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Air Methods Corporation (NASDAQ:AIRM)

Q1 2008 Earnings Call Transcript

May 8, 2008 4:15 pm ET

Executives

Aaron Todd – CEO

Trent Carman – CFO, Secretary and Treasurer

Paul Tate – COO

Joe Dorame – IR, Lytham Partners

Analysts

Bob Labick – CJS Securities

Greg Williams – Sidoti & Co.

David Bachman – Longbow Research

Barry Randall – Lazard

Kevin Campbell – Avondale Partners

Chuck Griege – Blue Lion Capital

Operator

Good afternoon. My name is Cassidy and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Methods first quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now turn the conference over to Joe Dorame at Lytham Partners. Please go ahead, sir.

Joe Dorame

Good afternoon. Thank you for joining us today to review Air Methods' first quarter financial results ended March 31, 2008. As the operator indicated, my name is Joe Dorame . I am with Lytham Partners and we are the financial relations consulting firm for Air Methods.

With us today on the call representing the company are Mr. Aaron Todd, Chief Executive Officer; Mr. Trent Carman, Chief Financial Officer; and Mr. Paul Tate, Chief Operating Officer. At the conclusion of today's prepared remarks, we will open the call for a Q&A session.

I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This conference call includes certain forward-looking statements which are subject to various risks and uncertainties.

Actual results could differ materially from those currently anticipated due to a number of factors including but not limited to the integration of CJ into existing operations, the size, structure and growth of the company's air medical services and products markets; the collection rates for patient transports; the continuation and/or renewal of air medical service contracts; the acquisition of profitable products division contracts and other flight service operations; the successful expansion of the community-based operations; and other matters set forth in the company's public filings. With that having been said I would like turn the call over to Mr. Aaron Todd, Chief Executive Officer of Air Methods. Aaron?

Aaron Todd

Thanks Joe and thanks to all of you for joining us today. As you know we have always indicated that weather and quarterly variations in maintenance and reimbursement rates have the biggest impact both positively and negatively on our financial results from quarter-to-quarter. With the recent dramatic increases in fuel prices we must now add this variable as well. It is very unusual to have all four of these factors beyond the unfavorable side in the same quarter.

Our ability to achieve profitability during our seasonally weakest quarter, when all four of these factors run favorable is reflective of the company's strength. Weather, maintenance and reimbursement can change directions from quarter-to-quarter; this should not be extrapolated based on one quarter alone. By way of update on key measures and other factors since our last conference call we are off to the following:

First the integration of CJ is going very well and should be mostly completed by the end the second quarter. The consolidation of the dual FA operating certificates is expected to be achieved in June. Upon completion, the duplicate training cost and related expenditure which were estimated to be over $750,000 since closing will cease.

Since our last conference call we did receive notification that one additional CJ customer will not be renewing their contract with us effect of July 1. We operated three 24 hour basis and one 12 hour base for this customer. The non-renewal is not expected to have a significant impact on earnings based on results achieved during the past 12 months from this contract.

As a result of the transitioning of CJ aircraft under the Air Methods FA certificate; the FA notified Air Methods in early April that documentation on previously certified avionics installations were deemed to be insufficient.

These 23 Aircraft were grounded for several days until the documentation could be modified even though these installations had previously been certified by separate FA officers and the documentation issues did not pose a safety of flight issue; although one of the aircrafts will return to service in a few days and the back up fleet or adjacent aircraft provided coverage within 48 hours of the groundings. As a result we do not anticipate a significant impact on second quarter earnings from this event.

We continue to maintain our year-over-year improvement in day sales outstanding in our community based receivable. As of March 31, 2008 our DSO's were a 115 days as compared with a 122 days as of March 31, 2007. December is computed utilizing annualized three month sales.

The aircraft dispositions during the first quarter included four aircraft sales. We anticipate significant aircraft disposition activity in each of the next several quarters as we continue with our fleet rejuvenation activities. As many as 24 additional aircrafts will be available for sales during the reminder of 2008. It is anticipated that these dispositions will result in further net gains. The rejuvenation activities will continue to have a moderating influence on our maintenance expense as well; as newer aircraft have dramatically lower maintenance costs. These savings will be offset in part by higher lease experience.

We have seen a dramatic increase in satellite base expansion activity within our hospital based services division. We have already received firm or signed agreements to expand base operations to include eight new locations during 2008 with our existing hospital customers. In addition we are actively negotiating additional contracts for three new locations in 2008 and 10 new locations in 2009.

