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Emergency Medical Services Corporation (NYSE:EMS)

Q4 2009 Earnings Call

February 11, 2010 11:00 AM ET

Executives

Deborah Hileman - Vice President of Investor Relations

William Sanger - Chairman and Chief Executive Officer

Randel Owen - Chief Financial Officer

Mark Bruning - Chief Operations Officer, AMR

Analysts

Kevin Campbell - Avondale Partners LLC

Ralph Giacobbe - Credit Suisse

Shelly Gnall - Goldman Sachs

Brian Tanquilut - Jefferies & Co.

Joanna Gajuk [ph] - BofA/Merrill Lynch

Sudeep Singh - Deutsche Bank

Dawn Brock - Kaufman Brothers

Alan Fishman - Thomas Weisel Partners

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 Emergency Medical Services Corporation’s Earnings Conference Call. My name is Noellia and I will be your coordinator for today. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

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

Deborah Hileman

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

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

Forward-looking statements may include, but are not limited to statements relating to our objectives, plans and strategies, and all statements, other than statements of historical facts that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.

Any forward-looking statements herein are made as of the date of this conference call, and EMSC undertakes no duty to update or revise any such statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in EMSC’s filings with the SEC from time to time, including in the section entitled ‘Risk Factors’ in the company’s most recent annual report on Form 10-K and subsequent periodic reports.

Among the factors that could cause future results to differ materially from those provided in this conference call are the impact on our revenue of changes in transport volume, mix of insured and uninsured patients, and third-party reimbursement rates and methods, the adequacy of our insurance coverage and insurance reserves, potential penalties or changes to our operations if we fail to comply with extensive and complex government relations of our industry, the impact of potential changes in the healthcare industry generally resulting from legislation currently under consideration, our ability to recruit and retain qualified physicians and other healthcare professionals, and enforce our non-compete agreements with our physicians, our ability to generate cash flow to service our debt obligation and cost of capital expenditures to maintain and upgrade our vehicle fleet and medical equipment, the loss of one of our members of our senior management team, the outcome of government investigations of certain of our business practices, our ability to successfully restructure our operations to comply with future changes in government regulation, the loss of existing contracts and the accuracy of our assessment of costs under new contracts, the high level of competition in our industry, our ability to maintain or implement complex information system, our ability to implement our business strategy, our ability to successfully integrate strategic acquisitions and our ability to comply with the terms of our settlement agreement with the government.

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

William Sanger

Thank you, Deb, and good morning. 2009 was another record year for EMSC. At the beginning of the year we said that the economic climate would present opportunities for the company and our performance in 2009 bears this out.

Our family of caregivers provided quality and compassionate care in more than 13 million patient encounters. We produced strong organic growth, have one of the largest new contract years on record, strengthened our core business and enhanced our market position.

With respect to operations, our focus on research utilization in revenue cycle management has led to improved margins and cash flow. Overall, we achieved adjusted EBITDA growth of 15.8%, EPS growth of 34.3% and produced free cash flow of $231.5 million.

Our improved performance was highlighted by contract growth, expanded service lines and our continued ability to enter into regional and national contracts. As you may recall in 2009, we entered into agreements with Christus Health, SunBridge, Sava SeniorCare, HealthSpring and Bravo Health.

We also renewed and expanded our contract with FEMA. This renewed agreement expands our EMS coverage to the contiguous 48 states.

We believe these types of relationships have positioned us to continue to grow our businesses and have provided a venue for additional regional and national contracts.

At EmCare, revenue grew by 20% and earnings improved by 40%. We were able to demonstrate our value to our hospital partners as a cost solution and quality provider as evidenced by a record year of organic growth in cross selling of our hospital based physician services.

In the fourth quarter, we started 35 new contracts and exited 10. Of the 35 new contracts, 23 were from the Pinnacle acquisition and additional five were from expanded service lines, of which 80% of these were with existing clients.

Our net new contracts started this quarter at EmCare, represent a $112 million in new annualized revenue almost none of which was realized in Q4. In 2009, 30% of our new contracts have come from national agreements. Moreover approximately 20% of our new contracts are the result of cross selling to existing clients.

I have talked in the past about the cross-selling strategy and I believe these results demonstrate our ability to capitalize on these opportunities and generate incremental business with existing clients.

Also worthy of mention is a fact that the Pinnacle acquisition has positioned us as a leading provider of anesthesiology services in the United States. As we looked to 2010, we believe the facility-based physician out sourcing environment represents strong organic growth opportunities. We also believe that the acquisition environment will remain strong in 2010.

At AMR, Q4 revenue growth was primarily driven by rate increases. While we've seen 911 volume growth and we started 34 new inter-facility agreements, we continue to see softness in our inter-facility transports. Notwithstanding these challenges however our focus on our operational fundamentals has resulted in year-over-year margin improvements. These strategies included enhanced deployment and better compensation management.

