Air Methods (AIRM) Aaron D. Todd on Q2 2016 Results - Earnings Call Transcript

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Air Methods Corp. (NASDAQ:AIRM) Q2 2016 Earnings Call August 4, 2016 4:30 PM ET

Executives

Christine Clarke - Investor Relations

Aaron D. Todd - Chief Executive Officer & Director

Peter P. Csapo - Chief Financial Officer & Treasurer

Michael D. Allen - President-Domestic Air Medical Services

David M. Doerr - President-Tourism Division

Analysts

Nick M. Hiller - William Blair & Co. LLC

Bob J. Labick - CJS Securities, Inc.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Dana Hambly - Stephens, Inc.

Operator

Good afternoon. My name is Nicole, and I will be your conference operator today. At this time I would like to welcome everyone to the Air Methods Reports Second Quarter 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.

Thank you. Ms. Christine Clarke, you may begin your conference.

Christine Clarke - Investor Relations

Good afternoon, everyone, and welcome to Air Methods Corporation's second quarter 2016 earnings call. Also on the call today representing the company are Mr. Aaron Todd, Chief Executive Officer; Mr. Peter Csapo, Chief Financial Officer; Mr. Mike Allen, President, Domestic Air Medical Services; Mr. David Doerr, President, Tourism Division; and Mr. Mike Slattery, President, United Rotorcraft.

Before we get underway, let me remind you that our earnings release and presentation slides that accompany this call are available on the Investor Relations' page of the Air Methods website. The earnings release contains our cautionary statements.

I want to point out that in our remarks this afternoon; we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of the risk factors in our SEC filings, including our 10-Q and Annual Report, which I encourage you to review.

With that having been said, I will now turn the call over to Mr. Aaron Todd.

Aaron D. Todd - Chief Executive Officer & Director

Thanks, Christine, and thanks for all – to all of you for joining us today. While Peter will offer added details on our second quarter results, I was pleased with the overall top line growth of 11% despite some of the challenges we faced which we described on last week's pre-announcement.

I wanted to offer some insights and lend perspective to these disclosures starting with Tri-State Care Flight. While Tri-State's performance in the first quarter of 2016 was very strong, it did underperform expectations in the second quarter. When you factor in the retained volumes from the bases that were consolidated, we estimate Tri-State lost approximately $1.5 million in the quarter, or approximately $0.04 per share. In the first half of 2016, we estimate Tri-State generated accretive results, or a gain of approximately $2 million or $0.05 per share.

To ensure the quality of care provided to Tri-State's patients was in line with our clinical and aviation standards, we made the decision to accelerate training that is typically performed over a longer period of time following an acquisition. This resulted in lowering service rates, thus impacting volumes and financial contribution. Training is now mostly complete, and service rates have improved in July resulting in higher volumes.

In the month of March, which was the first month after we consolidated five Tri-State bases, we completed 460 transports. Volumes declined to 329 in April, 302 in May before improving to 347 in June and 401 in July. Therefore, we were nearly back to March volume levels in seasonally low July despite the closure of an additional base in April, and the fact that July typically is a slower month for Tri-State than March.

We believe this issue is behind us and are focused on driving performance at Tri-State and all of our bases. This is also an example of how this company will not compromise on quality and safety. Tourism also presented some challenges for us in the quarter. Our total passenger account declined 9.7% year-over-year due to an operation – due to a combination of operational issues and market headwinds. We've seen a moderation of these pressures in July with our passenger count declining only 1.6% year-over-year.

We expect to return to growth in the second half of 2016. Turning to our financial target of mid $300 million in EBITDA for 2016, we continue to believe this is achievable for the year despite the results that were lower than expected in the second quarter. Year-to-date results are in line with our internal plans for one. Our trailing 12-month EBITDA is approximately $311 million. We expect this will be supplemented in the back half of the year with the following items.

