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Rural/Metro Corp. (NASDAQ:RURL)

F2Q08 (Qtr End 12/31/07) Earnings Call

February 11, 2008 11:00 am ET

Executives

Liz Merritt - Managing Director of IR and Corporate Communications

Jack Brucker - President and CEO

Kristy Ponczak - SVP and CFO

Analysts

Lawrence Weiss - Citigroup

Sal Kamalodine - B. Riley Investment

Robert Wetenhall - Royal Bank of Canada

Kyle Smith - Jefferies & Company

Dennis Wurst - vFinance Investments

Operator

Good day everyone, and welcome to the Rural/Metro Second Quarter Fiscal Year 2008 Financial Results Conference Call.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Liz Merritt. Please go ahead.

Liz Merritt

Thank you, operator. Prior to the opening of the market today, Rural/Metro reported un-audited results for its fiscal 2008 second quarter ended December 31, 2007. If you have not received a copy of the news release, it is available on our website at www.ruralmetro.com.

We have arranged for a taped replay of this call, which will take effect approximately one hour after the call's conclusion and remains in effect through midnight Eastern on Tuesday, February 12, 2008. Instructions to access the replay are contained in today's news release.

Our call is also being webcast and can be accessed at the Rural/Metro website where an archived replay of the call will be available for the next 90 days. Please note that today's call is copyrighted material of Rural/Metro and cannot be rebroadcast without the company's express written consent.

As a reminder, during the course of this conference call, management may make projections or forward-looking statements regarding the company's beliefs about its business prospects and disclosure about what management believes is affecting its financial performance. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements.

These risks and uncertainties include, among other things, the company's ability to collect its accounts receivables, maintain operating cash flows, secure new contracts, retain existing contracts and improve earnings and operating margins, and additional factors described in the company's filings with the Securities and Exchange Commissions.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to have been correct. These additional factors are included in the company's quarterly report on Form 10-Q for the period ended December 31, 2007 as well as other factors described from time-to-time in the company's SEC filings.

The company's forward-looking statements are based on information available today and it undertakes no obligation to update these statements, whether as a result of new information, future events, or otherwise, except as required by securities laws.

I will now turn the call over to Jack Brucker, President and Chief Executive Officer.

Jack Brucker

Thank you, Liz and thank you all for joining us this morning. With me today are Kristy Ponczak, our Senior Vice President and Chief Financial Officer, and Liz Merritt, Managing Director of Investor Relations and Corporate Communications.

We are pleased today to present results for our fiscal 2008 second quarter ended December 31, 2007. We believe these results reflect ongoing progress as we continue to execute on our business plan to generate sustainable revenue growth, minimize exposure to uncompensated care, and enhance billing and collections performance. A particular note is the improvements resulting from our ongoing efforts to reduce write-offs associated with uncompensated care.

We continue to experience significant improvement in key metrics we use to measure the effectiveness of our billing and collection efforts. For example, APC, which is our best approximation of cash collected per transport, grew to $352 per transport in the second quarter, up from $348 in the first quarter of fiscal 2008 and $342 per transport year-over-year.

DSO, which is a measure of the average time it takes to collect on each transport, held steady at 64 days in the second quarter, when compared to the first quarter of fiscal '08. On a year-over-year comparison, this statistic is showing a meaningful four day improvement, compared to the DSO of 68 days in the second quarter of fiscal 2007.

Write-offs of uncompensated care, as a percentage of gross ambulance transport revenue, trended positively over the last four consecutive quarters from 15.2% in the third quarter of fiscal '07 to 15.1% in the fourth quarter of fiscal '07, to 15% in the first quarter of fiscal 2008, and now at 14.5% in the second quarter of fiscal 2008. We believe this represents significant positive improvement.

Additionally, we have been effective in our efforts to increase ambulance subsidies on a year-to-date basis for the six months of fiscal 2008. We increased ambulance subsidy revenue by $1.5 million, when compared to the first half of fiscal '07. Total subsidy revenue for the first six months of fiscal '08 was up 32% to $6.2 million, compared to subsidy revenue of $4.7 million year-over-year.

During the quarter, we also won new 911 and non-emergency ambulance service contracts and retained existing business in several key locations. This activity included the award of three new contracts for non-emergency ambulance services. The first is which HCA's TriStar Health System based in Nashville, Tennessee to become a preferred provider to local area hospitals and healthcare facilities. We estimate that this contract will generate $2.5 million in net annual revenue.

The balance of the new business was secured in our Washington State market, where we remained a preferred provider for the Good Samaritan Hospital in Tacoma, and the Evergreen Healthcare System in Seattle. These contracts both began on December 1, 2007 and are expected to generate approximately $1 million in combined net revenue annually.

During the second quarter, we also retained two key 911 contracts with the award of a two-year exclusive term in Rochester, New York following a competitive bidding process, and a one year extension in Orange County, Florida, which includes all transports within the city of Orlando and the Greater Orlando area. We estimate these contracts will generate network revenue of approximately $15 million and $10 million, respectively.