Lastly at AMR, we're very encouraged by the success in growth of our managed transportation business. You may recall this is a visit in which we utilize our core competencies of call-taking and logistics management to deploy third party transportation. This business has attracted offering to insurance companies and states that are seeking managed transportation costs for their patients.

While today, managed transportation represents only 5% of AMR's revenue, we had a 60% revenue growth in 2009 and see this as a continued growth opportunity in the future.

In summary, 2009 was a year of growth and improved profitability. We are confident in the fundamentals of our strategy. We have demonstrated that company can perform in both positive and negative environments, and we believe we have positioned the company as a provider of choice to deliver quality solutions to our communities, facilities and the patients we serve.

I would now like to turn the call over to Randy Owen, our CFO.

Randel Owen

Thank you, Bill. First, as I discuss our performance, I’ll be referring to certain non-GAAP measures such as adjusted EBITDA and free cash flow, which are not considered measures of financial performance under Generally Accepted Accounting Principles. Therefore I direct you to the reconciliations included in our earning release and on our website.

Unless otherwise noted, all comparisons refer to the fourth quarter, ended December 31st 2008. Comparisons to 2008 results are impacted by our FEMA hurricane deployment, which was completed in the first part of the fourth quarter of 2008.

EMSC’s net revenue for the fourth quarter of 2009 was $654.3 million, a 10.2% increase. EMSC’s adjusted EBITDA for the fourth quarter was $71.2 million, an increase of 18.3%. Adjusted EBITDA margins increased 80-basis points to 10.9%.

The increase in adjusted EBITDA and EBITDA margins are from the net impact of increased volume from net new contracts, increased revenue from existing contracts, decreases in SG&A and fuel expenses, offset by increases in compensation and insurance costs.

EMSC net income for the quarter was $33.3 million or $0.75 a diluted share including an $0.08 tax benefit compared to net income of $20.9 million or $0.48 of diluted share in the fourth quarter of ‘08.

The tax benefit in the fourth quarter was primarily from reductions and accruals of approximately $3.5 million from previous tax positions. EmCare's net revenue was $321.2 million, an increase of 20.2%. This included a 13.3% revenue increase from the addition of 74 net new contracts since September 30, 2008, including 23 anesthesiology contracts from our Pinnacle transaction in December 2009.

Revenue increased 9.2% at same store contracts, as a result of an increase in weighted patient encounters of 12.9% offset by a decrease in net revenue per weighted encounter of 3.7%.

Although we did see higher volumes related to the H1N1 virus, this was limited to the first half of the quarter. The decrease in net revenue per weighted encounter we saw during the quarter was from lower acuity attributable to those H1N1 volumes.

EmCare generated adjusted EBITDA of $44.6 million, an increase of 40.3% and adjusted EBITDA margins improved 200 basis points to 13.9%. Compensation cost for comparables as a percent of net revenue, operating, insurance, and SG&A costs were lower that Q4 of 08' both from a dollar amount and as a percent of net revenue due to a continued focus on managing these costs.

AMR net revenue was $333.1 million, an increase of 2% or a 4% increase if you exclude the fourth quarter 08' FEMA hurricane deployment revenue of $6.2 million. This 4% increase was due to higher net revenue per transport of 7.1% offset by reduced weighted transport volume of 2.8%.

6% of the increase in net revenue per transport was in the impact of rate and reimbursement increases and 1.1% was from the growth in our managed transportation business over the prior year, which as you recall has no associated transports.

The 2.8% decrease in transports was primarily from the impact of exiting markets earlier this year. We continue to see softness in our non-emergency volumes as our same market transports were 0.7% lower than the fourth quarter of 2008.

AMR adjusted EBITDA for the fourth quarter was $26.6 million, a decrease of 6.4%. The decrease in adjusted EBITDA is attributable primarily to the favorable impact of the FEMA hurricane deployment in 2008.

Insurance costs were higher in the quarter by $3.5 million primarily due to a benefit recorded in the fourth quarter last year related to current year reserves in 2008. Fuel rates were lower by 400,000 this quarter compared to last year. And SG&A costs were lower due to costs incurred in exiting markets at the end of last year.

Cash flow provided by operating activities was $62.8 million in the quarter. AR decreased $10.3 million, and prepaid expenses and changes in other assets and liabilities increased cash $26.7 million related to the timing of insurance and tax payments.

EMSC free cash flow was $52 million during the quarter, not including a $17.4 million cash tax benefit from stock based compensation, which was reflected as part of financing activities. Free cash flow was down from $63.9 million in the fourth quarter of 2008 as that period was positively impacted by the timing of net cash collections from the FEMA deployment.

