Hanger Inc (HNGR) 2003 Q2 法說會逐字稿

Good morning. My name is Janeca and I will be your conference facilitator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group's second quarter 2003 earnings result conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you.

Mr. Sabel, begin your conference.

Thank you, good morning, everyone.

At the close of the market last night we recorded second quarter income of 35 cents per deluded share, representing a 21% increase. We saw net sales for the quarter increase by $5.8 million or 4.4% to approximately $138.9 million compared to $133.1 million in last year's prior comparable quarter. That sales growth was primarily the result of about $2.3 million or 1.9% increase in our same-center sales and our O&P practices and really an astounding 27.6% increase at our distribution segment or about $1.9 million. We'll talk more specifically about what caused that increase in the distribution division when Tom goes into the details of operations. We saw gross profit for the second quarter go to $73.5 million or actually 52.9% of our sales. That compares to $69.9 million or 52.5% of net sales in the prior year's second quarter. The improvement in our gross profit in both dollars and as a percentage in net sales was primarily due to a reduction in labor costs, and income from operations increased by $2.3 million here in the second quarter of '03 to $25.2 million, compared to same quarter last year, $22.million. That increase in income from operations is, of course, the result of increased net sales and gross profit. In the second quarter of '03 net income was $9.4 million or approximately, as I said, 35 cents per diluted share. We had an increased number of shares outstanding because during the quarter it became more dilutive to earnings per share to convert the company's outstanding preferred stock to common stock. Therefore the preferred stock dividends declared an accretion of $1.4 million, not included in the computation, of course in compliance with GAAP. In the corresponding period last year, Hanger saw a net income of $7.7 million, or what was 29 cents per diluted shares on what was then $22 million on weighted average diluted shares outstanding. As stated in our Q1 conference call, we expected to see sales start to trend up in the second quarter and then continue through the second half of the year. We've continued to see that sales improvement at our patient care centers during the quarter and we were able to achieve our profitability goals through a combination of sales increase, continued control of our costs, and continued exceptional overall performance by our distribution segment. I'd like to add that this quarter's results represent record sales in earnings, and for the first time in the company's history we have achieved 20% EBITDA margins.

Obviously we are quite pleased with these results and with that, I'll turn it over to Tom Kirk, our President and Chief Operating Officer. Tom?

Good morning, and thank you for being with us today.

I will direct my comments first to the quarter. We'll analyze our operations from a numeric point of view, and then we'll talk about the drivers behind it and some of the activities that we have underway, then a wrap-up on the first six months of the year. As Dan mentioned, our overall consolidated sales are up about 4.4%. It's roughly -- almost $6 million increase in sales. And I'll direct the comments in a moment to the breakdown across our two major business units.

From across the goods sales point of view we actually had an improvement in performance there, where a cost of goods is decreased by half a percent of sales. Owing primarily to our labor costs; labor costs as a percent and in absolute dollars in spite of some small acquisitions has decreased. Materials are up slightly. That reflects a slight change in our mix of business, which I'll talk about in just a moment. Mix was in the product line within HPO. Net of the sales increase and good performance on our cost of goods sold is that our gross margin is up about half a percent, as a percentage of sales on an overall basis increase of about $4 million, again, owing to the lower cost of labor and an improvement in the slight mix of business. For HPO, which is our Patient Care Business, we have had some improvement in sales, and on a gross basis it was slightly more than 3% and on a same-store sales basis it's about 1.9%. That's due to a combination of several items. Number one is, as we mentioned in the first quarter, we had some weather issues, which primarily related to our ability to schedule and for our patients to come into our patient evaluation clinics. Within these clinics, they come back in and it's a checkup for functionality and fit. It's general improvement in their clinical care, and this usually results in our being able to service them, and it's a good source of increasing our revenue on a routine basis, based on their medical necessity. We intensified that effort in the second quarter to make up for the first, and we saw that it paid off in dividends. At the same time we've increased the sale and our focus on our high-tech products, primarily our computerized needs. These products have higher price points, higher margins. They do run a slightly higher percentage of materials to dollar or revenue. However, in the long-run it improves patient functionality, enhances sales, and it's just a better way to go. So we've put on comprehensive marketing programs to push those products.

