TeamHealth Holdings, Inc. Q2 2010 Earnings Call Transcript

Aug.11.10 | About: Team Health (TMH)

TeamHealth Holdings, Inc. (NYSE:TMH)

Q2 2010 Earnings Call Transcript

August 11, 2010 10:00 am ET

Executives

Tracy Young – VP, Communications

Greg Roth – President and CEO

David Jones – CFO

Lynn Massingale – Executive Chairman

Analysts

Joanna Gajuk – Bank of America

Adam Feinstein – Barclays Capital

Robert Mains – Morgan Keegan

Kevin Ellich – RBC Capital Markets

Andreas Dirnagl – Stephens Inc.

Dawn Brock – Kaufman Bros

Kevin Campbell – Avondale Partners

Operator

Good morning and welcome to TeamHealth’s fiscal second quarter 2010 earnings conference call. Today’s call is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

At this time, I would like to turn the conference over to Tracy Young, Vice President of Communications at TeamHealth. Please go ahead.

Tracy Young

Thank you and good morning, everyone. Before we begin, let me remind everyone that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements, including remarks about future expectations, anticipation, beliefs, estimates, plans and prospects.

Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of TeamHealth to be materially different from the performance indicated or implied by such statements. Such risks and other factors are set forth in the company’s 2009 Form 10-K and the second quarter 2010 Form 10-Q as filed with the Securities and Exchange Commission.

A reconciliation of adjusted EBITDA to net earnings calculated under GAAP can be found in our earnings release, which is posted on our Web site, at www.teamhealth.com, and in our Form 10-Q.

I will now turn over the call to our President and Chief Executive Officer, Greg Roth.

Greg Roth

Thank you, Tracy, and good morning, everyone. I’d like to welcome you to TeamHealth’s second quarter 2010 earnings call. In addition to Tracy, I’m joined by Dr. Lynn Massingale, our Executive Chairman; and David Jones, our Chief Financial Officer.

I’ll start with a discussion of the drivers of our second quarter results. David will review our financial performance. I will then provide comments on our outlook for the remainder of 2010 before we open up the call for Q&A.

First, I’d like to thank our physicians, other clinicians and administrative employees for their hard work and dedication during the quarter. Our number one priority is caring for the patients of our client hospitals.

Highlights of our second quarter results include – net revenue less provision for uncollectibles grew 3.7%. Net earnings increased 18% to $18.6 million or $0.29 per share on a fully diluted basis.

Excluding the impact of a non-cash impairment charge, net earnings were $20.2 million or $0.31 per share on a fully diluted basis. Adjusted EBITDA increased 15% to $46.9 million and adjusted EBITDA margin increased 120 basis points to 12.5%.

We are pleased with our second quarter results which were highlighted by our strong quality of earnings. It generated top line growth led by our M&A platform and demonstrated the financial flexibility of our business model and effectively managing our cost structure to drive growth in earnings, EBITDA and EBITDA margin.

As we anticipated, acquisitions were the largest contributor to revenue growth. The four acquisitions that closed in 2009 and the two that closed in the first quarter of this year have been fully integrated and continue to deliver solid contributions to revenues, earnings and cash flow.

We believe our acquisition strategy will continue to play an enhanced role in growth for the remainder of 2010 and we continue to be an active participant in the M&A marketplace. To this point, yesterday we announced the acquisition of Morningstar Emergency Physicians, an Oklahoma City-based ED group, with approximately 500,000 annual patient visits.

Morningstar is a high quality physician group with an outstanding reputation and we are excited about the opportunity to partner with them in this market. This acquisition significantly expands our operational footprint in Oklahoma and Kansas and provides an additional regional platform for future growth.

Our acquisition strategy continues to focus on finding well managed operation that can be easily and rapidly integrated to our organization and are immediately accretive to earnings.

We continue to see a great deal of interest that has generated strong M&A pipeline and the current environment continues to yield some attractive growth opportunities from both acquisitions and new contract sales.