This excludes any contracts secured with new hospital customers some of which we are also pursuing. This level of activity is at an unprecedented level and will further complement our efforts to improve operating margins within this division. We have added three new community based locations since the beginning of 2008 and have consolidated operations with a joining basis at two separate locations since the beginning of the year.

We are pleased to announce that our products division recently received an order for 25 additional HH-60L Black Hawk interiors which has now increased the divisional backlog to $14.5 million as of the end of the quarter.

The company is in a very strong treasury position having recently paid in full its working capital line of credit. Having recently emerged from our slow winter season, it is unusual to be in a surplus position at this time of the year. We anticipate growth in our cash position through the summer and fall months and will likely use surplus cash to pay down term debt or buy out leased air craft pursuant to the fixed buyer options included in the leases.

And finally, by way of update, I wanted to tell you how pleased we are to have Paul Tate, our new Chief Operating Officer on board. He has been with us for several weeks and has done an outstanding job of addressing operational issues, helping us to isolate and identify opportunities for greater operational efficiencies and certainly will be available during the Q-and-A session should you have any questions of him.

We have updated our 2008 forecast to reflect the results for the first quarter and to adjust outlook for fuel price increases and the increases in charges that took place on May 1. The updated fuel prices anticipate an average 35% year-over-year increase in fuel for the remaining nine months in 2008. Based on our updated forecast, we continue to anticipate increase in earnings per share for the year equal to or in excess of 20%.

The forecast presumes weather is consistent with prior year cancellations; the reimbursement is stable with first quarter levels, plus anticipated increase on the May 1 price increase and moderation in maintenance expenditures as compared with the first quarter hourly flight rate. Therefore, we remain optimistic in our ability to sustain healthy growth despite first quarter weakness.

With that, I will turn the call over to Trent to discuss the first quarter results in greater detail.

Trent Carman

Thank you, Aaron. As we reported in today's press release, revenue, net income and earnings per share for the first quarter were $118.1 million, $2.3 million and $0.18 per share respectively. This compares to revenue, net income and earnings per share of $81.5 million, $3.7 million and $0.30 per share respectively for the first quarter of 2007.

Today we reported that revenue generated by our CBS division grew $15.9 million. The acquisition of CJ Systems on October 1 contributed $11.9 million to this increase. The remaining increase in CBS related to flight volumes from newly opened bases and through increases in our net revenue per transport.

We also reported that revenue generated by our HBS division grew $19 million. The acquisition of CJ Systems contributed $15.4 million to this increase. The remaining increase relates primarily to new bases and to annual price increases on our contracts.

General and administrative expenses increased by approximately $5 million for the first quarter of 2008. The majority of this increase relates to additional staffing related to the CJ Systems acquisition. General and administrative expenses were 14.5% and 14.9% of revenue for the first quarters of 2008 and 2007 respectively.

Earnings before interest, income taxes, depreciation and amortization or EBITDA were $8.3 million and $11.4 million for the first quarters of 2008 and 2007 respectively. On a trailing 12 month basis, our EBITDA is $63.8 million. You can reconcile EBITDA by adding interest expense, depreciation and amortization loss on the extinguished amount of debt and some tracking gain on disposition of assets to income for income taxes.

Our current asset position which is current assets versus current liability was $115.2 million of March 31, 2008 as compared to a $112.8 million at December 31, 2007. The company's net position which is total volume debt and less cash was $80.9 at March 31 at $90 million at December 31, 2007.

At March 31, the company had approximately $31 million of excess availability under its revolving line of credit. Cash flow generated by operating activities was $9.7 million for the quarter, this compares to $10.5 million for the first quarter of 2007. The company received net cash proceeds of $4.4 million from the four aircraft previously mentioned by Aaron and we paid down $9.1 million of debt during the quarter.

As mentioned during our fourth quarter conference call, the company has $100 million bank facility for which $61 million was outstanding at March 31. The weighted average interest rate on this debt has decreased by over 200 basis points since the first quarter 2007.

The company currently operates 320 aircraft; of these 182 are within our HPS division and 138 are within our CBS division. The company currently has 106 community basis and 157 hospital basis. With that I will turn it over to Aaron for his closing remarks.