And finally, we're beginning to see the take-hold of some of our business development in grassroots marketing efforts. And those are manifest in terms of using our business development folks that are out in the field to go out and attract new business by focusing on hospitals and medical clinics. And some of the efforts that have been unique to each of our individual markets in terms of some customized products, differentiated approaches at working with our referral sources to increase the relationship at that level. That has resulted in a continued growth in our unit sales. We have seen in this business, however, the government -- both at the federal and state level -- has made some changes in reimbursement and eligibility, and it certainly is no secret that some of the states have been under intense pressure, and they've been limiting the eligibility of certain classes of patients to what they are allowed to take in terms of reimbursement. End result is some of the states have swung pretty far, such as Massachusetts and Montana, where they've made severe restrictions, but recently I think because of the visibility and the lobbying efforts, those states have decided that they're going to change their position and come back and offer the services to a broader portion of the patient base. So, this is a bit of an edge in flow, but net looking at patient care, unit growth continues to be there. We are battling through some of the temporarily -- temporary kinds of reimbursement and eligibility issues. We think in the longer-term this will straighten itself out. Certainly by focusing on driving new products into the mix it's a good way to offset this. And we see those continuing.

At the SPS level as Dan mentioned, we're up almost $2 million, or almost 28% on a year period to period basis. That's the addition of two things, that's new product lines into SPS's portfolio. They've got positive lines they've brought in, good solid products, good price points and they're building demand through an eastbound -- enhanced sales force. So we actually have more boots on the ground that are out knocking on doors and telling the story. It's a very positive impact. And this was, as we had mentioned in the third quarter of last year, was all part of a comprehensive marketing plan that SPS put into action to emphasize customer service and increase portfolio of products as opposed to doing discounting that other folks were doing out in the field. So for the quarter on an EBITDA basis, going back to the consolidated numbers, we're up about 10 1/2% basically on a 4.4% increase on sales. It's about $2 1/2 million increase for the reasons we spoke about. Our G&A, which George will address in a bit more, is up slightly due to some of these marketing efforts that we've talked about, and on a gross numbers basis some of the acquisitions that we've brought into the Hanger family.

To remark on a couple of the events we've been focusing on during the quarter, the HPO level -- we have begun the commercialization and rollout of Hanger's insignia system. This is a blazer-imaging system that greatly enhances the patient experience. It provides benefits to the patient in terms of its fit, in terms of the patient process. It's not as disruptive or intrusive to a patient. Very accurate. In net-net it provides mobility and an on-going documentation for a patient. What this is is just a unique way to take the patient's image and size so we can custom make the appropriate device in a much more user time-friendly basis. We will be rolling this out over the next two years. We just had our first graduation class, if you remember in the first quarter we talked about our beta tests. Initial reaction from both our referral sources, our practitioners and our patients is all extraordinarily positive. Within the company, we've been working on a new billing and cash application system. That work continues. We did, however, take the decision during the second quarter, that we were -- we were going to slow down our field implementation of that while the data conversion and other portions of the project continue, and we did that intentionally to take a little extra time to scrub down our contracts and our fee schedules to make sure that our payer sources were in line. So we loaded them with the best and most current possible data before putting an out into the field. Was one of those decisions that we thought made a lot of sense because in the longer run it's going to greatly facilitate the implementation of this in hands of our field personnel. So while it does slow down the field implementation, it is going to provide benefits to us.