We are also pleased with our growth in same contract revenue. Due to the strong patient volumes driven by the flue and H1N1 2009, we are facing challenging year-over-year same contracts volume comparison. Despite the tough comparison, we delivered overall same contract revenue growth that was driven by both, fee-for-service volume and rate increases.

While growth in estimated collections per visit was a larger contributor to our same contract revenue increase, we did realize a modest increase in same contracts volume between quarters.

Also, as anticipated, overall net new contracts were impacted by decline in military staffing business. While this business did experience a quarterly percentage decline, that was higher than our full year estimate for the business, we continue to project approximate 3.5% decline revenue from this business which is consistent with our original 2010 expectations.

This view in support by the recent positive development related to a significant contract scheduled to be online at the beginning of the year that was delayed until July. The delay was due to our working through the incumbent protest process which happens from time-to-time in military staffing business.

We are the largest military healthcare staffing provider and have consistently like-sized our cost structure for this business to ensure that it has consistently generated positive cash flow.

Excluding the military operations, net new contract growth made up 0.4% positive contribution to overall revenue growth between quarters. We are pleased with our ability to adjust our cost structure in response to the softer patient volume in the beginning of the year.

We accelerate our plans to drive improvement and revenue cycle performance, professional service expense, as well as general and administrative cost. We improved our average collection per patient and drove margin expansions through cost management despite the continuation of the modest same-store volume growth.

We expect to see continued benefits from our cost management and investment throughout the remainder of 2010. In addition, we continue to make significant investments in operational best practices in information technology resources to supply our growth strategy.

We continue to be excited about the strengths of our strategic position and the opportunities for profitable growth either organically, by acquisitions or through opportunities in adjacent markets over the remainder of 2010 and beyond. With that I will turn the call over to David Jones, our Chief Financial Officer. David?

David Jones

Thank you and good morning everyone. Following the market close yesterday, we issued a press release and also filed our Form 10-Q reporting our second quarter 2010 financial results. My comments today will include a review of our second quarter and year-to-date results. We will also highlight and expand on some of the key issues for the company during the quarter.

During the second quarter of 2010, net revenue less provision for uncollectibles increased 3.7%, to $375.5 million. Acquisitions contributed 5.5% to the total growth rate, same contract revenue contributed 2.5% and non-military net new contracts contributed 0.4%, while net contract changes within our military staffing division constrained revenue growth by 4.6%.

Same contract revenue increased 2.8% to $332.4 million with an increase in estimated collections on fee-for-service visits contributing 4% of total growth. Increases in fee-for-service visits contributed 0.6%, while changes in contract and other revenue constrained growth by 1.8%.

The improvement in estimated collections per visit of 5.6% was driven by increases in the average acuity level of patients and increases in Medicare commercial and managed care reimbursement, which were partially offset by changes in payer mix between periods.

In light of the very strong same contract volume growth reported in the second quarter of 2009, same contract fee-for-service visits realized a modest increase of 0.9% during the most recent quarter.

The provision for uncollectibles was $280.4 million. As a percentage of total net revenue, the provision declined to 42.8% in 2010 compared to 43.0% in 2009. As a percentage of fee-for-service revenue only, the provision for uncollectibles declined to 51.4% in 2010 compared to 53.1% in 2009.

In regard to fee-for-service payer mix changes, we continue to realize a decline in self-pay volume as a percentage of total volume. Specifically, self-pay fee-for-service visits declined to 21.2% from 21.9% of total fee-for-service visits in 2009.

However, we also continue to see a modest shift in payer mix with increases in the Medicaid mix and declines in the commercial mix of patients. Medicaid patients as a percentage of total visits increased to 26.6% from 25.4% during 2009, while commercial patients declined to 27.8% from 28.8%.

With fee-for-service volume growth below historical trends, we emphasize appropriate cost management during the year. Professional service expenses increased by 2.0% to $283.6 million, but declined as a percentage of net revenue less provision by 130 basis points to 75.5%.