Aaron Todd

I think we are ready for any questions you might have and we look forward to chatting with you.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bob Labick with CJS Securities.

Aaron Todd

Hi Bob.

Bob Labick – CJS Securities

Hi, good afternoon. A couple of questions; first I want to ask – I think you clarified this pretty well in the release but I just want to double check. In terms of maintenance you suggested that maintenance excluding CJ was the driver this quarter and up 35%. We have been asking this since the acquisition; is there any unusual maintenance along with CJ acquisition or is this just the – normally in the fact that you have an $80 million line item now that has two thirds as unpredictable here in the quarter. I guess I just wanted to hear you say it one more time. It wasn't acquisition related, it was…

Aaron Todd

I think that's why we broke that out on a press release is that this is not a – we don't have a year-over-year comparative for CJ's fleet and it's hard to say that that couldn't have also been a factor. When you look at the total number relative to what was disclosed in the preannouncement you can clearly see that the existing Air Methods fleet that excluding those – that new ships that were acquired since the end of the last years quarter and excluding the CJ fleet were predominantly the reason for the significant increase in maintenance, which I think boards well for this being attributed to a quarterly concentration and not necessarily a long-term trend or some type of a carryover from the CJ acquisition.

Trent Carman

Just one thing to add to that Bob, you will see this in the Q which by the way should be filed tomorrow. During the first quarter, we had 31 engine overhauls that compares to 12 for the first quarter of 2007.

Bob Labick – CJS Securities

Okay, great.

Aaron Todd

Obviously, we got more aircraft but I believe that excluded the CJ aircraft. So we just had a lot of activity.

Bob Labick – CJS Securities

Okay, that's very helpful to hear and then I guess moving onto fuel, you obviously announced the price increase for May 1. If fuel were to keep going up which it seems like it does everyday, do you have the ability to put in further price increases in 2008 or how do you do that?

Aaron Todd

We do. With each new price increase, you have to make certain estimates on how much of that you are going to collect and the models that the company uses have been fairly predictive within a bandwidth of accuracy, but the answer is absolutely we do. What we did – the 35% that I referenced in my initial remarks, Paul Tate gave us the Jet A forward curve for the remainder of '08 at a point in time that was about a week ago and then we compared that to what the curve was the year before and averaged the year and it showed about a 35% projected average. Right now, the percentage is actually higher than that but last year, the cost of Jet A started going up in quarters two through four, so the year-over-year comparative is going to diminish if pricing stabilizes at these levels, which obviously is a big if, but that's how we computed the 35%. We included the first quarter results in our forecast for 2008 and that 35% year-over-year fuel increase and then also blend in the price increase on May 1 and then assumed that the below average reimbursement rate for the first quarter continued throughout the year which we think is a bit conservative and we were still showing an output of better than 20% growth in earnings per share and that's why we reiterated that guidance today.

Bob Labick – CJS Securities

Okay, just to stick on that point, does that include the sale of assets going forward as well?

Aaron Todd

It does not.

Bob Labick – CJS Securities

Okay, that excludes the sale of assets.

Aaron Todd

Going forward, yes.

Bob Labick – CJS Securities

Right, okay, right. Okay, great and then speaking with the efficiency in fuel and everything, we have talked in the past about the potential, probably I guess end of this year or '09 maybe, even more, to switch our twin engines to single in certain markets where there is an opportunity. Does that – will that help drive up fuel savings going forward?

Aaron Todd

There is no question. As we have disclosed many times, the incremental cost of operating a twin engine helicopter depending on the age and model can be anywhere from $0.5 million to $0.75 million and more per year and this year, the plan has a change of – a conversion of eight locations from a twin engine to a single engine. Now obviously, that's occurring throughout the year and so you won't' get a full year benefit of that but the plan right now has for eight conversions this year from twin to single.

Bob Labick – CJS Securities

Great, and I will hop back in queue and let others ask and I will ask some more in a few minutes, thank you.

Aaron Todd

Okay, thanks, Bob.

Operator

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

Kevin Campbell – Avondale Partners

Hi, good afternoon, thanks for taking my questions. I wanted to ask quickly on the patient mix and the revenue per transport; is there a reason why you didn't include any discussion of that in the pre-release but here obviously it's come in a little bit late as well.

