georgia and Tulsa, Oklahoma City, Oklahoma with the combined annualized revenue impact of approximately $75 million. On the expense side quarter-over-quarter we have seen a 90 basis point improvement in operating margins at AMR. This is the result of our platform for sustainable growth for PSG initiative and we started early last year which has improved our deployment and staffing utilization.

We expect additional margin improvements over the next few years as we fully implement these initiatives. These improvements coupled with our revenue growth drove a 14% increase of EBITDA over the same quarter last year. As mentioned during the recent IPO roadshow our new service evolution health further extends our continuous care strategy. Some of you may recall that we began this service as an expansion of the EmCare Hospitalist program to meet the needs of the post-acute care patients. This service is aimed at caring for high acuity patients prior to and post discharge from acute care facilities. Over the last several months Evolution Health has gained significant traction with health plans and hospital systems.

We’re currently managing approximately 10,000 patients in three states and have effectively reduced the cost of care for these patients while demonstrating improved outcomes and also improved patient experience. We expect to significantly expand our geographic presence and patient population over the next year. Finally I like to provide an update on our improved balance sheet and our view of healthcare reform. As a result of our recent (indiscernible) we have paid off approximately $500 million of debt and raised additional cash. With our net leverage at 3.8 times combined with our liquidity of almost $900 million, we believe we’re well positioned to capitalize on our robust acquisition pipeline as well as other options to further grow the business and improve shareholder value.

Moving into Accountable Care Act, while we believe the initial roll out continuous to have challenges, we do anticipate that we will be a beneficiary from the reform. While it's too early to know that timing and the full benefits should be realized we do anticipate additional volumes primarily at EmCare as those with new coverage are expected to increase emergency utilization due to the shortage of primary care physicians.

We also anticipate an increase in reimbursement for encounter of both EmCare and AMR for the uninsured patients they may now secure Medicaid or usage based insurance coverage. I would like to now turn the call over to Randy, our CFO. Randy?

Randy Owen

Thank you Bill. As highlighted in our earnings release that we just posted, our net revenue for the third quarter was 955.9 million, a 16.5% increase driven by 24.5% revenue growth at EmCare and 4.8% revenue growth at AMR. Adjusted EBITDA for the quarter was 121.7 million an increase of 17.6% compared to Q3, 2012. We reported a net loss for the quarter of 7.7 million compared to net income of 15.2 million in 2012 which was attributable primarily to the impact of one time IPO related cost. These cost included a $20 million termination payment of the consulting agreement with Clayton Dubilier & Rice and 29.5 million in cost related to the redemption of our Senior PIK Toggle Notes.

Redemption cost included 12.4 million of a cash premium to call the bonds and 17.1 million in non-cash expense to write-off unamortized loan fees. GAAP diluted EPS in the quarter was a loss of $0.05 which included the impact of IPO related cost. Excluding the after tax impact of the two items mentioned above our adjusted EPS was $0.13. Beginning in Q4, 2013 in addition to GAAP EPS we will also report EPS adjusted for tax effective amortization expense and other non-recurring items.

In Q3, 2013 our EPS adjusted for tax affected IPO related cost and amortization expense was $0.20 a share. EmCare net revenue was 605.1 million in the quarter, an increase of a 119.2 million or 24.5%. Acquisition revenue growth was 8.1% primarily related to the expansion of our post-acute services. Organic revenue increased 80 million or 16.4% over the prior year, 64 million or 13.1% of the increase came from net new contracts started since October 1 of last year.

This is an increase from the 10.5% net new contract growth we had in the first six months of 2013 due to an acceleration of new contract starts in the quarter. Revenue increased 3.8% at same store contracts from an increase in new revenue for weighted patient encounter of 1.9% and from an increase in weighted patient encounters of 1.9% including a 1.3% volume growth in our same store emergency department contracts. We have recorded a year-to-date net adjusted EBITDA benefit for Medicaid Parity of approximately 8 million including 3 minimum in Q3 at EmCare. We anticipate full year net adjusted EBITDA impact of Parity in 2013 to approximately 10 million to 12 million after netting it up physician compensation and other related offsets.

