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Executives

Christine Clark - IR

Aaron Todd - CEO

Trent Carman - CFO

Analysts

Bob Labick - CJS Securities

Kevin Campbell - Avondale Partners

Greg Williams - Sidoti & Company

David Bachman - Longbow Research

Chuck Griege - Blue Lion Capital

Chris Blackman - Empirical Capital

Bernie Harris

Air Methods Corporation (AIRM) Q2 2008 Earnings Call August 7, 2008 4:15 PM ET

Operator

Good afternoon. My name is Hether, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Methods' second quarter 2008 financial results conference call. (Operator Instructions)

Thank you. I would now like to turn the conference over to Miss Christine Clark. Please go ahead.

Christine Clark

Good afternoon. Thank you for joining us today to review Air Methods' second quarter financial results ended June 30, 2008. As the operator indicated my name is Christine Clark and I am with Air Methods Corporation.

With us today on the call representing the company are Mr. Aaron Todd, Chief Executive Officer, and Mr. Trent Carman, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for 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 the existing operation, 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 to turn the call over to Mr. Aaron Todd, Chief Executive Officer of Air Methods Corporation.

Aaron Todd

Thanks, Christine. I would like to extend a welcome to each of you on the call today. We appreciate you being with us. Obviously, the first half of the 2008 has been very challenging. However, we would like to highlight several factors that should favor our third quarter and future periods.

Same base weather cancellations through June were almost 1,100 higher than the prior year period. This reflects a very severe level and thus increases the probability for healthy improvement in flight volume in subsequent periods as weather moderates.

Oil has decreased from $147 per barrel to less than $120 most recently. In addition, average fuel costs during the second half of 2007 were higher than the first half of 2007giving us a more favorable comparative during the second half of 2008.

The difference between the first half of '07 and the second half of '07 was roughly a 20% increase already reflected in the historical numbers. We incurred over $2.3 million in cost to consolidate our operating certificates during the first half of 2008 as reflected in this afternoon's release. These costs will not be repeated in the second half of this year as we completed this process in late June.

After final calculations were made, maintenance expense did moderate slightly in the second quarter compared with our first quarter. We would anticipate further moderation in the second half of 2008, given the over 15% inflation factor experienced during the second quarter. As you know, however, any given quarter or two are difficult to predict.

We have not seen any deterioration in payer mix for community-based transport to date. The second quarter net revenue for transport was weaker than expected due to efforts by our billing and collection center to accelerate closeout of over co-pay accounts.

This resulted in a compression of write-off activity during April and May. When this ended in June, we saw a return to higher reimbursement for transport levels for the month of June which exceeded $7,000 per transport. Our price increase on July 1st should further mitigate weakness in flight volume and higher fuel prices.

We have converted several twin-engine aircraft to single-engine during the first half of 2008. Based on projected savings, this should improve pretax earnings by as much as $850,000 during the second half of 2008.

We have recently shut down three underperforming community-based locations, based on allowances generated at these three locations year-to-date, we anticipate a $900,000 improvement from the shutdown of these locations in the second half of 2008.

We are consolidating two dispatch centers into our central dispatch location in Omaha. This is expected to reduce costs by almost $350,000 during the second half of the current year. Our insurance renewal, effective July 1st will increase our insurance costs by roughly 3%. While the overall increase was higher, the majority of this additional increase is passed through to our hospital customers.

Our resulting insurance rates charged to our hospital customers are still believed to be the lowest in the air medical segment of helicopter operations. The company continues to enjoy opportunities to grow our operations. Since the beginning of 2008, our hospital-based operations have added eight new satellite locations.

The company has received notification from only one customer involved in one location since our last conference call that intends to terminate their contract early. This CJ contract did not generate positive contributions and therefore its early termination will have a favorable impact to future earnings. We continue to be successful at renewing contracts at more appropriate pricing levels.

Our community-based division is finalizing relationships in two locations that will facilitate expansions in the second half of 2008. Several other opportunities are being developed as well.

The company is in discussions with several hospital-based operations, both Air Methods’ customers and otherwise, which are evaluating a possible outsourcing of in other air medical programs.

Our Board of Directors has reauthorized a share buyback program. Our financing agreements have been revised to allow initially up to 25 million treasury stock purchases and the Board of Directors have authorized up to 2.5 million shares to be repurchased under the share buyback program. We will increase the allowances under the financing agreements as needed should we exceed the $25 million.

The purchase will be made from time to time based on internal calculations that evaluate the potential for these acquisitions to be accretive to projected earnings per share in future period. Purchases will be financed through leveraged financings of our considerable number of unencumbered aircraft. And while we will not give specific parameters of the program, we can say that the share price more recently has reflected levels that we believe to be undervalued and would justify repurchases.

As [Christine] mentioned we have used almost $12 million of our free cash flow during the second quarter to purchase leased aircraft, of which $3 million worth was subsequently sold as part of our fleet rejuvenation efforts. Obviously, we were deeply saddened by the two fatal accidents which occurred during our second quarter.