Finally, we were awarded a long-term renewal to continue providing specialty firefighting services to the Port Columbus International Airport in Columbus, Ohio. That contract, which generates approximately $2.5 million in net revenue annually, was awarded for a five year term in a competitive bidding process.

We'll now turn to a more detailed review of the second quarter results. Consolidated net revenue for the quarter increased 4.5% to $119.5 million, compared to $114 million for the same period in fiscal 2007. Ambulance services revenue for the quarter was $99.4 million or an increase of 2.9%, compared to $96.6 million for the same period of the prior year. Other services revenue, which includes fire services, was $19.6 million or an increase of 13.2%, compared to $17.3 million for the same period last year.

Quarterly payroll and employee benefits expense was $74.5 million, which represents 62.6% of net revenue, compared to $70.6 million or 62% of net revenue for the same period year-over-year.

We note that the quarter included a $2.5 million positive adjustment in the workers compensation insurance resulting from our independent actuarial analysis of historical claims activity. This $2.5 million adjustment compares to a $2.7 million positive adjustment for the same period last year.

Other operating expenses for the second quarter were $29.6 million, which represents 24.9% of net revenue, compared to $26.0 million or 22.8% of net revenue for the same period of the prior year. The difference included a $1 million increase in professional fees, which related primarily to the adoption of FIN 48, the company's financial restatement, our review of internal revenue Code Section 382 matters, and expenses related to the agreement to settle the proposed Board of Directors election contest. Also, higher gasoline prices contributed to a $700,000 increase in fuel expenses.

During the second quarter, we also recognized a gain on the sale of assets of $1.3 million, which included the benefit of a $1.6 million gain on the sale of accounts receivables that were previously written off. We believe we can enhance cash flow through this process, and we'll continue to periodically review self pay accounts or similar opportunities in the future.

Second quarter EBITDA from continuing operations was $13.9 million, compared to EBITDA from continuing operations of $13.6 million for the same period last year. Today, we also reaffirm our EBITDA guidance of $50 million to $55 million for the fiscal year ending June 30, 2008.

We'd like to turn now to a brief discussion of the agreement, we announced recently, which resulted in the settlement of a proposed election contest. First, we are very pleased to have reached these settlements. This will allow the company to once again concentrate fully on running the business and returning value to its stockholders.

The changes we have implemented or designed in order to enhance our corporate governance provisions. Additionally, the board has adopted stock ownership guidelines for non-employee directors in order to further reinforce their alignment with the company's stockholders.

At the annual meeting of stockholders in March 27, 2008, the company will be seeking consideration of several proposals as outlined in the preliminary proxy that we filed last week with the Securities and Exchange Commission.

In brief, we will ask the stockholders to consider proposals including: the election of three directors; amending the company's certificate of incorporation to enable stockholders holding 35% of the company's total outstanding shares to call a special meeting; amending the certificate of incorporation to require stockholder approval of amendments to the company's bylaws; and the adoption of the 2008 incentive stock plan, which is a plan we previously discussed with stockholders on several occasions.

This plan has now been fully-developed and approved by the Board of Directors, and we'll be presenting it to the stockholders for their consideration at the Annual Meeting. All details concerning these proposals will be contained in the proxy materials, which will be provided to the stockholders later this month.

This concludes our review of the second quarter financial results and other business matters. We will now ask the operator to open the lines so that we may take your questions. Thank you.

Question-and-Answer session

Operator

Thank you, sir. Today's question-and-answer session will be conducted electronically. (Operator Instructions). We will go first to Lawrence Weiss with Citigroup.

Lawrence Weiss - Citigroup

Hi, guys. Just two questions really. One, on the guidance, the $13.9 million that put out today was included about the $1.9 million gain on the sale of accounts receivable. The $50 million to $55 million, is that going to include a $1.9 million and how much of the $50 million to $55 million are you going to -- within that $50 million to $55 million, how much of these gains on sales of a previously written-off AR are going to be included into that number?

Kristy Ponczak

Hi Lawrence.

Lawrence Weiss - Citigroup

How are you?

Kristy Ponczak

I am good, thank you. To talk a little bit about the guidance, the sale of AR would be included in that number and, but in terms of sort of looking at EBITDA, what I might walk you through is that our EBITDA of $13.9 million has a couple of things in it that you might characterize as that we would not expect to repeat. In the quarter we have $1.9 million reserved in there within the contractual allowance line in revenue that relates to an alleged overpayment related to Tennessee, Medicare that we reserved for.

There is also approximately $1 million as Jack outlined of additional professional fees as described in addition to the AR sale. So, if you adjust those numbers that $13.9 million comes closer to sort of a $15.2 million for the quarter. But, again, in that number is include -- in terms of, in the $55 million, the AR sale would be in there.

Lawrence Weiss - Citigroup

Okay. Because you consider that to be more of an operating thing or because why would you actually include that into EBITDA, if it's more just one-time in nature?

Kristy Ponczak

Well, when I get to $15.2 million -- sorry, but I just walked you through, I may then backing that out, but from a GAAP perspective it is included in the calculation of EBITDA.

