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Air Methods Corporation (NASDAQ:AIRM)

Q1 2010 Earnings Conference Call

May 6, 2010 4:15 PM ET

Executives

Christine Clarke – IR

Aaron Todd – CEO

Trent Carman – CFO, Treasurer, and Secretary

Analysts

Bob Labick – CJS Securities

Kevin Campbell – Avondale Partners

Ryan Daniels – William Blair

Operator

Good afternoon. My name is Miranda and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Methods reports First Quarter 2010 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session.

(Operator Instructions)

I will now like to turn the call over to Christine Clarke. Ma’am you may begin.

Christine Clarke

Thank you. Good afternoon. Thank you for joining us today to review Air Methods first quarter financial results ended March 31, 2010. As the Operator indicated, my name is Christine Clarke and I am with Air Methods Corporation. Also on the today representing the Company are Mr. Aaron Todd, Chief Executive Officer and Mr. Trent Carman, Chief Financial Officer.

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

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

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

Aaron Todd

Thanks Christine and thanks to all of you for joining us especially after just another normal trading day in the market. We hope that you’ve weathered it okay. I will offer some insights into our first quarter results and an update of key events which have occurred since our last conference call. Trent will then be able to provide you with some added details on the financial results.

Since December 2009 through April 2010, we have seen a decline in Same-Base Transports, even after adjusting for affects of weather – changes in weather cancellations. During the five months previous to December 2009, we experienced an increase in the Same-Base Transports, adjusted for variation of weather cancellations.

As a result it is difficult to predict what the near-term trend in demand will be going forward. December through February was certainly very extreme weather months and the decline in demand was attributed to the effects of weather. March and April declined in Same-Base Transports may have more to do with the strength of their prior year months. Average flight volume in March and April of 2009 were as strong as average volume in May and June of 2009. Typically May and June are stronger due to less weather cancellations and due to commencement of more spring and summer activities.

As a result, we remained hopeful that growth in Same-Base Transports may return in the near-term as we have easier comps in the coming two months. It is interesting to know that fluctuations in patient flight volumes within our community-based operations have essentially neared fluctuations within our hospital-based programs which we serve.

We are pleased that recent community-based price increases have been holding with our privately insured patients. As you know we have implemented a supplemental price increase to further offset recent and possible future shifts in payer mix away from private insurance.

We anticipate achievement of our beginning of the year objective of better than 6% growth in net revenue per patient transport despite these shifts in payer mix. Our Days Sales Outstanding easing a trailing three month annualized revenue method reflects a decrease from a 107 days as of December 31, 2009 to 100 days as of March 31, 2010.

Maintenance expense per flight hour during our first quarter represented a significant spike over previous quarters. Only the third quarter of 2008 had a higher per flight hour results over the past several years. Accordingly, we would describe this quarter as unusually high. Whenever we experienced a reduction in flight volume, the reducing effect on maintenance expenditures associated with the fewer hours flown typically lags into future quarters.

The continuation of fleet replacement and twin to single conversion should continue to have a beneficial effect on the longer term outlook. While our products division first quarter results reflected significant decreases in external revenue in net divisional income, the revenue backlog has increased significantly as compared with the end of the prior year first quarter and as of the end of 2009.

Some of the governmental contracts were finalized slightly little bit later than anticipated, thus shifting a significant amount of work into the second half of 2010, as a result we anticipate significant increases in revenue generation moving forward especially in quarters three and four.

Since the beginning of 2010, the Company has used approximately $21 million of its treasury position in free cash flow to buyout leased aircraft. The annual aircraft rental savings specific to these aircraft is $3.8 million, while annual depreciation of these now on balance sheet aircraft will be approximately $2.7 million.

EBITDA therefore will be improved by the full $3.8 million and pre-tax income by a little over $1 million. This activity will be ongoing and will be a relevant contributor to enterprise valuation of the Company and to shareholder value. Of course decrease in aircraft rentals will be offset in part by new aircraft deliveries, but these new aircraft should have a reducing impact on maintenance expense.

Since the beginning of the year, our community-based operations have opened four new locations with four additional locations pending associated with hospital decisions to outsource a portion or all of their operations. Within our hospital based division, in addition to the two new bases which will open in the near-term associated with the new contract award previously disclosed we have received verbal commitment from two of our hospital customers to expand service to two new satellite base locations.

We did received notice from one of our hospital customers that there will be terminating their contract early involving two operating bases and that will occur at the end of 2010. We are in active discussions with several of our hospital customers who are evaluating risk sharing of full outsourcing of their air medical programs.