Even though we have enjoyed a strong safety record over our history and continue to implement changes to improve the margin for safety, we are anxious to learn and are focused on the causable factors of these accidents, so that any deficiencies in our operations can be addressed. We are presently unaware of any common factors between these events that that might identify a specific area of weakness within our operation.

With the completion of the integration of our aviation operations with those of CJ and given these recent accidents, the company will be retaining a third-party firm to conduct an independent safety audit, added measure of caution. We believe our optimism for the future is fully justified based on considerations of the factors I have just mentioned.

And with that I will turn the call over Trent to discuss the second quarter results in greater detail

Trent Carman

Thank you, Aaron. As we reported in our press release, revenue net income and earnings per share for the second quarter were $128 million, $4.8 million and $0.38 per share respectively. Revenue generated by our community-based operating division grew $16 million during the second quarter of 2008.

The acquisition of CJ Systems contributed $11.3 million to this increase. The remaining increase in community-based revenue related to flight volumes from newly opened bases and an increase in our net revenue per transport. Revenues generated by our hospital-based division grew $19.2 million. The acquisition of the CJ Systems contributed $16.1 million to this increase. The remaining increase in hospital-based revenue related primarily to new bases and to annual price increases on contracts.

General and administrative expenses increased by $5 million for the second quarter of 2008. The majority of the increase relates to additional staffing related to the CJ Systems acquisition in 2007. We anticipate additional synergies with general and administrative expenses later this year as we continue to consolidate overlapping functions as Aaron described. General and administrative expenses were 13.7% and 13.9% of revenue for the second quarters of 2008 and 2007 respectively.

Earnings before interest, income taxes and depreciation and amortization or EBITDA were $13.5 million and $17.5 million for the second quarters of 2008 and 2007 respectively. On a trailing 12 basis, our EBITDA is $58.4 million. You can reconcile EBITDA by adding interest expense, depreciation and amortization, loss on extinguishment of debt and subtracting gains on disposition of assets to income before income tax expense.

The company's net debt position, which is the total of all indebtedness less cash, was $83.7 million at June 30, 2008 and $90 million at December 31, 2007. At June 30, the company had approximately $35 million of assets availability under its revolving line. During 2008, the weighted average interest rate on approximately $65 million of our outstanding indebtedness has decreased by over 300 basis points since the first half of 2007.

We recently evaluated our aircraft fleet and the excess of fair market value over book value and lease buyouts for the aircraft is approximately $120 million. Cash flow generated by operating activities was $23.5 million for the first half of 2008. This compares to $22.5 million for the first half of 2007. During 2008, the company has bought out approximately $50 million of aircraft from operating leases and paid off approximately $3 million of promissory notes to currently secure aircrafts. The company may sell or release certain of these aircrafts in the future.

Additionally, the company has received $6.3 million in proceeds during the first half of 2008 from the sale of seven aircrafts. Our Products Division is currently under contract for 30 HH-60L units and 50 MEV units and three commercial interiors. Deliveries under these contracts are expected to be completed by the end of 2009. The backlog of revenue from these contracts is approximately $13.2 million. The company currently operates 314 aircrafts in its fleet, of these 177 are in our hospital-based operations and 137 are in our community-based operations. Additionally the company currently operates 102 community bases and 155 hospital bases.

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

Aaron Todd

Thanks. Trent and I think at this time we will just open it up to any questions you might have.

Question-and-Answer Session

Operator

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

Bob Labick - CJS Securities

Thanks, good afternoon.

Aaron Todd

Hi Bob.

Bob Labick - CJS Securities

Hi, a couple of questions. Thanks for the lot of information there, some of it was quick, so I may ask you to repeat a little.

Aaron Todd

Sorry, Bob. Go ahead.

Bob Labick - CJS Securities

First, just start with elaborating on the true-ups that you discussed during the quarter and then the current collection rates and what you would expect for the second half, a range of what you might expect for the second half?

Aaron Todd

Sure, I would be happy to. Are you talking about the crew training cost?

Bob Labick - CJS Securities

No. I am talking about the accelerated receivables?

Aaron Todd

I am sorry, I did not hear you.

Bob Labick - CJS Securities

Sorry, the accelerated receivables.

Aaron Todd

Yes. Sure. What happened is in middle of part of the first quarter, I noticed that we were starting to get some older co-pays that were aged over a year and asked the billing center to really focus on trying to get those closed out and collected or written off, whatever the case might be. They did a great job of going in and getting those accounts addressed, but it continues to really also focus on accounts over a 180 days.

As a result, we had a compression if you will; of write-off activity associated with working those older accounts and that resulted in some negative true-ups to the reserves. They essentially completed that process of getting, if you will, some of those accounts caught up roughly at the end of May and as a result in June, when we saw the cessation of that activity, we saw a return to fairly significant net revenue for transport in the month of June. The actual number was actually around 7,200 however, I would say that that is certainly higher than what I have put into our internal projections, granted that this also does not include the July 1 price increase that might further add to that, but we also have to give allowances to standard deviations from our averages.