Net cash used in investing activities was $85 million for the quarter including $11 million in capital spending and $74 million related to the Pinnacle transaction. Net cash provided by financing activities was $24 million for the quarter compared to net cash used in financing activities of $26 million last year. The 2009 amount includes the exercised stock options and the cash flow benefit related to tax deductions for stock based compensation.

The cash tax benefit was recorded in the fourth quarter as a part of financing activities as EMSC became a cash taxpayer during the quarter.

Q4 of ’08 included unscheduled payments of approximately $20 million on our senior secured credit facility. At December 31, 09 there were no amounts outstanding on our revolving credit facility.

Also point out that our cash position was virtually unchanged from the third quarter of 09, not withstanding our expenditure related to the Pinnacle transaction.

For the year ended December 31, 09, EMSC generated net revenue of $2.6 billion, an increase of 6.6% compared to last year or an 11.6% increase when excluding approximately $107 million from deployments under our FIMA contract in 2008.

Adjusted EBITDA was $282 million, an increase of 15.8% compared to last year including the impact of FEMA deployment in 2008. The company generated net income of $115.2 million or $2.64 a diluted share compared to net income of $84.8 million or $1.97 per diluted share for 2008 for an EPS increase of 34.3%.

EMSC operating cash flow was $272 million in 2009, free cash flow was $231.5 million for the year 2009 compared to $192.3 million in the prior year. EMSC had decreased DSO from 74 days at December 31, 08 to 64 days at December 31, 09.

This morning we are also announcing guidance for the year ending December 31, 2010. We expect full year diluted earnings per share to be between $3 and $3.10 and full year adjusted EBITDA is expected to be between $313 million and $320 million.

As noted in our release, the guidance includes $7 million in expected stock comp in 2010. It is important to note this guidance does not include any future acquisitions nor does it include any impact the company expects from refinancing its senior and senior subordinated debt, which we anticipate to complete in the first half of 2010. Bill?

William Sanger

Thank you, Randy. Operator, we 'd now like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operators instructions). Your first question comes from Kevin Campbell - Avondale Partners LLC.

Kevin Campbell - Avondale Partners LLC

I was hoping you could give a little bit more color on your guidance, particularly for EmCare, what your assumptions are on net new contracts? I think historically it’s been basically 25 a year and then I was hoping perhaps you could give us what you did in 2008 and 2009 on net new contracts excluding acquisitions as well?

Randel Owen

If you look at the last couple of years, I think last year we had, we've had around 33 to 34 net new contracts in both '08 and '09 compared to as you mentioned we used to be in the 20 to 25 range. So our expectation really is that we continue to grow as we have in the more recent year.

Kevin Campbell - Avondale Partners LLC

Okay, so we should be assuming them sort of that name, the net new 33 to 34 and then any acquisitions would be on top of that?

Randel Owen

Yeah, probably low to mid 30s when you look at net new contracts plus acquisitions, yeah.

Kevin Campbell - Avondale Partners LLC

What are your thoughts about relative to your guidance for the ambulance add-on payments, they expired at the end of the year. Are you assuming that they get renewed in the guidance or would that potentially be up-side if they do?

Randy Owen

No, Kevin, again it’s Randy. We have assumed and as you know historically, we have been successful in mitigating changes in rate. So, we have initially assumed that those add on payments would not continue.

Now if they do continue I don’t expect a big upside, as we would not need to mitigate those add on payments as we have assumed. So I don’t expect a major change in that in terms of what our expected revenue is on AMR.

Kevin Campbell - Avondale Partners

Also for EmCare on the quarter, you had some pretty attractive margins. How sustainable is that or should we look at them maybe coming back more to the 12s or so versus maybe 13.5 or so in the quarter?

Randy Owen

Yeah, I think we were, obviously with the volume I think the margins were up almost 13.9%. I would think of that - if you look for the year I think we’re at 12.8%. I think for 2010, we would expect a slight margin improvement from the full year of ‘09, but probably think of that more in that 13% range.

Kevin Campbell - Avondale Partners

Okay, great. And then I was hoping lastly you could talk a little bit about the deployment of new technologies for AMR. I know you had rolled that out to two test markets with a third that was targeted for perhaps last quarter. So how is that going, how have the results been and do you expect to roll that out elsewhere?

Randy Owen

Yeah, let me have -- ask Mark Bruning who is here, who runs AMR to respond to that.

Mark Bruning

Hi Kevin. I think we are very pleased with the results we’ve gotten in Las Vegas and in Alameda County. And we are moving forward with our deployment of the same technology in San Bernardino and it’s certainly in line with our expectations. We’ve improved on time performance and have been able to improve our operating margins in those markets.

Kevin Campbell - Avondale Partners

Do you expect to roll that out more aggressively perhaps in 2010 or is it still going to be very limited?