Despite impact on flight volumes over the past two quarters from increased weather cancellations Air Methods continues to generate healthy free cash flow. Cash flow from operations during the first quarter of 2010 was nearly $19 million. This compares with $16 million in the prior year quarter. As previously disclosed we will continue to use the majority of the excess treasuries and free cash flow to reduce our lease obligations and related aircraft rental expenses.

And with that I will turn the call over to Trent.

Trent Carman

Thank you, Aaron. I’ll start by giving a little detail on our operating expenses for the quarter. Flight center expenses were $53.1 million, aircraft operating expenses were $26.3 million, aircraft rentals were $12.3 million and cost of sales for our products division were $3.7 million.

In today’s press release we reported the general and administrative expenses were down 1.3 versus the prior year first quarter. This decrease is primarily due to the reorganization of our field operations during the second quarter of 2009. Revenue in segment information generated – revenue and net income, excuse me, generated by our CBS division during the quarter were $66.7 million and $854,000 respective. This compares to $69.2 million and $7.9 million respectively for the prior year quarter.

Revenue in segment net income generated by our HBS division during the quarter were $48 million and $4 million respectively. This compares to $48.6 million and $4.1 million respectively for the prior year quarter. Earnings before interest, income taxes, depreciation and amortization or EBITDA were $7.2 million for the first quarter of 2010.

On a trailing 12 basis, our EBITDA is $64.7 million. You can reconcile EBITDA by adding interest expense, depreciation and amortization and subtracting gain on disposition of assets to income before income tax expense. On a three month lagged basis, the Company’s payer mix for the three months ended December 31 were 36% for insurance, 29% from Medicare, 21% from Medicaid and 14% for uninsured.

This compares to 40% for insurance, 26% for Medicare, 20% for Medicaid and 14% uninsured for the three months ended September 30. We lagged the payer mix three months just to purify the payer mix as it finally stands. For the 12 months ended December 31, the payer mix was 38% insurance, 27% Medicare, 21% Medicaid and 14% uninsured.

Cash collections for insured patients improved during the quarter. For the 12 months ended September 30, cash collections as a percentage of gross charge for insured patients were actually 80%. This compares to 78% for the 12 months ended June 30. Cash payments as a percentage of our gross charge for Medicare and Medicaid and uninsured were relatively constant for the two 12 month periods. We lag all cash collections by payer type by six months as most all of the cash has been collected after six months from the date of transport.

As Aaron mentioned cash flow generated by the Company increased during the quarter from $15.7 million to $18.9 million. A decrease on the Days Sales Outstanding and working process for our products divisions helped drive this increase for 2010. For the quarter the Company used $14.7 million of cash to purchase six previously leased aircraft and other capital expenditures.

At the end of the quarter, the Company had $42.2 million of cash on the balance sheet and the Company’s net debt position stood at $64.5 million. The Company also has $45 million of availability currently under its revolving line of credit. The Company currently has 12 new aircraft on order that it expects to take delivery on prior to yearend, all of these aircraft are expected to be financed via operating leases.

At March 31, the Company had $2.3 million in notes payable that related to one new aircraft that had not been financed as of March 31. This aircraft was financed during April via an operating lease. As Aaron touched upon the products division, the backlog there is currently $23.8 million in comparison with the backlog was $15.1 million at December 31.

The Company currently operates 299 aircraft in this fleet of these 168 are in the hospital-based operations and 131 are in our community-based operations. The Company also currently operates 109 community bases and 125 hospital bases.

With that I will turn it over to Aaron for his closing remarks.

Aaron Todd

Actually we’re going to go ahead and open it up to questions now, if you would open it up for that purpose that’d be great.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Labick.

Bob Labick – CJS Securities

Good afternoon.

Aaron Todd

Hi Bob.

Bob Labick – CJS Securities

Hi. Few questions, first, I was hoping if we could talk a little bit more about the change in payer mix, obviously with the recession and things like that I can understand the insured patients down, I guess what’s more surprising to have Medicare up so much as the offset. Is this a geographic switch or what have you known?

Aaron Todd

First of all, keep in mind you got to be a little bit careful when you’re looking at just one quarter compared to one quarter, I mean you can have a couple percentage point fluctuation that is just inherent in the mix of patients that is, not directly related to the economy per se, the average trailing 12 versus the previous average trailing 12 probably is more relevant and you’re right both measures show that an incredible stability in the number of uninsured but an increase in especially Medicare and somewhat Medicaid.