Six additional months of Tri-State will be realized. The full year impact of conversions that took place in October 2015, plus the benefit of additional conversions that occurred in April and July of this year will benefit results. Contributions from thirteen greenfields opened since the second quarter of 2015 will benefit the second half. Improved financial performance due to the closure of six underperforming bases since the second quarter of 2015 will also help. And we continue to enjoy fuel and maintenance tailwinds. Furthermore our internal budget assumes no increase in net revenue per transport even though we've experienced modest growth year-to-date including and excluding Tri-State. Lastly we assume no improvement in same-base transports and we did experience a high level of cancellations in the fourth quarter of 2015 as a percentage of requests.

Additional highlights and updates since our last conference call include the following. In July we successfully converted another hospital base to a community base. In addition we are in active discussions with hospital-based customers for the conversion of 16 additional base locations. We added two greenfield locations in the quarter, reopened a seasonal base and closed two community bases. We remain active in seeking relationships with payers that are committed to partnering with us. As many of you are aware there have been recent developments in the government's opposition to the large payer mergers. Like most other providers we believe this opposition is a positive for our business over the long term. A concentration of market share among payers could negatively impact the price paid for our services and over time this likely would limit access to care for consumers.

We also made a number of personnel changes in the second quarter; specifically as announced on our first quarter call, we added Wayne Sensor as President of Direct Patient Logistics, which houses our transfer center services on May 2. Wayne was serving as CEO of Ensocare, a care coordination company in the post-acute care space and previously serving as CEO of Alegent Health, a 10 hospital system serving eastern Nebraska and western Iowa.

Jim Greiner joined us as President of Sundance Helicopters. He has 25 years of experience in business to consumer, Internet and mobile app industries and is a welcomed addition to our team.

David Doerr was appointed to the newly created position of President of the Tourism Division where he will be responsible for the leadership, strategic direction and growth of the division. He joined the company in late 2013 as the Executive Vice President of Business Development and has proven himself to be a valuable member of the executive leadership team.

Lastly Peter Csapo joined us as our new Chief Financial Officer on June 6. Peter brings significant experience in healthcare services and revenue cycle management serving most recently as the CFO and treasurer of Accretive Health.

I also wanted to take this moment to recognize the contribution that Trent Carman, our former CFO made to this company. Trent, his last day was last week, served this company for more than 13 years and helped lead it through significant growth over that time and for that we are most appreciative.

Before I turn the call over to Peter I wanted to make a final comment about our thoughts on our capital allocation policies. Historically we have deployed capital primarily to fund acquisitions and new base expansion. Currently however, with our stock trading at these lower multiples, we expect to deploy more capital towards our share repurchase program on an accelerated basis. During the second quarter and current quarter to-date through August 3, 2016 the company repurchased 1.4 million shares for $50.6 million. To-date we have repurchased 2.1 million shares for $77.5 million. We have $122.5 million remaining from our $200 million authorization from the Board of Directors. Our adjusted leverage ratio is a very healthy 2.8 times EBITDA as of the quarter end despite the fact that we repurchased over 5% of outstanding shares since the inception of our repurchase program.

With that summary, I'll turn the call over to Peter.

Peter P. Csapo - Chief Financial Officer & Treasurer

Thank you, Aaron. Good afternoon, everybody. I've had the pleasure over the past eight weeks since joining to talk to many of our investors and analysts, and I look forward to connecting with those that I have not yet had the opportunity. Now let me touch on the second quarter financial results. As Aaron mentioned, our revenues in the second quarter grew by 11%, $292.6 million from the prior year of $263.6 million. Growth was primarily driven by an 18.1% year-over-year increase in our Air Medical services, patient transport revenue from our community based business. Since the second quarter of 2015 we have added 33 community bases, from conversions, greenfields, net of closures and the Tri-State acquisition. While we have reduced eight hospital bases, as expected. Our AMS contract revenue declined to 1.9% from prior year quarter as we had nine – net nine base conversion since the second quarter of 2015 from the hospital based to the community based business model.

