Emergency Medical Services Corporation (EMS)

Q2 2008 Earnings Call Transcript

August 5, 2008 11:00 am ET

Executives

Deborah Hileman – VP, Corporate Communications & IR

Bill Sanger – Chairman and CEO

Randy Owen – EVP and CFO

Mark Bruning – EVP, AMR

Analysts

Art Henderson – Jeffries & Company

Kevin Campbell – Avondale Partners

Darren Miller – Goldman Sachs

David Bachman – Longbow Research

Dawn Brock – JP Morgan

Bob Yedid – Principal

Gary Taylor – Citigroup

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Emergency Medical Services Corporation’s earnings conference call. My name is Carol and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We’ll be facilitating a question and answer session towards the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host, Ms. Deborah Hileman, Vice President of Investor Relations. Ma’am, you may proceed.

Deborah Hileman

Thank you, operator. Good morning. I would like to welcome everyone to EMSC’s quarterly earnings conference call and introduce our presenters, Mr. William A. Sanger, Chairman and Chief Executive Officer, and Randy Owen, Chief Financial Officer. Also joining us today is Mr. Mark Bruning, AMR Executive Vice President, who will be available for the Q&A. Before we begin, I would like to read our Safe Harbor statement. Certain statements and information herein may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Forward-looking statements may include but are not limited to statements relating to our objectives, plans and strategies, and all statements, other than statements of historical facts that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Any forward-looking statements herein are made as of the date of this conference call, and EMSC undertakes no duty to update or revise any such statements.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in EMSC’s filings with the SEC from time-to-time, including in the section entitled ‘Risk Factors’ in the company’s most recent Annual Report on Form 10-K and subsequent periodic reports.

Among the factors that could cause future results to differ materially from those provided in this conference call are the impact on our revenue of changes in transport volume, mix of insured and uninsured patients, and third-party reimbursement rates and methods, the adequacy of our insurance coverage and insurance reserves, essential penalties or changes to our operations if we fail to comply with extensive and complex government regulation of our industry, both as it exists now and as it may change in the future, our ability to recruit and retain qualified physicians and other healthcare professionals, and enforce our non-compete agreements with our physicians, the loss of one or more members of our senior management team, the outcome of government investigations of certain of our business practices, our ability to generate cash flow to service our debt obligations and fund the cost of capital expenditures to maintain and upgrade our vehicle fleet and medical equipment, and the loss of existing contracts and the accuracy of our assessment of costs under new contracts.

I will now turn the call over to our Chairman and CEO, Bill Sanger.

Bill Sanger

Thank you, Deb; and good morning to everyone. Q2 of 2008 was another successful quarter for EMSC. We achieved 22% earnings per share growth, $65.4 million of free cash flow, and signed numerous new regional and national contracts. Moreover, we are encouraged by the market opportunities that exist for EMSC in both operating segments. Communities, providers and insurers continue to recognize the benefit of outsourcing and our unique ability to meet the growing demand as a solution provider.

Our sales activity continues at historically high levels, and the acquisition environment provides further opportunities to expand it to new services in new markets. For the quarter, EMSC’s net revenue was $571 million, or 10.5% greater than the same period last year. At AMR, Q2 2008 revenue grew by 9.6% over the same period last year. During the quarter, we added two net new 911 contracts and started a number of new inter-facility agreements for expected combined revenues of approximately $11 million.

In the second quarter, sales at EmCare continued to be very strong, resulting in revenue increases of 11.7% over the same period last year. We started 14 net new contracts for an expected annualized net revenue gain of $45 million, which included the acquisition of a two-hospital based emergency department physician practice in Florida.

I would now like to take a few moments to highlight a few of our recent contract wins. First, last week we announced an agreement with Universal Health Services as a national provider of pre-hospital and hospital-based physician services. This agreement includes emergency departments, hospitalists, and radiology, as well as ground and fixed-wing air ambulance transportation services. Since January of this year, we have entered national agreements with Health Management Associates, Golden Living, and numerous regional health plans. We are very confident about future opportunities for these types of agreements and expect to sign additional contracts for the remainder of 2008.

Second, we recently announced that AMR was awarded the Monterey, California 911 contract, which is effective September 1 of this year. This contract has annualized revenues of approximately $15 million.