So while I built my analysis on 6,900 as the expectation, certainly as we can see from June, there maybe some cushion in that number, but for right now we have built our internal expectations on 6,900.

Bob Labick - CJS Securities

Great. That is helpful. And then you discussed, closing three of CBS bases during the quarter. Two questions. One: could you just give us quarter-end count? Two: what were the reasons for the underperformance? What drove these divisions?

Aaron Todd

Yes, great question. Actually one of them was both, an air and a ground operation in Wisconsin. It was acquired in the CJ acquisition. We would have probably shut down that operation almost from the beginning, but there was a six-month notification requirement. And so we had to wait till the end of the June to shut that down and that was probably accounted for $900,000 losses in the first half of the year.

The other two locations have to do with Florida, where we found two recently expanded bases were too cannibalistic with adjacent bases and we are not achieving volume expectations and felt it was just best to shut those down. Did you have another question as well in there?

Trent Carman

He wanted the account. The account at the end of the quarter, Bob, was 104 for the community bases, right now we have 102 for the two that Aaron just mentioned.

Bob Labick - CJS Securities

Okay, great. How much of that is 17 for CJ now with one less?

Aaron Todd

One CJ, two Air Methods.

Bob Labick - CJS Securities

Right, but I do not know one or two, 17 are CJ bases still?

Trent Carman

I think it is 16.

Aaron Todd

It should be 16 with the shutdown of the one.

Bob Labick - CJS Securities

Okay, great. Thank you. And then just moving on, you spoke about it a little bit, but could you elaborate a little on maintenance and the trends? And I guess essentially if I am thinking about it correctly, you have finite maintenance events and so to the extent that flight hours are down, your maintenance per flight hours is going to be up. Is that the right way to think of it, and if you could discuss expectations in the second half as you rejuvenate the fleet.

Aaron Todd

Yes, great point. Certainly there is an element of that when your flight volume is down, it reduces your denominator for flight hours and as we know, while maintenance is a variable cost overtime in a short period of time, sometimes the actual dollars expended as was the case were in line with budgeted expectations, but because flight hours were below expectation, then that resulted in the inflationary view.

Initially we thought second quarter maintenance expense was almost equal to the first quarter because we were applying some estimates to flight hours. What we found out is that flight hours were actually a little higher than what we had thought because of the additional training hours that were taking place with the retraining the CJ pilots and utilizing some of the backup fleet for that purpose and had some adjustment up of the flight hours which reduced the cost per flight hour on the Air Methods’ fleet and thankfully that reflected about a 5% to 6% improvement from the 21% we had announced in our preannouncement.

So we did see some moderation there, but again, 15% year-over-year, there is still room for moderation there.

Bob Labick - CJS Securities

Great. And then, just jumping to one other thing that Trent outlined, could you just help us understand the value of the fleet versus buyout leases, $120 million number that you put out there?

Trent Carman

Yes, Bob. Most of the aircraft are leased that we have. Over 200 of the aircraft and within the leases they provide for buyout purchase options, shall we say at five years and nine years for the most part.

And if you look in one of the tables to a lease, there is what is called a stipulated loss value table. And that stipulated loss value is a mathematical table that says if there was an accident or you had to buy the aircraft out today, here is what it would be.

So you compare that to the Bluebook, which is effectively an industry publication as to the value of each aircraft and just take x minus y.

Aaron Todd

And then, Bob, on top of that, you have in our on balance sheet fleet that have been depreciated down and as the stock prices seeing softness, the fair value of the net assets of the company is certainly a relevant measure again.

And while the net book value of the company maybe around $13, you got a $120 million of potential off balance sheet equity in the fleet that is not reflected in that net asset number.

And so that pushes you potentially north of $20 a share. I think its $23, roughly. And certainly we felt that that might be a relevant disclosure for the shareholders to consider relative to the balance sheet strength of the company.

Bob Labick - CJS Securities

Great, very helpful. Thanks. I will get back in queue and we look forward to seeing you at our conference next week.

Aaron Todd

Thanks, Bob.

Operator

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

Kevin Campbell - Avondale Partners

Thanks for taking my question. I wanted to ask you guys, you commented obviously on transports and weather for July, any comments on what we have seen pricing-wise or maintenance wise in the month?

Aaron Todd

I have not seen anything yet. We usually do not get our preliminary results until probably sometime early part of next week, usually about seven to ten business days. So I do not have any clarity on that and certainly we will get a sense for how the reimbursement levels and maintenance with some of those things are trending, and if we get any certainly any variations, positive or negative that are material to revised expectations, we will certainly try to give some updates on that before November comes around.

