Hanger Inc (HNGR) 2003 Q1 法說會逐字稿

Good morning. My name is Sylvia, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Hanger Orthopedic First Quarter Earnings Announcement. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press "*" then the number "2" on your telephone keypad.

Thank you. Mr. Sabel, you may begin your conference.

Thank you, Sylvia. Good morning, and thank you all for joining us for our first quarter 2003 conference call. At the close of the market, last night, Hanger reported earnings of 19 cents per share, which represents record first quarter earnings in the history of our company on sales of $126m. That represented a net sales increase for the three months, ended March 31st 2003 of approximately $2.6m or 2.1%.

This sales growth was primarily the result of 1% increase in our patient-care centers and a 22.2% increase in the sales of our distribution segment. More specifically, the growth in distribution can be traced back to comprehensive strategic marketing review that we conducted last year and the outcome of the dedication to new marketing programs, which include expanding our product offering. This work was a key driver of SPS' first quarter growth.

In our patient-care business, several markets were impacted by severe winter weather. However, we continue to see improvement in operating synergies, which translated the increased earnings. Sales improved in March, as the weather improved somewhat; and we are encouraged by the information we've seen so far in April. As you know, the first quarter is always our weakest quarter due to the new insurance deductibles and the weather conditions in certain parts of the country.

Our patients have difficulty getting around in snowy and icy conditions. This winter was particularly brutal to both ice and large accumulations of snow. We are really pleased that in spite of this, we have record earnings for the quarter. Last year, conditions were almost the exact opposite. So by comparison, our sales growth is low.

However, in our budgeting and discussions with you in the mid-quarter, we did mention this weather could impact our results; and we anticipated that in our budgeting. So we did not anticipate any affect on our earnings. We fully expect that our projected same-store sales growth for this year will be achieved during the next three quarters.

Our gross profit for the first quarter of 2003 was $65.4m or 51.9% of net sales compared to $64m or 51.8% of net sales for the same period last year. The primary driver for the improvement in gross profit in both dollars and as a percent of net sales was a continued reduction in our material cost.

EBITDA for the three months, the highest EBITDA margin we have ever produced in the first quarter, increased by $1.5m or 7.7% to $20.7m, which translates to 16.4% of net sales. This represents another high water performance mark for us and one that is critical, as we strive to achieve higher levels of profitability for the year.

At the end of the quarter, we completed the acquisition of Northwest Orthotics and Prosthetics, a first-class patient-care center with very high quality personnel. This is in line with our goal of solidifying our geographic position in key markets as in this case, Seattle and funding these from our free cash flow. Since the end of the first quarter of last year, this is the third acquisition we had made; and it represents almost $10m in annualized revenue.

In spite of the cash used to fund these strategic purchases, our total debt level is down almost $17m compared with the end of the first quarter of 2002. And our leverage, I'm please to report, has decreased from 6.2% to 4 -- 6.2 times to 4. I hope my comments are giving you a solid overview of our business and progress during the first quarter.

At this point, I'm going to turn it over to Tom to provide additional detail on some of the key activities for the quarter and the progress we envision for the balance of this year. Tom will then turn it over to George, who will give you comprehensive summary of our financial results. Tom?

Thank you, Ivan. Good morning. I'm pleased to be with you this morning. What I'd like to do is to focus my comments on some of the significant activities that went on from an operating perspective during the quarter, talk about some of the challenges, some of the successes, and then wind up by talking about some of the things that we had put in over the last three to six months that we expect to be getting increased traction on, as we go forward in the year.

First off, and I think the big highlight here is to learn that Ivan had noted; in that the EBITDA was a record for us along with our EPS demonstrating that we continue to make progress along our profitability goals. Going to the input of it all, the sales line, our sales are up about 2%, as Ivan had mentioned or about a little more than $2.5m.

Within our HPO division, we were up 1%. Now, as we had talked to you in the past concerning our guidance, this didn't measure up to the guidance line that we had, because we had some specific challenges. Some of which are going to take care of themselves and already have, and some others that we are taking action on. As Ivan had mentioned, we are hit with some icy and bad weather snow problems, which always make it difficult for our patients in two perspectives.