Aaron Todd

We are happy to comment that now. I'll try and updated the trailing 12 months figures through the March 31; of course, we lagged at about three months because of the time it takes to actually purify the payer mix, but in the update of that through March 31 there was no change in payer mix. There was no shift between insured and un-insured in Medicare, so we have not seen any change in payer mix to this point relative to the date if it's presently available; that's why I mentioned in the disclosures and in my comments that if you look back on '07 and the fluctuation and the net revenue per transport you will see weakened and above average and below average quarters and that's just inherent within any given quarter as to how much you collect versus what you would have anticipated collecting and the true-up effect to that and this was a below average quarter, but its not attributed to shift in payer mix. Now whether it's attributed to economic factors and you are collecting less from coal pays and things of that nature, I think it's way too early to tell; but it's certainly – the variation is in line with the variations we saw in '07 so therefore we voiced cautioned in extrapolating the first quarter to the rest of the year.

Kevin Campbell – Avondale Partners

Okay and then historically when you had really good periods. When the revenue for transport was up, you said “hey don't necessarily take that in the next quarters. It's like to come back down” and that's been the case. Should we – here this was obviously a little bit below. I think our expectations and perhaps your – should we expect that to may be normalize a little bit higher in 2Q or should we just take this number and obviously including your rate increase that you push through on May 1, but how should we look at that?

Aaron Todd

Well, that's what we did for our budget forecast is because we want to maintain the degree of conservatism. Certainly the economy is having stress and we would not have the same confidence in saying that that is indeed going to occur, but at the same time when we have said in the past usually there is a much higher standard deviation from the mean when we've stated that in the quarter. So the last time we stated that was the third quarter of '06; we made that statement and that was significantly above the average; this is only slightly below the average. So I would say yes there is a higher probability it's going to improve then deteriorate, but only slightly.

Kevin Campbell – Avondale Partners

Okay and can you give us some idea – the products back log. I think you talked about that last quarter, about your target internally is at $13 million in revenues may be a little bit more; has that increased with this new order for the year?

Aaron Todd

It has; the new order added about $9 million in revenue of which about $5 million of that we expect to recognize in 2008. So, certainly there has been a – there is an improvement there and we did not – we have not updated the budgets for that contract since it just recently come in, so that could be additive.

Kevin Campbell – Avondale Partners

Okay. And can you give us a sense for – I know we're about five weeks into the quarter where maintenance is shaking up thus far as it returned back to a more normal level.

Aaron Todd

Great question. I have not seen April's numbers, so I really don't know. You know as much as I do at the moment. In tell we actually closed the books and take a look at that. I could ask how many checks we cut during the month, but it's still not very predictive and so, unfortunately, I don't have an update for you today.

Kevin Campbell – Avondale Partners

Okay, last question then, on the G&A line, it had a pretty good sequential increase in the first quarter. Obviously, you had the acquisition CJ in the prior quarter, so what was the key driver from 4Q to 1Q here?

Aaron Todd

Same issues that Trent addressed, just increase in number of engine overhauls and those – oh, you talking about G&A?

Kevin Campbell – Avondale Partners

G&A, I'm sorry.

Aaron Todd

I don't have the exact number in front of me but we did go down from 14.5, I think 14.9 to 14.5, what you are showing is the delta, I haven't compared sequentially.

Kevin Campbell – Avondale Partners

It was 15.7, I have in the fourth quarter and then 17.1 in the first.

Aaron Todd

Well, some of that is because of the continuation of a lot of the activity for converting the certificates that occurred in that first quarter and that's where we had the most activity and so part of that is attributed to that. The other thing that happens in G&A is matters related to compensation; your paying the FICA share and employment tax that maxis out and so a lot of times, you hit a higher overall cost, you get the audit fee in there in the first quarter typically and so it's not – those aren't really comparable quarters for that reason in part.

Aaron Todd

We also had some restricted stock and stock option activity in the first quarter of this year, Kevin.

Kevin Campbell – Avondale Partners

Okay, and what was the number you listed for the consolidation of the certificates and is that now completely done or should there be a little bit more rolling into the second quarter and then will be done?

Aaron Todd

Yeah, $750,000 and that is October 1 to date, and yeah, you will still see some of that through June. The third quarter is going to be when you are going to see the first windfall or if you will elimination of those costs.

Kevin Campbell – Avondale Partners

Great, thank you very much.

Operator

Thank you. Your next question comes from Greg Williams with Sidoti & Co..

Greg Williams – Sidoti & Co.