It is possible that as some individuals who were in the workforce that otherwise would have had entitlement under Medicare as the recession hit, that they may have chosen to well either, be, if they’re being laid off or whatever to begin taking Medicare benefits is one possible explanation. The Medicaid I think is somewhat driven by the stimulus package and the money is flowing to make those benefits available to more but it has certainly muted by almost a factor of half the effected that would have otherwise had because you’re right, we would have expected it all the flow into the uninsured category, in fact for the first quarter of 2010 lag three months we are 1% lower uninsured patients transported in the year before, but obviously for a three month period you can’t really draw a trend line there but, yes that’s holding up remarkably well relative to not having an increase in uninsured.

Bob Labick – CJS Securities

Okay, great. Thanks for that explanation. As it relates, just you mentioned like the five months we have a increase in same base excluding external factors and then in the next five months of a decrease excluding the same factors, obviously it’s difficult to read too much into that, but can you tell us how has interfacility volumes, how those trended over the last quarter.

Aaron Todd

There is no difference between seen an interfacility, they’ve all kind of going in the same direction. I think if we wanted to put an optimistic viewpoint on it, you could look at December through February and easily blame the reduction in requests which we did see to the weather and the impact it has on peoples activity and their willingness to facilitate a transport in inclement weather.

On the other hand in March and April where weather was not materially different than the year before and in April actually a little bit milder, I believe it has something to do with just for whatever reason attributes that caused the prior year to be strong, because ordinarily you would see a – those were very, very strong months, April and March compared to what we saw in May and June, which either means May and June just have and they did have higher weather cancellations which is unusual for May and June or for whatever reason, the nature the weather was so mild in if you remember March and April last year, spring came early in much of the country, and then the rain started hitting in May and June that that could be causing us to just merely have a tough comp months in March and April which will be followed by easier comp months comparative months in May and June.

But it is just really volatile, it’s really hard to tell what the clear trend line is going to be but, the reason we’re hopeful is that we had very high weather cancellation months in May and June and we saw no improvement in May and June of last year compared to March and April of last year.

Bob Labick – CJS Securities

That’s great. Thank you very much.

Aaron Todd

You bet.

Operator

Your next question comes from Kevin Campbell.

Kevin Campbell – Avondale Partners

Good afternoon and thanks for taking my question. I wanted to talk just briefly on the maintenance expense, obviously that was up year-over-year and it has to do with an increase in the number of events but also hoping you could talk about maybe last year was it – was anything about last year that was unusually low and therefore this year was maybe a little bit more normal or and I want to look at two not just the first quarter, the first quarter but also 2009 versus 2010. Was the maintenance expense we had in ‘09 an unusually low number for whatever reason?

Aaron Todd

It was, let me give you a sense for that. The net maintenance expense per flight hour in each of the four quarters of 2009 starting with the first quarter were as follows, it was $492, $478, $449, $486 and then boom first quarter 2010 comes along and its $587. So almost a literally, nearly a 20% uptick in that measure or little better than 20% uptick. If you look at all the historical years and of course we always noted that 2008 was a very tough year for maintenance and 2008 it was $472 right around $500, $514 and then excuse me it was $472 in the first quarter, $514 and then $613 which was a very high third quarter and then $543.

So we would expect the average for 2009 to be down from 2008 because we brought in so many new aircraft and we’ve been converting twins to singles. But if you even look back pre 2008, we’ve never and I am looking all the way back to literally the first quarter of 2004, the highest month we had was like $576 and most of them were in that kind of that $430 to $530 range.

So when you just look at the quarters and you realize that we’ve got a more modernized fleet and more singles operational, this hourly rate really sticks out. But the other thing that’s factoring it – factoring into this is that we had a dramatic reduction in flight volumes associated with the devastating weather and there is always a lag effect when you fly fewer hours you’re going to benefit eventually but it’s not necessarily going to be in the exact month or quarter where you’ve had the reduced volumes, so that that the reduction, the actual maintenance expense year-over-year was up 11% I think as I recall, but it’s the hourly rate is up dramatically more than that in part, because we flew less but there is a delayed effect from when you start to see the offsetting reduction effect on maintenance and that typically trickles in over the future months.

Kevin Campbell – Avondale Partners

That’s helpful. Could you talk – could you give us some idea about what would the total dollar figure that might be more appropriate for this year maintenance wise, just so given such a volatile line, knowing that of course it can be plus or minus couple of million bugs depending on what happens, but just to better help us.

Aaron Todd

Well we were budgeting from actual maintenance numbers last year, I think we were budgeting about 3% increase as I recall in our number and I think if you do the math on that, it comes out to be about a $107 million if you include. No, excuse me, it’s about 70. Yes, about $76 million.