Professional liability cost for $13.3 million compared to $12.4 million in 2009. As a percentage of net revenue, professional liability costs were 3.5% compared to 3.4%.

General and administrative costs increased 4.2% to $32.9 million. The overall increase in G&A cost was attributable to acquisitions during the period as core costs in this category declined by approximately $1.1 million between quarters. As a percentage of net revenue less provision, G&A cost were 8.8% compared to 8.7% in the same period of 2009.

Net interest expense declined to $4.9 million from $9.0 million due to reduce levels of outstanding debt associated primarily with the first quarter 2010 bond redemption and lower borrowing rates on a term loan facilities, offset by modest increases in interest rate hedging cost and reductions in interest income.

Reported net earnings were $18.6 million or $0.29 diluted net earnings per share compared to $15.8 million or $0.32 pro forma diluted net earnings per share in 2009.

The 2010 financial results reflect a contract intangible impairment of $2.5 million associated with the contractual relationship acquired in the prior year whose expected term is now anticipated to be less than initially estimated. Excluding this charge, diluted net earnings per share was $0.31 for the current period.

Please note that 2009 earnings per share amounts are pro forma for the retroactive effect of the conversion of the company’s limited liability equity interest into shares of common stock at the time of the December 2009 IPO. As defined under our bond indenture, adjusted EBITDA for the second quarter of 2010 increased 15% to $46.9 million and the adjusted EBITDA margin increased by 120 basis points to 12.5%.

During the quarter, cash provided by operations increase to $25.2 million compared to $19.1 million for the corresponding quarter in 2009, driven largely by the $8.5 million reduction in interest payments between quarters.

Looking at our year-to-date through June 30, net revenue less provision for uncollectibles increased 4.0% to $740 million. Acquisitions contributed 5.8% to the growth rate, same contract revenue contributed 1.3%, and non-military net growth contributed 1.0% and declines in our military staffing division constrained revenue growth by 4.1%.

Reported net earnings were $29.5 million or $0.46 diluted net earnings per share compared to $41.7 million or $0.85 pro forma diluted net earnings per share in 2009.

The 2010 year-to-date results include costs associated with our bond redemption of $16.2 million and the impairment charge of $2.5 million, offset by the favorable adjustment of professional liability reserves related to prior years of $7.2 million. The 2009 results include the favorable professional liability adjustment of $18.8 million.

After excluding these adjustments in both periods, diluted net earnings per share for 2010 were $0.56 compared to $0.62 for 2009. Adjusted EBITDA was $92.7 million compared to $100.3 million in 2009.

Excluding the impact of the prior year professional liability reserve adjustments in both periods adjusted EBITDA increased 4.9% to $85.5 million from $81.5 million and the adjusted EBITDA margin increased to 11.5% compared to 11.4% in 2009.

Turning to the balance sheet categories, as of June 2010 we had cash and cash equivalents of $33.3 million and an undrawn revolving credit facility of $125 million. As a result of bond redemptions during the first quarter, and $2.1 million of scheduled debt payments on the term debt during the year, our total debt outstanding at June 30, was $451.4 million.

As of June 2010, net accounts receivable totaled $255.3 million compared to $237.7 million at December 2009 with overall days in receivables declining to 61.4 days from 62.3 days between periods.

Year-to-date through June 2010, capital expenditures were $3.9 million compared to $4 million in 2009 and cash paid for acquisitions totaled $4.2 million compared to $2.7 million in 2009.

I’ll now turn the call back over to Greg, for his concluding remarks.

Greg Roth

Thanks, David. Looking ahead we continue to expect our full year revenue growth rate for 2010 to be at the lower end of the 6% to 8% range which includes an expected decline in our military contracts and division revenue of approximately 3.5% of total revenue.

This target also includes anticipated contributions from the Morningstar Emergency Physician Group in the second half of 2010. However we continue to view our longer term revenue growth rate opportunity to be range of 8% to 10%.