As I already mentioned, we're continuing to fine-tune our marketing effort and we're getting traction in the business development area and our new product development, emphasizing the higher-tech products is well underway. We have four new products that are in clinical trials at the present time. They will be rolling out in the fourth quarter. Two other key areas of emphasis for us, one is on our employee development. We've put together a comprehensive training program in information technology, which ranges all the way from showing people how to use their computer to making them a lot more functional on all of the software. This is in keeping consistent with our overall march toward growth through clinical excellence in technology. We quickly determined that we had to bring the level of I.T. competence up within the field. This is in two of our 18 markets at the present time and will be rolled out to the rest of them in the third and fourth quarters. And finally, we have been very active in supporting the O&P industry position within the governmental ranks. As I mentioned before, there's a great deal of legislation swirling around this area. It's yet to be decided how it will come out. The good news is that the primary focus of this is on the non-custom Orthotics portion of our business, which we have a very small share and which represents a very small portion of our margins. So we had a special conference call during the quarter to talk about some of these pieces of legislation and actually to quantify of impact, which was very small on a go-forward basis, not only due to the portion of the portfolio, but also our model, which shares the upside and the downsides with our practitioners. Let me return and quickly summarize for the six months our overall sales are up 3.3% on a consolidated basis. Going from about $256 million up to $265 million. Gross margin has followed. It's up more than $5 million. I think the key thing is here on a margin percentage basis, we continue to march forward. We've increased a couple of tenths of a percent from 52.2% to 54.4%. Labor on a percent basis is in line with the prior years in spite of the acquisitions we made several additional small acquisitions in the first quarter and when we look at a year-to-date, it's working well. Materials on an overall basis are down slightly. On a percentage basis it's continued emphasis on the best value program that the company put in last year, in spite of the change of mix, trying to emphasize some of the higher-tech products. Therefore, our EBITDA was up by over $4 million, or moving it from $17.3 up to -- 17.3% to 18.3% of sales for the first six months. Overall, we think we continue to be on solid footing, and looking to the balance of the year, we'll be pushing out the new insignia system completing and moving forward on our OPS billing, and cash application system and certainly emphasizing our marketing and business development programs and working diligently within the beltway to make sure that our policy-makers understand what is best for our patients in the industry. Thank you.

With that I'll turn it over to George for a close or look at some of the numbers.

Thank you, Tom.

I'll fill in around the pieces of the quarter and the year that Tom didn't already address as opposed to repeating that. Going through the quarter, at the SG&A line we have a million-dollar increase there versus last year, mainly due to higher travel, marketing and rent expense. The travel expense was up due to travel-related to training for the new billing system, which is not capitalizable. It has to be expense when incurred, and the enhanced sales and marketing function that we have. The rent increase is due mostly to common area costs going up due to the harsh winter and the acquisitions that we've made this year. In our marketing cost, it increased as we were part of the drive of sales. Depreciation was $326,000 higher than last year in the quarter, that's due to the accelerated write-off of the assets relative to the old billing system.

When it was clear at the end of the first quarter we had a good product that was going to be able to be rolled out during this fiscal year, we changed the useful life of the old billing systems and in effect will be writing those off over the remainder of the year. And then we'll start depreciating the new system at that point. The interest cost was $624,000 less than last year as we continue to pay down our debt. And due the effect of favorable interest rates on our variable rate debt as well as our interest rate swap. The EPS as Dan mentioned was 35 cents, up 21% over the prior year. Over the first six months, as you go down the P&L. I think Tom covered sales and cost of sales, SG&A had the same increase for the year, and I just explained what happened there. Depreciation, I think I just explained. Interest as well, the change there for the year is exactly the same as the first quarter. Going down to EPS, 55 cents versus 31 last year. You'll recall that last year we had an extraordinary item which under current rules is no longer categorized that way. That was the write-off of the cost associated with our re-finance last year. That would affect us -- that was an extraordinary item -- that would affect last year's EPS by about 13 cents. So I think a more appropriate comparison is 55 cents versus about 44 to see where we stand for the year. The other thing I'd like to mention is -- Dan mentioned that we are converting the Preferred stock for the EPS com putation. If you look at the quarter, our 35 cents if we didn't convert would be 36 cents. So that calculation was about a penny dilutive, and converting the preferred, because of the way the calculation works, is going to be diluted every quarter going forward, because it's a pick preferred, it's a contractual conversion of $16.50 per share, and that will continue to be more dilutive in the future quarters and for the year. On a balance sheet, AOR increased by $4.4 million over the last year, comparable to the $4.-- 4.4% growth in our sales. So mathematically, that increase makes sense. Our DSOs were slightly higher than at year-end at 75.5 days and our AR over 820 remains lower, 1/106 a percent at the end of the year. Inventory was up slightly by half a million dollars and $12.31 at turns remain constant at 2 1/2 times. Our Cap Ex for the quarter was $4.million and it was $3.2 for the year. Cash flow from operations was $14.2 million for the quarter, versus $19 million last year for the year, cash flow from OPS was $18.4 million versus $16 million last year. That's a $2.4 million increase.