Mark Bruning

I think it will depend on the markets. We will look at that strategically in both new business opportunities as well as existing markets.

William Sanger

Kevin, I would think of that, we do expect that roll out to expand some in 010' but really over the next two to three years, is where I think is a more appropriate horizon in terms of looking at a more significant roll out.

Operator

Your next question comes from Ralph Giacobbe - Credit Suisse.

Ralph Giacobbe - Credit Suisse

Obviously 09' was sort of a big flu year and I guess first can you quantify also the impact in the fourth quarter and the year and maybe remind us what you think sort of normalized volume range should be as we think about 2010?

Randel Owen

As we've said in prior quarters, we've traditionally seen 3 to 4% volume same-store volume growth. We've been obviously higher that in Q2, 3 and now in Q4. So I do expect where even if you would exclude that it look next year as though same-store is not growing at the normal rate because you are facing a higher comp, but we still expect the fundamentals to continue to grow.

And where EmCare is clearly grown in excess of 20% this year and again even if 3 or 4% is related to sort of an increase in flu volumes, we still expect sort of mid to upper teens growth that volume has, does have a lower acuity. So I think from an - the revenue impact isn’t that significant as the volume impact.

Ralph Giacobbe - Credit Suisse

And then, Bill, did you say you renewed FEMA? I think in the past you had said some of the contracts were coming up for renewal during 2010 and 2011. So can you just give us a sense of if it's all done at this point in terms of 2010, and if not just where we are sort of in the process?

William Sanger

Generally speaking when we talk about the larger contracts for renewal, we’re referring to AMR. We've got probably about 3 to 4 contract renewals that are scheduled in 2010. Again we’re confident, as we have been in the past, that we'll continue to able to bring up those contracts.

Mark Bruning

And Ralph just make sure - FEMA has been renewed and we did expand that to what they call zones 3 and 4 again which now cover the 48 states.

Ralph Giacobbe - Credit Suisse

And then on the AMR side, the transports continue to kind of trend down. I know you talked a little bit about it, but is there anyway to parse out how much sort of is due to FEMA and you all sort of walking away from some of the contracts? Just trying to get a sense of organic volume minus some of that noise and what we should think about and whether you think there’s growth for that business on the volume side in 2010?

William Sanger

We've been kind of encouraged with the opportunities at AMR. Clearly we’re disappointed in the softness in the facility side, which is primarily related to hospital census. As hospital census, I think will slowly increase in 2010, we believe we'll a slight uptick in our facility.

We also at the same time have expanded more aggressively into managed transportation and actually have now instituted our first contract to broker ambulance services. Historically in managed transportation, we've brokered medical transportation services but not ambulance services.

So, this will provide us an opportunity to position brokerage arrangements in markets in which we don't provide ambulance services. So, we hope to see increases on that revenue side in managed transportation, which does not have an attendant transport to it.

Mark Bruning

Ralph, one other example is, we just recently took over service in Emerald, Texas in that system, which will bring about 20,000 transports a year for that, that one system. So that was something we just did recently.

Operator

Your next question comes from Shelly Gnall - Goldman Sachs.

Shelly Gnall - Goldman Sachs

A follow-up on the AMR performance, can you talk a little bit about the contract exits, is that primarily a function of the economy or what is driving the contract exits on the AMR side?

William Sanger

Shelly, first, we didn’t really have any real exits this year, most of those exits were at the end of last year and at the very first of this year. Some of those were around softness maybe where we had more of a concentration on interfacility and just weren’t making of what we felt like was an appropriate margin, so we decided to exit those contracts.

Really for most of 2009, we have not had any significant exit outside of what happened at the, again, end of last year, first of this year.

Shelly Gnall - Goldman Sachs

So, I guess looking forward to 2010, would you expect contract exits will not be an important factor in your performance for AMR?

William Sanger

We see some selective small markets, we are obviously always looking at the profitability market-by-market. I don’t expect it to have a substantial impact in 2010 as it relates to market assessment.

Shelly Gnall - Goldman Sachs

On the compensation expense, what are the trends you are seeing there, looks like compensation expense is being driven a little bit higher?

William Sanger

Part of the compensation expense increased, Shelly. Couple of things were of course on the EmCare side with a significant increase in volume, you had to provide more coverage, which obviously drives some of that change. I think on the AMR side we actually did a really good job of managing deployment and utilization in light of softer volumes.

Obviously, with lower revenue, there's certain amount of fixed costs that you can't change quickly so as a percentage of that revenue we saw an increase in comp at AMR, but when you look the deployment strategy that Mark's put in, we've been very pleased with what we're seeing there.

Shelly Gnall - Goldman

And then for annual sort of year-over-year increases, would you expect to continue to see a modest benefit from the economy as far as less than typical inflation heading into 2010 for year-over-year increases?