Good afternoon guys. I just wanted to reconfirm the lag you have with the tops. The 20% EPS growth projection does not include the sale of the 24 aircrafts and your pension efforts?

Aaron Todd

That is correct.

Greg Williams – Sidoti & Co.

Okay, and then from a cash perspective though, can you use the last sale of $800,000 after-tax as sort of the going rate for the helicopters?

Aaron Todd

Absolutely not; they are all over the map. It could be anywhere from a literally $300,000, $400,000 all the way up to $2 million.

Greg Williams – Sidoti & Co.

Okay, that's very good to know. Another question I had was just your conversation about having eight locations moving from twin engine to single engine. Obviously, on the short term that works out; does that compromise you from a sales or service or getting dispatch calls perspective?

Aaron Todd

No, absolutely not. What we are doing is, we are doing a hub-and-spoke method where we still have twin engines in centralized locations so that when there is a need for a twin engine helicopter for specialty team flights, neonatal flights, for IFR flights that we still have that ability. The reason we have not driven a hub-and-spoke or a combination of twins and singles in part has been we have been waiting for aircraft and so as these aircraft come in it now makes these opportunities to be more efficient available. Now, there are some locations where we will not have been spoke, we will be exclusively twin engines because either light concern of that area require twins or has become a strong differentiator in the market place or competing with other twins and so therefore we are selective in where we do this. Air Methods will always have twin engine operations within both its hospital based and community based operations but now we are only utilizing twins where it truly makes a difference relative to both the service and our differentiations within that market.

Greg Williams – Sidoti & Co.

Okay I appreciate that detail, thank you.

Aaron Todd

You're welcome.

Operator

(Operator instructions) Your next question comes from David Bachman with Longbow Research.

David Bachman – Longbow Research

My questions have been answered here but just wondering if you will be willing to just give us an absolute fuel expense number either this quarter or last quarter just for modeling purposes to kind of help us think through that.

Aaron Todd

Sure, you bet. Let me – Trent's going to see if we got that fairly handy, hold on. Okay total fuel for the year to day period was $4,131 million.

David Bachman – Longbow Research

$4,131 million

Aaron Todd

Correct

David Bachman – Longbow Research

And that's for the first three months of '08.

Aaron Todd

That is correct.

David Bachman – Longbow Research

So and that was up 35% year-over-year.

Aaron Todd

Well now keep in mind that we have got the CJ operations in there for the community base where we have fuel risks, so what we announced within our update was that on a volume adjusted basis; it was up about a $1 million.

David Bachman – Longbow Research

Okay that's helpful to have, an absolute number there, thanks.

Operator

Your next question from the line of Bob Labick with CJS Securities.

Bob Labick – CJS Securities

Hi thanks. You just went through it pretty quick before but it sounds like there is a lot going on, on the HPS side in terms of contract expansions and renewals; could you talk to what's driving that trend and just your thoughts towards that division for the rest of the year.

Aaron Todd

Well, we are very excited. We see that – the renewals that we've been doing have been very – have been at pricing that is fair and reasonable to help us to establish their returns there, but more importantly we believe that we truly have provided a differentiated service in the market and are encouraged by the support and loyalty of our customer base as we go through these renewals. At the same time, the satellite expansions; our customers who are increasing their number of operating basis is at an unprecedented level relative to expansion in growth right now and I believe that we are uniquely to be able to facilitate that expansion because of the number of aircraft that we have on order and that are in the system that we have the ability to manage the fleet in such a way that we make those aircraft available to customers earlier than a competitor might and therefore, that's also I think driving. Some of the expansion is that you need both the need and the availability of the aircraft and right now, our customers are exhibiting the need and we have the availability of aircraft to accommodate that need and I think that has combined to generate an incredible amount of activity. Keep in mind that they are also looking at hub-and-spoke models where they are expanding into spoke locations with single engine solutions and that is further expanding their ability to be competitive within their markets as they are experiencing some of the same competitive influences that we are. So I think a lot of that is driving the expansion but we are very pleased with the way things are going thus far.

Bob Labick – CJS Securities

Great, very helpful. This maybe a strange question but could you remind us how you calculate your weather cancellations particularly in light of last four quarters' cancellations are so high; I'm assuming you are doing the same thing but if you just remind us and tell us it is indeed an anomaly in weather.