And with that, I'll turn the call back to Dan.

Thanks, George. With that we'd like to open it up for questions and answers.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just moment to compile the Q&A roster. The first question comes from David McDonald from Leerink Swann & Company.

Good morning, guys. Congratulations on the quarter. A couple questions. Dan, I was wondering if you could talk a little bit more about the back half of the year and just you know, what some of the drivers are that will help continue to ramp the same-store numbers and really drive the strength in the revenues in the back half of the year. Then I have a couple follow-ups.

Okay. Dave, what we expect to see is -- there has been some reversals as Tom pointed out, in some of the state programs. We don't anticipate any dramatic shift that I'm aware of in other state programs, but certainly the trend is that they're finding that this is a small expenditure at the state level, it has a dramatic impact on obviously constituents and patients within those states and it just doesn't make sense to cut back on these services because they end up really paying more for dependent care, obviously, than independent care. The other real driver is that we you know, Mike Murphy, our VP of Marketing, has now been on board for about seven months, and he has really put together I think a class A team of business development managers out in the field. We now have in total about 30 people in various positions. There's about 22 of them that are in direct contact with referral sources and contracting, etc.. And Mike comes to us you know, from the payers' side. He previously had been with United and with SIGNA. So he knows both sides, the provider and payer side of the equation. And Mike, along with his team, has designed I think very effective programs about making not only referral sources and payor sources, much more aware of what Hanger has to offer. And I think you'll start to see some of the impact of that as we roll into the second half of the year. Tom, is there anything you want to add to that?

Maybe just two quick points. One state that bears watching obviously is California. They seem to be in terrible disarray out there from the governor's chair all the way down. We'll get to see how that will play out. So naturally we're watching that one carefully. And on the up seed, we've got marketing programs. And as I mentioned, we see the technology play here in terms of some of the new products that are coming out as something we're really pushing and driving pretty hard on in the last half of this year and obviously into next.

Okay. Guys, just Tom on that point with technology. Does the technology drive more so just the margins or does it actually drive volume in addition? On the technology side. And then also, Dan, a follow-up. With you expect the sales force or the marketing team to be pretty constant around roughly the 30 folks that you have right now?

I'll quickly answer and then I'll let Tom answer the technology question. Yeah. For the time being we're going to maintain about the 30 level. We've done some statistical analysis that indicates that we could certainly use more in terms of coverage, but that obviously comes with an expense. We don't want to get the cart before the horse here. So we're going to develop what capacity we have with the existing force of 30 and then when appropriate we'll be able to start to increase that. Tom, you can I think hit the technology issue.