First is, those who'd have appointments have difficulty in keeping those appointments. Particularly, since the weather was so severe, we weren't able to open some of our offices on a couple of days. And, secondly, we schedule throughout the time period our patient evaluation clinics, and we use these to really bring our patients back to ensure that their fit and functionality is in order; and we had to cancel some of those clinics.

Now, this didn't hit all across the US, of course; it was primarily on the East Coast, ranging from Virginia up into the New England area, as well as some pockets in Midwest, and down in Texas and Oklahoma. That business is there. We're going back to make sure that it comes back, but it doesn't come back immediately, simply, because of scheduling issues. We're trying to get people back in to conform with doctor schedules as well.

Another challenge for us is the continuing state budget deficits in areas of Medicaid. So while we've been managing this in trying to convince people that they have to look beyond the immediate dollar savings and look at the outcomes; but we're still encountering some selected pockets where those budget deteriorated constraints are resulting in cutback on Medicaid spending.

A particular example was Massachusetts where, at the beginning of this year, there was a cutback, where folks over 21 were being denied O&P service. After a grass roots campaign, the State of Massachusetts has reversed that. So this continues to be a challenge, but the issue here is that, for a selected time period, it may affect us. But, obviously, we're working with others in the industry and industry associations to have these things have a minimal impact.

As we went into the contracting season, this year, we found that the contracting negotiations in some areas and with some carriers were particularly aggressive. We have made a conscious decision to examine each contract on the status of its profitability; and, frankly, we walked away from a couple. We did find out that after further review, some of these carriers actually came back to us.

We had one case where that did happen as of the first of year. They have informed us that they want to come back. Frankly, what they've recognized is that with our reach scope and the ability to reduce their back-office costs, it really represents a better value package to sign up with us. So that's a temporary situation that is coming back as a result of our marketing and contracting efforts.

We have also seen two cases of what I would just call industry slowdown. The first is owing to some doctor slowdown. We've seen some of this on the news. Where in some pockets such as Nevada and Philadelphia, due to malpractice insurance, some of the doctors have really just slowed down. They're not being active on trauma cases. They're delaying operations on everything with critical operations. As an effort to make their case to their local state governments by trying to get some relief on their problems.

For the months of January and February in two regions of the country; and we've verified this with some others in our industry. It was just a general slowdown in prosthetics. Orthotics business stayed solid. What we did see is that this business did return to its norms, beginning in March; but that's a case of where that's been pushed out into the year.

So net-net, through combinations of marketing, grass root efforts, and going back and just physically bring the patients back in, we are reversing those challenges that were there and go back to our normal guidance for the balance of the year and what we are looking at for the remaining nine months.

SPS, as Ivan had mentioned, was a real success story owing in large part to comprehensive marketing areas, expanding the product base, bringing on two new sales people. Also SPS have started a comprehensive effort in working with this outside customers - those - that was - those are outside of Hanger pinning with manufacturers and putting on educational workshops to get the message through that it's paying dividends. This work began last year and is really coming in to stride this year.

So, net- net as I mentioned before we're up about 2% on the sales lines. In terms of our cost to goods sold, the big success here is the continued use of the best valve program. That best value program on an absolute dollar basis actually reduced our materials cost by about three quarters of $1m. We continue to believe that the best value is best for our practitioners and our patients, giving them the products that assure clinical excellence.

We are continuing to put products into the best value program and I will talk a bit about some of our efforts in the new product commercialization process a bit later. SPS was also successful in reducing its materials cost. So on an overall basis it was the major contributor to our improved result at the gross profit line.

On the labor line, our labor force was constant except for we did make some increases last year from an acquisition point of view. So, obviously those reported in some higher labor dollars. We did give some small cost of living increases to those that did earn them. We'll be working to those modest salary increases for this year. When you look at our labor compared to our sales because of the lower level of sales and also because the first quarter is always our lowest level at sales. Our percentage always comes back up a bit in the first quarter, but we don't see any abnormalities in that area. So, as a result our gross profit was up $1.5m compared with the prior period.

G&A is the cost management issue making sure that we're getting the best value for the dollars that we're spending. That was flat in spite of bringing in some new acquisition and making some modest inflationary increases in the salary line within our G&A area. So overall, we had a record level EBDITA, 16.4% owing in large parts to the success on the material line and we intent to keep going on that.

