Air Methods Corporation Q2 2010 Earnings Call Transcript

| About: Air Methods (AIRM)

Air Methods Corporation (NASDAQ:AIRM)

Q2 2010 Earnings Call

August 5, 2010 4:15 pm ET


Christine Clarke – IR

Aaron Todd – CEO

Trent Carman - CFO


Bob Labick – CJS Securities

Kevin Ellich – RBC Capital Markets

Christina Balzac – William Blair

Kevin Campbell – Avondale Partners


Good afternoon. My name is Sarah and I will be your conference operator today.

At this time I would like to welcome everyone to the Air Methods Report Second Quarter 2010 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer sessions. (Operator Instructions).

Thank you, Miss Clarke, you may begin your conference.

Christine Clarke

Good afternoon. Thank you for joining us today to review Air Methods’ Second Quarter Financial Results ended June 30th, 2010.

As the operator indicated, my name is Christine Clarke and I am with Air Methods Corporation. Also on the call today representing the company are Mr. Aaron Todd, Chief Executive Officer; and Mr. Trent Carman, Chief Financial Officer.

At the conclusion of today’s prepared remarks we will open the call for a question-and-answer session.

I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

This conference call includes certain forward-looking statements which are subject to various risk and uncertainties. Actual results could differ from materially from those currently anticipated due to a number of factors, including but not limited to the size, structure and a growth of the company’s Air Medical Services and product market, the collection rates for patient transport, the continuation and/or renewal of Air Medical service contract, the acquisition of profitable products division contracts and other flight service operations, the successful expansion of the community-based operation and other matters set forth in the company’s public filing. With that having been said I would like to turn the call over to Mr. Aaron Todd, Chief Executive Officer of Air Methods Corporation.

Aaron Todd

Thank you Christine. First, let me apologize to you. We are new to our service through NASDAQ has some kind of a glitch and is backlogged in trying to get the press releases out.

The 8-K has been filed and the exhibit to the 8-K that you can access on EDGAR does have the entire body of the release, but many of you may not have been able to access that. Although a bit awkward, I’m going to just go ahead and read to you the narrative of the press release in case you have not received it to date and then I will offer some commentary.

The headline is Air Methods Reports Second Quarter 2010 Results and Third Quarter 2010 Update.

The underlying states that second quarter fully diluted EPS of $1.02 reflects 47% growth in that income.

Dated August 5th; Air Methods Corporation, the largest air medical transportation company in the world, reported their financial results for the second quarter ended June 30th, 2010 and provide an update on July 2010 community-based patient transports.

For the quarter revenue increased 8% from 129 million to 139.2 million in the current year quarter. For the six month period revenue increased 1% to 257.7 million compared with 254.4 million in the prior year six month period.

For the quarter net income increased 47% to 12.8 million or $1.02 per diluted share as compared with prior year’s second quarter net income of 8.7 million or $0.70 per diluted share.

Net income for the six month period decreased 6% to 12.9 million or $1.03 per diluted share compared to 13.6 million or $1.11 per diluted share for the prior year’s six month period. The increase in quarterly net income was primarily attributed to an increase in net revenue for community-based patient transport and lower maintenance expense per flight hour.

The current year quarter includes a pre-tax gain on disposition of assets of 0.1 million compared with the pre-tax gain of 0.6 million in the prior year quarter.

For the second quarter community-based revenue increased 19% to 86.6 million compared to 72.7 million in the prior year, while segment net income increase 77% to 20.4 million from 11.5 million.

Total community-based patient transport increased slightly to 10,507 as compared with 10,414 in the prior year quarter.

I believe that the release is now out and you can follow along if you would like.

Community-based patient transport for bases open greater than one year, same-base transports decreased 2% or 246 patient transports as compared with the prior year quarter.

Weather cancellations for community-based transport was $8,138 for the current year quarter compared with $6,969 in the prior year quarter, a 17% increase. This increase was attributed to recent price increases as well as weakness in collections experienced in the prior year quarter which reduced the net revenue for transport by 5% compared with 2009 average.

Hospital-based revenue decreased by 3% to 49.1 million compared to 50.5 million in the prior year quarter, while segment had income decrease 5% to 5.1 million from 5.4 million.