Kevin Campbell - Avondale Partners

Okay. Could you comment to on the same base decline? You comment a little in your press release on auto accident scenes and those being down with gases. Could you perhaps elaborate on that?

Aaron Todd

You bet. Thanks for asking the question. We were down about 400, which is a severe month. Half of it was explained by weather, the other half was not. We then went in and looked at how that 400 varied between inter-facility transport and scene transport. The decline was more heavily weighted on the scene transports.

We saw a similar trend in June and it would account for that remaining 200, it would account for about 50-60 transports that maybe attributed to a lower road traffic associated with fuel prices.

We saw similar measures, actually a little higher in June, about 100. The reason we started to see I think this in the June, July timeframe, because these are the months that have more discretionary travel and therefore there maybe more occurring of discretionary travel with the high cost of fuel. So I think the two reasons to be optimistic as we see fuel prices come down.

One is the impact it has on our direct expenses, but also it makes travel more affordable, which may bring a demand for services back to historical levels as people get out and travel again. But there is no question that that has been some influence from that, but admittedly, it is difficult to isolate down to the individual transport, but there is certainly some of that going on.

Kevin Campbell - Avondale Partners

Okay. Could you talk a little bit about, following the aviation incidents, what you are hearing from the FAA or the National Transportation Safety Board? Increased oversight? I heard you mention the independent audit that you guys will be having done on yourself, but could you just give us a little more color there on what you are seeing from the two agencies?

Aaron Todd

There has been two meetings, one back in Washington a couple of weeks ago involving the NTSB and the FAA and representatives from the major operators in the US. The head of the FAA, Nick Sabatini, certainly indicated that they still wanted to be collaborative and work together with the industry, to try to address these issues in a collaborative way, so that there is not a knee-jerk response that may not only not address what the issues maybe, but potentially could make safety margins even narrower than they are.

On the other hand, the NTSB is certainly taking a more independent view of things, and is certainly going to be studying the causable factors hopefully, but we are not aware at this time of any specific changes to regulations or other operational parameters that are being contemplated the results of the recent event.

Kevin Campbell - Avondale Partners

Okay. And then lastly, I missed some of the detail on the buyback, the number of shares or the dollar amount, I missed some of that, so if you could go just go over that again, that would be great.

Aaron Todd

The Board authorized up to 2.5 million shares to be acquired through treasury repurchases. The financing agreements between the company and its commercial banks previously had limitations on that. We got that lifted to 5 million up to 25 million allowed. It is more of a formality to accommodate the way that the debt covenants work, and how that would feed into it.

Certainly, if we find that we are purchasing more than 25 million, we would just go back and amend that agreement again in order to accommodate the higher purchasing levels, because obviously our expectations would be that if we started purchasing near the cap of the Board authorization, that would probably mean another limitation certainly. I mean raise of that limitation before that, but we thought it would be appropriate to disclose both figures.

Kevin Campbell - Avondale Partners

The prior limitation was $5 million total and now it is $25 million?

Aaron Todd

That is by the banks. Under the lending agreement by the Board, we go up to 2.5 million shares and after we have gone through 25 million worth of buybacks, then we can. If we still feel it is appropriate to continue, which we certainly would, if the valuations were still at attractive levels. And so we would certainly seek to amend that agreement again.

Kevin Campbell - Avondale Partners

Okay. Thank you.

Aaron Todd

You bet.

Operator

Our next question comes from the line of Greg Williams with Sidoti & Company.

Greg Williams - Sidoti & Company

Good afternoon. Thanks for taking my call. Just a couple of questions, just comment again on the 12% July transport drop? Is there a possibility of the scene incidents, both in June and July would be down due to just aviation incidents and sort of the headlines there?

Aaron Todd

That is a good question. We have had rough patches before as recently as '04 within the industry and '05 and where we had I think there were six fatal accidents in each of those two years and we did not see any impact on demand as the result of those accidents. Certainly in specific locations where those accidents occur, you do see an impact, but at this point in time, there is nothing to indicate that the change in demand is related to the recent accidents.

Another reason to illustrate that is up through in June and July, most of the variation is weighted on the scene plus side of things rather than on the inter-facility and if the accidents were going to have an impact you think there would be potentially more of an impact on the inter-facility side. But I am not saying that there is not some of that going on, but certainly I am not aware of that taking place.

Greg Williams - Sidoti & Company

And can you comment a little bit on the same as you are realizing from moving from twin to singe-engine, about 850,000 in the second half. I presume most of that would be maintenance cost savings?

Aaron Todd

Maintenance and fuel and insurance.

Greg Williams - Sidoti & Company

Now, since its maintenance and fuel, which is sort of volume driven, does that mean more of the savings would be bulk in the third quarter versus the fourth quarter?

Aaron Todd

Yes, I will just tell you what I did. It is between $500,000 and $750,000 of savings depending on the type of aircraft and the age et cetera. I think its $500,000. So I used the low-end of the range and for example if one base swapped out in April, then what I did was I said okay, we had four months in there at the higher level and I prorated the savings for the remainder of the year, and calculated on a prorated basis and that is how we got up to the aggregate of $850.