And the answer to that one is yes, it does help with our margins in terms of certainly the magnitude of the dollars because they tend to be a little higher-ticketed items. But they help us on the marketing side because of two things. One is that we believe the comprehensive customer service approach to getting reimbursements, designing the protocols, knowing what indications satisfy the insurance company or Medicare for who can qualify, but to send a unique position on new technology so that people who want to use a device, whose doctor recommends, it but they can't get reimbursement elsewhere, come over to us in order to get that technology. That's number one. And then secondly, the new technology also helps with market share because by working with these key manufacturers, we try wherever possible to at least get a time-limited exclusivity period. So we're the only shop in town that can offer it, and that brings sales. That, combined with obviously the good will of just having them plays well for the marketing effort.

Okay, then George, just a couple housekeeping questions. I didn't hear the AR over 120 days, and also the tax rate uptick, just slightly. I was wondering what you would expect the tax rate to be for the back half of the year? Thanks.

The AR over 120 days was at 24.9% of total, which is down about 1/10 of a percent over the end of the year. So we're happy with that. That's remaining constant. The tax rate increase, we don't expect that to change much from what it was for the first six months. And we're current at 45.7%. We expect to main than -- maintain that rate throughout the year. Was confrontationally slightly different during the first quarter, but it was immaterial, the difference.

Thanks, guys.

Your next question comes from Will Spence from CJS Securities.

Good morning. Can you guys give us a breakout of your sales EBITDA segment?

Was that by segment, Will?

Yes, it was. The distribution care centers and distribution --

Sales in EBITDA -- can I get back to you with that? I don't have that handy.

Yeah, sure, that's fine --

wait a minute, we're okay. We've got it. We're okay. For the quarter, sales at HPO were $133.7. The EBITDA was at $31.9 -- the rest of the sales and profitability are coming from SPS. So you can just do the math on that.

Exactly --

And then for -- I'm sorry. I read the wrong number, $31.2 was EBITDA.

Okay.

For the year, $248.2 were sales and $54.4 was EBITDA at patient care. And then the balance came from SPS.

Great. I noticed you had an increased percentage of repair mix coming from Medicare. Can you just give us detail on what caused that and what effects that has on your margins going forward?

The Medicare piece increase was really pretty slight. It went up .7 of a point over the year. We're 32.9 versus 31.7. We're up about 1.2%. And that's really a demographic issue.

Yeah, and that's really -- it's a demographic issue, and to be perfectly honest with you, the margins of Medicare are quite acceptable.

Got it.

As are their payment terms.

Okay. And can you just give us a little detail on your plan using your free cash flow? For this year?

Right now, Will, we have a $10 million balance on the revolver at quarter-end. Tomorrow we're paying down another $5 million on the revolver. As we go into the third quarter we have a couple of large cash outflows. We make the first partial payment on the bonus plan, plus we have a bond payment August 15th. So, third quarter should be about cash flow neutral on the revolver. So we'll stay around $5 to $7 million maybe on the revolver. Then in the fourth quarter we have another bond payment. We'll also probably pay the balance of the revolver off. So we'll be you know, down on the revolver, so we'll use the cash in the fourth quarter to pay off the $7 million that we'll probably have on the revolver at the end of the third quarter. Going into the first quarter of next year, we have the first payment -- or the next payment on the senior notes. And we'll have the bonus payment in the first quarter. So we'll probably borrow a little bit on the revolver then and we'll start to accumulate cash after that point. Now, in the second quarter of 2002 the sub notes become callable -- I'm sorry, 2004. Now, if market conditions continue the way they look today, pre-payable debt would be an option for the sub notes. Some sort of institutional term B or bank facility. I don't have a crystal ball, so I can't predict what the markets will look like ten months from now, but that's probably an instrument that we'll look into that we'll be able to use free cash flow to pay down that facility.

Great, thank you. And finally, in your discussion you mentioned slightly higher travel and rent expense. Within SG&A. Do you expect that to continue or is that kind of a one-time thing?