External revenue within the products division decrease 2.4 million or 40 % compared with the prior year quarter.

Consolidated maintenance expense decreased by 3% per flight hour, contributing to an overall decline in expense of 0.7 million as compared with the prior year quarter.

The company also provided an update on July 2010 flight volume. Total community-based transports were 3,642 during July 2010 compared with 3,867 in July 2009, a 6% decrease.

Daily average community-based transports in July 2010 represent only a 2% decrease over the daily average in June 2010. Same-grace transports during the month of July decreased by 398 transports or 10% as compared with July 2009, while weather cancelation decreased by 27 as compared with the prior year month.

Prior year July community-based patient transports were 7% higher than the next highest month in 2009, creating a strong prior-year comparative for the month.

And then my statement is as follows.

We are obviously pleased to see a return to strong earnings growth following the severe winter which impacted the previous two quarters.

The reduction in maintenance expenditures promotes confidence that the hourly rate experienced during the first quarter of this year was usually high.

We are pleased to see payer mix for community-based patient transports stabilized during the current quarter from percentages experienced during the first quarter of 2010. Even with the increase in net revenue per community-based transports, our day sales outstanding decreased to 83 days as of June 30th, 2010 compared with 109 days as of June 30th, 2009.

While our products division experienced a sharp decline in external revenue, the division enjoys a $21 million backlog as of June 30th, which is expected to improve financial results over the coming quarters.

So that represents the body of the press release. And I apologize to have to take your time up to read that, but hopefully that will make the call more productive for those of you who haven’t had a chance to do so.

Let me now that thank you for joining us today. Before I begin my remarks with the discussion of our quarterly results and an update on recent events, we wish to again express our deep sadness for the loss of our crew involved in the recent accident in Tucson.

We are cooperating with the NTSB in their investigation into the possible causes and will address any concerns regarding our operations which might emerge from it as causal factors are made known.

Now turning to our second quarter results, let me share the following.

The strength of our second quarter results can be primarily attributed to two factors; the growth of our net revenue per community-based transports and lower maintenance expenses.

Thankfully, we did not see any material change in our second quarter payer mix compared with the previous quarter. In addition collections of recent price increases have remained consistent or even slightly better as compared with historical levels.

We have also been able to lower our day sales outstanding within our community-based receivables from 109 days as of the end of June 2009 to 83 days as of June 2010, as I mentioned in the press release.

Much of this improvement is attributed to electronic billing procedures which have improved our speed of collections.

As we discussed during our first quarter conference call, maintenance cost for flight hours reflected a spike as compared with historical quarters. Cost per flight hours during our first quarter were $708 compared with the second quarter cost per flight hours were $546.

Our second quarter 2010 maintenance cost per flight hour was 3% below the prior year quarter, as well.

As we acknowledged during our previous quarterly conference call, demand per service continues to fluctuate. As an example, in June we experienced flight growth in the same-base transports within our community based operation. While in July, we experienced a 10% decrease despite minor weather fluctuation in both months compared to the prior year months.

As disclosed in our press release, July 2009 flight volume was 7% higher than the next highest month in 2009, thus it was a difficult comparative to improve upon.

In addition, average daily volume in the current year July was close to daily activity in the previous month of June. Flight volume predictability continues to be difficult in this environment.

We continue to utilize free cash flows to buy out leased air craft resulting in significant reductions in lease expense and corresponding increases in EBITDA.

Year to date, we have bought out 21 air craft for 22.8 million, which will reduce annual air-craft rental expense by 4.5 million. Two additional air craft will be bought out before the end of the year for 6.7 million, further reducing lease expense by nearly 1 million per year.

Since the beginning of the year, our community-based operations have opened seven new locations, two of which related to conversion of hospital-based locations to community-based operations.

Since our last conference call we have not been noticed by any of our customers of their intent not to renew their contracts. We are competing vigorously for opportunities to provide service to new customers in several markets.

As discussed, much of the work related to the significant backlog enjoyed by our products division shifted to the second half of 2010. Our outlook is therefore for meaningful growth and revenue and divisional earnings in the next two quarters compared to the previous two.