Net revenue per transport improved by 1.9% in the second quarter over the prior-year quarter and overall transports increased 15.9% over the same period. Same base transports increased a modest 0.4% year-over-year. While we had difficult weather in the month of May our overall weather cancellations were favorable with a decline of 643 cancellations year-over-year per quarter. Our commercial payer mix was unfavorably down approximately 50 basis points year-over-year for the quarter, while Medicare mix increased approximately 90 basis points, and Medicaid and self-pay remained relatively flat with the prior year. Excluding the impact of Tri-State, our commercial payer mix actually improved approximately 20 basis points over the prior year's second quarter.

Continuing with revenue, Tourism revenue declined 6.4% year-over-year in the second quarter due to a 9.7% decline in passenger volume, which was partially offset by a 3.7% increase in revenue per passenger. Tourism volumes were especially weak in the month of June. However, we experienced improved volumes in the month of July.

Our United Rotorcraft business posted a revenue increase of $2.9 million year-over-year for the second quarter from a strong backlog at the beginning of the year.

We achieved leverage in our air medical flight center and aircraft operating expenses as both grew year-over-year in the quarter less than 12.6% growth in AMS revenue.

Direct maintenance costs per flight hour declined by 1.1% year-over-year in the second quarter as we continued to benefit from our younger fleet age.

Fuel expenses in AMS will increase 1.7% year-over-year despite the 12.6% increase in revenue stemming from lower fuel costs and our fuel hedge.

The Tourism business also benefited from lower aircraft operating expenses for similar reasons as the AMS segment.

We did not achieve overall general and administrative expense leverage in the second quarter on a year-over-year basis due to the flight volume impacts in AMS and Tourism.

Consolidated EBITDA from continued operations increased 7% year-over-year in the second quarter, while earnings per share from continued operations increased 1.4% in the same period. EBITDA growth did not trickle down to earnings per share due to higher depreciation and amortization plus interest expense in the quarter. Please see our investor presentation posted on our website for reconciliation of EBITDA to net income.

Our weighted average diluted shares outstanding declined by 2.4% year-over-year primarily from executing on our share buyback program. We generated $50 million in operating cash flow in the second quarter and $23.7 million in free cash flow which nets operating cash flow against capital expenditures, but excludes impact of lease buyouts.

Our DSO increased 24 days over the prior year's second quarter but only increased five days since the end of the first quarter of this year. We typically experience a sequential increase in our DSO in the second quarter due to seasonality. I know, our DSO is an area of focus for our investors, so let me talk about the actions we have taken and continue to make. We have increased our staffing by approximately 65% since second quarter of 2015 at our revenue cycle office, with more than half of that increase occurring this past quarter. We're focused on optimizing our revenue cycle processes, working down the denial backlog which increased last year, and adjusting our workflows and practices to that payer behavior. We have made significant improvements but given the timing of collections following these enhancements plus the training and ramp-up time for new revenue cycle employees, we expect to see benefits towards the later part of this year given the lag in calculating our DSO.

We'll continue to increase revenue cycle staffing through the back half of this year to reach our optimal staffing levels. Improving the DSO is one of the highest priorities for our management team. Despite increasing our cost to collect with our DSO reduction initiative, we do not anticipate it will impact our ability to achieve our financial commitments for the year. Turning to our balance sheet, our debt, net of cash was approximately $929 million as of June 30, 2016.

Under our credit facility we currently have $180 million of delayed draw term loan and approximately $108 million of revolving line of credit availability. Approximately $460 million of our outstanding debt at the end of the second quarter had a floating interest rate at 2.5%. During the second quarter, we financed six new aircrafts, totaling approximately $24 million and we bought our five previously leased aircrafts for approximately $9 million. We also sold five aircrafts, generating approximately $3 million of cash proceeds. For the remainder of 2016, we currently have six new aircraft scheduled for delivery. The total costs of these aircrafts will be approximately $24 million.

Let me comment on two more important items. After a considerable discussion internally and with our Board we have decided to cease our historical practice of providing a pre-announcement, if our results deviate from those of our covering analysts for a multitude of reasons. We received considerable feedback from our investors on last week's pre-announcement and the volatility it created in our stock. As such, moving forward please do not expect us to provide a pre-release announcement if our financials deviate significantly from those of our covering analysts whether it is for the positive or negative. We have also made the decision to begin to provide monthly Air Medical community based transport and tourism passenger and volume metrics. Our goal will be to provide this information within a week following each month's end. We believe, similar to other industries which release monthly volume related metrics, this will provide greater transparency to our investors.