Kevin Campbell – Avondale Partners

Okay, for this year you’re budgeting around 76.

Aaron Todd

Correct.

Kevin Campbell – Avondale Partners

And then we should.

Aaron Todd

That reflects about a 3% increase in on an overall basis Trent or is that on a per flight hour basis?

Trent Carman

It’s overall.

Aaron Todd

That’s on an overall basis, so you might have a little bit of probably more of a flat line if you factor in some projected growth in same base transports of I think around 2%.

Kevin Campbell – Avondale Partners

Okay, that’s very helpful. Perhaps you could also give us some additional commentary on the collective bargaining agreement sort of where that stands?

Aaron Todd

We’ve got a meeting scheduled with would say the high leadership of Air Methods and the Union in mid-June and that’s going to be the first meeting that’s been held in a few months to see just where everybody is to try to put kind of the key issues on the table and try to trigger some movement and that’s the next meeting but, there is not been a lot of in fact there is almost been no activity since the last conference call.

Kevin Campbell – Avondale Partners

Okay. Two last quick questions. What was the total fuel spent last year, for the full year, if you have that for 2009?

Aaron Todd

I don’t have that in front of me, I don’t have for 2010 yearend P&L here now but.

Trent Carman

Hold on Aaron, I might have it. Actually I don’t think I did. Got it for the quarter and that’s it.

Aaron Todd

I think its disclosed in the queue though, hold on let me give you that information out of the queue (inaudible).

Trent Carman

Just the total for the quarter.

Aaron Todd

You want the total fuel expense for the quarter?

Kevin Campbell – Avondale Partners

For the first quarter of 2010 and if you have all of 2009, that’d be good but.

Aaron Todd

I’m sorry, okay yes its fuel for the first quarter was $2.950 million in the prior year first quarter it was $2.703 million, and then you know what.

Kevin Campbell – Avondale Partners

We could just follow-up offline on that.

Aaron Todd

Kevin if you call back, we’ll get you the full year, obviously that’s already disclosed number.

Kevin Campbell – Avondale Partners

Yes, no problem. And last question on the aircraft rental, you did about $50 million in total last year, should have been roughly the same number this year because of going up slightly because of the acquisition or the aircraft but then going down because of the buyouts.

Trent Carman

It won’t be dramatically different Bob, with the new ones coming on, although the new ones are back ended. We’ve got 12 that are coming in between now and the end of the year. So you’re not going to have a full year expense on that and that’s about $30 million in new aircraft rentals right there. So if you even took a three months worth of rentals on those that would be your math to add and we were at $12.3 million for the quarter and that’s going to come down with those buyouts that Aaron mentioned so it will be less from last year, it’d be less from $50 million.

Kevin Campbell – Avondale Partners

Okay, great. Thank you very much.

Operator

Your next question comes from Ryan Daniels.

Ryan Daniels – William Blair

Yes good afternoon guys. I was hoping you could start maybe just a little more color on your pulse on the HBS market and potential CBS conversions, if you’ve been having more conversations with some of your hospital partners given some of the noise in the healthcare industry and if you’re getting feedback that that’s becoming a more palatable option to turn the keys over to you if you will and turn those into CBS bases?

Aaron Todd

Let me make it clear because often times our customers do listen in and we’re glad that they do. Our – we have no strategy to try to go out and convince our customers to deploy a full outsourced service delivery model or to do other types of service structures than what they presently have. We are merely here to respond to their needs as they feel that is in the best interest of their organizations and their air medical programs.

That being said clearly with some of the challenges of the need to replace over model aircraft, the difficulty and procuring financing, the uncertainties of healthcare reform causing hospitals to look very closely at the costs of their operations as well as non-core services that many of them and I would characterize this may be an uptick in the neighborhood of 50% increase over say a year ago.

Many of our hospital customers are in active discussions with us about possibly outsourcing a portion of their operation, all of their operation maybe having more of a shared risk, partnership and so certainly that is taking place at an increased level but again we don’t apply – we don’t come to the table with our check book and say we’d like to buyout the program or try to apply pressure for them to do anything.

We’re happy to serve them in whatever capacity they believe is in the best interest of their organization. I am very, very optimistic that as we have been communicating both with our customers but with many other hospital-based air medical programs in the country about our incredible safety initiatives having excited level one within the SMS review process having embraced new technologies and having a more fully comprehensive safety management system that is maturing at an accelerated pace that we’re creating quite a bit of differentiation there and we also bring a lot of value added on patient quality, systems that they can access as well as other value-added services like billing, dispatch, transfer centers, things of that nature.

