Hanger Inc (HNGR) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Hanger Orthopedic Group's year-end earnings conference call. (OPERATOR INSTRUCTIONS) Mr. Ivan Sabel, CEO, Hanger Orthopedic Group, you may begin your conference.

Good morning, everyone, thank you for joining us. As you know, last night, close of market, we released earnings of $1.01 on adjusted diluted earnings for the year ended December 31, 2003. Before we get started, I would like to just briefly refer to the forward-looking statements, that obviously will be included in this press release, are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the Company's SEC filings for factors that could cause actual results to differ materially from the Company's expectations.

Joining me this morning on the call are Tom Kirk, our President and COO; our Financial Team headed by George McHenry, our CFO; Jason Owen, our Treasure; and Glenn Norman, our Controller.

As you know, we reported EBITDA at approximately $95 million, which came in at the high end of the range that we had reported earlier this month in our prerelease a couple weeks ago.

Fourth quarter, we were pleased to see signs of strength in terms of same-store sales growth -- approximately 3.2 percent. And although we're encouraged by that improvement in the fourth quarter, we realize that one datapoint does not make a trend, so we're still, obviously, actively managing our marketing process and our contracting process to continue to deliver same-store growth in line with what we enjoyed during this past fourth quarter and in previous years.

We're also pleased, obviously, this year to have completed two refinancings that were done, and have substantially reduced our cost of capital, and of course delivers more value, we believe, to our shareholders.

I stated in the press release that this past year of '03 was obviously a difficult year for us, it was a transition period for Hanger. We've made significant investments, which we believe will pay off substantially in the future, both in our systems, marketing and process improvement, that we believe, again, will help us meet our sales goals in 2004.

We also believe we continue to make substantial progress with our strategy to capture national contracts. And Tom, when he goes through the operations section of this, I'm sure will highlight some of that for you.

Our new billing system, OPS, is continuing to be successfully rolled out without problem. We have almost 300 practices currently on our OPS information technology system. And we're scheduled to be substantially concluded in all of our locations by June 30th.

So, again, we've made a number of investments in the future, and yet still finished the year with operating income that was higher than last year's results, and we believe sets us up for, hopefully, a successful and productive '04.

Why don't I have George McHenry walked us through the specifics of the financials, then he will turn it over to Tom Kirk, who will walk you through an operational review.

Good morning, everyone. For the quarter, I'll cover the income statement first.

Sales, as Ivan mentioned. comp sales in our patient care centers increased by 3.2 percent for the quarter, our strongest performance of the year. SPS continued to perform well with a 10.3 percent sales increase in their outside sales.

Cost of sales, the material cost was adjusted for fourth quarter the impact of our annual physical inventory. And despite that adjustment, which was relatively small at about 15 basis points, our gross margin for the quarter at 52.7 percent was within 10 basis points of the year -- 52.8 percent. That small change in gross margin, if you reflect on it versus the prior year, 53 percent, was really the result of the slight change in mix as we sold more highly priced prosthetic devices which have a slightly lower overall margin, but they (indiscernible) higher sales dollars they have a higher profit per sale.

SG&A, as mentioned in the release, increased by $8.2 million. And it is reflective of the investments we've been making. The principal reason for that, (indiscernible) also mentioned in our release, were a $2.2 million increase in salaries, travel and selling expenses associated with our investment in marketing, corporate governance and variable compensation to our practitioners.

$2.3 million increase in bad debts quarter-over-quarter. Just to clear up the explanation in the press release should have been a little better actually -- we had quarter-over-quarter increase, but year-over-year, we're 3.9 percent of sales versus 3.8 percent of sales last year. So, we were really, virtually level with the prior year, and we think once we're on one platform, that's an area that we're going to be able to make some inroads and further reduce that.

So what you saw in the fourth quarter was just a quarter-over-quarter change, because in the prior year, we were managing down to a lower percentage of sales on bad debts.