With that, let me turn the call over to the operator, to take questions from our analysts.

Question-and-Answer Session

Operator

Our first question is from Ryan Daniels from William Blair.

Nick M. Hiller - William Blair & Co. LLC

Hi. This is Nick Hiller in for Ryan Daniels. Thank you for taking my questions. I was just wondering, and I appreciate the additional transparency with monthly transport reporting, but with the July transports that seemed a little lower than we expected given that the Tri-State in-service rates were increasing again. Is there anything that you can point to that drove same-base transports down by more than 300? And was there actually still any training happening for the Tri-State pilots in July?

Aaron D. Todd - Chief Executive Officer & Director

I will let Mike Allen, our President of the Air Medical Services division address the question.

Michael D. Allen - President-Domestic Air Medical Services

Yeah. This is Mike. The impacts from Tri-State Care Flight on the overall results were de minimis. We did see an overall trend throughout seven of our nine regions of a decline in demand manifest through a decline in our same-base requests. And that led almost evenly to the decline in same-base transports for the month of July.

Peter P. Csapo - Chief Financial Officer & Treasurer

In addition, July of last year was a pretty tough comp. And it's seen a fairly significant increase year-over-year on same-base requests and to some degree we may be dealing with a tough comp month as well.

Nick M. Hiller - William Blair & Co. LLC

Okay. Great. Thanks. And you mentioned that Tri-State is seasonally weak in July. I was just curious what drives that because we were under the impression that summer is usually kind of seasonally good for you guys.

Aaron D. Todd - Chief Executive Officer & Director

Well, it's 110 degrees down there in the desert southwest. So I think that has a lot to do with it. Arizona and New Mexico have always had reverse seasonality.

Nick M. Hiller - William Blair & Co. LLC

Okay. Great. And then regarding the accretion you had previously talked about for Tri-State, do you still think you're on track to hit that $0.20 you had talked about for year one and then the $0.30 for the second year?

Peter P. Csapo - Chief Financial Officer & Treasurer

I believe, we're on track for the $0.30. We are on track to achieve kind of the run rate that we've anticipated so that would reflect $0.10 for the remainder of the year. So right now, our best estimates would be $0.15 for this year because we can't presume we're going to catch up the shortfall that we experienced in the second quarter, but that our run rate will be back on the $0.20 pace that we'd anticipated at the beginning. That's what we're projecting right now.

Nick M. Hiller - William Blair & Co. LLC

Okay. Thanks. And then just one last one, for the DSOs, I mean, you discussed the initiatives that you're taking to bring those down. I mean, is there any target level that you have for DSOs or you...

Aaron D. Todd - Chief Executive Officer & Director

Yeah. I mean...

Nick M. Hiller - William Blair & Co. LLC

Is it too soon to think about that?

Aaron D. Todd - Chief Executive Officer & Director

Yeah. I mean our target is to try to get it to a point where it's equal to the prior-year level and brings stabilization to that metric. Now there's only certain portions of that that we can control. We've seen sequential decline since the high in May and we would expect to see a few days of decrease in July as well based upon our preliminary estimates. So we believe we're finally getting to a point where we're going to lap the year. August was when we really started to see some of the dramatic shifts in denials and requests for additional information and other stall tactics, and that's – while we have seen some more recent increases in the number of requests for additional information, if you will, administrative delays. The denial for medical necessity has been reasonably stable.

Nick M. Hiller - William Blair & Co. LLC

Okay. Thank you.

Operator

Our next question is from Bob Labick from CJS Securities.

Bob J. Labick - CJS Securities, Inc.

Good afternoon.

Aaron D. Todd - Chief Executive Officer & Director

Hi, Bob.

Bob J. Labick - CJS Securities, Inc.