Following the completion of our first half results, we now expect to generate adjusted EBITDA for fiscal 2010 in the $154 million to $156 million range. Reflecting an increase from our previous year of approximately $150 million which will be driven by an adjusted margin of 10% to 10.5%.

Consistent with prior years, our revised outlook for 2010 assumes a reduced EBITDA contribution in the second half of the year due to normal seasonal impacts on our operating model.

With that operator, would you please open the line for questions?

Question-and-Answer Session

Operator

(Operator instructions). And our first question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Joanna Gajuk – Bank of America

Actually, this is Joanna Gajuk for Kevin. First thing, can you give us maybe more color on the Morningstar acquisition in terms of the pricing compared to average for the company and maybe some color on the (inaudible) multiples?

David Jones

Hey, Joanna, this is David. Thanks for the question. The Morningstar acquisition as we announced yesterday, from our standpoint, we would consider it a regional platform opportunity. They are a great group of physicians headquartered in Oklahoma City. They work with about 15 customers right now. They’ve got some presence in both Oklahoma and Kansas. In regard to terms and purchase price, we will really not disclose that.

To give you some idea though in the press release, we referenced 500,000 annual visits out of that group. I would say just because of sort of the market there, the average revenue per patient is a little bit less than what I would say our consolidated average revenue per patient looks like. But nevertheless it’s still a very good opportunity for us and we are quite excited about.

We’ve talked before about purchase price multiples and sort of a core target of four to six times, that tends to be really when we are dealing with often times a lot of, what I refer to as the tuck-in acquisitions. The larger size acquisitions that we have a little bit less perceived, are customer risk, due to customer concentration we might be willing to pay a little bit higher multiple. But about giving the details of this one, this is a transaction that we are very excited about from an operational standpoint and are very comfortable that it contributes to not only the revenue growth but also earnings growth on a go forward basis.

Joanna Gajuk – Bank of America

Just to conform, so now your guidance includes also the Morningstar acquisition, correct in the second half.

David Jones

Right, and really from the beginning even last quarter when we affirmed our guidance, sort of in the 6% to 8% revenue growth range, even though we sort of oriented little bit to the lower end of that range, that considered and contemplated that we would be doing additional acquisitions in the year. You might appreciate that at the time of the call we were in pretty deep dialog with this particular group and we were cautiously optimistic. So our original guidance all year really contemplated this type of transaction in 2010.

Joanna Gajuk – Bank of America

And then on the quarter, the question on your interest expense, because I guess I believe on the first quarter call you were talking about $4.5 million interest expense per quarter, and I guess we have seen a slightly higher number this quarter, so the question is whether this is the run rate going forward?

David Jones

I think we did reference a number that I think last year or last quarter was a little bit lower than what we saw. This quarter it was about 4.9. I think there were a couple of things that did create a little bit of volatility in terms of some hedging cost and some interest income. Interest income is a little bit down this year or this quarter compared to last quarter. I do think this is probably a better number on a go-forward basis. It is a pure number in the second quarter. It has none of the residual effects of some of the interest cost associated with the bonds that were redeemed in the first quarter.

Joanna Gajuk – Bank of America

And then my last question on the military business you still expect to see 3.5% that is required for this year, but do you have any more visibility about the following contracting because I guess there was annual bidding process for this contract, so if you can provide us with more color?

Greg Roth

This is Greg. On the military side, as you said, we are projecting about 3.5% all-in, even though this quarter was a 4.6% decrease. We are in the middle of the contracting cycle right now. Pretty much we’re on plan what we expected to achieve, but we’ll have more color this time for the call next quarter, but we’re still in the middle of the contracting cycle.

Operator

Our next question comes from the line of Adam Feinstein with Barclays Capital. Please go ahead.

