Prospect Medical Holdings, Inc. F2Q10 (Qtr End 03/31/10) Earnings Call Transcript

Prospect Medical Holdings, Inc. (PZZ)

F2Q10 (Qtr End 03/31/10) Earnings Call Transcript

May 18, 2010 4:15 pm ET

Executives

Devin Sullivan – IR, The Equity Group Inc.

Sam Lee – Chairman and CEO

Mike Heather – CFO

Analysts

Kyle Smith – Jefferies & Company

Miles Highsmith – RBC Capital Markets

Jacques Cornet – Gates Capital

Presentation

Operator

Good day everyone and welcome to the Prospect Medical Holdings second quarter financial results call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Devin Sullivan. Please go ahead sir.

Devin Sullivan

Thank you, Michael, and good afternoon everyone. Thank you for joining us today for Prospect Medical Holdings’s second quarter financial results conference call. Our speakers today will be Sam Lee, Chairman and CEO of Prospect Medical Holdings; and Mike Heather, Chief Financial Officer. Also on the call is Adam Goldston, Prospect’s Senior Vice President. Before turning things over to Mr. Lee, I would like to remind everyone that statements made during today’s call may contain forward-looking statements which are not historical facts.

Investors are cautioned that forward-looking statements including statements regarding anticipated or expected results involve risks and uncertainties which may affect the company’s business and prospects including those outlined in prospects Form 10-Q, which was filed on May 17, 2010, and other filings.

Any forward-looking statements discussed during this call represent management’s estimates only as of the date hereof or as of such earlier dates as are indicated and should not be relied upon as representing estimates as of any subsequent date. While Prospect may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so even if its estimates change.

With that I'd now like to turn the call over to Sam Lee, Chairman and CEO of Prospect Medical Holdings. Please go ahead.

Sam Lee

Thanks, Devin. Thank you all for joining today us. We’re pleased to report another solid quarter which included double digit increases in revenues, higher operating income and record quarterly and trailing 12-month adjusted EBITDA. We were again solidly profitable with positive operating cash flow and free cash flow. Our financial position remains very strong. We have ample access to liquidity and a full year horizon before our primary borrowings mature, and perhaps equally important, we are achieving these results with a diverse stream of revenues and opportunities.

Just over 70% of our hospital revenues during the second quarter were Medicare and Medi-Cal reimbursement. This is a population of patients that many providers are unable to care for in a cost effective manner. Prospect on the other hand has consistently demonstrated the ability to operate profitably, while delivering high quality of care, thus increasingly making us an attractive healthcare partner for HMOs, government payors and physicians, especially now as new health reforms are unfolding asking providers to better demonstrate quality and efficiencies.

And our Medical Group segment remained solidly profitable, even though given current economic and unemployment levels commercial HMO enrolment is down. This highlights the importance of our revenue diversification approach and the flexibility of our model, where with a focus on Medicare products we actually increased senior enrolment, our most profitable line of business by approximately 600 covered members during the quarter.

We believe that Prospect is well positioned in this market and businesses. And speaking with investors this past several months, introducing our story to new investors [ph], the recurring question is how was Prospect able to accomplish all that it did in the past two years, integrating four separate companies, two distinctly different businesses, four distinctly different local geographies, and improving each of the four separate operations, two of them which were restructurings and turnarounds, including shepherding [ph] Brotman Medical Center through and out of bankruptcy.

Well, from our perspective it is fairly straightforward. We employ a proven portable operating blueprint that yields high quality of care and sound financial results that can be executed in varying scenarios. We created a data driven company environment in which every aspect of the business is measured, validated and acted upon responsibly.

We have assembled a team of talented, battle tested exceeded that are hard-working, accountable, and clear on our mission. Still we believe there is much to be done if we are truly to capitalize on the opportunities we see before us. We continue to view California as a strong positive for our company due primarily to the success that we have demonstrated operating here.

In many reimbursement categories, California is 50% to 60% under reimbursed versus national averages; something we expect will normalize over time in our favor. We also know that California is significantly under bedded when it comes to hospitals, which we also view as a positive for our business.

As discussed earlier, we serve a high percentage of Medicare and Medi-Cal sectors, while demographics and recent healthcare legislation will be significantly increasing the market size. In fact, of the estimated 30 million newly insured expected to enter the system, it is expected that almost 6 million will be in California. Other positive factors in our market includes the nearly 10% decline in hospitals over the last several years, further heightening the supply demand imbalance, as supply contracts the population increases, and aging demographic takes hold and more people receive insurance coverage.

California’s Assembly Bill 1383 is just one of the sources of additional funds coming into the hospital system in the state. With almost 2 billion expected to start flowing later this year, about $8 million of which is targeted towards our hospitals, we don't know for sure when and how much we will see. So we haven't accrued any of that yet, but it speaks to what we see happening in our industry, speaking of which, and before handing it over to Mike let me take a few minutes to provide you with a snapshot of some things we are seeing on the horizon.

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