We started collecting Parity payments from 19 states to-date; however we have not collected from some of our larger states including Texas and California that have announced that payments including retroactive payments for ’13 will begin next year. We’re still scoring the full impact of Medicaid Parity for 2014 and anticipate an increased benefit next year due to our continued growth and the full year impact of states that did not make retroactive payments in ’13.

We will provide further information on the expected net EBITDA benefit in ’14 when we release our 2014 guidance. EmCare adjusted EBITDA increased 19.3% to 82 million with an EBITDA margin of 13.6% versus 14.1% last year. The slight decline in margin was primarily due to additional startup compensation cost driven by the number of recent contract starts and recruiting challenges that at a small number of selected contracts. Startup cost typically include physician contract buyout provisions, sign-on bonuses and temporary staffing cost.

Insurance expense included the decrease of 0.1 million for favorable prior year development this quarter compared to a decrease of 1 million in Q3, 2012.

AMR net revenue was 350.8 million an increase of 4.8%. Revenue from existing market increased 9 million or 2.8%. In existing markets our weighted volume decreased by 0.8% primarily due to the softness in the IFT markets. Revenue per transport increased 3.6% in existing markets due to rate increases and a higher 911 transport mix.

Revenue per transport from net new contracts increased by 2.3% primarily from the impact of a recent managed transportation acquisition offset by decreases in FEMA deployment revenue for Hurricane Isaac of approximately 6 million in Q3, 2012.

As a reminder Q4, of 2012 included approximately 37 million of net revenue and associated EBITDA for our Hurricane Sandy FEMA deployment. So our Q4, 2013 compared to our Q4, 2012 AMR net revenue and EBITDA will be affected by that deployment. AMR adjusted EBITDA for the third quarter was 39.6 million compared to 34.7 last year for an increase of 14.2%.

EBITDA margins increased 90 basis points to 11.3% in the quarter and is due primarily to a reduction in expenses as a percent of net revenue related to the impact of PSG initiative that Bill noted. Insurance expense includes an increase of 1.7 million for unfavorable prior year development compared to an increase of 0.1 million in Q3, 2012.

Cash flow provided by operating activities was 51.7 million in the quarter excluding the onetime IPO related operating cash outflow of 20 million compared to a 106.1 million last year. Change is primarily due to an increase in net income excluding IPO related cost offset by an income tax refund of 43 million received in third quarter last year and an increase in accounts receivable during 2013.

Accounts receivable increased 71.5 million in the quarter compared to an increase of 25.5 million in the prior year. While AMR’s DSO remained unchanged in the quarter and has decreased this year, EmCare’s DSO as we noted in the press release increased six days primarily as a result of two factors. First as we discussed in our IPO roadshow provider enrollments were previously delayed by CMS due to a requested change in our enrollment process. While our process have been, improvements years ago, CMS requested a modification to this process. In June both we and CMS agreed to the process changes and we completed virtually all of their requested modifications to the enrollments that had been on-hold and by late September CMS released a significant portion of those enrollments with an expected cash impact of approximately $25 million.

We expect collect a majority of these receivables in the fourth quarter and collected approximately 7 million in October. Second we have had a significant number of recontract starts. New contracts typically experienced an increase in accounts receivable and DSO for 6 to 9 months before we returned to a normalized collection path.

I would like to point out that while we expected a reduction in DSO in the fourth quarter of ’13 and in 2014 we anticipate DSO to be higher than historical levels due to our working capital investment associated with a higher level of organic starts. Net investing in financing cash flows are highlighted in the press release. Adjusted free cash flow was 35.4 million in third quarter compared to 77.7 million last year. The difference is attributable primarily to the aforementioned changes in accounts receivable at EmCare and an income tax refund receipt in third quarter of ’12.