As we look out over the balance of the year, and we've been telling you about some of the new folks that we have in here in terms of our staff and our operations, I'd like to highlight some of the programs that we've been installing, that we think are going to be paying dividends in the future. The first one, as we all recognized is the people business. We got a new head of HR join us in fourth quarter of last year, and he's been able to supplement the efforts that our people have had underway in two key areas.

One is the area of recruiting, and we've actually mounted a comprehensive effort to ensure that we have a proper flow of good people in our pipeline from a practitioner and from our staff support area. We have expanded our recruiting areas, to go outside the borders of the US, and we are looking in other English speaking areas around the world. We've brought some of those folks in. They are aggressive; they are very pleased to have the opportunity to work well, and they integrate not only well within our operations, but they also fit nicely with our customers, as they have a good concept of customer service, and the doctor's that we service well.

And the second area of HR, is in the area what we can call career succession planning, and that involves such things as training, development and career in professional growth. So, that we have the right people in the right place at the right time, and those are gaining traction.

On the sales and marketing line, we've had our marketing organization populated for the most part, I think, we have, perhaps, one or two openings in that. We've started some new efforts in business development which our folks that are out in the field working on a daily basis with our market leaders and our practitioners, to identify targets within the 75% of the business that we don't have, and this is the rightful shot of going in and customizing the value proposition to suit the need of those specific customers whether they are doctors, the hospitals or the third party payers. That effort is beginning to pay off. And that's the one frankly that will allow us to capture and steal some market share from the overall market.

We've also brought on board the new Vice President of Contracts and she will be continuing the work to better manage our contracts. We've listed those out. We are going to put those on an electronic database and manage those on a proactive basis. One of things that we've insisted that we have to do in this area is to get our arms around which of those contracts that we need to go back and have a discussion with the third parties in terms of are the fee schedules up to date? Are we getting the value in those contracts at the bargain that we cut? Are we seeing the rise that we had expected to see in terms of volume? Are they paying on the proper terms? We've identified a couple of 100 of those, that for any one of the above reasons that need to have further discussion and our contracting team is in place now.

We've had three new additions in that area, as well as a new VP and we are mounting a campaign to go back out and open those up, convincing people as we did on the one contract, that I mentioned back in the operational review, that frankly some of the benefit that we have, can better service their needs and therefore can lead to better terms and conditions.

New point also within our marketing is the is formalization of our new product development process and this is how do we get new products because we have seen that technology has a huge benefit in that business, has the huge benefit to our patients. We have four new products in this pipeline that we are currently evaluating. We are negotiating with the supplier of the fifth one that has, what we believe to be, great potential by formalizing this and ensuring that we get the clinical excellence the sharing that we get through panel of doctors and inline and to endorse the product and ensuring that we can put all the paper work necessary from the regulatory and reimbursement side.

We hope to expedite the process of getting these into the market place. And that's the key focus for us because those products were on a cost to revenue line run little higher percentage. The magnitude of the margin that they bring is greater than some of the commodity products.

A key project for us that we've passed a couple of milestones on for this year is the installation of our OPS billing system and many of you will remember that this is the common platform that will cut across all of our business. We designed it last year, we went through our alpha test, went through the beta test in the beginning of this year and we began on April 14th for the implementation of this platform.

We have beta sites just went right into transition of actual operations and as of April 14th we began the actual roll out, closed the month of April for those branches and we are pleased to report that not only that we closed with out incident that those that are out there in charge with using this system on a daily basis could even see the best thing they've ever seen, very user friendly, very easy to train and learn. So, we are expecting big things in that in terms of enhance data processing capabilities.

Two other quick notes in the first quarter, we sent an announcement out talking about the benefits of our education fair. Our morale is up, practitioners are motivated and we expect that continued use of education in training will continue to keep us at the forefront of clinical excellence and along that line we had announced it, we had introduced a better educational fair the new Hanger insignia digital patient processing system and that basically is the different way of processing our patients to way of acquiring the data from them, putting that data into a CAD instrument and subsequently into a CAM. What it represents for us is it's fast and accurate; it's clean. It is customized to the patient's need. Most importantly, for a doctor on a record keeping basis, it give us a permanent record of the patient's condition.