Lawrence Weiss - Citigroup

Okay. Fine. And the second question is Jack, you kind of -- or going through the percentage of revenue that were considered to be uncompensated care and there was meaningful improvements from 15.2 to 14.5, what drove that? There was a big jump between this last quarter and the second quarter, what drove with this specific quarter?

Jack Brucker

Lawrence, we had a number of initiatives that we have outlined in previous calls. We have some specifics on those initiatives and I would like to turn the call over to Kristy to give you those specifics.

Kristy Ponczak

Yeah. We do continue to work on those initiatives that we outlined for you in Q3 of '07. A couple of the contributors that we're seeing to that when -- as we're seeing, we've spoken to you and given you the percentage breakdown for the write-offs of our uncompensated care, those continue to trend positively. For instance, in September, we had outlined for you to this 62% of our write-offs related to self-pay; for the six months ended, 63% relate to self-pay, which is a positive trend and I'll explain that in just a minute; commercial insurance write-offs were 20% in the September quarter, they are down to 19%; and the Medicare/Medicaid denials were 11% and they are down to 10%.

How I always guide people was that internally our goal is that a 100% of our uncompensated care write-offs relate to our self-pay group. So to the extent that we can continue seeing those trends positive that is a big contributor to our overall reduction in uncompensated care. Also, just surrounding the initiatives we've had with regard to the pre-bill process that we described, the focused efforts on the ground in the local market has been a significant contributor and we continue to see benefits from that.

Lawrence Weiss - Citigroup

Thanks very much.

Jack Brucker

Thank you, Lawrence.

Operator

We'll take our next question from Sal Kamalodine with B. Riley Investment.

Sal Kamalodine - B. Riley Investment

Hey, guys.

Jack Brucker

Good morning, Sal.

Sal Kamalodine - B. Riley Investment

Just a follow-up on the EBITDA question. In addition to the sale of the written-off AR's and the $1.9 million offset against net revenue. If you also back out the non-cash benefits from pulling down the reserves on the insurance accruals, the cash EBITDA number I get to is $9.8 million for the quarter. Is that right?

Kristy Ponczak

Yeah. If you look at the adjustments, which get you to about $15.2 million and you back out the $2.5 million, is that what you are saying?

Sal Kamalodine - B. Riley Investment

Yeah. Well, if you start with $15.2 million and you back out the $2.5 million in reversal, that benefited payroll expense and the $1.9 million reversal that benefited the general liability accrual and you exclude the sale of receivables and you add back the $1.9 million from the reverse from the medical claims, I get to a $9.8 million cash EBITDA for the quarter?

Kristy Ponczak

Yeah, I think based on what, the only adjustment I would make to that Sal in looking at those actuarial adjustments is that I would also consider backing out the million dollars of professional fees that we incurred that we do not believe are run rate, because the majority of those fees as Jack described were one time in nature.

Sal Kamalodine - B. Riley Investment

Okay.

Kristy Ponczak

Which would get you to more to a $10.8?

Sal Kamalodine - B. Riley Investment

Okay. So $10.8, but then capital expenditures during the quarter ran at $5.2 million, and that's maintenance CapEx. If you take the $10.1 million in EBITDA and cash EBITDA for the quarter and back out $5.2 million in CapEx from that, your cash EBITDA less CapEx was $4.9 million in the quarter. That's half of your interest expense for the quarter, right? You booked $8 million in interest expense and your EBITDA less CapEx was half of that. So how do you feel about your liquidity position right now?

Kristy Ponczak

Yeah, I think I would characterize the free cash flow a little bit differently in terms of sort of from a run rate perspective, but in terms of liquidity we are comfortable, the cash interest, you are right, cash interest is about $5.5 million for the quarter. We also had we talk about cash taxes; they were about $200,000 for the quarter.

So in a quarter, I would get to free cash -- you would get to a free cash flow and adjusted free cash flow what I would describe closer to $6. But definitely these first six months from a one-time perspective, from a cash flow perspective we definitely have some hits in these six months that have driven our cash balances down somewhat. But again I don't believe we expect those continue going forward.

So if you look at our guidance that we have reiterated, our guidance is of $50 million to $55 million. We do believe our CapEx will be $13 million to $15 million, which is our guidance which brings you to. If you back out cash interest of about $20 million and taxes of an estimated $1 million for the year, you are still getting to a free cash flow of somewhere between $16 million and $21 million.

Sal Kamalodine - B. Riley Investment

Right. I would argue you would also have to back out the $8 million on the 12.75 because that eats into the equity. So maybe it isn't a free cash flow number, I mean it does eat into the shareholder equity, at some point that needs to be accounted for somewhere, right?

So, can you just reiterate how much of the $50 million to $55 million in EBITDA for this year includes in terms of these benefits from selling written-off receivables and also what your accounting on in the second half of this year in a way of reserve pull downs to make the $50 million to $55 million number?

Kristy Ponczak

In the $50 million to $55 million number, in terms of the overall cap, we would include the $1.6 million of AR sales, total was $1.9 million but some of it went down below in Disc Ops. So from a continuing operations perspective, it's $1.6 million. In terms of right now projecting towards the $55 million, we are conservative and do not have any plans for actuarial adjustments in the fourth quarter. Although we will certainly do our review and always are hopeful that we get some positive adjustments, but they are not calculated on $55 million.