Hi. So, just sticking with that last point that you were just finishing there for a second, Aaron, if you could. If the denials are reasonably stable and just given the seasonality of how you calculate DSOs for the six month annualized, is it fair to say you would expect potential moderation of the DSOs in the back half of this year?

Aaron D. Todd - Chief Executive Officer & Director

Well, there's several things that are causing us to be hopeful. Obviously we're not ideal at predicting these things. I think, we've come in – our DSOs have come in reasonably aligned with what the analyst's expectations have been for the end of the first quarter and the second quarter. When we've – some of the achievements we've done, we've reduced for example, the days to get a bill out from 15 days to about 9 days. We have been able to get the number of denials, or the denials from medical necessity responses, that backlog was as I recall was in the 200 range. It's down to about – we've got about a 45 or a one week backlog there. And but the problem is it takes – it can take three months to six months before you see the benefit of those changes spit out on the other side. So, we hope we'll start seeing those benefits in the third quarter and fourth quarter. We historically have seen declines in our DSOs in the third quarter and fourth quarter due to the seasonality associated with the calculation of annualizing six months net revenue.

And so, while we've seen that in June and July, which is encouraging, we hope to see that continue through the remainder of the year, and hopefully get to much closer to what the prior year levels were sometime between now and the end of the year. But of course, that's based upon what we can control and assuming that the dynamics don't change. One of the things that we also have noticed a little bit is although the denial activity might be stable in some respects, sometimes the turnaround time is elongating, so you get them the information but instead of them turning it around in 10 days, they turn around in 20 days or 30 days. And so, we're seeing some of that as well. One payer in particular accounts for, based upon the balances over 60 days, accounts for almost – is it, Kevin, (23:17) about 10 days or 12 days of the DSO?

Unknown Speaker

I think, it's closer to eight days.

Aaron D. Todd - Chief Executive Officer & Director

About eight days of our DSO increase. And so, there's also some concentration of challenge in the DSO endeavor.

Bob J. Labick - CJS Securities, Inc.

Got it. Okay. Well, thank you for that color, certainly. And then, just back to your earlier comments, you believe you're still on track for the mid-$300 million EBITDA for the year. And you talked a little bit about July being a little bit below. I think, earlier, when you had given that guidance, you had also said potentially 20% volume growth. Are those two still aligned? Does that mean you expect stronger volumes in August, September, in the back half of the year?

Aaron D. Todd - Chief Executive Officer & Director

I'm sorry. Where are you getting the 20% volume growth?

Bob J. Labick - CJS Securities, Inc.

I think on the Q4 call, after you had Tri-State, you had mentioned that was a potential target. So I'm just verifying that's...

Aaron D. Todd - Chief Executive Officer & Director

Yeah. I won't speak directly to that. I think how you can break it down is you can say we're going to have the full six months of Tri-State Care Flight in there. Obviously that is going to be additive to the EBITDA which you're starting out at $311 million on a TTM basis. We had a heavy amount of our hospital-based conversions occur in the early part of October so you're going to get a full additional quarter there. And then, we also had the conversions in April and July of this year so you'll get the benefit in the second half of those. You've got 13 greenfields since the second quarter of 2015 and maintenance and fuel continue to be tailwinds.

So what we did is when we took the $311 million and we added those things in there, it got us back to that $350-ish million range, mid-$300 million range. And so the things that obviously are the major assumptions embedded in it is that net revenue per transport will at least be flat. And we have been outperforming that measure in the most recent quarter and year-to-date. And it also presumes that Same-Base Transports are flat. And obviously in July, we fell a little short of that but it was a tough comp month. But that's what's embedded in our belief that our beginning of the year objective is still within reach.

Bob J. Labick - CJS Securities, Inc.

Got it. Okay, great. And, collections have been strong so far, which is very nice to see. Can you talk a little bit about do you have maybe the – usually you have a patient mix true-up number that you often given on the call as well?

Peter P. Csapo - Chief Financial Officer & Treasurer

Bob, we don't have that right now, but we can distribute that later. I'll get that information for you.