Aaron Todd

Yeah, here's what happens. The phone rings and they ask for a transport and we are unable to facilitate that transport due to weather. We log that in as a cancellation. Now in addition to that, we know that if indeed there is a need for a call to come in, shortly after that call that was just turned down, it's possible they won't even call us while the same weather conditions are in place because they know that we are down due to weather. So sometimes that may understate the amount of weather cancellations that actually occur but offsetting that is not every call that we receive always ends up with a transport because maybe there is a boarding of the flight because the transport is no longer needed for whatever reason; those tend to offset each other. So the cancellation number has been over the years very predictive of the net influence that it's had on our same base transports and as you can see in the first quarter and in the month of April, the change in weather cancellations was very approximate to the change in flight volume.

Bob Labick – CJS Securities

And so your definition is the same. Has the test for requirements for being able to fly in weather changed at all with…

Aaron Todd

Not, that would in any way affect volume materially and not recently either.

Bob Labick – CJS Securities

Okay, and then last question, if you have this – would it be possible to break down the CJ community based and Air Methods community based separately for both the quarter and for April, if you have them?

Aaron Todd

As far as volume or cancellations?

Bob Labick – CJS Securities

No flight volumes, sorry not cancellations.

Aaron Todd

Yeah, we can. Hold on, I would give it to you, one moment. Trent's trying to find it if you can hold on for a moment. Bob, we just don't have it handy but we can certainly give you that information. It's not publicly sensitive. So, will be happy to share that with you offline.

Bob Labick – CJS Securities

Terrific. Okay, that's all I guess for now. Thank you very much.

Operator

Your next question comes from the line of Barry Randall with Lazard.

Barry Randall – Lazard

Hi, good afternoon. Thanks for taking my call. I was wondering if I could ask something of a strategic question of you and that is to understand your company a little better; annually when you go through strategic planning, budgeting and so forth, what metrics do you use to gauge your progress throughout the year; is it market share, is it revenue growth, is it transports? I mean how – this may be tied into how you compensate yourself bonus schemes and so forth, but really what I am trying to get out is what's your goal in being a public company; is it some measure of profitability, is it take every more market share and so forth; if you could elaborate on that I would really appreciate it.

Aaron Todd

Yeah, we don't consider ourselves the market share company. I mean we are not trying to just – revenue growth is not a primary measure of success for us. Yes, we want to expand the business and we want be successfully at it, but rate of return is far more relevant on our business than revenue growth. We have always given annual guidance that our objective each year is to grow our earnings per share, fully diluted earnings per share by 20% or greater and in recent years certainly we have significantly outpaced that, but that is the minimum measure of success that we established for ourselves each year within the limitations that the business has relative to weather and things that are if you will – beyond our control. Within each division we have certain objectives that try to generate net rates of return and we typically don't share those probably because they are competitively sensitive but it's all geared towards trying to generate a 20% growth in earnings per share on an annual basis. EBITDA is a secondary measure; we understand the importance of cash flows in our business; we enjoy a fair low non-growth CapEx profile and therefore we believe that EBITDA has a lot of relevance as well in computing enterprise value and we have typically seen evaluations recently between nine and 10, eight to 10 certainly if you look at a broader range and we are certainly on the low end of that range presently.

Barry Randall – Lazard

Great, that's terrific. I appreciate that thank you.

Aaron Todd

And just if Bob you are still listening we got the volume information for you. Total community based transports in 2008 through April were 14,291 and CJ transports were 2,474 of that of which 599 were in April from CJ and the rest were in the first quarter, so that gives everybody the same information at the same time. Next question operator.

Operator

(Operator instructions) Your next question comes from Kevin Campbell with Avondale Partners

Aaron Todd

Hi Kevin. Kevin can you hear me

Kevin Campbell – Avondale Partners

Okay sorry about that, I had you on mute. A couple of modeling questions; can you – you talked about the eight new basis on the hospital side and then I guess the four that were – it sounds – I don't know if that was one contract for four basis that we were not hearing, anyway if you could just sort of walk through how those play out throughout the year, when we should expect them to come off and come on.

Aaron Todd

Sure. I won't give you names because it will be a bit competitively sensitive but we had – of the expansions we had one come on in the first quarter of – one, two come in the first quarter of '08. We expect four in the second quarter of '08 and two in the third quarter of '08 and I hopefully that adds up to eight; if it doesn't then I added where I should have subtracted but that's what we have right now that are firm or signed agreements for satellite based expansions.