Sal Kamalodine - B. Riley Investment

Got it. Okay. And then the statement of cash flow you filed this morning shows a $1.3 million debt issuance in the quarter was that drawn on the revolver?

Kristy Ponczak

We did. We did draw 1.3 million on the revolver for five days during the month of December, and then it was paid back. So, the repayment of the debt that you see on the cash flow was $6.3 million includes $5 million of principal payment on the term B loan plus the repayment of the 1.3 on the revolver.

Sal Kamalodine - B. Riley Investment

Okay. And how much did you've outstanding in letters of credits during the quarter?

Kristy Ponczak

We've $46 million in total of which $45 million is under the synthetic letter of credit facility.

Sal Kamalodine - B. Riley Investment

Okay. So, that's flat sequentially?

Kristy Ponczak

Yes that has.

Sal Kamalodine - B. Riley Investment

Okay, got it, thanks. And then has there been any final resolution to the 382 issue that was highlighted during the quarter. I can't really tell from the last press release, whether there had been a final determination from the IRS regarding the NOLs?

Kristy Ponczak

The way that really two works is that we aren't going to the IRS to get their opinion on it. It's an internal calculation and a self assessment and self disclosure with the IRS. But we've certainly worked through it who we need to get comfortable on a quarterly basis are external of the accounting firm. We've worked through that with them and are not noting a change in ownership effective at 12/31/07. So, that you'll see, we've some additional disclosure in that in the Q that you'll see when that comes out later today.

Sal Kamalodine - B. Riley Investment

So, the ultimate usability of the NOLs is going to be determined by who and when if it's not going to be determined by IRS ultimately?

Kristy Ponczak

Well, the way it is, as you view it. We as management and as the company assess it and we monitor it continually. If we were to deem that we had threat to the change in ownership then we'd be consulting with the IRS at that point and self disclosing that in terms of our ability to use our NOLs going forward.

But certainly from our internal perspective, we've deemed that as of 12/31, we had not tripped the change in ownership and we're fine and our Price Water Health has also reviewed our assessment of that and is also comfortable with that. So, at this point, we feel comfortable that we've not tripped it. The second press release we put out in mid January was just to remind shareholders out that this is a real issue for us that we're monitoring closely and more of a reminder than anything else.

Sal Kamalodine - B. Riley Investment

In the event, where some of the NOLs would go away, have you estimated or done a back of the NOL calculation on how much of the NOLs are potentially at risk here?

Kristy Ponczak

Absolutely, But we've done an extensive and internal analytics surrounding that. In terms of what the impact could be is all predicated on the stock price and why that at any given point and time that's what the IRS look, what the internal revenue for the 382 Section describes, as you evaluate the level of the your NOLs, how much you're utilizing, what the current stock price is and then you also look at sort of a treasury rate, when you are trying to determine your annual limitation that all comes down to an annual limitation that you might be limited by to offset your taxable income.

Sal Kamalodine - B. Riley Investment

Right, so what would be that number?

Kristy Ponczak

That isn't the number that we've disclosed, but in terms of where it is. But if at this kind of a stock price certainly with a lower stock price it could be significant in terms of overall despite the nature of where the stock price is. So, we haven't disclosed that number.

Sal Kamalodine - B. Riley Investment

Okay. Just two more quick questions and I'll get off. Can you give us the net new revenue you are expecting from the contracts that were signed during the quarter, if you exclude the discontinued contracts? In another word, instead of just giving us the new contracts, if you could give us a net incremental revenue number from new contracts that were signed in the quarter less ones that were terminated?

Jack Brucker

Sal, this is Jack. We announced the new, new business in National Tennessee of $2.5 million and new, new business in Washington State of $1.0 million.

Sal Kamalodine - B. Riley Investment

Yeah.

Jack Brucker

Are you referring to the subscription fire contract and -- what are you referring to?

Sal Kamalodine - B. Riley Investment

Transport contracts in general. I'm not specifically pointed to anyone contract. Whether no transports contracts that were terminated during the quarter, is that what you are saying?

Jack Brucker

We did have an exit in Forsyth County, Georgia, which was a four car operations, a $1.2 million of annual revenue, 911 who was -- but comparing the EBITDA it would be a better way to do that than the revenue. But the margins on the 911 are much lower than the general transport sum.

Sal Kamalodine - B. Riley Investment

So, net new revenues in the order of $2.3 million from these new contracts?

Jack Brucker

Something likes that, yeah.

Sal Kamalodine - B. Riley Investment

Okay. And then, finally, could we get an update on the real estate sale you were considering…

Jack Brucker

Sure, Sol. The building is still for sale. The market has slowed somewhat in that part of North Scottsdale. We are still actively showing the property. And there is still, I would say real interest in the property. It is still our plan to sell the building. And we can't give you an estimate on when, but there is still a lot of activity on the property.

Sal Kamalodine - B. Riley Investment

Okay. Great. Thanks.