We've had that on beta test seven sites, we're wrapping up the evaluation of those sites and our project manager has made some recommendations on the business plans to go forward. We are very optimistic about this and so we think it can pay benefit not only to clinical excellence, but also to the way we manage our patients and the way that the data is available for subsequent evaluation by our patient physician.

We also passed the key milestone on April 14th within the HIPPA area and are happy to report to you, we're completely HIPPA compliant in terms of privacy and advising our vendor as well as our patients of their rights to privacy in getting the report sign off. As you know, in the health care industries, this is been a major concern, it is one that we think because of our size and scope that we were able to bring the proper resources together and get this done in a very professional and in the government compliant way. And my last comment is we're continuing to work on our area to better process. We are managing our inventory and for making sure that the successes that we've in the past on our accounts receivables will continue to go forward.

And so with that I'll be turning it over to George who will put a summary around all of those number scores. Thank you.

Thank you Tom. I'll try not to repeat some of the stats you've already heard. On the income statement, sales increased by 2.1%, mainly due to the 22% increase in sales in our distribution segment. Our gross margins improved year over year by 10 basis points to 51.9% from 51.8% last year, due to a slight improvement in material cost. I want to remind you all that we normally have lower gross profit in Q1 due to our seasonal sales.

In this case, we have to remember is our cost to sales labor is relatively fixed and in fact in the first quarter it usually spikes a little. It's usually a little higher than the other three quarters because nobody takes vacations during the first quarter so you have a higher vacation accruals there in the first quarter than we do in the other quarter which are actual labor a little bit higher than the rest of the year. And therefore what we have to we do is basically take your labor divided by four when you're projecting and take your material cost and spread it as percentage of sales and this impacts your margins in first quarter.

We are aware there's some guidance on the street where we believe they spread the total cost to sales as a percentage of sales and obviously that would underestimate the cost to sales and other estimated margins in the first quarter. We were comfortable with our EPS estimates and we believe they realized that that was off but made you change to the SG&A, which caused essentially a week less but they should have made in your model. And what I have incurred you to do is really focused on our year over year performance.

We, and as I'd just mentioned, we improved our margins by 10 basis points and if you look at SG&A, our SG&A in total dollars was absolutely flat which we're pretty pleased with when you consider the fact that we made two acquisitions last year. So, we really kept our overall SG&A down over the prior year and that resulted in operating income improving by $1.8m.

Our D&A was down from last year as our CAPEX was relatively low and really in 2000, all the way through 2002. You should keep in mind that our new billing system, as Tom mentioned, is going to start billing into service and it's going to start really rolling out in second and third quarter and at that point we will start depreciating that new asset and it's going to increase our D&A.

I also want to remind you that as we move into our different billing systems and turn off the old system, there will be some write-offs associated with whatever book value we have left of the investment in the old systems. That will likely happen in third and fourth quarter.

The net income increased by $3.9m partially due to capitalized cost that was written off as part of our bond deal last year. I mentioned - we mentioned in the press release that last year we had $2.8m extraordinary item related to the write off of those costs. The treatment for that item no longer is as an extraordinary. It's a separate line item component of interest cost below operating income and so you should take that into consideration when you are looking at the numbers.

On the balance, our working capital increased slightly to $139.6m to restoring cash balance. Our AR decreased by $2.1m to $107.6m. Our over 120 days remained well at 25.5% to recall in the fourth it was 25% and the only reason there has been a slight increase is because our growth receivables are down due to the seasonal sales. Our DSOs improved 72.9 days, again that's in part due to our seasonal sales since that's a 12 month rolling calculation.

Our current receivables, that's 0 to 30 day receivables, increased to 41% of total AR and you have to go back to 1993 but we had a really a much different payer mix to see better results. So we're pretty pleased with that. From a cash flow perspective our cash flow from operations improved to $4.2m this year that's compared to a $3m use last year. So we had a $7.2m improvement there.

And lastly our CAPEX was $3.3m for the quarter compared to $1.6m. That's due to the investment we continued to make in the first quarter on the new billing system, which is now rolling out. And with that I'll turn this over to you for questions.

Sylvia, we can open it up to questions and answers at this point.

At this time, I would like to remind everyone, if you would like to ask a question please press "*" then the number "1" on your telephone keypad. Again, if you will like to ask a question please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question from Kevin M. Fishbeck of Lehman Brothers.