Bob J. Labick - CJS Securities, Inc.

Okay. No, that'd be helpful just in terms of getting everything through that net revenue number. All right. Last one bigger picture and I'll get back in queue. But obviously you're making a big statement with the accelerated buyback versus historically and mentioning that again on the call. So it seems like at your current valuation, buying back stock makes more sense than further M&A, but could you talk a little bit about just industry consolidation and where the industry stands in general? There must be smaller guys having a hard time with the DSOs and with insurance companies as well. So what do you see over the next couple years in terms of that?

Aaron D. Todd - Chief Executive Officer & Director

Well, as you know, Bob, historically acquisitions within the air medical space have ranged with multiples between 8x and 10x. We're trading between 6x and 7x right now. So, obviously, to the extent that expectations continue to be in those ranges, it would be very difficult for us to justify, shall we call them, tuck-in acquisitions in those multiple ranges when we can be buying back shares between 6x and 7x. And so you're right that that would be something that would have to be reconciled for us to justify doing acquisitions of companies, especially if it's within those multiple ranges, when we can be buying back our own shares at these multiples.

When you're talking about larger potential opportunities, I think that you'd have to be looking at the long-term and make a good decision that probably is still very sensitive to ensuring accretiveness, but would certainly, because those would be more transformative acquisition opportunities might be looked at independently relative to their accretive value rather than in relationship to the opportunity costs associated with share repurchases.

Bob J. Labick - CJS Securities, Inc.

Very good. All right. I'll get back in queue. Thank you.

Operator

Our next question is from Jason Gurda from KeyBanc.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Hey. Thanks. Good afternoon. I wonder if I could approach, Peter, the question a little bit differently, if you maybe have a target in the number of days you'd like to decrease the average collection time on your end by.

Peter P. Csapo - Chief Financial Officer & Treasurer

Well, we don't have a specific target, but as Aaron mentioned, if we can get back to where we were on a year-over-year basis and maybe show some reduction against that, I think we would be pleased given where we are currently. I think we're trending and we have good momentum. The velocity of cash coming in the door continues to be very strong with the improvements we've made. As you heard on my comments, given that half of the staffing adds just occurred in the past quarter. As we get those folks fully trained and woven into our work flows, we expect them to contribute a lot more. There's a ramp-up period in terms of that getting to full productivity. So our goal, again, is to be somewhere in line with where we were at the tail end of 2015 and if we could make some improvements against that, we see that as a win.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Okay. That's helpful. And is there any update on – there was talks about going from 8% to maybe 15% in-network on the managed care side. Any updates on that progress?

Aaron D. Todd - Chief Executive Officer & Director

Yes, I'll let Mikey Allen address that question.

Michael D. Allen - President-Domestic Air Medical Services

Yes, we're making progress. We're continuing to negotiate with payers. I think the realistic target for the rest of the year is going to be in that 10% to 12% range. But we are ramping up our effort actually within our core expertise – bringing on some additional core expertise to help us navigate through these negotiations more deliberately going forward.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

And I was curious what – if you have any anecdotes, what the response is from the payers as we start these conversations. Because it strikes me that in a lot of areas that you guys have been out of network for quite a while. Are they receptive? Are they hostile?

Aaron D. Todd - Chief Executive Officer & Director

This is Aaron. Both the payers and we as a provider want to make sure that the patient is not caught in the middle, and I think we have good interest on both sides of the table to try to come to a resolution. But as you might imagine, we come to the table wanting higher reimbursement collected more quickly, and they would like with reasonable inflators and they would like to pay less in some cases and have certain tease and seize associated with when they believe payment should be justified and so it just takes time.

And when you're dealing at a national level, those can be multi-year negotiation endeavors. When you're dealing with a single provider in a smaller region or location, then we believe that we have a greater opportunity there. We're, obviously, focusing on those who are paying well below usual and customary rates as measured by averages across the country, and what we would define as greater opportunities to achieve more reasonable reimbursement levels, higher than what we've been receiving. And also where that's creating more hardship for the patients and we believe both sides have a compelling reason to try to get to an agreement. And we've had some success as we've mentioned, but it takes time to get through the back-and-forth of negotiations.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Okay. No, I appreciate that. And then just lastly, do you have any theories on what happened in the Tourism business? I know that a lot of that business I think you've said is international in nature. What happened to the slowdown? What caused the slowdown? And maybe why you think it's going to come back in the back half of the year?