Third, we have renewed our National Disaster Response contract with the Federal Emergency Management Agency or FEMA. This agreement calls for AMR to provide ground ambulance, air ambulance, and para-transit services to supplement the Federal and/or military response to a disaster, as to terrorism or other public health emergency. This contract presently covers the 21 states along the Gulf and Atlantic Coasts and may be expanded to all 48 contiguous states.

Fourth, we announced yesterday the signing of an agreement to purchase the management entity of Clinical Partners, which allows us to expand into the anesthesia market. We believe this platform will provide a solid foundation for growth in this service line. Clinical Partners has contracts at more than 35 hospitals in six states and has a strong reputation with an excellent management team. This acquisition will enable us to respond to the numerous requests that we have received from our existing as well as new clients for this service.

Finally, it is noteworthy to mention that the recent passage of the Medicare legislation reversed the scheduled physician reductions and provided for an increase in Medicare ambulance transports rates of approximately 2%.

I'm also pleased to report that we continue to make progress in our collection efforts and reducing our DSO. Randy will provide more details on that progress. Randy?

Randy Owen

Thank you, Bill. As I discuss our performance, I'll be referring to certain non-GAAP measures such as adjusted EBITDA and free cash flow, which management defines as cash from operating activities less non-acquisition related investing activities and uses as a measure of performance but which are not considered a measure of financial performance under Generally Accepted Accounting Principles. Therefore, I direct you to the reconciliations included in our earnings release and on our website.

EMSC's consolidated net revenue for the second quarter of 2008 was $571.1 million, an increase of 10.5% over the same quarter last year. AMR’s net revenue was $323.7 million, which was 9.6% higher than the same quarter last year. Revenue for weighted transport increased 5% over last year, and overall, ambulance transports increased by 34,600 or 4.9% with recent acquisitions adding 42,900 transports, offset by a reduction of 15,000 transports in markets we have exited since last year. Our same market ambulance transports increased by approximately 6,700 or 1%.

EmCare net revenue was $247.4 million, an increase of 11.7% over last year, and includes an 8.2% revenue increase from the addition of 37 net new contracts since March 31 of 2007. Revenue increased 4.1% at same-store contracts, primarily as a result of an increase in patient encounters of 4.2%. Excluding incremental positive revenue adjustments of $4 million in the second quarter of 2007, we saw an increase in same-contract net revenue per encounter of 1.9%.

EMSC’s adjusted EBITDA for the second quarter of $55.5 million was an increase of 5.9% compared to last year. When adjusted for the incremental revenue at EmCare in Q2 of 2007, and the reduction in favorable prior-year insurance development adjustments, adjusted EBITDA improved by 24.6% and margins improved by 100 basis points. The improvement was driven by volume and revenue increases from existing contracts, volume from net new contracts and acquisitions, and partially offset by higher provider compensation and fuel costs.

Insurance expense was slightly higher compared to Q2 of 2007. Prior-year favorable development adjustments were $5.3 million lower this quarter than the same quarter last year, and were offset by a reduction in current-year insurance expense of $5.2 million.

AMR’s adjusted EBITDA for the second quarter of 2008 was $26 million, an increase of 11.2% over last year. The increase in adjusted EBITDA was attributable primarily to the net impact of revenue growth in existing markets and acquisitions, partially offset by higher fuel costs of $4.3 million when compared to the same quarter last year. Fuel costs in the quarter represented approximately 3.8% of net revenue, and we continue to secure additional rate increases to mitigate higher fuel costs. Insurance expense in this quarter was the same as last year. And while favorable prior-period developments were $2.4 million lower than last year, our current-year insurance reserves were also lower by $2.4 million.

EmCare generated adjusted EBITDA of $29.5 million, an increase of 1.7%. When adjusting for the incremental revenue at EmCare in Q2 of 2007 and the reduction in EmCare favorable prior-year insurance development adjustments, EmCare’s adjusted EBITDA improved by 23.2% and margins improved by 90 basis points. The improvement was due to the net impact of increased revenue from net new contracts, and volume increases at existing contracts. Compensation was higher as percentage of revenue compared to prior year, due to increased provider costs, primarily the result of new contract starts and physician compensation pressure in certain markets. While insurance expense was comparable to last year, current year insurance reserves trended downward by $2.8 million, while prior-period development adjustments were $2.9 million lower in the quarter.