Adam Feinstein – Barclays Capital

I have Bryan Sekino here also. Let me start. I just wanted to talk a little bit more about volume trends. You guys showed volume growth and not many companies did in the current quarter. So maybe to talk about (inaudible) was a little bit lower than what I know you normally target, but you talked about the difficult comps in a challenging environment.

Maybe just curious, Greg, to get some thoughts in terms of how you think about volume growth, what do you think is going on out there in terms of emergency rooms in the context of just lower utilization throughout health care right now, and then just what visibility you have in the back half of the year?

Greg Roth

I guess the way that I would see it, if we look at the volume for this quarter and looking at our business, as you know, Adam, we’re a little heavier on the eastern side of the country than the western side. Looking at this quarter, we had softness on the western side of the country and actually did, relatively speaking, better on the east and southeastern side of the country. So I think that explains why our volume was a little better than anticipated.

I think it was 7% in the prior year, so we’re very pleased with a, call it, 1% increase this year. As far as utilization, we still are working through. As you know, we do a pretty detail analysis on the flu. We don’t talk about those numbers specifically, but generally speaking, we still see the compression was due to the flu this year.

David Jones

In regard to our views on the second half of the year, I think we continue to be extremely cautious about our outlook on volume growth over the next couple of quarters. We have, as Greg alluded to, in this quarter we had a very challenging comp from last year and we really continue to have pretty challenging growth comps in quarters three and four. So our position is very cautious.

We have seen over the past six months, though, an improvement over the beginning of the year in just the overall volume trends. January and February were very soft on a per day basis, March was a little bit better and we’ve seen not necessarily a continuing improvement, but a continuation of that March improvement in the second quarter.

We are quite cautious on our outlook for volume growth and don’t expect it’s going to get back to what we would consider a normalized historical growth rate of 2.5% to 3.5% in the second half of the year just because of those comps we have in front of us.

Adam Feinstein – Barclays Capital

I was curious if you can drill down on the professional service expense line. It came in much lower than we had anticipated it. I wanted to know if these are short-term cost reductions or we can expect similar level of year-over-year reduction for the rest of 2010 and 2011 as well.

Greg Roth

I think that we are working very hard to match our overall cost with lack of growth on the volume side. Obviously, on the military side, we’ve done a lot of work in that area, for that piece of business, the significant decrease in revenue on our core business. We have worked very hard to match our professional expenses with our volumes. I would not anticipate that type of a margin continuing on a go-forward basis. Dave, if you want to add anything to that?

David Jones

No. There is a natural seasonality to our business as well that will impact we think the margin in the second half. What we’re really looking at on our core same contract business is trying to really manage the growth rate of those cost. You can’t really often times cut or reduce cost on a core business, because we have got to be extremely competitive with market comp, in specific hospitals we are working with. If we are seeing a little bit of an incremental increase in volume, there is some staffing requirements there. So over the natural cycle of our business, over the course of the year we do see increases occurring, three and four.

The other thing we do tend to see a little bit softer revenue impacting the second half of the year and so when you got a scenario where you are seeing sort of a normal inflationary adjustment in cost increases combined with a little bit of softness may be in revenue, for the second half of the year, we would expect some of the volume or some of the margin to come down a little bit. We are very pleased with the results this quarter but, we don’t want folks to annualize the first half of this year and think that’s sort of a full year number or even sort of the margin right now and that’s sort of our new go forward margin. That is again just a normal seasonal aspect of this business where it bumps around a little bit.

Operator

Our next question comes from the line of Robert Mains with Morgan Keegan. Please go ahead.

Robert Mains – Morgan Keegan

Thanks good morning. Did you see any difference in volumes between the emergency departments and some of the other businesses that are kind of more tied to in-patients business?

Greg Roth

No Rob, we did not.

Robert Mains – Morgan Keegan

Okay and when you look at the volumes, going through the emergency department; anyway to kind of parse out to respiratory or something like that to see, maybe get an estimate on underlying growth x-flue?