William Sanger

I would think so. I think it's probably similar to what we saw here this year. I guess maybe we don't expect a significant uptick I guess next year in terms of what maybe required from a compensation rate change.

Shelly Gnall - Goldman

Can you give us any guidance on your tax rate for 2010?

William Sanger

We expect that Shelly to be similar to what our full year '09 tax rate is sort of in that 38.3% to 38.5% range.

Operator

Your next question comes from Brian Tanquilut - Jefferies & Co.

Brian Tanquilut - Jefferies & Co.

Bill, just wanted to ask you about the Pinnacle acquisition if you can just talk a little more about the strategy, what should we expect you guys to do going forward? I know this is a big platform acquisition. How should we think about the strategy there?

William Sanger

First, talk about the Pinnacle acquisition, we'll talk about the strategy. We were fortunate to partner with the Pinnacle Group, there is a combination of relationships we’ve established. One is a management services organization where we’re managing primarily the contracts in Texas for about 50 hospitals and then we’ve acquired the practices in North East and there are about 23, 24 practices.

Our strategy is to number one, expand from existing footprints that Pinnacle already has established and built in the North East as well as the Central region of the country. Number two, we’ll also look for additional footprints in various sections of the country where we don’t have a presence.

Number three, we’ll utilize our expertise with the gained infrastructure from Pinnacle combined with CPPA, which we acquired last year to enter into contracts for existing client base. That three pronged strategy is well into place. We’re very confident in our ability to execute against all three of those strategies.

Brian Tanquilut - Jefferies & Co.

So when you talked earlier about seeing a sort of robust acquisition pipeline or a good acquisition environment, should we expect that you guys would look further in anesthesiology or were you talking more about the ambulance side or the ER side?

William Sanger

We will be opportunistic on both sides of the business. Clearly the market has heated up on the outsourced physician side and you will clearly hear opportunities arise that we will capitalize on in 2010. At the same time, we are also looking opportunities on the managed transportation side.

Brian Tanquilut - Jefferies & Co.

And then Randy, still on Pinnacle. Just wondering how that would impact the revenue per encounter or how should we think about that as it hits your P&L?

Randel Owen

Well Brian, one of the things that we are doing is trying to wait of course [ph] encounters when you look at the anesthesia side. Clearly I do expect an increase in the revenue per encounter because a part of this, as Bill noted, management fee where we don’t record the metrics for those hospitals in Texas as Bill described. So I can't give you a percentage off the top my head but I do think that would possibly impact what we show as a rate per encounter.

Brian Tanquilut - Jefferies & Co

So shouldn’t that theoretically also drive your margins in that segment just because you are not really charging any cost to that managed revenue.

Randel Owen

Well, you have internal costs. I think when we've talked before about the acquisition we did say that the blended margins there were a little better than our EmCare margins. So I do think there would be a slight improvement there just related to the mix of that business.

Brian Tanquilut - Jefferies & Co.

Fuel, how should we think about that? You guys are hedging I know, how should we think about that in 2010, what have you baked into guidance?

Randel Owen

You are right, we probably have hedged about half of our exposure in 2010, I think our expectation is that even with that we'll probably see anywhere between a 15 and 20% increase in our fuel cost at AMR. This year we've spent about - just for reference, we've spent about $28 million this year in fuel on the AMR side. So even with hedging, we do expect a increase.

Brian Tanquilut - Jefferies & Co.

So that’s all baked into guidance already.

Randel Owen

That’s correct.

Brian Tanquilut - Jefferies & Co.

Municipalities receive more RFPs right now or why haven’t we seen more significant up tick in number if we haven’t?

Bill Sanger

Clearly, we would have liked to see more RFPs going out to bid, municipalities take a very long time to make the decision, particularly if they are moving from fire department to combined fire department/private provider.

We do know just yesterday, day before yesterday, Orlando went out to RFP. We continue to be hopeful some other very large communities will follow suit.

The disappointment is really in the political process, the length of time that it takes to make the decision to outsource. But we’re confident that that will continue in a positive vein.

Operator

Your next question comes from Kevin Fischbeck - BofA Merrill Lynch.

Joanna Gajuk - BofA/Merrill Lynch

Actually this is Joanna Gajuk [ph] for Kevin. I have just a few questions. In terms of what are your thoughts on the appropriate model for leverage and if you call your bonds, would you in the future imagine putting in new debt at some point?

Randel Owen

As I mentioned, we’re sort of initiating a process here to refinance our debt. We do, at this point anticipate that we will refinance both our existing bank debt and our existing senior sub debt or bonds with a new bank facility. So we’re initiating that process and once we obviously know that structure and the impact, then we will communicate that publicly in terms of what the ongoing benefit is as well as what any onetime costs are related to that transaction.