Well, the travel, part of that is going to continue throughout this year because we're going to -- as we continue to roll out OPS, they'll have training costs associated with that. So it should slow down next year, because that's a one-shot deal. But with the larger marketing force, we'll have more travel there. That will be constant while that force remains at the current level. The rent expense is expected to go down slightly because of the weather issue, but our acquisitions, that will add to rent expense and also add to sales.

All right, great. Thank you very much.

You're welcome.

Your next question comes from Kevin Fishbeck from Lehman Brothers.

Hello, good morning. Let's see, I had a question. If we could get more color about why same-store revenues are coming in around 2% in the quarter. I was wondering if there's something industry-wide going on. Not a lot of healthcare providers are talking about change of benefits, holding down volumes. Are you seeing anything similar for you guys and whether there was anything industry-wide I guess besides you know, possibly Medicaid enrollment changing that may give you confidence that allows you to go back to the target rate of 5% toward the end of the year?

There's no benefits design changes. I mean, these are still products and services that are routinely offered in all healthcare packages. There's no discussion that I'm aware of, Kevin, of elimination of any of these services at the private pay level. The state, you know, we've been through that and obviously you know, that is what it is. The government -- the U.S. government -- has already published what the '04 increase -- CB -- CPI increase -- for Medicare will be, it's actually 2.1%, somewhat higher than we had anticipated. And we have you know, nothing that we see on the horizon that would fundamentally change our outlook for gross. I think what we've been up against is you know, certainly the general economy does have an effect on us. These people have co-pays and they have out-of-pocket expenses, and you know, I don't have to tell you guys what's going on in the general economy. It's not the greatest right now. A lot of people are out of work, so people are preserving benefits and halting off in some cases, replacement of devices. Certainly new devices are a necessity, they're not halting off, but I don't think there's anything -- I don't know what you're seeing in other healthcare companies. I'm not aware of benefit changes, but certainly not here in the O&P field. Tom, do you want to add anything to that?

Just that we're in the constant ebb and flow on the reimbursement side. For the union side, we don't see anything that would be a take-away from the unit side of things, and actually we're being driven by the continuing demographic changes of how the populations' baby boomers, are moving into the picture, as well as by the disease indications. Certainly the number of diabetics and obesity makes the headline every day. That ultimately reports over to our unit. The reimbursement, we've talked about the government on the private pay side. That's always an ebb and flow. Certainly the rising medical costs are again in the employers' spotlight. As a result insurance companies are bargaining aggressively. We had one indication where an insurance company came to us and wanted us to accept a dramatic reduction, which we didn't feel was in our best interests, and so we didn't accept their proposal. They went off and contacted with someone else and it lasted for a short period of time; in months they were back. Simply couldn't perform at that level. So there's always an equilibrium. I think the past six months has intensified in terms of the aggressiveness, but what we're seeing now is that that's beginning to moderate a little bit. People just can't provide these services at some of the levels where the insurance companies want to go. They don't have the scale and size to handle it, so as a result on a going-forward basis, we won't be without our hiccups, but on a going-forward basis we think we can get up to more comfortable levels.

Kevin, another thing I'll add is on the product side, when you slice and dice the change in our sales that way, weakness has been in our shoe business and in our DME business, which are both minor parts of our business and also very low margins. So for that reason that gives us some faith that our sales are going to firm up going forward.

Okay, and then can you just maybe comment on the distribution segment? It seems like the comps get a little tougher, so I don't expect to grow at 20% plus forever, but what do you think a more normalized growth rate is there. Your thoughts on how much you should be investing in that business since it seems like when you put in a new catalog and the extent of sales force seems to grow nicely, or whether that will still be a low single-digit grower going out.