Jack Brucker

Okay, Sol.

Operator

(Operator Instructions). We'll go next to Robert Wetenhall with Royal Bank of Canada.

Robert Wetenhall - Royal Bank of Canada

Hey, good morning.

Jack Brucker

Good morning, Robert.

Robert Wetenhall - Royal Bank of Canada

A couple of questions. Your $50 million to $55 million guidance for the full year, is that total EBITDA or is that adjusted for your press release calculation?

Jack Brucker

That would be GAAP EBITDA.

Kristy Ponczak

Yes, total EBITDA.

Robert Wetenhall - Royal Bank of Canada

So that's a total EBITDA number before making adjustments for it to gain on the sale of receivables accounts.

Kristy Ponczak

That's correct.

Robert Wetenhall - Royal Bank of Canada

Outstanding, just going through your Q, it looks like you are on 14 buildings with a book value of $9.5 million?

Kristy Ponczak

That's correct.

Robert Wetenhall - Royal Bank of Canada

Okay. Out of those 14, is the building for sale in Phoenix? I think on the last conference call you said you had a $9 million of book value?

Kristy Ponczak

Yeah. That's correct.

Robert Wetenhall - Royal Bank of Canada

So essentially what are the other 13 assets for buildings?

Kristy Ponczak

They are some smaller structures across the country, but tend to be very small, substation type of locations where we just pose standing on to that, but certainly smaller property than this large property in Scottsdale.

Robert Wetenhall - Royal Bank of Canada

So the one Scottsdale building basically is more than 90% of the book value of your PP&A? Would that be correct?

Kristy Ponczak

Of the building PP&A? Yes.

Robert Wetenhall - Royal Bank of Canada

Okay. So out of that $9.5 million book value, $9 million of it or greater relates to that single asset correct?

Kristy Ponczak

That's right.

Robert Wetenhall - Royal Bank of Canada

And so you intend to sell that and then relocate operations further east of the 10?

Jack Brucker

Robert, this is Jack. I think our plan on relocation would be to move some -- there will be several different locations. We've already moved our west building to a location on the Pima Indian Reservation. We're looking at a property in east of the airport, but not very far from here, so within a five to seven mile range of the existing building.

Robert Wetenhall - Royal Bank of Canada

Got it. So you intend to sell the building and proceeds are your mark for the repayment of your Term loan, correct?

Jack Brucker

It was in the last amendment that 100% of the proceeds net of sale expense are return to the Term B Loan.

Robert Wetenhall - Royal Bank of Canada

Go you. That's great. And what do you think is beside soft market conditions, you are just holding out for a better price or what's the expected timing? Is this an event that you expect to sell towards your current this fiscal year?

Jack Brucker

Well, I would say two things. One, Robert that the market has slowed somewhat since Christmas but we still are actively showing the process. To use your words about holding offer for a higher price I think we're still in that mindset that we are trying to get the best possible price because we have multiple people looking at the property.

As far as selling in this fiscal year, it's hard to make a prediction on when we might be able to sell the property. But we're actively marketing the building and we are going to sell this as soon as we can achieve what we believe is a fair price for the building.

Robert Wetenhall - Royal Bank of Canada

That's terrific. Forget about this fiscal year, what about in the calendar year. Do you think, would you look lower the price during the next 12 months to move it off the books and realize cash from it?

Jack Brucker

There is a trade off there. The building is fully occupied with our own people in several different administrative groups. And I don't think our current mindset would be to lower the price below book value or above to sell it, if that was just to give you some hint of what we're thinking.

Kristine Ponczak

We certainly have some internal. We've certainly done some present value calculations internally and have kind of a benchmark price that we would not be willing to go below.

Robert Wetenhall - Royal Bank of Canada

Sure. Would you be willing to, I mean what is that roughly? 1.5 times book?

Kristine Ponczak

I think my real estate group would shoot me if I started quoting that on that.

Robert Wetenhall - Royal Bank of Canada

We don't want that to happen. But I mean, I assume you guys have owned the asset for how many years?

Kristine Ponczak

Robert, the Company owned that asset probably beginning year in 1997. I don't really know when the Company acquired the asset it was in, I don't know. But it was, we've had it for more than 10 years.

Robert Wetenhall - Royal Bank of Canada

Great. So I assume you'd definitely look to get a multiple book value in a sale, correct? Like 1.5 to 2 times.

Kristy Ponczak

Absolutely, we certainly need to be north of book value. But I mean in terms of our internal benchmark and our internal lower, something that we are just not prepared to give over the. Again we are in negotiations and working to that right now and we hope to communicate that to you as soon as we can.

Jack Brucker

Yes, it's hard to answer that Robert. As Kristy said, we are negotiating with some of our parties right now. We hate to give our targets out on the conference call.

Robert Wetenhall - Royal Bank of Canada

That's more than fair. I understand. You obviously completed a shareholder agreement recently. Is there any impetus that you might possibly sale the company from the controlling shareholder?

Jack Brucker

I am not sure what do you mean by controlling shareholder?