We have recommenced negotiations with our pilot’s union beginning today after many months of inactivity. We are hopeful that an agreement can be reached soon.

We were successful at securing a reduction in our aviation insurance rates with reduction percentages in the high single digits beginning July 1st.

Looking forward, we are hopeful that the winter quarters will enjoy more moderate weather than existed in the prior year. In addition, should we be required to assist FEMA in response to any hurricane threats in this current season, any such activity would reflect year-over-year growth as no such activity occurred last year.

With that long summation, I will turn the call over to Trent.

Trent Carmon

Thank you Aaron. Let me offer some detail on operating expenses and divisional performance for the quarter.

Flight Center Expenses were 53 million, Aircraft Operating Expenses were 26.1 million, Aircraft Rentals were $11.7 million, and cost of our Products Division were$2.7 million.

General Administrative Expenses were up $1.8 million versus the second quarter of 2009. This increase is primarily due to some increased employee headcounts and to some bonus accruals reported in the quarter.

As a percentage of revenue, General and Administrative Expenses were 12% for both second period quarters.

Revenue and Segment net income generated by our CBS Division during the quarter was 86.6 million and 20.4 million respectively. This compares to 72.6 million and 11.5 million respectively for the prior year quarter.

Revenue and Segment net income for our HBS division during the quarter were 49.1 million and 5.1 million respectively. This compares to 50.5 million and 5.4 million respectively for the prior year quarter.

Earnings before interest, income taxes, depreciation, and amortization, or EBITDA, were 28.7 million and 19.2 million for the second quarter of 2010 and 2009 respectively.

On a trailing 12-month basis, our EBITDA is 74.2 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 lag basis, the company’s payer mix for the three months that ended March 31 was 36% for insurance, 30% for Medicare, 21% for Medicaid and 13% for uninsured.

This compares to 36% for insurance, 29% for Medicare, 21% for Medicaid and 14% for uninsured for the three month ended December 31.

We lag the payer mix by three months to purify the final payer mix.

For the 12 months ended March 31, the payer mix was 38% for insurance, 28% for Medicare, 21% for Medicaid, and 13% for uninsured.

Cash collections from our insured patients remain strong during the quarter. For the 12 month ended December 31, cash collections as a percent of gross charge were 80%. This collection percentage was the same as the 12 months ended September 30.

Cash payments as a percentage of our gross charge per Medicare and Medicaid and uninsured were relatively constant for the two 12 month periods.

We lag the cash collections by payer mix by six months as most all of the cash has been collected after six months after the date of transport.

Cash generated by the company during the six month increased from 24.1 million to 31 million. A decrease in date sales outstanding and work in progress from our products division helped drive this increase in 2010.

For the six months the company used 27.9 million of cash to fund the purchase of 19 previously leased aircraft and other capital expenditures.

At the end of the quarter the company had $38.8 million of cash on the balance sheet. And the company’s net debt position, which is a total of all indebtedness less cash, was 65.9 million. This compares to 68.8 million of net debt at December 31, 2009.

The company currently has approximately 45 million of availability under its revolving line of credit.

The company currently has nine new aircraft on order that it expects to take delivery of prior to year end. All of these aircraft are committed to being financed by operating leases.

Aaron touched upon the backlog for our products division. To put it in perspective, the backlog at June 30th was $21 million and December 31 it was 15.1 million.

The company currently operates 300 aircraft in its fleet, of those 169 are in our hospital-based operations and 131 are in our community-based operations. The company currently operates 113 community bases and 125 hospital bases.

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

Aaron Todd

I think we’ll open it up to questions now, Operator. If you could facilitate that please.

Question-and-Answer Session


(Operator Instructions)

Your first question comes from the line of Bob Labick – CJS Securities.

Bob Labick – CJS Securities

Hi, and good afternoon. First, I just wanted to say I am very sorry for your loss in Arizona as well.

Aaron Todd

Hi Bob. Thank you.

Bob - CJS

Moving onto the business. Net revenue for transport was very strong and up sequentially quite a bit. I think your price increase sequentially was equal to Q4 to Q1 and then Q1 to Q2, but you had this big bump. Were there other changes that influenced the growth in net revenue?