Yes. Hello. I had a couple of questions. I got on the call a little bit late. I'm not sure if you gave out a same store?

One minute please.

Hello.

Mr. Fishbeck?

Yes, hello.

Kevin, are you there?

Yes, I am here Ivan.

Yes, I think for your first part of your question, which is the only part I think that we received so far was what same store sales growth was?

Yes.

Basically we had about 1% same store sales growth. There was - we have -- there're two things on the HPO line on the same store, Kevin. Slightly, north of flat, but we're also reporting, as you'll remember, the impact during the first quarter some of the two acquisitions that we made at the end of last year. So, it's up slightly 1%.

Okay, and I guess I have a question that I had, some of the other companies have been saying that they've seen volumes impacted by some change in benefit designs with increased co pays, coinsurance and things like that. I was wondering if you have seen any impact of that during the quarter?

Nothing in the measurable way and we're aware that some of the States because of their situation have been looking at who gets coverage and the split of who pays and higher co pays as well as some of the age category changes we know that those things are being but they haven't impacted our business in any meaningful way.

Okay, then one last question. Do you have any update on Medicare?

No, Kevin, the only update we have is that it appears that there was a recommendation made to CMS earlier in the week, that the competitive bidding for that very limited number of our product codes be pursued by CMS. And the rest of demonstration projects that have been going on in Texas, and in Florida. Again just remind everybody that's really not our business. This is sort of over the counter, nonprofessionally fitted or made devices in the old product area and as we have said to you before, if in fact that becomes a situation where those few items are competitively bid we believe we are in the ideal position to offer the government in fact the only company that can offer the government 600 or so points of service with one contract. But again, that's a very small part of all the industry, a very small part of certainly Hangers business. That's the only new additional update. Other than that, we're slated to continue to get our annual updates with our CPI index and there's nothing else new on that horizon.

Okay. Thank you very much.

The next question comes from Ruth Epson [ph].

Hi, good morning. I have three questions. One if you can give us the cash balance, two if you could speak to the practitioner turnover during the quarter and three on the Medicaid front, I'm wondering if you could tell us what the status is in California and what the likely impact of their budget is going to be on you, if they eliminate O&P coverage and also whether there are other states that you know have such proposals on the table?

Firstly the cash balance was $13.7m.

Ruth on the practitioners, we ended the period with 866 practitioners, which was a net turn over of seven tenths of the percent. And the California situation in terms, Tom do you want to address that?

Sure, California has had a number of proposals on the table that they have been kicking around in State legislature. One of them is the complete elimination of the Medicaid across the board. That's O&P and other things. While we don't think that very realistic of it, it does certainly mean that they can comply with some of the government - the federal government regulations in providing care and coverage. Nevertheless they're looking at a myriad of other things in terms of the impact should that all go away California's a large state plus having in excess of 60-patient care centers and it could represent $1m to - maybe $1.5m but depending on how they would come down of this.

And are there any other states that have such proposals outstanding?

Right now all the states, Ruth , have been kicking around some kind of proposal. California, that seems to be the most egregious sort of thing. We have seen where it could be as minor as Colorado where the impact might be 3,500 lives to as major at Colorado. O&P represents a small portion of the state Medicaid budget. So they don't get very much in the way of benefit by going after O&P and what we've been trying to convince them up to our work at the grassroots level that while the dollar they may save on expenses seems like a real dollar to them. If they push this through the total picture they end up with people that have impaired functionality and they're going to pay for nurses, nursing home, etcetera, etcetera.

So, almost every state is looking at one way or another of excluding some group, changing the age requirements, changing the co-pay perhaps denying a portion we've seen it as crazy as piece of orthotics in dental for example. So, there's a lot things being discussed in the end if we think that this is a small piece of the overall action with some major consequences that they may not be so aggressive to going after.

That's particularly true because in this case of Massachusetts, these patients are very visible. You may have seen the USA Today article that showed one of these very visible patients on the - in a photograph of being denied coverage at the state level which we think is of the things that caused this to be reversed. So, while there's a lot of discussion, I think that they are trying to think twice before they implement any kind of stringent reduction in your program.

So, what is your budget incorporate for total Medicaid revenue this year?

Medicaid represents

Percent change.

Total Medicaid. It was 9.6% actually increased by one-tenth required year.