Robert Wetenhall - Royal Bank of Canada

Well, I'm just saying in your new shareholders' agreement with new individuals or institutions coming on the Board. Is there a consideration of hiring a financial advisor of any sort to realize value further? Is that been a topic which has been mentioned or discussed?

Jack Brucker

We have been asked the question in the past about whether we've retained a financial advisor or not and we have not answered that question, we've not disclosed that. So, I'll just repeat that, we have not disclosed if we retained the financial advisor or not to serve the company, so.

Robert Wetenhall - Royal Bank of Canada

Got it. And just one kind of clarification because you guys went through pretty fast. Cash interest this year will be $20 million, CapEx will be $13 million, is that correct?

Kristy Ponczak

$13 million to $15 million?

Robert Wetenhall - Royal Bank of Canada

$13 million to $15 million, and then $1 million in cash taxes?

Kristy Ponczak

Yes.

Robert Wetenhall - Royal Bank of Canada

Okay, great. So essentially, you should, even if you are in a situation where the Hold Co debt goes cash paid at some point, you should have adequate free cash to service interest on that?

Kristy Ponczak

Yeah. Our senior discount piece of debt goes cash pay starting March 2010 and I think we have spoken historically that by March '09, we would be looking at that time to the feasibility of refinancing that piece of debt because at that point penalties associated with early extinguishment would be at a level that would probably be more prudent. So I would suspect that we would refinance that before we went cash pay.

Robert Wetenhall - Royal Bank of Canada

Fair enough. And are you permitted under the 9 and 7/8 senior sub indenture to do that by borrowing on the revolver and using funds to buy back the Hold Co debt?

Kristy Ponczak

We would have to reach out to our senior subgroup in terms of taking on any additional debt and get their permission and negotiate that or do a complete refinance above the layers of debt.

Robert Wetenhall - Royal Bank of Canada

Okay. So that's definitely something you've discussed internally but acknowledgment need to address that at that point?

Kristy Ponczak

Absolutely.

Robert Wetenhall - Royal Bank of Canada

Great. And one final question, you have been immensely helpful. What was net availability under the $20 million revolver at the end of the quarter?

Kristy Ponczak

Just shy of $20 million. Just to clarify, in the $20 million revolver we do have a $10 million letter of credit sub-line and I have used a small piece of that sub-line, less than $500,000 of that sub-line to issuing the letter of credit. So we effectively have just shy of $20 million available under revolver.

Robert Wetenhall - Royal Bank of Canada

Great. That's immensely helpful. Thanks for the color.

Kristy Ponczak

You bet.

Jack Brucker

Thank you, Robert.

Operator

We'll go next to Kyle Smith with Jefferies & Company.

Kyle Smith - Jefferies & Company

Hi, good morning.

Jack Brucker

Good morning, Kyle.

Kyle Smith - Jefferies & Company

Just may be one or two more questions on the, from a headquarters building.

Jack Brucker

Yes.

Kyle Smith - Jefferies & Company

Do you have third-party appraisal or anything along this lines that wouldn't necessarily give away your price point but could still give us a sense of value or may be recent transactions in the market on a per square foot valuation basis?

Jack Brucker

You know Kyle; we would really love to tell you that. I think because we are negotiating with several parties right now, they may or may not turn into a sale, but we are in negotiation. I would just prefer not to talk about market value or target price or anything like that. The book value is $9 million and I think that that's really as far as we can go. Hope you understand that.

Kyle Smith - Jefferies & Company

Yeah, I do. It was worth a shot.

Jack Brucker

Okay.

Kyle Smith - Jefferies & Company

And then the $1 million of non-occurring professional expenses. The language in the press release wasn't entirely clear; does that include the amounts for the election contest or just the FIN 48 and IRS 382?

Kristy Ponczak

I apologize if that was confusing, but yes, it does include some of the costs associated with the election contest. I would say that you can probably assume by the date we issued and announced the settlement agreement that we will continue to have additional costs in Q3 for the time spent during January and the beginning of February to resolve that. But the Q2 also included some costs associated with the proxy contest.

Kyle Smith - Jefferies & Company

Okay. Any sense as to what those amounts in Q3 might be?

Kristy Ponczak

I don't know right now. I'd say I have not seen all of the bills come in primarily from the legal side, but we will certainly report on that in Q3.

Kyle Smith - Jefferies & Company

Okay. But probably not materially out of line with what they've been in previous quarters?

Kristy Ponczak

I suspect that I am real specific to the board election contest. I would say that I have a fair amount of fees incurred during January on settling that issue.

Kyle Smith - Jefferies & Company

Okay.

Kristy Ponczak

But in terms of in comparison to year-to-date, I would not expect them to be significant compared to year-to-date.

Kyle Smith - Jefferies & Company

Okay, that's helpful. And then on the matter of sales of written off AR, I didn't quite follow the discussion was going on is this something that you do expect to continue to do when you see gains in future periods or was it something that was really just confines to some one-off opportunities that you saw in second quarter?

Kristy Ponczak

We definitely will continue to sell off our self pay accounts that we've previously written off. So, we'll continue to see that going forward in a strategic manner. We will not see to the level that we saw in this quarter because we did some catch up in terms of sales. But we'll see that going forward it's one of our routine actions that we take going forward.