Aaron D. Todd - Chief Executive Officer & Director

Well, thankfully the Grand Canyon and the Hawaiian Islands have not gone away, so that's a good thing. I'm going to let David Doerr, President of the Tourism division address that one.

David M. Doerr - President-Tourism Division

Yes. Thank you, Aaron. As you know, we faced several headwinds in the second quarter in terms of passenger volumes, and it was tied to numerous factors that are honestly a little bit difficult to isolate. What I can tell you is that on a sequential basis, since April, we've seen continued improvement in our growth rates and month-over-month we've seen improvements and we expect to continue to see that. Our team in both Blue Hawaiian and Sundance are extremely focused in on the growth going forward and we expect to continue these trends to show favorability. Now there are some factors, very macro factors around international travel and how much they're spending in market, but in my mind, they really aren't the primary drivers for our growth, and we are going to continue to see improvements going forward.

Aaron D. Todd - Chief Executive Officer & Director

And it appears, based upon what we've seen year-to-date that the seasonally weak period was weaker than we would anticipate and the stronger summer periods are more in line with the historical levels of demand. So and again, we were also able to get slightly above rate of inflation improvement in revenue per trip.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Okay. And is it also possibly that – I know that last year the business was growth very strong and was actually ahead of our expectations. Is it maybe just, in part, difficult comps?

Aaron D. Todd - Chief Executive Officer & Director

I don't think so. I think we believe that, in some cases, the visitors to the Hawaiian Islands, the Grand Canyon and Las Vegas markets are up. But our belief is, is that the amount being spent per tourist is down slightly. I think it has more to do that in the summertime, a lot of times there's more demand than capacity. So, therefore, whatever variation might be there relative to those macro factors are not experienced in the actual results because your supply is already struggling to keep up with demand during the peak seasons.

Jason W. Gurda - KeyBanc Capital Markets, Inc.

Okay. Thank you.

Operator

Our next question is from Dana Hambly from Stephens.

Dana Hambly - Stephens, Inc.

Hey. Thanks. Good afternoon. Just on the financial target for the year, the mid-$300 million, when you laid that out in February, it sounded like it was very, very conservative. Now it sounds much more like reality. And so from February to now were the two main drivers really Tri-State and Tourism? Or is there anything else that would reset expectations?

Aaron D. Todd - Chief Executive Officer & Director

You know, Dana, I don't know that I ever used the words very, very conservative. I think what we said is that one of the more conservative assumptions was that we assume no growth in Same-Base Transports and no growth in net revenue per transport, which certainly based upon historical levels of trending would be deemed conservative. There's no question that the second quarter took some of the cushion out of our numbers, but again, we have reforecast actuals through June and what we know to date and believe that it's still achievable, and certainly, it's fair to say that we underperformed to our expectation in the June quarter. And therefore by definition, the amount of conservatism or cushion in the forecast is less than what it was at the end of the first quarter.

Dana Hambly - Stephens, Inc.

Okay. And then on Tri-State, I'm not trying to be critical. I just want to understand when you figured out that you needed to take some aircraft out of service and why wasn't that anticipated and just kind of how that works?

Aaron D. Todd - Chief Executive Officer & Director

Sure. I'll let Mikey answer that one.

Michael D. Allen - President-Domestic Air Medical Services

Yes. It's difficult to determine in due diligence the level of proficiency on any of the work groups, because we don't get access to that level. So after we got in there, we just felt more comfortable across the board going through and doing full training on all the staff members at a more accelerated pace. We thought it was just healthier for the cultural transition and for the qualitative aspects. So we made that decision as we got more deeply embedded through the transition. We also accelerated the base consolidations, which was partially responsible for driving the positive results in the first quarter as well as a result of that.