A point in your 2003 outlook, are you assuming that Medicaid revenue is flat or down a certain percentage?

Basically flat.

Flat, yes.

Okay. And then - Tom I'm sorry, I'm a practitioner. Can you just - I guess I'm a little bit surprised that the number was down versus December? Given that I believe the first quarter is also typically when you get and your graduating class coming in. Can you just?

No, its not when the new graduating class. The new graduating class actually is coming up during June.

Okay.

That's when the graduates come out and again certainly in the Newington program we have retained the overwhelming majority of those residents in the Hower [ph] system. And Jason, you have a comment I think.

Yes, the other that's going on right is we paid bonuses in the first quarter and these bonuses if you leave during the year, you loose. So, there might be a couple of people leave around bonus time. Also there's a fair amount of people to be hired or to start in the queue right now. I was talking to our HR lady that does all of our recruiting and typically you have 10 to 15 people that'll be waiting to start in the following month. That number's close to 30 people that will start in the next two months. So, the 866 they were reporting, it's kind of just a blip on the screen and as Ivan said looking at the trail in 12 months its 0.7% net turnover. Its not an area that we look at its concern and this number should be higher when reported at June 30.

Okay. Just for my record. Can you just breakup how many people left and how may hired during the quarter?

During the quarter we had 20 hires, we had 19 resignations, and we had one person newly certified. Then obviously the balance is eight people that are no longer employed with company for various reasons.

Termination?

Yes.

Okay. Thank you.

Your next question comes from David MacDonald.

Good morning guys, couple of questions on pricing. Just want to get back to the Medicaid for a second. In most of that 10% of the revenues, can you guys give some sense in terms of representatives of profitability to Medicaid book of business makes up?

Medicaid is typically a basic coding. We don't -- unfortunately we don't cost every product in every contract as of yet. But on average, we look to the reimbursement rights to Medicaid and over the past three, four years they've always trailed Medicare. So, we know, it's on the lower end of our profitability sale. To give you exact gross profit...

We don't have that, David.

Okay.

And the other thing David, and for everyone else, let me just caution you that although, obviously, the stature interval financial straights rate now, we all know that, in that we're looking in every area, not just O&P but every area. All of these -- as Tom put it at a very small expenditure to state level. And, even in those states where we have seen some of those benefits go away, we've been successful in turning alternative funding sources, I mean, if someone is in need of a prosthesis and our sources to be able to ambulate, they're going get it. I mean, there are other funding sources. These, and as Tom pointed out, the cost of caring for these folks if they become immovable goes up dramatically compared to the cost of a prosthesis or in orthotics.

Okay.

So, although it's a challenge and certainly we all, anyone dealing with any state funded program, has to deal with that. I think in the O&P states, alternative funding and endorse some reversals like we've seen in Massachusetts would be the order of the day.

Okay. Can you guys talk a little about the acquisitions of, you know, you're seeing any movement in terms of multiples that you're having to pay on a pick up practices and whether the focus, kind of going forward will be on selling out existing markets or potentially looking at acquisition to new markets?

Yes, Dave, the first of all, the most of those have remained constant, which remained 4.5 to 5 range and we're really the only active supplier that is out there right now, and we have a very healthy pipeline. We are being extremely selective and only during acquisitions such as the Northwest acquisition where we feel doubt, that most western part of the country and, yes, you will -- we'll have some in those four states where we currently do not reside. We have some potential there. Again, it's identifying the proper practice that we meld, not only from a financial synergy standpoint, but in all came from a cultural standpoint.

So, we have the luxury, I'm pleased to say at this point, of being very selective under absolutely no price pressure at all because there really is no competition right now for these acquisitions. Although, the sellers, there is a breakpoint where a seller will lose interest unless it's a reasonable multiple. We believe that is somewhere in the 4.5 to 5 range. Again, we will fund those, as we have so far, out of our free cash flow and I think you'll see us continue the selective "mom and pop" type acquisitions.

Okay. And just finally guys, can you give a quick update on exactly how the billing systems will roll out? What percentage of the practices will be rolled out initially? And then, kind of, walk us through that process and also just discharge? Is there going to be some impact? Its flowing through the P&Ls, though in terms of depreciation or whatever that would ask that to some degree of the billing system coming in, that will go away when you retire the old system?