Greg Roth

Yes, Rob I would just say broadly that, we look at this data and our expectation is, in our general guidance as we look at is, that there was an impact on the flu but, I don’t think we want to disclose those numbers, because it’s such raw data and you have to estimate based on diagnoses. But generally speaking, I would say that directionally it’s still impacted the volume this year.

Robert Mains – Morgan Keegan

We have heard from some quarters that there may be increased activity on the part of the hospitals to own more other doctors, hire doctors on staff. I’m assuming that that is not a big trend in the hospital based specialties that you’re looking at, but I just want to get some confirmation of that?

Greg Roth

Rob, this is something that happens from time-to-time. I would say that every year that happens and has happened since I’ve been here a little bit. But we have not seen an uptick in that area, especially on the ED side.

Robert Mains – Morgan Keegan

Okay, nor in the other specialties?

Greg Roth

I would say that every once in a while you’ll see a hospital medicine contract go that way and that has happened over the last few years, but it’s not that common.

Robert Mains – Morgan Keegan

So, nothing that you’ve would identify as a new trend.

Greg Roth

I would not characterize it as a new trend, correct.

Operator

Our next question comes from the line of Kevin Ellich with RBC Capital Markets. Please go ahead.

Kevin Ellich – RBC Capital Markets

Just wondering if we could go back to the acquisitions, and do you guys provide how much you expect to spend annually on acquisitions?

Greg Roth

We do not.

Kevin Ellich – RBC Capital Markets

And then could you talk a little bit about the type of visibility you have on the other deals, and how long does a big deal like Morningstar usually take to close?

Greg Roth

We have several opportunities that we’re looking at and Morningstar Emergency Physicians is a great acquisition, great doctors, great leadership and we are very excited about it. I would say this is a little bit unusual for us to size and that happens from time-to-time. But often these types of what we would consider for us a larger acquisition may take a year or two or three sometimes.

So we are not anticipating closing these deals on a regular basis. I think we are very focused on the tuck-ins, the tuck-ins work very well for us, they are easy to integrate, they are immediately accretive and we’re more focused on that but we’re always looking at the larger regional groups for opportunities to help us broaden our platform.

Kevin Ellich – RBC Capital Markets

So would you say Morningstar was in the works for more than a year?

Greg Roth

I would say that it was in the works all of this year, yes.

Kevin Ellich – RBC Capital Markets

And then just wondering, what are the specialties you guys really want to focus on and what looks most appealing from a strategic standpoint?

Greg Roth

Well, we start with the ED, that’s our core business and as you know we acquired Anesthetix which is a really high quality acquisition in December of last year and we’re having success in that area. We’ve integrated that acquisition very well. We’re pleasantly not surprised, we’re pleasantly pleased with the activity that we’ve had with them. We see as a huge growth opportunity, we do believe that they are going to continue to grow significantly on the sale side and at some point we might want to look at an acquisition in that area.

So I would say first ED and then second anesthesia, potentially hospital medicine, but we have not seen a hospital medicine acquisition that we like the price of. The valuations are pretty high right now on hospital medicine.

Kevin Ellich – RBC Capital Markets

Just one last question on the Anesthetix side. Actually two part. Typically, how much are you able to include the billing and collections, I mean is that part of the strategy? Also, have you been able to retain the key employees like Dr. Gottlieb and Dr. Ramani?

Greg Roth

On the improving the revenue side, that’s not something that we publicly disclosed. I would say it’s not really our strength right now in the area of anesthesia. I think we are good at it and we have good results, I should say. On the ED side, we’ve been doing that for 30 years and are extremely good at that. As far as keeping the key employees, we did keep the key people, and quite frankly, we would not do a deal of that size without keeping the key employees. We did keep all the key employees for Anesthetix and we kept all the physician leaders in the Morningstar acquisition as well.

Operator

Our next question comes from the line of Andreas Dirnagl with Stephens Incorporated. Please go ahead.

Andreas Dirnagl – Stephens Inc.