And the last piece of that change is made up of approximately $1.7 million in written occupancy, associated, principally, with acquisitions we scheduled (indiscernible) increases.

EBITDA, for the reasons I just discussed, excluding finance costs, was $19.2 million compared to 24.6 in 2002. The interest for the quarter was $1.3 million less than last year, and that's a result of the refinancing transactions that we completed in the fourth quarter, as mentioned by Ivan just a minute ago.

For the year, sales in our patient care centers increased by 1.7 percent, SPS performed well with a 19.7 percent sales increase because of their expanded product lines and the beefing up of their sales force.

Cost of sales, I think I really just covered that. We were 52.8 percent versus 53 percent, that's slight 20 basis point change was the result of that mix change I just mentioned.

SG&A for the year was 10.4 million higher, and it was due to the same basic reasons I just mentioned. A $5.7 million increase in the salaries, travel and selling expenses (indiscernible) for the marketing, corporate governance efforts that we're undertaking.

Bad debts was up 1.7 for the year, that's, virtually, entirely due to the sales increase. It's just applying the same write off percentage to higher sales volume.

And lastly, the rent increase for the year was $2.7 million.

As a result of that, EBITDA increased to 95 million for the year, depreciation was $800,000 higher than last year -- and that's due to increased depreciation as we retire some of the old billing systems that we're closing down as we continue to implement OPS.

And interest for the year was $2 million lower than the prior year, you can see most of the decrease in interest occurred in the fourth quarter.

On the balance sheet, our cash increased to $15.4 million from 6.6 in the prior year, due to strong collections in the last two weeks of the year. Our AR increased by $8.9 million, and that was due principally to a strong December sales volume. Our year-over-year December sales volume was $7 million higher than the prior year, so you can see most of that increase was due to strong sales in December. And most of the rest of that was due to the acquisitions we made during the year.

DSO's were essentially the same as last year at 75.2 days, there was a big improvement in our aging. (indiscernible) 120 (ph) AR was reduced by almost 6 percent to 19.2 percent from 25 percent in 2002. That's the lowest percentage it's never been. And the current categories, 43.3 percent which is also the highest it's been. So the aging has steadily improved towards current, and we feel we had that under good control.

Our inventory increased by $4.1 million to $60.6 million due to the sales increase, and the practices that we acquired during the year, and the product that we added down at SPS to support the new product lines that I mentioned led to their sales increase.

CapEx for the quarter was $4.9 million, 17.9 million for the year. And Cash flow from operations increased by $9.5 million to 57 million from 47.5 million in the prior year. This is despite a fairly significant increase in working capital as we supported our increased sales and made some acquisitions. And was a result of continued strong collections. With that, I'd like to turn the conference call over to Tom Kirk to comment on operations.

Pleasure to be with all of you this morning. I'd like to spend a few minutes just talking about some of the areas of focus that we had in 2003. As well as, how those will play out into early 2004, to give you a feel for some of the investments we've been making.

First, briefly, just to touch upon the sales line, we recognize that while we were up for the quarter 7.8 million and 22.4 for the year, in a couple of areas we have to do some reinforcing to shore up the sales (technical difficulty) case of our patient care business, we're up $4 million in the fourth quarter, 8 million for the year. SPS was up 0.8 million in the fourth quarter and 5.8 million for the year.

Bear in mind, SPS turned in some admirable statistics for, the year 2003 started off on a comp basis against 2002, pretty low 2002. More normalizing toward year-end.

Bottom line of all this is SPS is continuing to add product, continuing to advance its capacity. But we are intensifying our efforts into our patient care business to identify new possible ways to boost up our sales line.

We saw, on the sales line for the year, that our prosthetic mix -- prosthetic business moved up a little bit, changing our mix with orthotics moving down, our prosthetics was up about 3 points, orthotics was down. I think there's some of the things that I will be talking about that we can do some work in that area to capture new sales.