With the reduction in leverage and increased liquidity we anticipate using a substantial portion of our liquidity for our acquisitions. In addition we’re evaluating capital structure options that may include additional debt reductions. Finally we expect full year adjusted EBITDA to be in the range of 457 million to 462 million of 2013, 2014 guidance will be given when we release our fourth quarter results. Bill?

Bill Sanger

Thank you Randy and operator we now would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes to us from Brian Zimmerman of Goldman Sachs. Mr. Zimmerman your line is open.

Brian Zimmerman - Goldman Sachs

Could you give us some comments on the types of opportunities you’re seeing on the AMR segment with the major competitors seeing some struggles there? Have you seen a pickup in these opportunities?

Bill Sanger

As I mentioned Brian, by the way good afternoon we won several 911s, three of which previously were held by Rural/Metro. We do know that San Diego which is a relatively large 911 is also going out to bid this year. I do believe there will be opportunities, I really cannot quantify them at this point in time as it relates to the challenges Rural/Metro has. We do also believe that more cities will be evaluating alternatives as they continue to struggle with balance in their budgets and looking at alternatives to outsourcing from the, referred to as a third party to a private provider.

Brian Zimmerman - Goldman Sachs

Okay and then it seemed like your same contract volumes actually got better sequentially, can you make some comments on what you’re seeing in terms of emergency room department volumes?

Randy Owen

I think when we talked before and even on the road show with concerns about volumes in the first half of the year and we had a very slight negative in Q2. We always felt like there were some seasonal changes and impacts to that. So we had seen stability in volumes we believe obviously a number of our facilities are in the Southern part of the U.S. for which I think we have seen more stable volumes where I know for us and others there have been some pressure in volumes in the Northern part of the country.

Brian Zimmerman - Goldman Sachs

Okay and then in your prepared remarks you mentioned that it's a bit tough to certainly [ph] the impact of healthcare reform but with all this coming out of the news around enrollments and on the exchanges, have any of your views changed towards what you’re expecting to see from a benefit standpoint going forward?

Bill Sanger

No we continue to quantify those Brian. You know clearly our challenges in terms of the roll outs of the exchanges, I do believe that you know whether it's a society or the government, we will work those issues through and that we will see the benefits in the near future but somewhat delay.

Operator

Our next question comes from Kevin Ellich of Piper Jaffray. Mr. Ellich your line is open.

Kevin Ellich - Piper Jaffray

First of all could you may be talk about your capital deployment? Randy gave some comments about you know may be looking at additional debt pay downs I guess. How aggressive do you think you guys could be in 2014 and then what are you looking at and seeing on the M&A front?

Bill Sanger

Yeah had couple of things so one look, obviously we’re evaluating a few options you know we know in the near term we can pull back up to 35% of our bonds so that’s clearly something that we’re evaluating here. We can also obviously pay down term debt if we choose, it may also be opportunities to look at repricing some of our debt given a much better you know improved capital structure and leverage profile. So I expect some combination here when you look at cash not only the liquidity we could have now but obviously the free cash flow that we expect continue to generate. So again as I said I think the majority of our cash will be used for growth opportunities, there is a very strong pipeline you know of opportunities but I do expect us to kind of conclude on other sort of debt options here in the next few months before we get into next year.

Kevin Ellich - Piper Jaffray

And then going back to your Parity comments Randy also, I think you said 10 million to 12 million is what you expect for the year. Was that in kind of in-line with what you were expecting when Parity was first laid out and I guess what percentage went to the physicians?