Greg Williams - Sidoti & Company

Okay, got you. Can you remind me again what line the FAA certificates would have been on the income statement?

Aaron Todd

Yes, basically there is about four components. You will have some in G&A, which is associated with the training captains that were retained to assist with the transition. We had a reduction of those. I believe it was ten lower positions towards the end of June, early part of July. Then you will have a portion of it, that is in flight center expenses associated with the work over shifts that we had to pay for the pilots that went to the additional ground school and the additional check rise.

And then the remaining portion as we took the number of flight hours that were flown on those incremental training flights and we multiplied it times the average maintenance per flight hour and fuel per flight hour to come up with the remaining portion. So you have got some in G&A, you have got some in flight center and you have got some in flight operations.

Greg Williams - Sidoti & Company

Okay, got you. And Trent, you spoke pretty fast, I missed the amount of community-based ships in the fleet and hospital-based?

Trent Carman

Yes, 177, for hospital 137 for community.

Greg Williams - Sidoti & Company

Okay. Great. And how about the community bases and hospital bases?

Trent Carman

Currently there is 102 community and 155 hospital.

Greg Williams - Sidoti & Company

Okay, perfect. Thanks guys.

Trent Carman

You bet.

Operator

Our next question comes from the line of Bernie Harris with Oppenheimer.

Bernie Harris

Not with Oppenheimer, but anyhow.

Aaron Todd

I know who you are with Bernie, go ahead.

Bernie Harris

Very good report by the way and the information you gave that is very helpful. I am confused a little more on the value because the idea of book value is one of my client that looks at book value and I keep reminding that it is fleet. So, if I understood right, there is about 200 planes that are leased, is that right?

Trent Carman

Yes, a little over 200 aircrafts that are leased, that is correct. and then we own several and have mortgages or own them outright and then some of our hospital customers own their own and we operate them on their behalf.

Bernie Harris

We got 200 that are leased, but how many do you actually own and have depreciated now?

Trent Carman

Let’s see, about 70.

Bernie Harris

About 70?

Aaron Todd

They are not fully depreciated, but they have been depreciated well below their fair value based upon the Bluebook measure.

Bernie Harris

All right, so basically they are held on your books as depreciated value?

Trent Carman

Correct.

Aaron Todd

That is correct. Yes.Trent Carman

Or they are not on our books, but we have the ability to buy them out at stipulated loss and the stipulated loss value at the present time aggregated over 200 aircraft is combined with what the differences for those aircrafts on balance sheet is where Trent came up with 120 million.

Bernie Harris

No, I am just referring to 70.

Trent Carman

Yes, the 70 are on the balance sheet currently.

Bernie Harris

But at depreciated value?

Trent Carman

That is correct.

Bernie Harris

So right and if you actually went to sell, they might be worth more. Is that correct?

Aaron Todd

They would be.

Bernie Harris

Okay. And did you have a breakdown of what the depreciated value of those 70 are?

Aaron Todd

Well no, what we said is 120 includes both the lease and the difference between fair value and depreciated book value.

Bernie Harris

Okay. Thank you.

Aaron Todd

You bet.

Operator

Our next question comes from the line of David Bachman with Longbow Research.

Trent Carman

Hi, David.

David Bachman - Longbow Research

Hi, good afternoon. Since everyone else is asking you to repeat some numbers, I am going to do the same. You mentioned several of the things that you are doing and the potential impact on the second half of the year. $850,000 from the conversions and then the base closings and dispatch consolidation, can I just get those numbers?

Aaron Todd

Sure. The base closings, we lost $900,000 on those operations through the first half of the year, so we basically just zeroed those out for the second half.

David Bachman - Longbow Research

Okay.

Aaron Todd

There was about $350,000 from the consolidation of the dispatch centers. One is already done and the other one will be completed in about a week. I think it is a 13 FTE reduction.

And then the twin-engine was 850, and then the consolidation of the operating certificates was about $2.3 million in the first half of 2008 that we do not see replicating in the second half.

David Bachman - Longbow Research

The $900,000 loss was in the first half?

Aaron Todd

Correct.

David Bachman - Longbow Research

Okay, first half. Okay, so all those are first half numbers?

Aaron Todd

Correct. Those are not annual numbers. Those are just first half only.

David Bachman - Longbow Research

Okay. Did you say how many conversions that were? You said several, is that two or three?

Aaron Todd

You mean that we are having discussions with?

David Bachman - Longbow Research

No. On the single-twin conversion?

Aaron Todd

I have got the actual number. I think its right around five that have been throughout year-to-date if I remember.

David Bachman - Longbow Research

Okay.

Aaron Todd

I can give you the exact number if you call me back tomorrow, but I just do not have that right in front of me.