On the cost of goods, what George had mentioned is that we've had a slight change in that, about 1 percentage point for the quarter. A couple of tenths of a percentage point for the year. This is something we watch very closely. This is something that, from a margin protection point of view on our gross margin, we're very conscious of. And we intend throughout 2004 to maintain those margins at the levels that we currently are, or improve them slightly. The question is, how to do that.

The first way that we're going to do it is by working in a very deliberate way with all our vendors through our best value program. And that involves, from a partnership point of view, sitting down with all of our supply chain vendors, the suppliers, the freight providers, and looking at where we are in trying to find ways to save money. In addition to that, we're looking at ways that we can do some new product combinations, or even identify possibilities for private-label products that meet all of our clinical needs but still offer us additional value. Or in some cases, even exploring alternative sources.

Second method is having a continued focus on our processes improvements. Dan mentioned that a bit earlier, which is continue to invest, to find ways to reduce redundancy and improve our productivity and our operations.

A good example of that is the OPS billing and collection system that we've had underway for the better part of 2003, and will wrap up in the first half of 2004. Nearly 300 installations that are in those that closed on that new system reported it was one of the easiest closes they've ever had. But in addition to the ease-of-use, what it also offers us is a single platform, reduces our training, helps improve our dataflow so that we can consolidate our information in a much easier method to get better data, better information for managing the business.

And in conjunction, with another process improvement that we've been investing in, which is called our workflow, which is really a standardization and a simplification of our front office paper inpatient flow, combination of the billing with the workflow is going to significantly reduce some of the redundancy and some of the work that occurs in managing our receivables, and in the front office paper flow.

The bottom line out of all of that is that we're going to have better information, we're going to have that information a bit sooner, we're going to be able to take the opportunity to make better decisions.

Another example of a process improvement that we've been working on, since about one year now, is Hangar's exclusive insignia digital imaging Cad Cam (ph) system. It is really a process improvement, it was slated to be into the hands of about 60 of our practitioners by year-end. We recognize the need to move more quickly on this, and as a result, by year-end we have 97 of them out instead of 60. And today we have 107 out. And it was just about a year ago that we started with a small demo of four or five of these, out on a sort of an advanced beta tests. So it's come a long way, and it has proven itself to be very fast, very accurate, while still providing a permanent record of our patients' condition.

Most importantly, it really allows our practitioners to spend more time with their patients, to let go of some of the fabrication in the back office. So that they can deliver the quality of care and that Hanger is known for. And so that they can devote themselves to improved patient experience in terms of the diagnosis, the fitting, then the subsequent alignment and the carry worked for total rehab of our patients.

We're going to be continuing to accelerate this rollout, it's going to be -- we will have it into the hands of 200 practitioners by early in the second quarter with a target of between 3 to 400 by year-end as we monitor the events throughout the year, we will that decision. And at the same time, since it is a process improvement, we're working to define and put into place the carver (ph) strategy that would be necessary to support this from a regional and from a centralized point of view.

Point of all that is it gives us additional capacity, it helps us control our costs, but most importantly it allows us to continue to provide clinically excellent care, which is at the bottom of everything we do. Making sure that that's right sets the foundation to grow from.

With that in place, let's flip back, maybe, to the sales line and talk about some of the things that we're doing to improve our sales growth.

Particularly important, and why I mentioned the word capacity, because we've got a very moderate percent of flow-through variable cost. So anything that we can do to find incremental revenue while managing our cost of goods is going to really help our book of business from a weighted average EBITDA percent basis.

The first way is to take a look at our sales program. Routinely, we use practitioners in the field, by going out, making sales calls, if you will, in-service educations, we also set up our patient evaluation clinics, where we bring our patients back, we examine them for fit. Traditionally what we've been focusing on is in the prosthetics area. While we intend to have more patient evaluation clinics this year, we've already booked out three months ahead of time. Putting together patient evaluation clinic in orthotics, and last year we have even put into place and hired a Director of Orthotics.