Aaron Todd

Yes, I mean, we collected a little stronger from our private insurance; that was probably the biggest one. You can always have a little variation with true-ups and how the collections and write offs compare against what you had originally reserved for.

As Trent mentioned, we lag – we make an estimate when we book the month of transport. And then that gets chewed up three months later and so you’ll always get – if the payer mix comes in stronger than the three month historical average then you’re going to get an increased from having the payer mix come in a little stronger than you had originally estimated, as well as if collections come in a little stronger so that is probably part of it.

Bob Labick – CJS Securities

Got it. And how does that look going forward for the back half of year and your current thoughts?

Aaron Todd

Well you know, it’s hard to predict where payer mix is going. I mean, you know, certainly we’re pleasantly surprised to see it kind of strengthen a little bit. Actually when you look by month, June actually started to show some real strengthening that brought the average to an equal to the first quarter.

We are starting to see a little bit of recovery there, which is good. But it is still hard to predict. I think what we can be comfortable with is that it does, you know, we did do another increase on July 1 in line with kind of the percentage increases we did previously. I think we have pretty good confidence that those increases will continue to be honored by the insurance providers. So that bodes well. And our monthly collections in July were strong again. And so that is always a good barometer. But I have not seen the July results yet

Bob Labick – CJS Securities

Okay great. Then looking at transport trend; they’re still choppy to weak overall. Is this consistent to with what you are seeing with ER admissions at hospitals, or any other drivers you’ve come up with?

Aaron Todd

It’s consistent with what we are seeing with our hospital-based operations, and certainly, you have to look at kind of non-ambulatory ER admissions. And yes, those have continued to be soft. But again, I would characterize – I think July is kind of an aberration, Bob because it was by far the strongest month last year.

There was a big drop off in August and September, which is not typical. And I don’t know what made it so strong, but it was tough comp.

We have been fairly consistent in that 0-1-2% down over the last three months, not counting July. And I think that when you look at July being fairly equivalent to June’s daily average, I would characterize us in being in a flat-to-minimally-down kind of profile.

Bob Labick – CJS Securities

Okay. And looking at, you know, in the past you’ve done some base consolidations, competitors or on your own, I’m thinking of Atlanta in particular. Is there any opportunities out there, or is that on hold with the industry with other –

Aaron Todd

There are a few. We’ve got a few bases where consolidation might make sense in light of the volumes coming in a little weaker than anticipated.

We’ve got a few basis that we kind of placed on a kind of a short watch list, where they’re not really sustaining themselves, and yet some of that volume could be picked up by adjacent basis. I wouldn’t be surprised if we had a few changes in either relocation, or shut down, or getting additional subsidy to keep the service in a local community at a few of our locations.

Bob Labick – CJS Securities

Okay. Well, congratulations on a nice quarter. And we look forward to seeing you in a few weeks at our conference.

Aaron Todd

Thanks, Bob.


Your next question comes from the line of Kevin Ellich from RBC Capital Markets.

Kevin Ellich – RBC Capital Markets

Good afternoon, guys. I was just wondering if you could maybe talk a little bit about what you are seeing in the products division. It looked like the backlog came in pretty good at 21 million. What’s driving that?

Aaron Todd

Most of it is contracts that were anticipated but were just a little bit late in getting finalized for the medial interior manufacturing kit that we provide for the Blackhawk utility helicopter. As well as the MEV, the medical evacuation vehicle, the medical interior that we produced. And it really was just those contracts finally getting secured, and they just came in a little bit earlier. But most of it is on the government side.

Kevin Ellich – RBC Capital Markets

Got you. And then I guess, when we think about that backlog, where do you think that normally should fall out?

Aaron Todd

You mean when will it be recognized? Or how does the level compare to historical?

Kevin Ellich – RBC Capital Markets

Yes. How does the level compare to historical?

Aaron Todd

When you consider our annual external revenues has been in that 25 million range, and we’ve got 20 million of backlog, I mean, that’s close to a year and that’s what I characterize as being on the strong side. It’s up 5 million from the beginning of the year, so it is going in the right direction. I think we would give it a positive note.

Kevin Ellich – RBC Capital Markets

How long does it usually take to come through?