Just a couple of follow-ups as well on the acquisition side. Just out of curiosity, David, in terms of your ex-in revenue guidance and your newly updated EBITDA guidance, are there any further assumptions of acquisitions in those numbers?

David Jones

Not really. I think we still have, what I would call, a reasonably good pipeline, but the reality, as we get closer to year-end, any impact is probably going to be negligible. Not to say we’re going to be out there; we are going to be out there, working the pipeline. If we could close a couple between now and the end of the year, that’s great, but once again, I think any contribution is not going to be that significant just giving the timing of when we might be close something.

Andreas Dirnagl – Stephens Inc.

So there’s nothing specifically baked in like Morningstar was?

David Jones

No, not at this point.

Andreas Dirnagl – Stephens Inc.

And then, Greg, maybe just some commentary, if you could, in terms of the process on Morningstar. I’m just more curious, was this a private conversation you were having with the group and you eventually came to term or was there some bidding process involved?

Greg Roth

Andreas, I would say that for this particular opportunity and almost all the opportunities that we have there almost always a private opportunity. As you know, we care a lot about being a physician-friendly organization, spend a lot of timing having dinners and talking to physicians and comparing notes and trying to find a way that we can both be successful, and this was a very similar deal.

Lynn Massingale

If I may, Andreas, we have a small but we think effective M&A team that’s made up of non-physician leaders with experience, but we also have a number of other physician leaders who talk to groups they know around the country because that’s really where the knowledge. And then we try to go out and sit with those groups candidly as we did in the early ‘90’s when there was a lot of upheaval in health care and a lot of uncertainty. We talk to groups about what we think what the future holds and what our risks and opportunities are in the specialties that we are working. Those conversations may or may not turn into more subjective conversations and letters of intent, that sort of thing.

So, it can be a long process in terms of going from introductory meetings to closing the transactions, but that’s generally how they work. M&A guys have some conversations independently, some of our physician leaders have conversations independently, and then we wind-up with that combination of folks in a room, talking more seriously about what might happen and how this might work. That’s exactly the nature of Morningstar. We talked with them for a long time, they are a great group, and in all that, the timing came together more quickly over the last few months, but conversations can sometimes take a long time as David said earlier.

Andreas Dirnagl – Stephens Inc.

In other words, this sort of transaction is not just negotiating a specific price; it may very well involve convincing that they want to be sellers?

Lynn Massingale

Certainly, that’s true. I guess if you look from our standpoint, these were usually not auction processes, our interest in acquisitions are not groups that are in trouble. They are good groups with good doctors that have either some risk that they face or maybe the things we provide.

As you know, we’ve done cost-effective investments in infrastructure, in IT, in processes for improving emergency department performance, things that’s hard for smaller groups and even regional groups to bring to the table. At the same time, they bring to the table a long track record with the hospital, good experience with the hospital. We’ve visited all these Morningstar hospitals and we are very satisfied with their services, glad to see us partner with them to bring some new things to the table.

Operator

Our next question comes from the line of Dawn Brock with Kaufman Bros. Please go ahead.

Dawn Brock – Kaufman Bros

I just have a couple of questions, and we’re probably beating a dead horse on guidance, but I just want to make sure that I’m comfortable with this. The revenue right now of 6% to 8% growth is you are comfortable with the lower end of that range, EBITDA up about 50 basis points and military firmly at negative 3.5% versus that range of negative 3% to 3.5% from the beginning of the year. Do I have that right?

Greg Roth

Dawn, this is Greg. Yes.

Dawn Brock – Kaufman Bros

And secondly, again with the acquisition, you said that Morningstar was in the hopper in all of 2010, is it then fair to assume that the $65 million in non-binding LOIs from the first quarter call was completely associated with Morningstar?

David Jones

It was not completely but you might appreciate, a fairly large transaction, that was a large portion of it but there were some other transactions included in that number.