Kevin Campbell – Avondale Partners

Okay, and the one more non renewal that you received and was that again for four bases from one hospital?

Aaron Todd

That is correct and because it was – in reading between the lines of what I said, because it was a very low profitability – so we say a zero profitability contract, we would not have a material impact on our earnings simply because we were – it was a CJ contract that did not generate any contribution and that's measured based upon the last – since we have acquired CJ.

Kevin Campbell – Avondale Partners

Okay, and it was – has that contract already been cancelled or is that kind of roll off at the end of –

Aaron Todd

It rolls off on July 1 – July 1.

Kevin Campbell – Avondale Partners

July 1? Okay. And then, just looking at that can you give us an – the fuel again – just can you give us an idea of sort of the average fuel cost per flight?

Aaron Todd

$350 million.

Kevin Campbell – Avondale Partners

Okay, great. That's it, thank you very much.

Operator

Thank you. Your next question comes from Chuck Griege with Blue Lion Capital.

Chuck Griege – Blue Lion Capital

Good afternoon, just a few questions.

Aaron Todd

Sorry, I didn't catch the name.

Chuck Griege – Blue Lion Capital

It's Chuck Griege.

Aaron Todd

Okay, Chuck, go ahead.

Chuck Griege – Blue Lion Capital

We have spoken in the past.

Aaron Todd

Yeah.

Chuck Griege – Blue Lion Capital

So, just some housekeeping questions here. At the end of the first quarter, how many community bases did you have?

Aaron Todd

At the end of the first quarter, we had – I've written that off of my scripts, but I can't find my script now. Here we go; I have 106 community bases.

Chuck Griege – Blue Lion Capital

Okay, and you were talking about expanding that by four and then losing four.

Aaron Todd

No, that's hospital based –

Chuck Griege – Blue Lion Capital

So the hospital base. The four that are being closed by July 1 are hospital based.

Aaron Todd

Correct.

Chuck Griege – Blue Lion Capital

Okay.

Aaron Todd

And we are adding eight on satellite expansions in '08. It's what we know thus far.

Chuck Griege – Blue Lion Capital

On the community side.

Aaron Todd

On the hospital side.

Chuck Griege – Blue Lion Capital

So the two expansions in the first quarter of '08, those are hospital.

Aaron Todd

Correct.

Chuck Griege – Blue Lion Capital

Yeah, okay. So your community based growth in the first quarter was what?

Aaron Todd

We added three locations and we shut down two.

Chuck Griege – Blue Lion Capital

Okay, so net one.

Aaron Todd

Correct, but that's not necessarily a revenue measure because the two that we shut down were adjacent to other locations that would pick up that revenue. So it doesn't necessarily mean that you have a net one in revenue production. You just have a positive three with the shutdown of the two not compromising revenue production.

Chuck Griege – Blue Lion Capital

Okay, and your fleet size on the community side is what?

Aaron Todd

Community side, we have 138 aircraft.

Chuck Griege – Blue Lion Capital

Okay, and does that include the ones that are for sale?

Aaron Todd

Operationally, yes, it does, should be a few there but not many. It would be more in the backup fleet.

Chuck Griege – Blue Lion Capital

Hospital based count at the end of the first quarter?

Aaron Todd

182 aircraft and 157 bases is what we have currently.

Chuck Griege – Blue Lion Capital

Okay, and the price increase that you took on – what was it, May 1?

Aaron Todd

Yes.

Chuck Griege – Blue Lion Capital

Is that enough in your opinion to offset the higher costs you have been facing?

Aaron Todd

It is. Based upon what we are seeing right now, certainly if we have more increases than in the cost of fuel or maintenance doesn't moderate back to an average level then we would likely consider a late summer adjustment to pricing for community based operations.

Chuck Griege – Blue Lion Capital

Okay and you disclosed that you had 12 engine overhauls last year in the first quarter versus 31 in the first quarter this year. Can you give us some colors to what your overall count was in 2Q, 3Q and 4Q?

Aaron Todd

On engine overhauls we did.

Chuck Griege – Blue Lion Capital

Yeah

Aaron Todd

Most of those are disclosed in the 10Q's but we don't have those right in front of us.

Chuck Griege – Blue Lion Capital

Yeah okay.