EMSC net income for the quarter was $18.3 million or $0.43 a diluted share, compared to net income of $15.1 million or $0.35 a diluted share for an increase of $0.08 or 22% over the second quarter of 2007. The improvement was due to an adjusted EBITDA increase of $3.1 million, lower interest expense of $1 million, gains on insurance collateral investments of $1.5 million, and offset by higher income tax expense of $2.3 million.

Our free cash flow was $65.4 million during the second quarter, compared to $6.4 million in the same period last year. Improvements in operating cash flows were primarily driven by improved cash collections in both segments. EMSC had a sequential decrease in DSO of 2 days in the second quarter, driven by a decline in accounts receivable at both AMR and EmCare. AMR had a DSO decrease of 2 days, offset by a temporary one-day increase from the CMS implementation of its new National Provider Identifier or NPI program at the end of May 2008. And I'm pleased to report that July was AMR’s highest collection month this year.

At EmCare, our DSO declined 3 days in the second quarter of 2008, due in part to a collection of Medicare and medicated billings, which had been delayed as a result of the time required to obtain provider numbers. During the second quarter of 2008, receivables delay due to enrollment issues decreased by 20% and we continue to see significant progress in this area.

Net cash provided by investing activities was $0.5 million for the quarter, compared to $17.2 million used in the second quarter of 2007. This change is due to a $14.9 million reduction in net insurance collateral requirements, and reduced net capital spending of $6.8 million compared to the same period last year, offset by an acquisition of an ED physician practice of $6.7 million during the quarter. The reduction in net capital spending is primarily the result of timing of asset purchases, and completion of system upgrades in the first half of 2007.

Net cash used in financing activities was $1.8 million for the quarter-ended, compared to $6.3 million for the quarter last year, primarily due to year-over-year changes in the amount of outstanding checks. At June 30, there were no amounts outstanding under our revolving credit facility.

EMSC is increasing its adjusted EBITDA and EPS guidance for the year-ended December 31, 2008. The company expects diluted EPS to be in the range of $1.70 to $1.75 a diluted share, from previously-announced guidance of $1.57 to $1.63 a diluted share. Adjusted EBITDA is expected to be in the range of $227 million to $232 million, from the previously-announced guidance of $225 million to $230 million. Bill?

Bill Sanger

Thank you, Randy. Operator, we will now open the call to questions.

Question and Answer Session

Operator

(Operator instructions) Okay, gentlemen, your first question will come to you from the line of Art Henderson of Jeffries & Company. You may proceed.

Art Henderson – Jeffries & Company

Hi, good morning, thanks for taking the question. Couple of questions for you; could you talk, Bill, a little bit more about the Universal Health opportunity as well as the anesthesiology management contracts you announced yesterday? Just what that may mean in terms of size of those opportunities?

Bill Sanger

Sure. Let us start with UHS. As you know, UHS has a combination of acute care and behavioral facilities. Our contract encompasses both operating divisions, that is the Acute Care and Behavioral Divisions. On the Acute Care side, essentially, the way a program works for the following services

ED, hospitalist and radiology, there is an opportunity that one of those services are outsourced. We are the preferred vendor in which we provide a proposal. We have an opportunity to submit that proposal based on their qualifications and needs. If we don’t need that particular need, then they have the right to go out and outsource. Our experience with our similar agreement with HMA is that that has not yet happened.

On the Behavioral side, it is primarily ambulance transports. As noted in the release, Art, it includes both ground transport as well as air transportation. You know, presently we have approximately 30% of UHS hospitals. We are confident as time progresses we will get the majority of both Acute Care as well as manage the transportation needs of Behavioral Health.

On the anesthesia side, we made that announcement yesterday, it has been several months that we have looked very seriously at various acquisition opportunities in that space. We chose Clinical Partners primarily because of their cliniacal expertise and their strong management team. We initially entered this anesthesia space through an MSL arrangement. It is our intention over time to take on more anesthesia practices in a traditional EmCare model, where the physicians will work for us and will provide services directly to those physicians. Under the MSL arrangement, you have a lower revenue base but a significantly high margin on a go-forward basis.

Art Henderson – Jeffries & Company

Yes, and my question on that is, is the margin, I mean, is it virtually all profit, what is the margin, is it above 50% sort of range?