David Bachman - Longbow Research

Okay. and then, can you just update us in terms of craft orders, what you have taken delivery on this year, what your expectations are for the rest of the year and where those numbers stand at this point?

Aaron Todd

Well, for the total year, it is about 42 right now. We have taken delivery and funded, I think, it is 17 so far. We have taken delivery and have a three-month window to finance about another six and then the rest come in through the remainder of the year, heavily towards the fourth quarter though.

David Bachman - Longbow Research

Okay, fourth quarter?

Aaron Todd

Yes.

David Bachman - Longbow Research

Okay. And then just on weather, of course, that is the big factor here that no one can get their arms around, but is there anything that has changed in terms of geographic exposure, or anything like that that factors in at all, or is it just.

Aaron Todd

Well ordinarily the CJ bases could have skewed thatbut as you know, we have been excluding the CJ bases from the measure, so that can’t affect it. The last month that we had less severe weather was January. January of '08, we had fewer weather cancellations.

The problem was we had very severe winter, December was very severe last year then January was not too bad, then February and March and April were more severe with winter and then all of a sudden we had all the flooding and heavy rains up in the Midwest and those continued and we have a little bit of residual from that.

We have weather cancellations every year, I mean every month of every year, so it is always a question of degree. Certainly weather cancellations have come down I mean the summer months as compared to the winter months, but the relevancy is how they compare to the year before.

David Bachman - Longbow Research

To the year before? Okay.

Aaron Todd

Of the months in the year before.

David Bachman - Longbow Research

Exactly, and then have you started any repurchase activity?

Aaron Todd

Well, we are not allowed to until we got everything disclosed. The earliest that we could begin purchasing would be next week under our insider trading policies.

David Bachman - Longbow Research

Okay.

Aaron Todd

Obviously, we want to let the shareholders have an opportunity to digest the today's release and then we will evaluate where we are and move forward.

David Bachman - Longbow Research

When was the last time that you repurchased shares in the past?

Aaron Todd

It has been many years. I am guessing it has been over five years, at least.

David Bachman - Longbow Research

Okay. That is it for me. Thank you.

Aaron Todd

Yes.

Operator

(Operator Instructions). Our next question comes from the line of Chuck Griege with Blue Lion Capital.

Chuck Griege - Blue Lion Capital

Good afternoon, all my questions have been answered. Thank you.

Aaron Todd

Well great, Chuck. You have my number on the release; feel free to call me if something comes up.

Operator

Our next question comes from the line of Chris Blackman with Empirical Capital.

Chris Blackman - Empirical Capital

Yes, thank you. I appreciate the amount of data you have been providing. Just with the housekeeping, maybe I missed it, but what are your DSOs running currently with the change you had in taking your accelerating your receivables trends?

Aaron Todd

They are not too dissimilar. We have had price increases that can drive up DSOs as you know the way the calculation works, but I think we are right around. I have got the exact number here. We were 110 using an annualized three months. We were about 106 last year, but we were at 117 in February, and we are down to 110. So you can see that we dropped about seven days during that period of time that we were working on the accounts.

Chris Blackman - Empirical Capital

Okay. And if you had to guess through the balance of the year, do you expect it to remain in that 110 area?

Aaron Todd

Yes. We have always said 110 to 115 is a good place for it to be.

Chris Blackman - Empirical Capital

Okay. And explain the reserves how you go through the determination of?

Aaron Todd

Sure. What we do is in the month of transport, we take our running collection rate for transports older than a year, but under two years. And then we further adjust that, bringing price increases because we know price increases can dilute the collection percentage

And so we further increase the bad debt reserves for the effect of price increases since that time and then we establish a reserve.And after three months from date of transport, we go in and we evaluate what the actual payer mix is of remaining open accounts and we multiply those numbers by our running collection rate by payer type using the historical trends and we recalculate the balance. And then we compare it to what is on the books and we adjust the difference, up or down every month based upon applying that computation.

Chris Blackman - Empirical Capital

And those reserves have been running dollar-wise in what kind of figures?

Aaron Todd

Well, did you mean that as a percentage?

Chris Blackman - Empirical Capital

No, it is absolute dollars. And maybe it is in front of me and I just do not see it?

Aaron Todd

Do what?

Chris Blackman - Empirical Capital

In dollars?

Trent Carman

Well, let me just give you the figure, we got that on the Q. Why do not you get it on the K? You get the breakdown on the 10-K which will give you what those percentages have been running.

On the Q, for example for quarter end June 30, 2008, gross billings is at a (inaudible), your provisions for contractual discounts for Medicare/Medicaid were 33% and provisions for uncompensated care was 22% and that would consist those numbers compared with 29% for contractual discount in '07 and 22% for provision for uncompensated care in '07, so the numbers have been fairly consistent.

Chris Blackman - Empirical Capital

Okay. Thank you. And I know you brought Paul Tate in there to work on some of your operational issues. Anything you can share with us as far as the plans in addition to what you have done so far or anything that you are working on that you have not shared with us to improve your operations?