Randy Owen

Well there is not, I don’t have an overall percentage Kevin. Obviously they go through whatever plans you know plans we have. Traditionally those have been anywhere from sort of 20% to 30% depending on the contract and where it is and the volumes et cetera, the Medicaid mix of those contracts for example. So it's a smaller percentage. It is a little better than we thought so when you look at that 10 million to 12 million I think we thought you know that’s after you take out some of those cost. So I think initially we were thinking 8 to 10 was sort of the number we had initially sort of calculated so we’re seeing some improvement and actually we probably expect more improvement in ’14 as we again we have had a lot of growth recently and as we identify which of those physicians in that growth is eligible for that Parity and growth in the business and again as I mentioned not having the retro-payments. We expect a bigger increase which we will discuss next quarter.

Kevin Ellich - Piper Jaffray

And then just one last one for Bill. Looking at your overall contracting environment, you’ve had some nice net new wins and gave some good detail in your prepared remarks. Just wondering you know are lot of these opportunities really being driven by the crowd [ph] selling and I guess how was that trended over time and what should we think about or how should we expect that to unfold in 2014?

Bill Sanger

If you look at approximately 20% of our facilities today have multiple service lines and I think the sort of value proposition is that the integrated model really follows patient not just episodically but throughout the care in the hospital setting. Under the leadership of Todd Zimmerman, President of EmCare. We have really refine that strategy, we believe that as we go forward those opportunities is going to continue not only in the facilities that have limited multiple services line but as we sell we’re finding more and more we’re not selling single contracts, we’re selling multiple contracts. I do think there has been a sea change in the industry as it relates you know the selling contracts.

Operator

Our next question comes for us from A.J. Rice of UBS.

A.J. Rice - UBS

Maybe just first of all ask for a little more color on the Evolution Health and maybe even the nature of an update on the nature of discussions you’re having with the insurers and the providers about working with you and I know also there were some discussion about acquisition opportunities maybe down the road, any update in things you’re looking at there?

Operator

One moment please while we resolve some technical difficulties.

A.J. Rice - UBS

I was just asking, I don’t know if you heard the question about Evolution Health and just if there is any update maybe a little more drill down on the discussions you’re having with payers and providers about using this service, where is that sort of taking you as well as any discussion about related acquisitions? I know there is some hope in overtime you might see some transactions that enhance capability there.

Bill Sanger

I will start off with to remind everyone in Evolution Health our client, our customers, our health plans and hospital and hospital systems. For hospitals and hospital systems our emphasis on shifting and managing the readmission process. As an example we have been able to reduce generally speaking we’ve been able to reduce readmission rates for an average Medicare readmission rate is about 27% in this country, ours are down between 7% and 9%. As it relates to health plans our activity is really with some of the larger health plans and really managing the highest acuity patients that comprises the majority of the spend.

If you look at the types of patients we manage you know at this point in time they are generally multi-core morbidity patients have spent anywhere between a 150,000 - 200,000 of healthcare resources over the last year. Our numbers are less than half of that as we manage those patients. We will be seeing more development as we get more active with signing contracts in different areas of the country. We’re care for patients in three states today. We’re in active discussions with the major health plans as well as in chain discussions with major health systems to manage their readmission process. So I’m very bullish about the growth opportunities for Evolution Health and I think you will hear a combination of not only new (indiscernible) startups but also some acquisitions in the future.

A.J. Rice - UBS

And maybe I throw in one more question just I know you’ve the joint venture with HCA and there was some discussion that overtime that might broaden out. Can you give us an update on how that’s progressing at this point?

Bill Sanger

Well our joint venture with HCA is really a shared governance model that I have referred to in my prepared remarks. I believe that the venture is achieving it's objectives and that is to improve overall patient care at lower cost. I would think that if you would ask questions of our partners at HCA as it relates to our relationship I think they would also reflect to the fact that we have achieved those objectives.

A.J. Rice - UBS

Okay but in terms of the facility served at this point, is there any update on how?

Bill Sanger

We continue to roll out throughout the system and I don’t have an exact number for you now but it certainly has increased overtime.

Operator

Our next question comes from Josh Raskin of Barclays.