Bill Sanger

The margins are significantly higher than what we traditionally see in the EmCare space presently, which is about 11%.

Art Henderson – Jeffries & Company

Okay, all right. That is helpful. Real quick on the DSOs. Obviously, great work this quarter. Should we continue to see, I think based upon your comments about good collections in July, continuing to see that tilt over a bit more, and really, what is the opportunity, how far can you take those DSOs down?

Randy Owen

Hey, Art. This is Randy.

Art Henderson – Jeffries & Company

Hey, Randy.

Randy Owen

Listen, I think there has been a lot of focused effort on both segments on the DSO and obviously we continue that and we are seeing the results of that. So I think as we have said before, we definitely feel like we will be able to reduce DSO in the second half of the year. We felt like before and I think we would say the same thing that – for we have seen some of the increases in AMR from the sister conversion, we thought those would work themselves out this year and that seems to be the track that we are on. EmCare, since it wasn’t in our control, we weren’t willing to go that we would get it all back this year, and I would probably stick to that, I think we are seeing some significant releases of amounts being held, so I think you will continue to see improvements in DSO at both segments this year.

Art Henderson – Jeffries & Company

Okay, two little small questions and I will get in the queue. CapEx guidance still $45 million to $50 million for the year?

Randy Owen

Well I think right now, we are trending below that, we have never given specific guidance, but if you look at sort of what our historical spend has been, I think we are seeing the ability to be more prudent and careful with our capital and we have got some good discipline in place where we are able to take advantage of that. So I do see capital expenditures being on a lower trend this year.

Art Henderson – Jeffries & Company

Okay, and then last one, MediCal, any sort of exposure there with the things that are going on in California?

Bill Sanger

Yes, I think there is some exposure, probably more on the AMR side, I don’t think at this point it is a significant number. Obviously we expect a net plus when you take into account the Medicare increase that we got, you know, of around 2%, offset by the MediCal; I think the MediCal may be probably less than – maybe $1 million or less than $1 million impact, but still, net positive when you consider the impact from Medicare.

Art Henderson – Jeffries & Company

Okay, great. Great quarter, thank you.

Operator

Thank you, sir. Gentlemen, your next question comes to you from the line of Kevin Campbell of Avondale Partners. Please proceed.

Kevin Campbell – Avondale Partners

Good morning, thanks for taking my question. I wanted to ask you guys real quickly on your realized gains and losses on investments. Obviously, you had a good gain there this quarter. Can you talk to me about to me of what we should expect there going forward?

Randy Owen

Yes, Kevin. Let me take a moment on that. Yes, we had some in the first quarter. It is part of the normal process we go through and it relates to the insurance collateral that we have and mainly on the EmCare side in the cap given and part of the normal management of investments. Obviously, given the market volatility that we have seen earlier and some good value on some treasuries, we took advantage of that, you know; and locked in on some of those gains which helps us mitigate funding as well in the future. So, I see that more as a normal course of business. I don’t know that I can give you a specific number, you know, for the rest of the year.

Kevin Campbell – Avondale Partners

Okay. What about the potential uses of increasing cash? Obviously, you still would potentially do some more acquisitions; but have you given some consideration to paying down debt?

Randy Owen

That is still an option for us, Kevin. I think our first priority has been to use that for acquisitions and we still – as Bill indicated, still have a very good pipeline there, but depending on timing of those, we might consider using some to pay down debt as well.

Kevin Campbell – Avondale Partners

Thanks. And then on the depreciation and amortization, you had a modest sequential decline. What really drove that decline and should we expect it to increase going forward or remain about the levels we saw here in the second quarter?

Randy Owen

I think I would see it more in the levels that you are seeing. What you are seeing, some is – something that were done several years ago, for we had higher capital rolling off from a depreciation standpoint, and obviously, we have been able to reduce our capital spend in the current year. So I really don’t see a real increase in the D&A.

Kevin Campbell – Avondale Partners

Can you guys talk a little bit about your – your costs a little bit more or maybe the compensation and benefits and operating expenses and maybe some of the pressures you are seeing there?