Aaron Todd

Sure. Well, Paul brings a lot of savvy in information systems. And certainly, he is working on some legacy systems that we had already been investing and replacing and has helped to accelerate and to make that a more efficient process. Certainly, he is presently looking at some of the ways that we can structure our field operation overhead structure so that we can be as efficient as possible.

He is bringing a lot of support to our products division and assisting them in their management of margins, and bringing some project management to play there. You know, certainly they have had seen a lot of growth and we have not seen as much of that hit the bottom line.

So he is bringing a little bit more discipline into that area. Certainly, he is involved in. As we have the grounding of the aircraft that we mentioned at the last conference call, he was very instrumental in helping to organize, getting those aircrafts back up and running.

He has attended the safety meetings with the FAA due to a conflict that I had and is bringing some of the safety programs of the Part 121 commercial carriers in trying to modify those, have them be applicable to an EMS HEMS or Helicopter Emergency Medical Services environment and the acronym for that effort is called an ASAP program and he is certainly focused on that as well.

Chris Blackman - Empirical Capital

Okay. There is a couple of other questions, if I may. I think when you bought the CJS, the company had maybe come off of a period of time when their net profit margin was running slightly less than 1% and maybe in fiscal '07. And I think you all have been running in the net profit margins somewhere north of 5% and you were hoping to obviously bring the CJS more towards your net profit margins. Can you give us any direction on what we are seeing when we compare the two?

Aaron Todd

Sure. 70% of CJ's revenues were hospital-based programs and you are going to be looking at about a three to five-year period to get those margins up to a market level. And frankly our contributions were not all that great either in the last couple of years and we started to see good improvement in '07 and maintenance is taking us back a step here in the first part of '08, but that is going to take a little time.

On the 30%, certainly that was a big driver of our outlook for accretive results in the first year. The problem is with the weather cancellations and the softness in demand here in the summer months, all of the numbers that we have shown do not reflect the similar impacts on their 17 and now 16 community-based locations and that certainly has bit into the outlook for accretiveness there in the initial quarters.

So we had a great first quarter with subsequent to acquisition, which was the fourth quarter of 2007. But we have not seen the level of accretiveness because they have been impacted by the same issues of fuel and weather affecting their flight volume and their cost of operations.

Chris Blackman - Empirical Capital

Okay. And that three to five-year period, that you mentioned that it may take to get up to the acceptable levels, what would those levels be? Where do you hope for those levels to reach?

Aaron Todd

Well, I think we have always said that within our segment net income, if you look at our segment footnote, we would like to see that number in the 10% to 12% range. Of course, we have corporate admin and taxes and other costs that come out of that, but we have had that at the 10% level historically and as inflation has dramatically affected the business, certainly we saw a lot of margin erosion.

We are going to honor these contracts, but we are doing our best to work with our customer base to try to find ways to have these contractual relationships be a win-win.

Chris Blackman - Empirical Capital

But you are still hoping and expect to able get to that 10% to 12%?

Aaron Todd

We are committed to do all that we can to achieve that. We are going to be competitive in the marketplace, so there is no such thing as a guarantee on those things, but we are also not afraid for certain relationships where there should not be any willingness to try to make those contractual relationships favorable to both the customer and us as a service provider. As you know we have walked away from or we have not renewed a couple of those.

Chris Blackman - Empirical Capital

Right. And finally, two more if I may. One on fuel. Your average fuel cost per flight this past quarter?

Aaron Todd

I have got that. Hold on. If you just include the Air Methods’ aircrafts here is what we have and because I had to exclude and so you could it year-over-year, for the six months ended June of '07, it was about $259 a transport. For the six months ended December, '07, which I believe that does have a little bit of CJ and it should not have affected much; but it was $316 per patient transport. This is not per flight hour, but per patient transport and in the first six months of '08, it was $385.

Chris Blackman - Empirical Capital

385? And you were modeling I think a 35% increase year-over-year. Have you changed that at all?

Aaron Todd

Absolutely, in fact when I modeled my second half, which is what gave rise to the updated guidance in our preannouncement, I used June levels of fuel expenditures going forward. So as we have seen some reduction more recently, we would hope to start seeing some benefit from that in the August timeframe if they stay at these levels.

Chris Blackman - Empirical Capital

And the June would have been what percentage year-over-year? What where they using that figure?

Trent Carman

So we were at 400 and above.

Aaron Todd

Well we were at 56% quarter-over-quarter, so we would have been somewhere probably in that 60% to 65% range.

Chris Blackman - Empirical Capital

Okay. So then your total fuel expense year-to-date is how much in absolute dollars?

Aaron Todd

We have a little bit of fuel expenditure within our hospital-based operation, so we will just give you the CBS which is the lion share of it.

Trent Carman

$8.5 million through June.