Josh Raskin - Barclays

I was going to say hopefully there is no emergency at the hotel but based on your business I don’t know if that would be the worst thing. So quick question on the Evolution you just talked on A.J’s question. Do you guys have a revenue when you need that contribution from Evolution in the quarter?

Bill Sanger

Well we do Josh, we haven't disclosed that, that’s part of the EmCare segment and I think it's fairly similar to what we have probably talked on the IPO where the revenue is still little over $100 million obviously the bigger opportunity there as Bill mentioned discussions that we’re having where we expect to see growth in that from both you know health plans and health systems.

Josh Raskin - Barclays

Okay so maybe breaking it out in the future when it's matured.

Bill Sanger

Yeah at some point we would expect it.

Josh Raskin - Barclays

Okay. The guidance the 457 to 462 for adjusted EBITDA, how much of that is EmCare? Are you guys sort of given segment like guidance as well or are we just going to stick with sort of a combined number?

Bill Sanger

No we’re sticking with combined number at this point, that’s what we have done before and that’s what we anticipate doing going forward.

Josh Raskin - Barclays

And then just last question on reform, obviously we’re seeing a little bit of delay in some of the exchanges I think it's probably more timing than anything else. But are you guys working with any of your hospital partners, I’m thinking more on the EmCare side but even on AMR around outreach programs or you know identification and specific individuals and things like that. Do you have any specific actions that you guys are taking and maybe if you can talk about the timing of those actions?

Bill Sanger

With both hospitals and communities we’re early stage of discussions, many of our hospitals have been working with our physicians and our staff and AEDs. If you will to gear up to assist the patients as they enter into the emergency room if they are eligible assist them in the paperwork [ph] and help them get into what may be available to them. We’re at very early stages, very early stages. I mean we have begun discussions in the last several weeks with communities about outreaching out in the community relative to identifying who might be eligible and what systems are available utilizing our AMR workforce to assist those folks and securing some type of coverage. So the answer to that is yes but in a very limited fashion but I see it accelerating substantially overtime.

Randy Owen

Josh we have always worked especially the hospital have worked very closely with the hospital even in the past, if there was an uninsured working with them to see if they met any Medicaid qualifications or whatever else. So I would expect that to continue and be pretty seamless.

Operator

Our next question comes from Andrew Schenker of Morgan Stanley.

Andrew Schenker - Morgan Stanley

Just a few little questions here, looks like your self-pay volumes kind of as a percentage have sort of picked up a little bit and sequentially there looks like they expect the Medicare, was there anything behind that move or was it just normal seasonality of variation?

Bill Sanger

Andrew it's more seasonality. There weren’t any sort of specific markets or specific areas where we saw a sudden, big change.

Andrew Schenker - Morgan Stanley

Otherwise they are fairly, necessarily stable on the quarter?

Bill Sanger

Yes exactly.

Andrew Schenker - Morgan Stanley

Okay and then just moving over to the AMR side, it looks like a revenue per weighted transport went up pretty strong, I think it was close to 6% here. Anything worth breaking out behind of numbers and is that kind of a sustainable run-rate going forward? I think I had it coming in a little bit below at the corner, that I expected to.

Bill Sanger

Yeah couple of things Andrew on that, if you look at that close to 6% number, look about half of that number as I mentioned is related to sort of an increase in our from an acquisition or managed transportation business that business as we have said before and for those not familiar we don’t do transports on that, we’re a broker and we provide services. So all the revenues that comes in from that and a few other businesses are really sort of non-transport related and really impact the rate. So if you look at it from a real rate standpoint the way we look at it is on our same market basis where we had about a 3.6% increase in the rate for our ambulance transports and that really was driven by normal sort of inflationary increases, rate increases as well as a stronger 911 mix with obviously a higher reimbursement for 911 transports.

Andrew Schenker - Morgan Stanley

And just last question, I was just thinking about the volume trends maybe up close both segment nationally there. Where there any trends worth highlighting of strengthens or weaknesses across the country or a region [ph]? Thanks.