Randy Owen

On the EmCare side, we were certainly seeing compensation pressures for physicians. If you look at – the greatest compensation pressures are related to the number of starts we have had this last quarter, Kevin. With 14 net new starts, when we do get a new contract, our overall cost generally is a bit higher for the first several to first six months. As we settle those in, those will be continued to lower, if you will; but we are seeing that throughout certain markets that increase in the compensation demands for ED physicians particularly.

On the AMR side, there is primarily cost related to fuel. As we have stated in the past, we have a specific strategy to mitigate that by going back to the city, so we have been quite effective and we will continue to be effective for the remainder of this year.

Kevin Campbell – Avondale Partners

And that presumably falls in the operating expense line?

Randy Owen

Yes.

Kevin Campbell – Avondale Partners

Okay. And you guys have looked like you have done a pretty good job maintaining – that has been flat over the last three quarters sequentially?

Randy Owen

Yes. I mean, fuels, obviously we have been able to reduce operating expenses in some of our other base – sort of ground ambulance business as it relates to subcontracting of services; we have done a nice job there to help sort of offset some of the changes in fuel.

Kevin Campbell – Avondale Partners

Okay. Thank you very much.

Operator

Thank you, sir. Gentlemen, your next question comes to you from the line of Shelly Gnall of Goldman Sachs. Ma’am, you may proceed.

Darren Miller – Goldman Sachs

Good morning, this is actually Darren Miller sitting in for Shelly. Quick question; looking at the AMR results, the revenue for transport came in a little stronger than they were expected. What was driving that?

Bill Sanger

I think, one of the main things, Darren, is that we have been successful in going back and getting additional rate increases, you know, starting in the last year and this year related to some of the fuel. So we have been successful and that has probably been one of the main drivers for a little more improvement in revenue than you may have expected.

Darren Miller – Goldman Sachs

Got you. And then actually looking at what looks like the price of fuel coming in a bit here. Is that driving part of the increased guidance or would that actually be upside to the new higher guidance range?

Bill Sanger

Well I think if you look at – we haven’t given out specific numbers, but obviously as we look at our guidance, we continue to anticipate that fuel is at pretty high rates, given kind of where we are seeing them today. So obviously, if fuel really increases significantly from here, then that is a different story. But we have taken into account the fact that we are seeing a higher spend on fuel in the guidance that we have put out there this morning.

Darren Miller – Goldman Sachs

I'm sorry, just to clarify. So fuel actually is higher than expected in relation to the guidance range?

Bill Sanger

No what I'm saying is, is that in the revised guidance that we put out this morning, okay, we have taken into account that fuel today is at a higher price than what we had originally anticipated. So we have taken that into account into the guidance that we put out this morning, that it is at a higher rate today than it was earlier in the year.

Randy Owen

Yes, we are not anticipating the reduction in fuel cost.

Darren Miller – Goldman Sachs

Got you. And then you had expressed an interest in possibly expanding into teleradiology. Can you just give us an update on how you view those industry trends?

Bill Sanger

Clearly, for most individuals on this phone, the whole teleradiology business is going through a metamorphosis and the primary reason now all moving towards a terminal reach. We have been very active in that space and we are confident that we will continue to expand our radiology services and ultimately make an announcement of our ability to expand into teleradiology.

Darren Miller – Goldman Sachs

Great. Thank you very much.

Operator

Thank you, sir. Gentlemen, your next question comes to you from the line of David Bachman of Longbow Research. Please proceed.

David Bachman – Longbow Research

Hey, good morning and congratulations on a nice quarter.

Bill Sanger

Hey Dave, thanks.

David Bachman – Longbow Research

Can you give us a little bit of an update on HMA and Golden Living and you mentioned with UHS that you already had 30% of those, I think their acute care hospitals as customers prior to this national agreement and where were you at on HMA on that when that agreement was signed?

Bill Sanger

When we first signed HMA – this is Bill, David – HMA beginning at the of January, we were at about 17, 18 contracts; we are now at about 29 contracts, and so we have had great traction with HMA on both the ambulance and the outsource physician side. On the Golden Living, that contract was signed earlier this year as well. That is a phased approach and Mark Bruning, who runs the MR division may want to address the phased approach on Golden Living and where we are at that.

Mark Bruning

We initially identified 32 facilities to roll out. We have rolled those facilities out. We will continue to add volume through Q3 and Q4, we are confident we are executing on that strategy and going along as we expected it to.