Joanna Gajuk - BofA/Merrill Lynch

Thank you, and then just coming back to AMR business, I know you're emphasizing wheelchair transport and exiting the under performing markets but when we should actually see the year-over-year declines start to moderate?

Randel Owen

Well we do see, as Bill mentioned a little earlier, I think the one thing where we've been challenged from the economy standpoint is around that interfacility volume. Our emergency volume is actually up slightly year-over-year.

So we continue to see some slight increase there. I think over the next year I would still expect our volumes to be softer. So until we see a change in the economy, I think the inter-facility side will still be a softer and our volumes will sort of flat to maybe slightly up in 2010, is how we thought about it, barring any significant new contracts.

Randel Owen

The reality, a good proxy for inter-facility transports is hospital census. As you see increases in hospital census should - we should also demonstrate our ability to increase our inter-facility transports.

Joanna Gajuk - BofA/Merrill Lynch

Coming back to your comments about acquisitions outlook, are you seeing any pressure on multiples that you have another public competitor?

Randel Owen

Well, we have really not seen additional pressure, we had expected to see lower multiples, but those multiples are still in the four to six range on the EMS side and in the five to seven range on the physician side.

William Sanger

The market is so large that we’ve really not seen any change in that at this point.

Joanna Gajuk - BofA/Merrill Lynch

Just today, there were some discussions I guess in the senate about address of legislation that would allow hospital-based physicians to get some funding through the stimulus program. Can you comment on that? Are you aware of that?

William Sanger

If I understand you, I apologize if I am misunderstanding, you may be referring to funding that may be available to physicians for IT technology.

Joanna Gajuk - BofA Merrill Lynch

Yes.

William Sanger

If that’s what you are referring, hospital based physicians are not eligible for that opportunity, because it’s the hospital technology systems primarily that they use. Now independent physician such as an independent hospitalist group that utilizes the technology, I understand are eligible for those grants. But generally speaking anesthesiologists, ED physicians, radiologists utilize the technology that's incumbent to the hospital, hospital systems.

Joanna Gajuk - BofA/Merrill Lynch

It sounds like there must be something coming out that that would actually allow the physicians to get funding.

Operator

Your next question comes from Sudeep Singh - Deutsche Bank.

Sudeep Singh - Deutsche Bank

Randy, I guess the first question is just I wanted to get a sense if there was any favorable or unfavorable adjustments through prior period reserves in the quarter?

Randel Owen

We didn't have that out, because they're very small. We actually had a very slight unfavorable adjustment at both AMR and EmCare around a million dollars or less and it was pretty comparable to what they were in the fourth quarter of '08. So at this point we really not had anything of significance.

Sudeep Singh - Deutsche Bank

Could you just perhaps give us the stat on Medicaid mix in the quarter?

Randel Owen

On Medicaid, hold on let me grab my sheet here. Medicaid from a volume standpoint it was about 12% of our volume, it was up from about 11% in the third quarter. So it was up slightly -- again we think that's driven more from the EmCare side around some of that H1N1 additional volume.

So self-pay was actually down slightly, but consistent with prior periods, we’ve not seen any real material changes in our mix.

Sudeep Singh - Deutsche Bank

And do you have the EmCare Medicaid number handy?

Randy Owen

Yeah, EmCare itself was about 11.6% in the fourth quarter compared to 10.2% in the third quarter of ‘09.

Sudeep Singh - Deutsche Bank

Great. And then just the last one from me, though you talked a little bit about just the MSO and kind of the rational behind that business. I was just wondering ultimately, does the MSO really help win contracts in the hospital where there is anesthesiology group present or does it even also position you to perhaps buy some of these anesthesiology practices down the road since you’ve already servicing some of them?

Randy Owen

Surely. We see the MSO as a transitional step into the business. You may recall when we acquired CPPA, another anesthesia group in 2008, we began that process through the acquisition of the management services organization and we are transitioning to acquiring those practice.

Similarly we believe that is the strategy we will be using with Pinnacle. It’s a good entrée into the market and allows us to understand the infrastructure that exist and also provides opportunity to acquire those practices in the future.

William Sanger

And Sudeep, even outside of that, whether we were to do that or not, the MSO really is where lot of your infrastructure is. So the leadership of the group for example with Pinnacle, the resources, whether it’s billing, the recruiting, scheduling, all of the core functions are really done there.

So that’s really where we have the ability to service new contracts that we go out and sell whether it’s cross selling or with new facilities. So that’s not contingent upon sort of any potential purchase of those contracts.

Sudeep Singh - Deutsche Bank

I mean most of the contracts, because the two MSOs that you did acquire were you entered into long-term agreements with the practices, is that right?

William Sanger

Correct.

Sudeep Singh - Deutsche Bank

So is it ever the case that you could actually win. Can you make the business work without having a long-term contract?