Aaron Todd

We expect the 20 million to be mostly recognized through the second quarter of next year. A big chunk – it will be front ended. So more of it will be in the next two quarters than the second two quarters likely.

Kevin Ellich – RBC Capital Markets

Okay, got you. And then maybe to trend big improvement on the DSO front, just wondering where do you think this could go? How low do you think it can go?

Aaron Todd

Well, we used to say that in the low 100’s was about as low as we were targeting. But what has happened is a lot of payers now accept electronic billing, where as historically that was not as pronounced as it is now. So that is certainly helping the payment. There is also pressure brought to bear on insurance companies to pay in a timely fashion. I would not envision it getting better or being reduced from where it is now. I just don’t see that happening.

Kevin Ellich – RBC Capital Markets

Understood. And then last question, with the cash on the balance sheet and the strong cash flow you guys generate, just wondering what you plan to do with that money?

Aaron Todd

Well, we have, as we mentioned, been applying it to buying out leased aircraft at their early buyout dates, which is a fixed amount. And we can always try to negotiate an acceleration of buyout. But with Air Methods having excellent credit, the lessors are usually content to let the lease run to the next early buyout date.

We can have anywhere from 30 to 50 million of available aircraft to buyout. And when you’re able to increase your EBITDA by anywhere from 15 to 25% of the amount of buyout treasuries that are utilized, it is very accretive to enterprise value that is based upon multiples of EBITDA. It, in addition, gives us the ability to accelerate or to increase our tax depreciation through accelerated methodologies once the aircraft become owned and further defers payment of taxes.

It’s a good use all the way around. Now certainly, we have an ongoing stock-buy-back program in place. And Trent and I do have the latitude given by the board to make purchases from time to time if we believe that the stock prices is getting a very low evaluation. We typically base that on multiple of EBITDA. Our intent is not to retire a significant quantity of shares, but to be supportive at certain levels when we perceive it is grossly undervalued.

Kevin Ellich – RBC Capital Markets

How much is the buyback grant now?

Aaron Todd

We are allowed under our agreement to go purchase as much as 25 million. We have done approximately 5-6 million to date.

Kevin Ellich – RBC Capital Markets

Okay, what about acquisitions?

Aaron Todd

Well, we are always active in evaluating opportunities to grow inorganically. And certainly, while we can’t speak specifically of that, we would be focused on any opportunities within Air Medicine. Certainly we have discussed the idea that we may look to do some vertical integration between ground and air in specific market where we think it would be complementary with our community-based operations.

We have some activity there that we – relative to pursuing opportunities and certainly would have the balance sheet to do a lot of things. Of course, the companies have to be for sale or at least willing to discuss strategic alliances. And sometimes that is the case and sometimes it isn’t.

Kevin Ellich – RBC Capital Markets

Got you, thanks guys.

Bob Labick

Thanks, Kevin.

Sara - Operator

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

Christina Balzac – William Blair

Hi. It’s Christina Blazac for Ryan Today.

Bob Labick

Hi, Christina.

Christina Balzac – William Blair

Aaron, can we start, we know you’ve been visiting with your HBS clients recently, can you share with us any insights on their level of insurance, and the outsourcing model and potential conversion from HBS to CBS?

Aaron Todd

Sure. My primary reason for visiting them is to educate them in some of the incredible things we’re doing around safety management, safety technologies, and our safety management systems.

We’re doing some wonderful things that are truly innovative. They are embracing some the safety programs that are in place within the commercial part 121 carriers.

Of course, we had a press release earlier in the year that described that we were one of only a few aviation companies in America that had exited level one as determined by the FAA’s office. So really, just doing a lot of those kinds of discussions.

We typically do not try to push our hospital customers unless we think it might be in their best interest to outsource, as certainly we want to be support to them however they would choose to partner with us.

That being said, with the uncertainty and concern associated with Healthcare Reform, many of our hospital customers are looking to ensure that they have lean operations, that they are focused on their core services, and that they are getting prepared for that uncertainty, and are taking a hard look as to whether they want to continue to be in an ownership position with the Air Medical program rather than – or rather in an affiliate position, having, you know, outsourcing the service and converting it into a community-based operation.