Bill Sanger

Not really. I think similar to what you know maybe some hospitals and others are reporting I think you know volumes in some of the northern, North-East for us or maybe little softer. We continue to be you know positive stable volumes for majority of our business and whether it's Florida, Texas and the southern part of the U.S. So we didn’t really see anything that we consider really unusual and is more seasonal as we sort of anticipate. AMR we see some softness in the IFT, the non-emergency market as we mentioned but the 911 volumes continue to be positive and continue to be stable.

Operator

Our next question comes from Kevin Fischbeck of Bank of America Merrill Lynch.

Joanna Kornacka - America Merrill Lynch

It's Joanna Kornacka filling in for Kevin today. Thank you for taking the questions here just on the few last here, on the new contract wins there are number of upbringing pressures [ph] there. Can you give us a little more color in terms of the types of contracts you know by business line that you’re getting there?

Bill Sanger

The maturity of our new contracts are the combined ED, hospitalist program. We are seeing a greater interest in our combined anesthesia hospitalist integrated program as well but the majority of this last quarter were ED and Hospitalist.

Joanna Kornacka - America Merrill Lynch

And similar question but in terms of the acquisition commentary that it seems like there are couple of things in the pipeline and you’re going to be focusing your capital from there, probably so any color in terms of which areas will be the focus areas there in terms of acquisitions? Are you focusing mostly on growing the Evolution health business or I guess anesthesia versus ED, so any color you can give there?

Bill Sanger

I think we will see acquisitions in all aspects of the business. I think I would expect a majority of that activity to be both on sort of the EmCare and Evolution health segment of the business. I do think there are a number of really good ambulance transport opportunities and certain markets that are adjacent where you can get you know some synergy for that. So I do expect to see acquisitions in all parts of the business but probably if there is more focus or more likelihood of larger transactions will be more on the EmCare and Evolution health side.

Operator

Our next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank

I wanted to just ask a few things, the first is just as it relates to you know how you’re guiding implicitly for Q4, pretty nice step-up in EBITDA sequentially so I guess I just wanted to get you know some brief comments from you about how you think that take shape, is there just a little less startup expenses, and in Q4 is there anything that you want to call out relative to that? What’s implied in the guidance?

Bill Sanger

The only thing I would say is look we expect to continue to see a solid number of new starts, so we know what we have sort of on-tap and what we believe what we will be starting in the quarter and so I think that will still be very positive. With that we will continue to be you know startup cost as we have seen and so I think we will still see a little higher level on that. I think margins will be especially if you look at the EmCare size, we will be fairly stable. So I don’t expect any sort of major changes and sort of volume trends or anything like that and continue to expect to see some nice growth on the net new contract side.

Darren Lehrich - Deutsche Bank

And then just you know back to your comments Randy on AMR and we saw I guess a step up in the managed transport revenue. I think that’s been tracking you know sort of in the 12% to 13% of AMR range. What was it in the quarter? And is that now a new level or do you think it will climb from even what we saw here in Q3?

Bill Sanger

It is still a fairly small part of the AMR size. I don’t have the number exactly but that sounds pretty close from that standpoint. It is an area that I think we’ve talked about for a long time that it's an area that we have an interest in as you continue to see some (indiscernible) in the non-emergency market and continue to see an ability to over the longer term utilize other transportation modes to transport patients and take care of patients. We’re obviously trying to be proactive in that and so it continues to be an interesting us both on a state, Medicaid program for example and on the commercial side. So I do think overtime we expect to see that to increase as a percent of the AMR growth, we may not see it as much in the near term just because I think we’ve additional 911 opportunities that we may see on the ambulance side.

Darren Lehrich - Deutsche Bank

And did you enter a new state, can you just talk a little bit about what you acquired and what access you get from that deal?