Bill Sanger

So that is an exclusive arrangement that will ultimately cover all of their facilities.

David Bachman – Longbow Research

And remind me of how many facilities ‘all’ is; how many facilities in Golden Living?

Bill Sanger

It is pretty close to 300 facilities.

David Bachman – Longbow Research

Together? Okay.

Bill Sanger

Nationwide.

David Bachman – Longbow Research

Great.

Operator

Thank you. Gentlemen, your next question comes to you from the line of Dawn Brock of JP Morgan. Please proceed.

Dawn Brock – JP Morgan

Good morning, guys. Just really quickly just on that last question of those 300 facilities nationwide; about how long would that phase-out last in your estimation?

Mark Bruning

I think that – this is Mark Bruning – I think probably over about a two-year period when you look at our velocity of roll-out, if you will. We are confident that relatively by the end of next year, I think we will be pretty close to full phased in of those facilities.

Dawn Brock – JP Morgan

Okay, that is excellent. And UHS, where are you as far as contracts with them and you know, just your general expectations around that?

Bill Sanger

Well, since we have announced UHS, we have signed I believe two or three agreements. I believe we have 12 now, which are primarily EDs, a couple of hospitalist programs and we do expect to get further traction in Q3 with that newly announced arrangement.

Dawn Brock – JP Morgan

Okay, excellent. And, Randy, just moving quickly to AMR; again, strength in the quarter, everybody is commenting on it. Can you tell us whether or not or how much River West actually did contribute, where that is as far as your expectations?

Randy Owen

Yes, Dawn, this is Randy. River Medical, which is the one that we announced earlier this year in Arizona, was just under $1 million. So there is some contribution but not a major part of the improvement year-over-year. And it so far is tracking I think actually better than what we originally thought. So we are real pleased with what we are seeing there in that new part of the country that we entered into this year.

Dawn Brock – JP Morgan

Thank you, Randy for correcting me as Medicare and River Medical and I guess I was thinking about both of them at the same time. You know I guess what I'm thinking about is that Arizona market and the fact that you acquired your rate into it was really quite strategic. You know, what else are seeing on that front and how do you look at that going forward?

Mark Bruning

This is Mark Bruning. I think it is a strong basis for acquisitions and future growth in that market and we are certainly continuing to look at opportunities in the Arizona market.

Bill Sanger

Remember Dawn, it was – you couldn’t get in there – you know, they are not issuing new licenses or sealing any; so, now that we are in there with the acquisition, we now have the ability to bid on other contracts in the state now that we are in there. So we saw that both as a good business for us but as importantly or more importantly, the opportunity to really expand in that very good reimbursement market.

Dawn Brock – JP Morgan

Yes, I guess that was what I was more driving at was where the opportunities were from and you know, potential RSC perspective, you know, you have got kind of a regional player in there and whether or not there were any contracts that were coming up that you would be bidding for, or you know, even any non-911 contracts that you know you felt as though you were gaining traction on.

Mark Bruning

This is Mark. I think that we are continuing to evaluate opportunities, I don’t have any specific to talk to in terms of 911, but we continue to pursue non-emergency opportunities in (inaudible) key market and again, we are very confident we are going to be able to continue to execute that strategy and grow in the Arizona market.

Dawn Brock – JP Morgan

Okay, that is great. Thanks, guys.

Operator

Thanks, ma’am. Gentlemen, your next question comes to you from the line of Bob Yedid of Principal. Please proceed.

Bob Yedid – Principal

For Bill, Randy and the team, very nice quarter. So I wanted to just focus on the anesthesiology acquisition that you made, Clinical Partners. Maybe you can talk about that business and does that help provide a platform of know-how and systems and a management team that you can build on over time and is the – the second question is, is the team from that acquisition staying with your company for some period of time?

Bill Sanger

The answer to that last question Bob, your statement on that is yes. The total management team; including the billing services are coming over to us at about 43 FGEs. The CEO of the company is obviously joining us as well. Dr. Bolnil, who is a quite-renowned anesthesiologist in the nation, started this business several years ago and has been able to maintain one of the highest contract retention of any anesthesia group in the country. Has a high reputation of clinical care and an excellent management team and we believe that to the basis of that acquisition combined with a number of our existing clients that are requesting that we provide anesthesia services, our pipeline, as we speak of today is very robust as relates to the service.