David, I'll start with the rule out sequence. As you know we have 600 patient care centers, roughly the plan is that -- we began the implementation on April 14th. We're sequentially using two primary drivers, what makes sense from the geographic location because there's tremendous amount of training and we've trained the trainers and thereafter, so, we want to be logistically smart, that's one the first criterion.

The second criterion is that we examine and we want to start in the areas where we think we will get the greatest learning and the greatest acceptance and we know that over 50% of our patient care centers are currently on the top system. This is a derivative of tops. It's enhanced. It's called tops on steroids. So these people, they are currently using this system are very conversant with the features and how it works. So, between the geographic and the existing top systems that going to define how we roll this out.

We are - our roll out schedule has us going from April 14th to October 23rd. We recognized this that we may have some rain dates that may come up for whatever reason that will be tacked on to the end. But basically we're going to process through almost on a linear fashion, taking a little time off before the month end closes and recognizing also that there could be a couple of vacation issues coming up in the summer.

You can almost do the linear division of over the period from April to October, six months so its roughly about 100 a month. But there's been a tremendous amount of precedent before we go out there, in terms that to get ready within a branch, the training of all the people. So while those physical installations may end up taking this today or two, the office - I mean we what to it in discipline ways actually under preparation was probably 60 days before we ever arrive on the site to install it.

Okay.

Its very disciplined and a very well organized implementation plan

To answer your second part of the question, Dave, the new systems going to end up with the total cost of between $5m to $6m. It's have about a five year life. So the increase in D&A is going to be about $1.2m a year once its totally in service. The Legacy Systems that we're turning off or we're going to have write offs have about remaining book value about $2m and that comes in D&A that in all likelihood should have a separate line items so no one gets confused. And the elimination of that D&A will have one such written off or have some impact the other way.

Okay. Okay, Thanks guys.

You next question comes from David Carmen [ph].

Yes, good morning. One housekeeping type of question, two-business questions. The housekeeping issues is simply, if you haven't mentioned, that the bonus payment that you accrued, would you get paid out? How much is that? Then the two business questions are could you just address how you refine I guess the occipital (ph) methodology each year with the what the assumption is in '03 following your review and how your '02 estimates work? And then also address why is this that the areas you mentioned negotiations with them. They were being kind of aggressive. You're not really seeking much a pricing game. So its kind of surprising to me that they are looking for what it sounds like even roll back? Thanks.

Now David let me clarify one thing. When you ask you're accrued to be paid out, do you want to know what we paid out in the first quarter or do you want to know what we've accrued in the first quarter? So you can get paid out some time in the future.

I am sorry, I am recalling from last year. I though there was a fairly hefty payment gets accrued paid out in the month of April. Do I have the timing off?

No it was March 15th. We get to pay back March 15th to get a current tax reduction

So from the tax point of standpoint that's when we pay it?

Got it.

And what we accrued at the end of the year was $23m and I would have listened to you all and paid out.

I got the wrong quarter. Thank you

Its all right.

And David, could you repeat, I mistook your question about the careers. We'll take that one and then let me ask you to come back and repeat the question on refining us. It shook up just a little bit there. In terms of carriers, for whatever reason we've noticed that within some geographic areas, I use the word aggressive because that's the best description. As we went back to sign them up again, we found that they came back and they pushed on us saying would like to have a bigger discount. And we have slugged our way through most of that. In one case, we actually said we're frankly not in a position to go to that level of discount. We recognize that obviously you want to ask for these but things you're going to have to find other careers to make up, because we're not going to do yet and frankly by the time they went through and did all the math, they left us for a while.

I think what they saw that there were cost and trying to manage a network discreet smaller carriers to do the same job. It ended up calling us back and asked us to come back in. It's the normal push in some that the insurance industry seems to be under some stress these days and so from time to time when you seeing that in the past and I am sure those continue to go forward in the future. But by understanding our position in each of these contracts, the kind of business they represent and the benefits that we can bring, I think we can reach a win win with these guys and sometimes it's just little a more difficult than others.

But they were basically seeking year over year price declines is that?

That's correct.

Thank you. On the inventory processing, just I remember that there have been some significant year-end adjustments for the last two years. It's always an estimate. What is the estimate for your first quarter here vis-à-vis what it was last year?