William Sanger

Yes, certainly, we can make the business work without having a long-term contract as Randy pointed out. It’s about getting infrastructure and the management team to service the opportunities that are in the marketplace.

We prefer to have that option of the long-term contract in the event we do not want to converge the existing practices into our AnesthesiaCare, which is the name of our company.

William Sanger

This year, prior to the Pinnacle acquisition, from the clinical part of the acquisition, we were able to add, grow our anesthesia business by 20% in terms of number of contracts just by selling contracts from the platform that we have.

Operator

Your next question comes from the line Dawn Brock - Kaufman Brothers.

Dawn Brock - Kaufman Brothers

You've given a lot of color today. On the managed transport side, it's been nicely impacting growth over the last few quarters. Can you talk a little bit about expansion opportunities or your plans there?

William Sanger

We are bidding several contracts, state contracts that are out in our peak process right now. We are hopeful that we will, certainly win some of those contracts in addition, we have targeted managed care companies.

More and more of managed care companies such as HealthSpring are providing transportation services as a benefit to the Medicare population, that is almost a common benefit that we see today with the Medicare managed care business.

So we see this as a growth opportunity going into the future and as dual strategy of working with the states, working with insurance companies and also working with health systems. The best example I could give you of managed transportation is our relationship with Kaiser Permanente, which we have for several years.

Dawn Brock - Kaufman Bros

And on the cross selling side, and maybe I just missed this. Last quarter you actually broke out for kind of what we started with - what our net new contracts were and how many of those net new contracts were from existing [ph]?

William Sanger

Sure, we had 80% of net new contracts we cross-sold in the quarter, which represent essentially 4 contracts net.

Randel Owen

But for the year, Dawn, just a couple of points that Bill made also for the year, I think we'd also feel very good about it, when you look at for the whole year of our net new contracts that we added, about 20% of those were from existing customers.

So we really saw some momentum on the cross-selling opportunity and we also - again the same kind of number, but on our national agreements, about 30% of our contracts this year were with our national agreements. So we feel very good about sort of the opportunities again to continue to sell in those agreements, to expand into new agreements and to cross-sell.

Dawn Brock - Kaufman Bros

And just to kind of follow-up, the question was asked a little bit earlier, one of the first questions in the Q&A as to the difference over the last maybe a year or two in the net number of contract adds and it has gone up into the 30s from the 20.

Are you guys finding, you are getting more traction and maybe over the next couple of years, we are going to see the same kind of percentage increases and that maybe the difference between the 25 and the 35 is the cross selling?

William Sanger

Clearly, we have added services over the last couple of years and we are very bullish about our service. We haven’t talked much about radiology, but radiology is a growing opportunity for us as well. And by the fact that we are not only selling ED services, now we are selling four hospitalized physician services, we do expect that rate of increase to continue into the future.

Dawn Brock - Kaufman Bros.

You’ve probably given me a good answer to my last question, which is you have definitely gone and penetrated the anesthesiology service line and you’ve really grown radiology and hospitals mostly organically to this point. Do you look out and see those two service lines as potential opportunities for acquisition expansion in the future?

William Sanger

If indeed the opportunities there add an appropriate multiple, we will certainly look at those opportunities. And I will remind you that we have a very strong organic story and we talk about, we supplement organic growth through acquisitions.

At the same time, we see hospitals as a fundamental core service for EMSC, as well as the other two services that we’ve mentioned in the past, radiology and anesthesia. So we will look at opportunities to target acquisitions in those areas.

Operator

Your next question comes from Alan Fishman - Thomas Weisel Partners.

Alan Fishman - Thomas Weisel Partners

I wanted to get into, first, I guess, I forgot whether it was Bill or Randy. One of you mentioned the Amarillo - AMR contract, could you elaborate on that, in particular 20,000 transports a year?

Randel Owen

We just recently, again, after the - in the first part of 2010 completed it. It was really more of an asset acquisition of services that were provided by the system there. So we now really do all the 911 services in that community and again it was more of a asset based small acquisition but with that we get again about 20,000 transports a year are provided in that community.

William Sanger

We're finding there are more opportunities in the marketplace where hospitals are having a difficult time in managing hospital based ambulance services. We do believe there are other opportunities, which we will capitalize on in the market.

Alan Fishman - Thomas Weisel Partners

I assume most of that 20,000 is 911?

William Sanger

That's correct.

Alan Fishman - Thomas Weisel Partners

I guess secondly, on the capital spending and acquisitions in 2010, how should we think about total cash expenditures next year or this year rather?

William Sanger

I don't want to say guided but we’ve certainly I shared with the Street that generally speaking our acquisitions represent 3% to 5% of our top line. We believe in 2010, it will probably be at the higher end of that 3% to 5%.