Kyle Smith - Jefferies & Company

Great. Best of luck in finding good price for those AR.

Kristy Ponczak

Thank you.

Kyle Smith - Jefferies & Company

And then the $1.9 million of disputed Medicare revenue in Tennessee, I think it was'04, '05, what kinds of risks are there surrounding this? Is this something where if it doesn't go well we could see punitive actions taken by Medicare or monitory damages at a multiple of the disputed amount?

Kristy Ponczak

This is actually an issue that we've been working on for about 1.5 year with the intermediary and with the OIG. We've actually gone through a couple of appeal processes on this review. I believe the number that we've reserved is the number that is very close in line with the number that we'll be finalized. We're waiting right now for final confirmation and final agreement on the number with the intermediary. But I suspect that it will not be materially different than that number.

Kyle Smith - Jefferies & Company

Okay. Great. Glad to know that there is not going to be like the future items with this. On the workers comp and general liability fronts, new adjustments like clockwork every six months have been favorable. I've been subtracting these benefits from EBITDA to make my life more complicated. I'm starting to wonder if maybe that's a little bit punitive with respect to the credit picture because they have been consistently positive.

Maybe you can help me in thinking a bit about why these always go in the same direction and how much the reversals that you make in any given six month window relate to the developments during that window versus how much are just experiential adjustment to accruals that were made years and years ago?

Jack Brucker

Well, this is Jack. As I read and I think I read it too fast. The benefit we got last year in workers comp was 2.7 and the benefit we got this year was less 2.5, it's less, but close. It relates to our safety program and back-to-work program. And we've a large, many thousands of workers in the field on a daily basis and it's a constant thing. It's a day-to-day 24/7 business and the effectiveness of ours worker safety and our back-to-work programs are an ongoing thing.

So, when you are doing theses subtractions and add backs, we had 2.7 million last year-to-date in fiscal '07 and $2.5 million this year-to-date. So, I mean you can make an argument on either side of that, if should that be taken out or not. Going forward, I think all of our field operations are very in tune with our safety program and enhanced back-to-work program, which is really vital to getting people off their workers comp and getting them back-to-work even at a reduced level.

And so, we expect to have a high level of emphasis on our back-to-work and worker safety program going forward. And accidents do happen and they get reserved for. And then the resolution of those claims is what generates these actuarial benefits.

So, to simplify -- from my simple perspective, where we've continue to have accidents and problems going forward in workers comp yes, and we'll continue to emphasize and try to reduce the amount that was originally reserved and generate actuarial refunds absolutely we will do that.

So, we are not predicting an ongoing stream of reductions, but the initial reserve that's been set tends to be -- we've some history now it tends to be set pretty conservatively and our back-to-work program has been pretty successful. So, that's what generating this ongoing stream of positive benefit.

Kyle Smith - Jefferies & Company

That's helpful commentary. I appreciate that. And then on the IRS 382 issue, it's a rolling three months window, correct?

Kristy Ponczak

Rolling three year window.

Kyle Smith - Jefferies & Company

Rolling three year window, okay, three year window, so that explains, why that? When might this issue finally be put to bed one way or the other assuming that we don't have any future spikes and transactions among large holders? Is there a cluster somewhere in your recent history that's really driving the analysis here or is it spread out overtime and this is really never going to go away?

Kristy Ponczak

Generally, I'd say that if you look back at the history of when our largest shareholders have moved into our stock. Generally, what you're seeing is that that happened between sort of March and September of '05, where a lot of the chunks that came in. So to the extent that we start moving pass that period that will give us a lot of relief in this calculation.

I would say that the really the -- from the Company's perspective, the risks that's out there is that a new 5% shareholder would pop up unexpectedly, which would immediately drive at least a 5% in that calculation which could be significant. So in terms of your comment of, is there something that the Company will always deal with. To the extent there are two main factors that drive this issue; one is that at this point, we're relatively closely held by a few large shareholders and also the stock price, those two issues are what drive the matter home to us.

So, will this always be an issue for the Company? It will loosen up after -- gets a little looser after June, gets a little looser yet again after September of this year of '08 and then -- but also to the extent that that the share price goes up, it also becomes less risky for the Company.

Kyle Smith - Jefferies & Company

That's helpful as well. And then the final thing is on the Net APC, which you point to on the past couple of calls. We are seeing a nice sequential track here. I think we now have two quarters with positive year-over-year comparison. Last March 2007 there was a little bit of a cliff, its slight downwards.

How much of this is seasonal versus an operational shortfall that since been corrected, and sort of, how should we be thinking about the comparison going into March? Should it be a very large positive year-over-year comparison because of the gains that you've already realized or may be sequentially it might be down, but still up year-over-year?

Kristy Ponczak

That's a good question. Yes, if you followed our releases, we definitely saw a downward trend in Q3 of fiscal '07 and saw a slight improvement in Q4 and then are seeing -- have been seeing quarterly improvements then. I would not -- generally when you are looking at it, I wouldn't generally look at it as a seasonal change.