Dana Hambly - Stephens, Inc.

Okay. That's helpful. On the cash flow, pretty good through the first half of the year. I think last year in the third quarter cash flow took a step down. So if you could just remind me is there seasonality in the quarterly? If there was something in the third quarter of last year?

Aaron D. Todd - Chief Executive Officer & Director

No, actually, one of the big things that you're going to see is that our CapEx is going to where it's fairly consistent with the first half of 2015 in the first half of 2016. Our CapEx is going to be dramatically below what the prior-year level was in 2015. We have six aircraft on order for delivery in the second half of 2016. And Mike, can you refresh my memory?

Michael D. Allen - President-Domestic Air Medical Services

20.

Aaron D. Todd - Chief Executive Officer & Director

And we had 20 that we took delivery of in the second half of 2015. And further benefiting where we will take a total delivery of 31 aircraft I believe it was in 2015...

Michael D. Allen - President-Domestic Air Medical Services

Correct.

Aaron D. Todd - Chief Executive Officer & Director

...that would put us at about...

Michael D. Allen - President-Domestic Air Medical Services

17

Aaron D. Todd - Chief Executive Officer & Director

...17 aircraft total new deliveries in 2016. And we only have four aircraft right now that we believe we will need to supply our needs for 2017. So the CapEx is going to – we are now literally on the eve of seeing dramatic decreases in the year-over-year comparative. It will come down to a trickle as we anticipated it would as the pipeline cleared out. And that's going to manifest the free cash flows of the company at full power going into the next several quarters. That will also fund a lot of repurchasing activity that in addition to the borrowing capacity that already is present in the balance sheet.

Dana Hambly - Stephens, Inc.

Okay. That's helpful.

Peter P. Csapo - Chief Financial Officer & Treasurer

I would also add that as the DSO improves in the back half of the year that's going to free up obviously the AR to turn that into cash and following the peak quarters for the quarter. So I think that's going to significantly boost the cash flows on the balance sheet.

Aaron D. Todd - Chief Executive Officer & Director

Yes. I mean one of the things – obviously much of the significant increase in DSOs really materialized in the second half of the year. And...

Dana Hambly - Stephens, Inc.

Right.

Aaron D. Todd - Chief Executive Officer & Director

...from a year-over-year basis, it's about $2 million per day.

Dana Hambly - Stephens, Inc.

Right. Okay. All right. Thanks for that. And just last one for me. I haven't given it too much thought because you just announced it on the monthly stats. I appreciate the transparency. I just wonder if this actually creates more volatility in the stock and if that's something you gave some thought to when you decided to do this.

Aaron D. Todd - Chief Executive Officer & Director

Volume is what it is. It doesn't change. It's only one of four, five key variables that determine the outcome of a quarter. Net revenue per transport is highly relevant. You have maintenance, which is very relevant, fuel, all of the effects of those things are also very relevant. On the other hand, it's fairly clear this is a company that really has little control over hitting targets in a...

Dana Hambly - Stephens, Inc.

Right.

Aaron D. Todd - Chief Executive Officer & Director

...three-month timeframe. So let's just call the monthly transparency of the volumes as a good balance and compromise. When we talk to our shareholders or analysts, probably a little more than half would ask that we not pre-announce and there are several that still like it. And so I think this is as a good happy balance that we've come up with.

Dana Hambly - Stephens, Inc.

Okay. Well include me in the happy that you're doing away with the pre-announcements.

Aaron D. Todd - Chief Executive Officer & Director

Okay.

Dana Hambly - Stephens, Inc.

Thank you very much.

Aaron D. Todd - Chief Executive Officer & Director

You got it.

Operator

We have no further audio questions at this time.

Aaron D. Todd - Chief Executive Officer & Director

All right. Very good. Thank you for participating. Sharon, the 10-Q will be out tomorrow. So you may have questions after you review that, and Peter and I and Kevin will be available to answer any additional questions you might have and thanks for participating.

Operator

That concludes today's conference. You may now disconnect.

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