Alan Fishman - Thomas Weisel Partners

And on capital spending?

William Sanger

I think it could be around - similar to what we see in ’09. It could be a little higher than that depending on the opportunities, but I do think you could still see a positive substantial investment in acquisitions.

Alan Fishman - Thomas Weisel Partners

Secondly on capital use, I guess on DSO, they came down significantly year-over-year. How do you -- probably a portion of that was FEMA maybe. How do you think about DSO going forward and what do you see as being kind of the low end or where you hope to kind of max out?

Randel Owen

This is Randy. So first on the FEMA side really all that got cleared out at the end of ’08. So ‘09 really doesn’t have anything related to FEMA. But to your point, we did reduce DSO by 10 days in ’09.

There is clear opportunity, continued opportunity and we’ve said that in the past, we’ve had more of that on the AMR side than on the EmCare side, but we do expect DSO improvement. It’s probably not at 10 days, could easily be half of that, a little better, yes more of that coming from the AMR side.

AMR now is sort of in the 70 day DSO, just under that. EmCare is under 60. So, I do think that AMR can ultimately, not in one year, can ultimately be sort of in that 60 or just under 60 day range and I think EmCare is probably in that mid 50s range, is sort of what we expect there in the near term.

Alan Fishman - Thomas Weisel Partners

So, given that uses of capital, outlook and as you look towards debt refinancing and you not really talking about, can you weigh the management’s propensity to use the cash on the balance sheet to pay down or reduce debt as you look at refinancing both of the portions or would you keep the same level of indebtedness in order to pursue potentially it sound like larger acquisitions in 2010.

Randel Owen

I think at this point, we also haven’t concluded that as we look at re-financing here in the near term. Generally I would say that we still feel like our best use of cash is for acquisitions.

So I do think we would use some of that as it relates to refinancing especially as it relates to some of the expenses that are part of that one time cost, we could pay down a small amount of that but our plan is to really preserve most of the cash we have for growth.

Operator

Your final question comes from Kevin Campbell - Avondale Partners

Kevin Campbell - Avondale Partners

I wanted to ask, Bill, what was the percentage of customers where you now have multiple contracts at this point, is it still pretty low?

William Sanger

Yes, I think it probably around 10% where we have multiple in that - that where we have four, it's in a very small percentage, less than 1% to 2%. So again we look at that as runway opportunity.

Kevin Campbell - Avondale Partners

Is there any percent of contracts where you really think, there is no ability to cross sell, so really, the upside isn’t going from 10% to a 100%, its going from 10% to 50% something like that?

Randel Owen

I mean every hospital is different, a lot depends upon the satisfaction level with their incumbent hospital based physicians and our ability to demonstrate both financially, and from a value orientation, the benefits of having a single company provide multiple services. I think that opportunity is greater with the systems than it is with the single hospitals.

Kevin Campbell - Avondale Partners LLC

And, I missed the organic growth numbers for EmCare pricing and volumes. Could you give those again?

Randel Owen

If you looked at - what we call same store same contract growth in the quarter, it was about 9%, just over 9%. Volumes were actually up almost 13% and then the rate was down almost 4%.

And again, that was just really attributable to the higher volume, obviously driven from the H1N1 in the first part of the quarter with a lower acuity.

Kevin Campbell - Avondale Partners LLC

You saw total 9% same store growth? Last couple of quarters…

Randel Owen

Yes.

Kevin Campbell - Avondale Partners LLC

Closer to 7%, is that right?

Randel Owen

I’m sorry?

Kevin Campbell - Avondale Partners LLC

The last couple of quarters had been closer to 7%, if I recall?

Randel Owen

Yes. We did see in the first part of the quarter, a real increase in our volumes at our existing contracts. Really, again, driven from that H1N1. That’s right.

Kevin Campbell - Avondale Partners LLC

Last question, I just want to make sure I heard this correctly. The guidance does not assume the refi, is that correct?

Randel Owen

That’s correct.

Operator

Your next question comes from Alan Fishman - Thomas Weisel Partners.

Alan Fishman - Thomas Weisel Partners

Could you just refresh our memories on where the market is in terms of acquisition multiples in the EmCare side of the business?

William Sanger

Sure. I had mentioned that on the EMS side, ambulance side. Four to six range on the outsourced physician side, five to seven times. Depending upon the specialty, the size of the specialty. Generally speaking, hospitals are on high end, maybe in excess of seven times, and single practices or small practices are going to probably go in that lower four to six times.

But, we haven’t seen much change over the last year in terms of the multiple.

Operator

At this moment, there are no questions in queue.

William Sanger

Thank you, operator. And thank you everyone for your support and interest in EMSC.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a great day.

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Source: Emergency Medical Services Corporation Q4 2009 Earnings Call Transcript
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