Bill Sanger

Yeah I mean the acquisition that we did was in Florida so it was a new footprint for us which was nice and it was of interest to us. So we do have a fair amount of business in AMR in the Florida area. This was in the western part of Florida. So it was a nice sort of tuck in in a new platform to really expand some of those services in sort of the top eastern part of the country.

Darren Lehrich - Deutsche Bank

And just last thing, you mentioned that presentation for EPS and new convention for Q4 and we’re used to seeing that I guess just if you could help us think about the actual pretax amortization that you think applies here on a quarterly basis to just basing your run-rate.

Bill Sanger

Yeah let me see if I can pull it up here. Darren amortization if you look at I guess pretax if you look at that, we’ve been running you know roughly about sort of 19 million or so a quarter on a pretax amortization perspective and I sort of expect that number to continue. So I would use that number to think about that from your modeling perspective.

Operator

Our next question comes from Ryan Daniels of William Blair.

Ryan Daniels - William Blair

I guess quick one for you Bill, given the strength you’re seeing in net new contract wins, which I know is a record year-to-date. Can you talk a little bit about some of the investments that you’re making or any changes you might be making on physician recruiting to you know sure you can staff such a strong level of new business?

Bill Sanger

Yeah as I mentioned Todd Zimmerman our President has made several changes at EmCare to really reflect the new growth rate that we expected to continue into the near future. We have made substantial investment both technology and people on the recruitment side and we believe that the combination of, we recruit more physicians not only on aggregate basis but also on a percentage basis that we ever have in the past. One of the biggest challenges we always have is when we have contract losses we lose our physicians as well. Having a 98% retention rate last quarter was really helpful, as you get to keep those physicians and not to worry about recruiting new physicians for ended [ph] contracts. I do believe that we will be challenged like everyone in the industry as I said in the past, the denominator of this equation is being able to recruit physicians and I think we do a very good job that we recruit over 1000 physicians last year and clinicians. I do believe our new technology combined with our new emphasis on recruitment will substantially meet our needs going into the future.

Ryan Daniels - William Blair

And then maybe a follow-up to I think A.J’s question just on your JV model with HCA, are you seeing more interest from other facilities maybe larger IDMs or national operators and the ability to kind of bundle together hospital that may need and may not need subsidies into a bigger package and type of JV relationship? Any color on what you might be seeing there.

Bill Sanger

You know clearly as I said earlier I just think there is a sea change in the industry and particularly in the systems approach to our top placed physician contracting and although HCA kind of set the stage, there are other systems for profits and not for profits that are absolutely heading at that direction.

Ryan Daniels - William Blair

Okay and then just one quick one for Randy in regards to the Medicaid Parity. I want to make sure I had this right. Are you recognizing that on a cash or an accrual basis? I know we've got different companies doing it differently based on the states paying or not paying at this point.

Randy Owen

Yeah Ryan it is in accrual basis. So while we have gotten cash from quite a few state, they are lagging and so we have I think from a cash standpoint we’ve collected probably close to a $1 million so far. So we’re comfortable, we have gone through all the process from an accrual standpoint you know it's appropriate and I think like others and as I’ve heard with others we expect to see that cash start to accelerate and then even more so next year as other states really start some of that funding.

Operator

Our next question comes from Kevin Campbell of Avondale Partners.

Kevin Campbell - Avondale Partners

I just had a couple of quick modeling ones. Randy, could you tell us about, you had some restructuring charges in the quarter, and I noticed you didn't exclude those from your adjusted EPS calculation. Maybe you could talk to us a little bit about what those charges are and why they are not excluded from the adjusted EPS?

Randy Owen

Look some of these we have had some of these restructuring charges in the past and you can see it from quarter-to-quarter in our historical financials. We’ve had them from time to time especially over the last couple of years from AMR. We have you know made some changes in the business for example and closed some offices or some operations, exited some markets you know example. So while it is clearly I guess mutual from a base operating standpoint, it's not sort of a non-recurring event. It doesn't occur that often or that sizable, and it obviously has a pretty immaterial to EPS. So at this point we just focused on the things that we felt were sort of non-recurring related to the IPO sort of transaction.