We have been pretty consistent in saying that our objective is to try to have about eight locations a year would be an outlook for hospital-based operations converting to community-based.

We’ve had commitments or have accomplished a combined about five in the recent couple of quarters. So I would say we are on pace to see about eight per year convert. But again, that will be on the timeframe that the hospital sets, not as we would try to push to occur.

Christina Balzac – William Blair

Sure, of course. That is helpful. Aaron. Thank you. Second, can you give us an update on the labor contract and any specifics on the pilot’s union renegotiation?

Aaron Todd

Yes. Last November or December there wasn’t a lot of progress being made, and there were no new meetings scheduled. But at the same time, neither the company nor the union asked to be released from mediation.

I think there was kind of a bit of period of time to regroup and determine what was most important.

We have agreed to come back to the table and place our key issues on the table, and maybe put to the side some of the lesser issues, and see if we can’t get some movement on these matters.

If not, then the hope would be we might be able to elevate the negotiations up within each respective organizations and try to get more of a spirit of conciliation. And then if that doesn’t occur, either us or the union could ask to be release from mediation.

That request may or may not be granted. There may be other processes that are to be followed before that can occur. But once a release from mediation is granted, there is a 30-day cool off period, and either side can basically follow the path that they had originally set forth.

Christina Balzac – William Blair

Great, that’s a nice update. My last question is can you share with us any – where you stand right now on fuel hedging for the remainder of 2010?

Aaron Todd

Yes. We’re hedged to the end of the year because of the sideway motion of the fuel and the flattening of the fuel curve, the forward curve. We did delay more than we otherwise would to set that in. We’ll probably, in the next week or two, layer in a hedge at least for the first six months of 2011. And then probably towards the end of the year layer in the second half hedge.

By waiting, although it’s – the price per barrel has gone up a little bit, that has been more than offset by the cost of having procured the hedge earlier. So we are still in very good shape to lock in that hedge for the first half of 2011.

We typically like to be about a year out in our hedge strategy, and again just for those who may not been focused on this, we typically will hedge against severe movements up greater than 20% from current market. And we pay a premium for that rather than a no-cost collar, which allows us to benefit from any decreases in the price of fuel no matter how far it goes down. That seems to have worked well for us to neutralize fuel as a major factor in earnings volatility, while at the same time limiting our upsides should fuel should decline.

Christina Balzac – William Blair

Thanks. Congratulations on a nice quarter.

Aaron Todd

Thank you.


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

Kevin Campbell – Avondale Partners

Great. Just one question from me. I know historically in the past when you have had a really strong pricing quarter there have periods where you have said you felt like it was maybe an unusual quarter and not to model that going forward. Do you feel that way about second quarter results or - ?

Aaron Todd

You know, I think it is a little on the high side. Maybe it’s a $100-$200 a transport higher. But keep in mind, I’m also doing a July 1 increase.

I suppose if you want to be conservative and kind of bring it back to around that 8,000 level and then build in a price increase, you might be back to where you started. But I would certainly characterize it as a healthy number.

If payer mix starts to shift in our favor, which there is nothing to indicate that it would or should, then that could certainly cause it to exceed. But I would certainly characterize it as a strong number. It’s not an abnormal number.

The reason why as a percentage year over year it looks high is that the prior year quarter was exceptionally weak. It was the weakest of the four quarter, and this one is on the healthy side. Putting a little cushion in there, Kevin, for a more average quarter is never discouraged.

Kevin Campbell – Avondale Partners

Just to be clear, you said your price increase on July 1 was consistent with what you’ve done is the last couple of quarters, so about 5% for commercial?

Aaron Todd

Yes, that is certainly what is stated in the Q as well.

Kevin Campbell – Avondale Partners

Okay. Any expectation you do one on October 1, or –

Aaron Todd

You know, a lot will depend on where volume goes and how payer mix shifts. But we certainly would never rule something like that out.

Kevin Campbell – Avondale Partners

Thank you very much.


(Operator Instructions) At this time there are no further questions.

Bob Labick

Very good. Again, we apologize for the technical glitch, but it was after hours and everybody now has the release, and we appreciate your participation and your patience. And again, call us if you have a more detailed question that we weren’t able to get answered for you. We will be around. Take care.


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

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