Bob Yedid – Principal

Great. And then the other question I had was just if you can give us a – I know you had growing opportunities in the radiology and hospitalist and I may have missed, Bill, some of your opening remarks, but I don’t know if you have commented on any growth in those two smaller businesses.

Bill Sanger

Radiology, we did sign a pretty significant contract with Florida Hospital to manage their overall radiology services. That is going quite favorably, as I had mentioned earlier. We are very aggressively looking at the teleradiology terminal region marketplace. Our hospitalist program, we have had a retraction, if you will, we have exited some contracts that were under-performing and we are looking for additional acquisitions, but we had flat growth on the hospitals for the quarter.

Bob Yedid – Principal

Okay, good and very helpful. Thank you very much.

Operator

Thank you, sir. Gentlemen, your next question comes as a follow up to Kevin Campbell of Avondale Partners. Please proceed, sir.

Kevin Campbell – Avondale Partners

Thank you. Just wanted to ask one quick question. Sounds like you guys have a lot of opportunities obviously in front of you and EmCare for UHS and HMA. How much of that is already reflected in your guidance. I mean, is your guidance already assumed sort of the recurring contracts and that is it, so new ones would be incremental to that guidance?

Bill Sanger

Yes, Kevin, we did specifically these in our guidance, we always assume in our guidance that we will be able to add new contracts, you know, that wee don’t know, the first of the year when we do our guidance. I do think what we are seeing is that our sales this year has been excellent; we have added a lot of net new contracts and so depending what happens on the last half of the year, I think it could be a good part of our increase, contribute to our increase and guidance.

Kevin Campbell – Avondale Partners

Okay, thank you very much.

Operator

Thank you very much. The next question will come as a follow up again from David Bachman of Longbow Research. Please proceed.

David Bachman – Longbow Research

Okay, great. Just a follow-up question on the EmCare side again. In terms of pricing, remind me of – or walk me through the process; if there is a material change in patient payer mix, uninsured or rising labor cost et cetera with one of your contracts, what is the process for going back and trying to help mitigate that?

Bill Sanger

Well, we have two types of arrangements with hospitals. One arrangement is such that the hospital provides as a subsidy, whereas the payer mix or conditions of the hospital requires us to have a subsidy in order to maintain a margin that we target. And there is a group of hospitals, about 6% of all hospitals where we don’t have any subsidy whatsoever. When we see a change, whether it is in payer mix or request change by say the qualifications or the number of providers that provide services at ED, we have the right to go back to the hospital and request an additional subsidy, or in the case we don’t have a subsidy to request a new subsidy. We have been quite effective in doing so, particularly as we see changes in difficult areas to recruit. And there are times, however, we go back to the hospital and they can afford to increase their subsidy and those times we do add to that particular hospital.

David Bachman – Longbow Research

Okay, so, if you can’t maintain the margins that you are targeting in there, you could potentially walk away if the –

Bill Sanger

With a 90-day notice.

David Bachman – Longbow Research

With 90 days. And are you willing to give any number on – you know, how many – how do we think about how many of these subsidies may occur on a regular basis or as to a year or a couple of quarters?

Bill Sanger

It is hard to say, how many times did we go back, you mean?

David Bachman – Longbow Research

Yes, getting a new –

Bill Sanger

We don’t go back that often, I would say. If you look at the book of businesses, 400 contracts. At any given time we may go back every quarter to half a dozen of those contracts, request additional subsidies or modifications in the scale.

David Bachman – Longbow Research

Okay, that is helpful just for me to wrap my head around that. Thank you.

Operator

Thank you. Gentlemen, your next question comes from the line of Gary Taylor of Citigroup. Please proceed.

Gary Taylor – Citigroup

Hi, good morning. Had a few questions. Randy, I came on just 3 or 4 minutes late. So I missed if you explained on the revenue adjustment, why it is $4 million to the top line and only $1.9 million to EBITDA?

Randy Owen

Now that was last year, Gary. So, if you recall, last year, we had some additional revenue adjustments in Q1 and Q2 of last year. So what you may have missed was when looking at the year-over-year comps, you need to take into account that last year, we had the additional $4 million of revenue and about a $2 million EBITDA impact in Q2 of 2007. It was pretty nominal this quarter.