Kevin Campbell - Avondale Partners

And should we think about those being roughly the same size going forward? Or was this quarter unusually high or low?

Randy Owen

No I think you will see whether it's this number or even lower. Again it sort of varies depending on that, I think we’ve been through if you look at the last few years, more of our restructuring as we have changed, made changes on the AMR business especially. So I actually would expect to see that number to decline overtime but we may choose at some point to make another adjustment to the business that we think has a big benefit long term and could have that happen again.

Kevin Campbell - Avondale Partners

Okay. And then on the D&A and interest expense, those are both a little bit off from what I was thinking. So is the third quarter run rate for D&A a good number? And with the interest expense, should, same question, or should we expect interest expense maybe to be a little bit lower, depending on when you actually paid off the debt?

Randy Owen

Well I think if you look at, I would still expect sort of the D&A to be fairly close to that from a run-rate perspective. We may see a little tick up in D&A just as I mentioned we had some additional capital from some of the new 911s that we will begin to depreciate but it's not a material sort of difference in that sort of run-rate. I think from an interest standpoint we did pay PIK notes we paid off on August 30th. So you didn’t have sort of the full quarter benefit of that given the timing of the IPO. So you do have probably around 34 million or so of cash interest expense that I would expect on a quarterly basis given the current structure we have today, okay? And then there is another call it 4 million or so that’s for the non-cash amortization around the debt and the loan fees.

Kevin Campbell - Avondale Partners

And then for the new contracts for AMR, the three new ones you guys called out, remind me. Did those have any impact at all in third quarter? Or if not, when do they startup?

Randy Owen

Well minimal, Shelby and DeKalb County started in August so there wasn’t a significant impact, those were smaller. The larger one which is sort of Tulsa, Oklahoma City which is about 50 million of the 75 started on November 1st.

Kevin Campbell - Avondale Partners

Okay and then last question. Bill, could you maybe go over some of the new contract numbers again? I think I missed some of them as you were writing a bunch. I want to make sure I have the numbers correct for EmCare.

Bill Sanger

So we did report numbers and we have reported revenue but not numbers. Year-to-date new contract wins contributed on annualized basis about 260 million of new revenue. We’re going to stay away from reporting contracts and just report net revenue wins.

Kevin Campbell - Avondale Partners

Okay. So that was $260 million of net new annualized revenue signed year to date, and the number was 35% of that was additional service lines? Is that correct?

Bill Sanger

Yes correct. You know sources of existing relationships.

Operator

Our next question comes from Frank Morgan of RBC Capital Markets.

Frank Morgan - RBC Capital Markets

Just a couple quick ones here on the EmCare side of the business. Could you comment a little bit about what you are seeing from an acuity standpoint, or acuity trends are? And then secondly, in your markets, are you seeing any increased competition from urgent care centers around the country? Thanks.

Bill Sanger

You know clearly we’re seeing somewhat of an increase in the case mix index in terms of our ER as well as the hospitalist visit. Now obviously if the flu season comes back we will see that case mix index go down, obviously those are lower acuity individuals. As it relates to competition urgent care centers not so much urgent care centers as much as freestanding EDs particularly in Texas for instance Houston has I think ED freestanding EDs these are 24 hour emergency departments. I know there has been a lot of state action that the medical society hospital organizations are trying to stop the proliferation of the freestanding EDs. We do see some cannibalization in areas like Houston and southern parts of Texas but we haven't really experienced too much elsewhere in the country at this point in time.

Operator

I show no further questions in the queue at this time.

Bill Sanger

Okay thanks everyone for joining us today. We look forward to our Q4 call with you soon. Thank you.

Operator

Thank you for joining the Envision Healthcare Holdings third quarter earnings call. You may disconnect at this time.

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