Definitely in fiscal '07, we were seeing increases in pressure on uncompensated care and as a result of that we put in seven initiatives to reduce on uncompensated care and improve the overall net average patient charge. And what we are seeing as -- the improvements we're seeing in that APC and the reduction and the write-offs of uncompensated care as a result of those initiatives which were focused directly on billing and correction processes.

Kyle Smith - Jefferies & Company

Okay. So in other words, we shouldn't be looking for much of a sequential drop. It was mostly operational issues that have since been corrected.

Kristy Ponczak

Yeah. I think internally, we certainly have continued to have expectation that we will continue to improve upon that. One of the initiatives that we have in place is an electronic patient care record system, which are the handheld tablets that is being rolled out over the next, we have a big roll out coming in April, one of our largest markets and then we will be rolling out the balance of that across the country in the next 15 months to 18 months.

We believe that again will continue to improve on this. So internally, we expect to continue to see reductions in the write-off associated with uncompensated care. Where exactly that number will go is, has a lot of complicating factors then it's impacted by rate increases, your percentage of self-pay transport that sort of things, but, overall, we'd expect to see that continue to put pressure on that downward.

Kyle Smith - Jefferies & Company

Okay. Well, best of luck with that and thank you for answering all my questions.

Kristy Ponczak

Sure.

Operator

We'll go next to Dennis Wurst with vFinance Investments.

Dennis Wurst - vFinance Investments

Good morning.

Jack Brucker

Good morning, Dennis.

Dennis Wurst - vFinance Investments

I am looking at the balance sheet that has roughly $300 million in assets and third of that or just under a third of that is the favorite topic of the morning being accounts receivables inline. Now, have you guys explored possibly monetizing instead $2 million, $3 million at a time a large chunk of that at once?

And then the second part of my question is as this number gets bigger if its that hard to unload this asset on somebody say like GE and should I be taking the initiative that haircut is $86 million because of the impairment, because of the size of the asset and you would have to sell it at discount. Should I be doing that myself or are you guys doing that for us on the balance sheet? It's a large number. It's a $300 million asset line.

Kristy Ponczak

Yeah. Dennis, I would say that we do in term of your hair cutting the number, I would say no. You do not need to haircut that number. We do have extensive analytics around the collectibles of our accounts receivable and establishing reserves around our accounts receivable. The $86 million number you're seeing is what we believe will be cash collected.

Dennis Wurst - vFinance Investments

Okay. So that's not the IOUs. This is roughly the market value of the asset. So if you hit the button and you called one guy who cared, you could be possible sell the whole thing around $86 million?

Kristy Ponczak

Absolutely.

Dennis Wurst - vFinance Investments

Why haven't you yet? You've done little bit, but quite honestly, it's a third of your asset.

Kristy Ponczak

That is, we have not reached out. We do our billing and collection in-house. We believe that there is tremendous value to doing it in-house. We have five billing locations across the country with, in term of, overall collections and we have not strategically made the decision to outsource all of our accounts receivable. The one that you, the sale of receivables that you are seeing on the book is a very net number. There were you can imagine when I am selling self-pay accounts that I have written, that I have already written off, I am selling that at quite a discount. So, there were millions and millions of dollars that we sold of self-pay. But in terms of tactically outsourcing all of our accounts receivables that just not a strategic move that we have made at this time.

Operator

We have time for one final question. We will go back to Sal Kamalodine with B. Riley Investment.

Sal Kamalodine - B. Riley Investment

You touched upon my question Kristy. I just wanted to circle back on the AR's and what price you got for these AR's, in other words how much did you sell to get a $1.6 million gain?

Kristy Ponczak

Yes. These were receivables that had been written-off quite some time ago. The market for the receivables that we were selling, we were getting somewhere just less than 2% for those receivables that were being sold.

But again as you know in terms of having experience in sale of AR, it depends on many, many factors in terms of what price you can command and the analysis of that and the age of the receivables at what point in the process you are selling them. But this particular book of receivable that we sold were old, and so in terms of the percent it was less than 2% overall.

Sal Kamalodine - B. Riley Investment

And if you look at the other book of self-pay receivables that you are preparing to sell, what kind of price would you expect for that and how big is that book?

Kristy Ponczak

I don't have that book in front of me right now. It's something that we are going to routinely do throughout the year. But I'd say overall the receivables that we'd be selling on a routine basis are somewhat newer in terms of the overall collection process that we'd expect to get a little bit better rate on those going forward.

Sal Kamalodine - B. Riley Investment

A little better than $0.02 from $1?

Kristy Ponczak

Correct.

Sal Kamalodine - B. Riley Investment

Okay, thanks.

Operator

And at this time, I'd like to turn the call back over to Mr. Jack Brucker for any additional or closing comments.

Jack Brucker

Okay, operator. Thank you very much and thank you all again for joining us today and for your continued interest in Rural/Metro Corporation. We'll continue to keep you informed of our progress and look forward to our third quarter report to you all in May. Thank you very much.

Operator

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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Source: Rural/Metro Corp. F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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