Gary Taylor – Citigroup

I'm sorry. So there is no revenue adjustment this quarter, or very little?

Randy Owen

Yes, nominal. Virtually none.

Gary Taylor – Citigroup

Okay, yes, I understand that now. And can you help me remember, DNA was down sequentially in the 1Q and then down again in the 2Q and I think you had just talked about some equipment rolling off, is that still the case?

Bill Sanger

Yes, it is two things, Gary. You know, one is I think, a number of years ago, we had higher capital expenditures and more technology capital expenditures that we are starting to see roll off, which is part of that decrease. And then also, we are also spending less capital today than we did in the past. So I think sort of a combination of those two things.

Gary Taylor – Citigroup

On revenue, what – I think total revenue was up $58 million year-over-year. What was the acquired revenue in the quarter, is that the number that is – you can easily breakout so – acquisitions contributed how much year-over-year in terms of revenue?

Randy Owen

Gary, I'll sum ahead, I think it was around $18 million that we had from the acquisitions.

Gary Taylor – Citigroup

Okay. And then I have two more questions. Just thinking about EBITDA growth, if you look over the last couple of years, a reported EBITDA growth of 26%, 21% if I'm doing my math right. First half of this year, up a little less than 3%, which obviously doesn’t sound nearly as good, but to your credit, the prior-period adjustments helping you are down pretty dramatically year-over-year. Should it actually imply some nice improvement, sort of organically, ex the adjustments that have come through in terms of insurance and revenue? So the question is, given that wide variants in recorded EBITDA growth, what do you really think the core EBITDA growth of the company is over the next couple of years, and then what has been getting better organically such that you are still able to modestly grow the EBITDA without all the adjustments, is there any one thing that is coming through on the cost side that has been out there for a while or, just trying to understand it a little better.

Randy Owen

Yes, I think. A couple of things, Gary. Yes, again, it is not highlighted I think, coming to your point. Our base, when you look at sort of the base business and excluding some of those impacts of reduced variable insurance and revenue adjustments, we had about a 25% EBITDA growth when you exclude that. So we are very pleased with that and what we have been seeing on that front. I think that is driven from probably two or three main things. One is, it is clearly growth. I mean, we have been able to grow our business both from an organic standpoint, we have had some nice acquisitions. So we have been able to leverage our fixed cost and our infrastructure around that growth that has helped improve our margins. And I think we have also done, even with some pressures around fuel and some of those things, we have done a nice job of really being more efficient in our deployment, for example at AMR, and we have done a good job there. We are also seeing, you know obviously, as we had indicated in the past, that even though we expected some of these favorable developments to go down, we felt like our current exposure would go down as well. And that is what we are seeing.

Bill Sanger

I think one other item, Gary, is that – you know, the business model on both operating companies is such that was have an ability to have cost transference. So as we see extraordinary costs enter the system, we can transfer those to the providers, to subsidies and to changes and overall contract relationships with the cities.

Gary Taylor – Citigroup

Is that to imply that that ability or that pull-through is accelerated from kind of 2006, 2007 and you are realizing more of it now?

Bill Sanger

I think it accelerates based on the biomedical conditions. Obviously, if Medicare had gone forth with the reductions, we would have been back to our hospital clients, seek an additional reimbursement. It really depends upon the environmental conditions.

Gary Taylor – Citigroup

Final question I'll throw at you; Rural Metro sitting out there with a $42 million value or market cap and presumably there would be some synergies and overlap. So I'll kind of throw a softball to you. Why or why not might you look at acquiring another large provider in multiple markets?

Bill Sanger

Well, we certainly would not exclude that, and as indicated in our state of strategy, we are always seeking targeted acquisitions that are complimentary to the core business and if Rural Metro were a target in that arena, and the numbers made sense, we would certainly consider that, Gary.

Gary Taylor – Citigroup

Okay, thank you.

Operator

Gentlemen, this concludes the presentation for today. The question and answer portion is over. Mr. Sanger, I'm going to turn it back to you for any closing remarks.

Bill Sanger

I thank you, operator. I just want to thank everyone this morning for their time and also the support of EMSC, and have a good afternoon.

Operator

Ladies and gentlemen, this concludes your conference for today. Go out and have yourself a great day.

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