Sure, Kevin. We don't think that's reasonable to expect that that's going to continue at the above 20% level. As we mentioned, we brought in some new products and people into the portfolio. That's been a boost, particularly comparing to the first two quarters of last year. If you recall, last year the first quarters in the industry, some of the other players were having problems and they were off selling on price, and as a result we took some shots early on last year. We believe the marketing plan we put into effect last year that emphasized customer service started to pay off in the third quarter, and we saw a nice return third quarter of last year. So on a comp basis, it will be a little more difficult. The 20% decibel won't hold up. I think that's a new basis and new products. There's no reason on a go-forward basis that we can't continue to scour the market for products. We currently are doing that and fellows in that division are negotiating for some exclusive positions right now to bring a few products in. But probably a more rational, reasonable level will be in the 8%. 10% could be the top end of what they might be able to do on a quarter-over-quarter basis going forward.

Okay, thanks.

Again, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from Henry Rock Deutsche Bank.

Hey, guys. Congratulations on a nice quarter.

Thanks.

Just curious. A couple questions. On the labor savings. Do you expect to be able to continue to sort of pair down and save on the labor side or are you kind of done with most of those initiatives?

For the most part we are finished with those initiatives. Now, that's not to say we're not going to continue on a go-forward basis, but the capacity, etc., etc., is pretty much going to be flattened out. As we make some advances in technology, there may be opportunities for some additional review of our labor costs in terms of the heads that are out there. But we're not anticipating anything that would be as dramatic as what we've achieved over the last couple of years. So it's pretty much plateaued down. And well, it's obviously under constant review, but we are certainly conscious that as the economy turns around, what will will be the expectation of people in terms of merit increases and those kind of things. So it's going to be a management effort on a going-forward basis, but we're pretty pleased that we can hold it at this level.

Henry, when we talk about benefits to gross margin that relate to labor, we're really not talking about wholesale reductions in labor, we're talking about a more efficient labor force.

Okay.

So it becomes a lower percentage as a percentage of sales. Not necessarily a lower whole number.

Just a productivity issue.

Correct. And Tom talked about, like Insignia and work flow process are continuing to boost or bolster that efficiency level.

Okay. I know you mentioned on the -- well, you talked about the private page as being the HMO's being tough negotiators now. I think you said flat to 1 percent increase in private pay? Is that still what you're seeing for 2004 as you negotiate through on the contracts?

I think that's generally so. One of the things that the OPS conversion has helped us with is as Tom pointed out, one of the things we've done before we load all this data into the system is to go back and scrub all of it. And what we're finding is in some instances there are updates to contracts that we have not taken advantage of simply because we didn't do that particular scrub. So, there is a little bit of low-hanging fruit out there on some of the HMO, private pay contracts, where they may be paying us off of '00 or '01 fees now, where we're entitled to an update and we're updating the contracts as we scrub through them. I think generally speaking your first comment of flat to slightly up is correct, and in a few instances where we just simply didn't go after our update, we are now doing that.

Okay. And just on the inventory, I missed that number for the end of the quarter that you had mentioned.

You're talking about total inventory you want?

Yeah, that's it.

Give me one second. Total inventory at quarter-end was $58.3 million.

Okay. Great, thanks very much and good quarter.

Thanks.

Your next question comes from Mary Austin from Pax World Funds. Please go ahead, ma'am. Your next question comes from Gershon Stearn from Stearn Capital.

Hey guys. Nice going.

Thank you.

One quick question. You alluded to acquisitions -- is there much going on in the acquisition front at this time?

Yeah, the acquisition program is as active as it's ever been, Sonny. We're just being extremely cautious and moving very judiciously in our due diligence and making sure that the acquisition candidate matches both from a cultural standpoint, a strategic standpoint, for example densification or taking us into a new area. So we have a healthy pipeline of acquisitions. The reason you don't see us doing them as quickly as we had in the past is that in all candor, there's not a lot of competition out there, so there's not a lot of pressure on us for that, and we're just being very cautious and very careful.

Good. Thank you very much. Keep up the good work.

Thanks, Sonny.

At this time there are no further questions.

Well, thank you all again for your continued interest and support of Hanger and we'll be back to you a couple months with Q3 results. Have a good day, everybody. Thanks.

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