Dawn Brock – Kaufman Bros

And then my second question on Morningstar is, as a new regional platform opportunity it sounds like it will end up being a new regional office in Oklahoma City, so that will take you to 14 regional office, kind of fill in that gap in the Midwest. Are there going to be additional initial costs associated with rolling that into your existing infrastructure and support system?

Greg Roth

I would say that we’re excited to have them, they want to grow. One of the reasons why we did this acquisition was; one, they are a great group and two; they are very interested in growing which aligned with our interest very well. So we do plan on growing. I would say there would be some modest increases, part of why they came with us was to have all the support and have all the tools that we’ve developed, so that there will be a modest increase but not a significant increase in overheads.

Dawn Brock – Kaufman Bros

My last question is just on the military side; it makes perfect sense that the second quarter was probably going to be the worst quarter for lack of better terms. Can you just give us a little bit of color on contract churn and why the second quarter will be the worst and how you kind of get us to that down negative 3.5 of being kind of your base line for how bad it can get?

Greg Roth

I think that is as far as how bad it can get. We believe we’ve got visibility into the remainder of the year for the most part. We’re in the middle of the contracting cycle. So there is still significant number of moving parts. We’ll have a lot more clarity. Normally these contracts are wrapped up by October 1 and it takes a little while to sometimes understand exactly with much precision, would these work for us financially. So normally by sometime in October we have much more clarity. Also if I could mention that we did start some business at the end of this quarter that’s starting to ramp up which will help us for the third and fourth quarter of this year that is known.

David Jones

The other thing, keep in mind if you look back at the performance of the military division; some of this downward movement that we saw in revenue actually started in the fourth quarter of last year. So we’re coming upon sort of the cycle where the comparisons on revenue growth get a little easier in the fourth quarter because of that and that combined with, as Greg said, some of the new business we’re starting gives us comfort with our view right now that is ultimately the 3.5% decline for the full year even though we’re little bit worse than that year-to-date and in the second quarter.

Dawn Brock – Kaufman Bros

That’s actually what I was thinking, so I thought that you had an anniversary in the fourth quarter and that that would actually made that fourth quarter number considerably less worse than the second and third quarters.

Operator

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

Kevin Campbell – Avondale Partners

Just two quick ones, does your longer term 8% to 10% revenue growth assume some level of acquisitions and it is well or that sort of a true organic growth with same contract plus.

Greg Roth

It does include some level of acquisition.

Kevin Campbell – Avondale Partners

Can you give us a sense of excluding acquisitions what may be the long term growth should be?

Greg Roth

I think normally we look at our growth model, as we talk about portfolio of growth opportunities and I think that we normally talk about the growth piece of the portfolio of acquisitions of 2% to 4%.

David Jones

We really look at it as a range. There is each of the growth areas, the same contract, the new organic and in the M&A each can sort of move independently in terms of what does in a given year towards contribution. 2010, we said from the beginning, we are not going to get a lot of lift from our organic but normally we would expect without these big comps to get about 4% to 6% of our overall revenue growth coming from same contract and we think sales can do, sort of 2% to 4% and some years is going to be stronger than others, some year its up, some year its down and we do think sort of M&A the 2% to 4% as well.

So that gives you a bit of a range, sort of in the low end of all those, it’s about 8%, on the high end if everything hits its 14% that’s where we sort of settle in, sort of mid-point where we think it’s, call it the 8% to 10% assuming not all these will be maxing out nor all these piece sort of hitting the bottom of our expectations.

Kevin Campbell – Avondale Partners

Great that’s very helpful. And then lastly on Morningstar; are the margins associated with that business in line with your average EBITDA margins, or are they a little bit better or little bit worse. Can you just give us a sense?

Greg Roth

I would say, comparable.

Operator

Thank you. There are no further questions in queue at this time. I’d like to turn the call back over to Mr. Roth for closing remarks.

Greg Roth

Great. Thanks a lot. I’d like to thank everybody for spending time with us today. I hope you have a good week. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes our conference for today. We’d like to thank you for your participation and you may now disconnect.

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