So I feel very good about how we’re competing in the marketplace and we have several legitimate real opportunities to have new hospital customer relationships over the coming 12 months.

Ryan Daniels – William Blair

That’s very helpful color and then maybe a quick follow-up there, you’ve mentioned a couple of times risk sharing on CBS and I guess I’m not as familiar with that at least you had spoken about it as much in the past. So maybe two questions, one, is that a big piece of your CBS division today that incorporates risk sharing or some kind of joint ownership and number two, maybe just a little bit more discussion about how that’s structured and how that works with the hospital partners?

Aaron Todd

It really does matter which division it’s housed and because both divisions will sometimes get involved with risk sharing models. Whether a program is housed within the community-based division, as depended on whether we’re billing the patients or the hospital is really billing the patient and who owns the air medical program or program bases.

The risk sharing models have a wide variation all the way from instead of having a large monthly fixed fee and a lower hourly fee, you might have a lower monthly fixed fee and a larger hourly fee that puts shared risk on program flight volume. It could be 100% variable where you have all of your contractual revenue tied to flight volume and so if the program has a good year in flight volume then we’ll generate more revenue, if it has a slow year, we’ll generate lesser revenue and kind of have a shared risk profile with our hospital customers.

We don’t have a lot like that but we do have a few locations like that, then you have another risk sharing model where they may say we want to have a traditional relationship with you for three of our bases but for two of the outlined bases we want you to operate that under an independent provider or CBS model of service and be joint ventured in that effort and so sometimes we’ll do that.

In other cases, they may say we would like for you to take the risk of the marketing and the operations and the billing and collecting and all of that but we would continue to provide the medical staffing and oversight in return for a fee that we would pay to them either on a per trip basis or on a cost plus kind of basis. So there is just a lot of different ways in which these services can be provided and usually we defer to our hospitals, customers as to what is most beneficial to them.

Ryan Daniels – William Blair

Okay, perfect that’s great color to and then two more quick ones. First, I’m just curious if you could talk a little bit about the flight simulators you purchased I think earlier this year, it’s not something you’ve mentioned on either the recent calls but I am curious, obviously it’s going to be a big safety and training benefit, but is that something that could drive cost savings because you’re using the helicopters lots for training and maybe just color on the actual safety benefits or training benefits as well?

Aaron Todd

Actually you’re exactly right, one of the great benefits is that when you’re doing a check rides you don’t have to do as many flight hours in the aircraft which places the aircraft out of service, so if you’re in a flight training device and you’re doing a check ride if you will and a caller comes in for service you can interrupt that check ride and go to the aircraft and still be able to take that flight versus if you’re up in the air with a training captain and the call comes in, you’re already away from the base and that call for service might go unanswered or another ship house to come from further away.

So it reduces the – it should reduce the number of flight hours on actual aircraft which is very expensive in terms of maintenance fuel, but also reduce the number of mis-flights associated with training activities. So we do believe that it will be a cost saver but we think it’s also going to be greatly enhance the quality of our safety activities as well.

Ryan Daniels – William Blair

Okay, and then last question I had just looking back at some of the cost on fuel, I know you gave the numbers there, I am curious if given that the flight hours to-date have been less than you anticipated going into the year. If you effectively hedged more fuel than you initially thought and if so, if that will drive a little bit more cost savings than you initially thought.

Aaron Todd

Well basically we hedged about 70% of our anticipated usage through the end of 2010. In the month of April we got within penny or two of hitting the strike price of $2.32 I believe per gallon on for wholesale.

So I mean we have kind of moved up but to a point where the hedges kicked in. The strike price goes up I think into the 270 or range in starting July 1 to December 31. And then we are preparing to layer in a hedge for the first six months of 2011 here in the next few weeks.

So it basically removes that is a major factor of, yes it might affect the quarter by a few cents a share but it’s not going to be a primary reason for not achieving our objectives in a given year.

Ryan Daniels – William Blair

Okay, perfect. Thanks again for all the color Todd.

Aaron Todd

Yes.

Operator

And you have no further questions at this time.

Aaron Todd

Very good. Just to help Kevin out. Kevin the total fuel burned or usage in 2009 was $11.782 million. So if you’re still listening, go ahead and draw that one down. The quarterly report on Form 10-Q that will be filed with the SEC will be out tomorrow and encourage you to review that when it become available EDGAR and as always if you have any questions as you review that or consider the discussion today, feel free to give us a call and we, if you’re in the neighborhood, always drop in for a visit if you can.

Thank you and thanks again for your attendance on the conference call today.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Air Methods Corporation Q1 2010 Earnings Call Transcript
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