Chris Blackman - Empirical Capital

$8.5 million, all right. And then as far as the way you continue to break out the CJS separate from your legacy Air Methods business. At what point will we start seeing that consolidate?

Aaron Todd

Well, everything is consolidated. Certainly we try to strip off the revenue, because it is easy for us to identify the revenue generated from those bases. We are already unable to give you specifics on how much of our bottom-line was added or subtracted because of the CJ acquisition because we consolidated their operations fully including G&A and those areas. And so, our ability to really separate those is really only limited to revenue breakout at this point.

Chris Blackman - Empirical Capital

Oky and for the most part, those consolidations are complete, where we do not have many, if there are more synergies left available?

Aaron Todd

I would say that all of the short-term ones are mostly accomplished as of the end of June, when we had finished the retraining of the pilots.

Chris Blackman - Empirical Capital

Okay. And then finally, but are you reviewing at all how you calculate your weather cancellations? Do you remain perfectly comfortable with how you calculate that or is there any massive amount that we have seen here recently, has it caused you to review that at all?

Aaron Todd

Well first of all the criticality is being consistent in how you do it and we have not changed one thing. More importantly, corporate headquarters has no ability in any way to influence that number. What happens is the dispatch centers basically receive a call, and that is logged in as a request, and if they are unable to respond due to weather, or weather conditions, they log it as a weather cancellation. Now there were some slight modifications to weather minimums in the early part of '06, but certainly that would have no bearing on any variation in the month of the second quarter that we have been reporting on. So, I truly believe it is severity of weather. Admittedly, having six more severe months in a row is unusual, it is frustrating, but there have been no changes. It is a very straightforward way in which that is computed.

Keep in mind to some extent it may also be an understated number, because we only count on weather cancellation when the phone rings and we are not able to respond. We have no way of knowing how much of the reduction in request is associated with the fact that when weather is bad and they know we are unable to respond that they may not even bother calling us.

If they had already been rejected 30 minutes earlier, because of weather and they can see that the weather conditions have not changed, a lot of times the calls won’t come in at all and so that can certainly understate the actual severity. And that is why sometimes you do see a difference between weather cancellations and absolute reduction in transport.

Chris Blackman - Empirical Capital

Okay. Thank you. And at the risk of one more, just any comment on additional industry consolidation that you are seeing? Pockets or anything that has happened in general industry conditions given the difficult environment for you all, are we seeing some other smaller players run into harder times, or any additional consolidation going forward? And that is it for me. Thank you.

Aaron Todd

Sure. I would say that we are always engaged in discussions where we see opportunities to improve efficiencies in markets through consolidation. Certainly everybody in the industry has been affected by these same factors of fuel and weather and the impact of fuel on lesser traffic and those types of things. I don’t think there is anybody out there saying, hey we need to consolidate for strength's sake. But certainly there is always an openness to that.

Chris Blackman - Empirical Capital

No recent prices that have been out there to gauge anything by, any transaction multiples?

Aaron Todd

No. There is no benchmark information that I am aware of.

Chris Blackman - Empirical Capital

Thank you.

Aaron Todd

You bet.

Operator

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

Kevin Campbell - Avondale Partners

Thanks. I just wanted to ask one last question about perhaps, how you calculate the net revenue per transport? And looking forward, is it really a change in patient mix, but perhaps a change in the amount that you might collect on the deductibles from the people that are insured? What are your assumptions there, and how does that impact your net revenue per transport number.

Are you being a little bit more conservative given that the economy maybe worsening and it maybe more difficult for deductibles to be met?

Aaron Todd

Well, I think there is risk there, certainly. The realities prior to the July 1 price increase was something between 6,600 we averaged and 7,200 we did in June, because we know what was deflating April and May, I tend to be a little bit thinking it is closer to the 72 than the 66. Other then, of course, you have got the 6% or 7% price increases that took place on July 1.

So if you assume on the price increase that you could pick up a couple of hundred dollars more there, I think your reality could be somewhere between the 6,900 and 7,400. We have always said that there is about plus or minus $200, $250 bandwidth between the average on any normal quarter or any given quarter. So, when I said that I am projecting 6900 for the rest of the year, that that does have some degree of cushion built into it based upon our achievement level in June and the fact that we had also a price increase July 1.

Kevin Campbell - Avondale Partners

Okay. Thank you.

Operator

There are no further questions at this time.

Aaron Todd

Okay, very good. Thank you and I know some of you like to give us a call right after the call. Trent and I are actually in Pittsburgh, where we have completed a Board meeting and are about to get on a plane. So, we will be in the office tomorrow and if any of you have any follow-up questions, you may give us a call any time tomorrow and we will try to get your calls returned. Thank you for your participation and if you are ever in Denver, please drop in.

Operator

Thank you, this concludes the Air Methods' second quarter 2008 financial results conference call. You may now disconnect.

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Source: Air Methods Corporation Q2 2008 Earnings Call Transcript
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