Aaron Todd

They are available, we can pull that information. Keep in mind though engine is not the whole – engines are not the only things that drive maintenance. You got transmissions, rudder blades, tell rudder systems, 5,000 ounce inspections, avionics repairs; I mean it is just a one of the more significant measures that we are able to isolate. Maintenance is about an $80 million plus line item for us and about two thirds of the cost of maintenance are unscheduled and about a third is schedule and that's why it's difficult to determine that. Engine typically is about 40% of the cost to maintain an aircraft and obviously that would be less on a single engine than more on a twin.

Chuck Griege – Blue Lion Capital

Okay if you were to take your total maintenance expense in a year and divide it by the average number of aircraft, is that a valuable metric.

Aaron Todd

No, because you got more flight hours in the summer months than you do in the winter months and that can cause a variation. You will typically have more maintenance in the...

Chuck Griege – Blue Lion Capital

Well, that's what I've seen over the course of the year as opposed to quarterly.

Aaron Todd

Well Chuck I am not sure what you are trying to understand. Are you saying if you just take the first quarter and extrapolate it, how does that compare to what we are expecting for the full year.

Chuck Griege – Blue Lion Capital

No, if I was to go back and we will get '05, '06, '07 and then look at my model for '08 would there be some sort of commonality in terms of the maintenance expense.

Aaron Todd

The answer is no and here is why; you got too many variables in that comparative; one, we are going from twins to singles; two, we brought in CJ that had a difficult portion of number of twin engines which is going to increase the hourly rate; three, we are bringing in brand new aircraft and they have a dramatically lower rate and four you have got a high inflationary influence on spare parts and five you have got variable in flight hours based on maintenance and other factors and so it's not as simple as just drawing a trend line because you got a factor all five of those variable into your analysis.

Chuck Griege – Blue Lion Capital

Okay given difficulty in forecasting.

Aaron Todd

It is extremely difficult and that's why we don't give guidance on a quarter.

Chuck Griege – Blue Lion Capital

Understand. Give us a little bit of color as to what you do look at that gives you the confidence to forecast 20% plus EPS growth.

Aaron Todd

Well what we do is we take our average cost per flight and then we adjust it up or down based upon the one third that have scheduled events. So, we will take – if it's a bell 222 and let's say the hourly cost to maintain a bell 222 is $750 then we will look at the 222 fleet and we will say “okay what is on the schedule that we know that is scheduled and how does it compare to the year before” so we might bump up that $750 to $850 or might bump it down to $650 based upon those factors and then we use that times the hours that we are projecting the flight based upon the revenue assumptions to build it up and so that's how we build it up and that's what gives us the confidence that is more than just a guesstimate but there can be variation because of the two-thirds that can ebb and flow, but keep in mind, while it does ebb and flow over a quarter, over a year, those factors tend to average out as you have more flight volume and as you have a growing fleet and as a result, these do tend to be fairly predictable year-over-year but quarter-over-quarter, they can vary. We might have $7.5 million maintenance months, one month, we might have a $4.5 million maintenance month, the next month. That's the kind of standard deviation you can have and that's what makes it difficult to predict a given quarter.

Chuck Griege – Blue Lion Capital

Okay. Well, thanks a lot, I appreciate. I will get back in queue.

Aaron Todd

Thank you.

Operator

Thank you. (Operator instructions) Your next question comes from the line of Kevin Campbell at Avondale Partners.

Kevin Campbell – Avondale Partners

Sorry guys, one last question. You said the cost per flight – fuel cost per flight was $350. What would that have been say at the end of last year?

Aaron Todd

$250.

Kevin Campbell – Avondale Partners

$250? Okay, great, thank you.

Operator

Thank you. At this time, there are no further questions. I would now like to turn the conference back over to Mr. Aaron Todd for closing remarks.

Aaron Todd

Thank you and thanks, great questions. I know it's a lot to digest in just an hour but as the 10-Q will be out, we expect tomorrow and you got a chance to review that, please give us a call, we'll try to clarify any of those details and again, we are still very, very bullish on the future. We obviously would have liked not all four of the variables to go against us in the first quarter but we know the probabilities are in our favor to get back to the strong performance we have seen in recent quarters and continue to have great optimism for the year, and appreciate your participation today.

Operator

Thank you. Thank you for joining today's Air Methods first quarter 2008 financial results conference call. You may now disconnect.

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Source: Air Methods Corporation Q1 2008 Earnings Call Transcript
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