Well, first let me clarify one thing you said in 2002 we were spot on with our estimate for inventory. We took a physical. Our total book to physical adjustment was $200,000. In the prior year we had about $5m favorable impact of the book to physical that was because we have to come in off to what it occurred in 2001 -- 2000 we were just being very, very conservative in our core method, I believe right if I know that. This year we are accrue and essentially based on last year's -- the experience established during the last inventory and we monitor that in every quarter. Some quarters may be a little better and some quarters a little worst but you are talking you know small adjustments just tweaking of that -- after number we established last year when we took our physical.

That's substantially identical since last year's worked out so well.

Yes.

Okay. Great. Thank you.

Your next question comes from Adam Like [ph].

Hi guys I was just wondering if you have the patient care center distribution EBITDA on numbers available?

Yes. To make this numbers work while we're also going to give you the corporate eliminations number and that will tie back to.

I think we need to do that offline because we have to -- I don't have the consolidating sitting here.

Okay.

Can we.

Sure, yes, no problems. That was enough. Thanks.

Your next question comes from Randy Golky [ph].

Yes just a very quick one can you give me the borrowing under the revolver and the revolver availability please?

Sure. Revolver availability or revolver borrowing at quarter end was 23m its $75m facility that we've got with $52m of availability and if we add that to the cash position of 13m that's what is liquidity for the company.

Great. Thank you.

At this time I would like to remind everyone in order to ask a question please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to again compile the q and a roster.

If there are no other questions I'd like to Tom, would like to just follow up with one thing right now before we close out.

Yes this, coming back to the question that Ruth Epson had asked earlier regarding the impact of the Californian Medicaid. Ruth, I just wanted to be clear that as you can see California Represent about 10% of our business. The numbers that I gave you, I was thinking in quarterly terms, you'll have to multiply that by four to get the annual impact and it's going to be $4m to $5m. Its roughly about 10% and overall Medicaid represent around as Ivan had mentioned 9.5 % of our total revenue. So, it's a pretty linear relationship.

Thanks Tom.

Sylvia, you had a couple of questions in queue.

Yes. Your next question comes from Henry Recoff [ph].

Hi guys. I just -- you must have slowed down in the - may be this is a slow quarter just could you reiterate the guidance of the sales guidance generally little less than 5% but still somewhere around there with margins around 19 % maybe a little less. Is that correct?

That's correct.

And free cash flow is still about the same as you your prior guidance?

Yes.

Nothing changed?

No.

Right just little weaker sales.

Henry, you know as we said we pretty much anticipated after having like no bad weather last year that was going to happen in our budgetary process.

And then distribution when you just said the materials saving there, are you just able to purchase at a more direct rate? You were able to figure that out. I know that's a little different from the you make the annual estimate for the material cost you are able to figure that out by how I just didn't get that?

I will take it. On an operating prospective, we know where what we're buying and that's the continued use of -- what I will call volume leverage, buying in the products, and we know on a purchase-order-by-purchase-order basis what they are. So, we can then track the cost in a more specific manner. And then we know as they are selling for the outside so it's a follow-up to of the purchasing process.

Okay. Thanks very much.

Your next question comes from Rob Crystal.

Hi guys, congratulations on good quarter and tough environment. I guess, could you help us, may be, I don't know whether you looked at it this way or not, but could you give us what your internal growth was in the region that weren't affected by the weather to give us a sense of how the rest of the business did?

Rob, it's going to take some time to go through the individual numbers.

Okay.

We'll talk of that offline?

Yes absolutely.

Okay, great.

Thanks.

Your next question comes from Mary Austin [ph].

Hi, I jumped on the call late, so if you wouldn't mind repeating your CAPEX and DSOs please?

Sure. CAPEX for the quarter -- we'll think for a second was $3.3m as compared to $1.6m last year for the same quarter. And our DSOs were 72.9 days to the improvement in -- keep in mind, it's partially due to work that have been seasonally low in first quarter.

Okay thank you.

At this time there are no further questions. Gentlemen, do you have any closing remark?

Yes. I just want to thank every body for your continued interest and support with Hanger, and that we look forward to talking to you with our Q2 results. Thank you. Have a good morning everybody.

Thank you for participating in today's teleconference. You may now disconnect