So, if you remember my comments on mix, we see some opportunities in orthotics, and we also see some opportunities for some new products in the orthotics area that I will mention a bit later. But this is one of the areas where we think we can add to the sales line.

At the same time, we recognize that in order to provide this quality educational seminars, our folks need new, improved, updated materials, and we're making a comprehensive review of putting all the brochures, the videos together, so they can go out and actually educate and alert people to the latest devices, the latest protocols, that are out there in all of their workshops.

We're also finding that our Insignia Scanning System (ph) is really a great door-opener in terms of scheduling those seminars. And frequently we're even finding PTs and doctor groups, clinics, hospitals and some nurses that have invited us in, asking for a seminar and also asking us to demo the Insignia System so they can see it. So, it's also, in addition to being an improvement in our patient processing, it's also a help to us in our fundamental marketing programs.

The second area for advancing our sales growth is in the area of business development. We have had, historically, about a dozen sales folks on the ground. They were working on a sort of a regional focus, and as of last year, we started hiring some additional ones so that we have 22 of these individuals staffed.

But most importantly, we have refocused them. So that now their efforts are exclusively looking at getting new business. They've been assigned a very specific territory. Their performance and activities are monitored in a classic sales customer-relationship management fashion, where we know what they're doing, who they're seeing. And the significant piece of their comp is based on getting new business. They went through that training in the fourth quarter of last year, and that was part of the investment we made in bringing them up to speed. And we also brought in the necessary software and tracking systems so that we can specifically monitor the performance that they're bringing. And they're targeted to bring us additional benefit beyond what we would normally see coming out of our baseline business, but we're expecting that through that, we're going to be able to generate new business on these selected areas. They cover, currently, about one-third of our overall area.

The third area for additional sales growth is in our contracts area. And as a result of taking the time to review all of our contracts and putting in the new OPS system, we identified some opportunities where we could go back and reopen negotiations with some of our payers to find opportunities to advance the fee schedule, define better ways to work with the payers, to add value to their system. And so routinely, we have contracting people that are now out on a regional basis.

Year and a half ago, those folks were all sitting in Bethesda (ph), but we now have them out in the field so they can go and knock on doors, and sit-down and explore these possibilities with the payers throughout the US.

The fourth area is in national contracts. And this is truly an area where if one looks at Hanger and says -- how can we use the muscle of the scale that we have in place, national footprint, to bring to bear and differentiate ourselves from some of the other folks that are competitors. This is clearly one of the ways.

This was a big area of concentration at the end of '03. We put together a comprehensive model, upon which we based proposals. And we've gone out and talked to some of the big national and the big regional carriers -- bear in mind that these carriers represent about $800 million worth of work in the O&P area. So it is a very fruitful area for concentration.

And their focus has not been on price, the negotiated deal based on low price, but really based on partnership. Trying to figure out how we can use our systems and our location to satisfy their membership requirements, and at the same time, to take hassle out of their managing numerous contracts through all of the mom-and-pops that are out there.

So we're trying to do a partnership approach, trying to increase, there's big volumes here -- but most importantly, we've set ourselves up that we will have the capacity in the business to service this volume. And with our leverage model, it makes great economic sense.

We have been in discussion since the end of -- I guess, the midpoint of the fourth quarter of '03. Now these have intensified early into '04 here, and some have even progressed to the latter stage negotiations. So we're very optimistic on this point and feel that this is truly a place where we can stand apart from some of the others.

Fifth area for our growth concentration is by looking at new products. These products, especially if they can be exclusive to Hanger, provide the dual benefit of additional revenue, and at the same time, if we have it and others don't, of attracting sales into the Hanger system.

We've been working with all of our vendors to bring new products into our patient care centers, and also to sell them to SPS, and we've just recently announced relationship with one of the larger vendors out there that provides for SPS to move their products. And at the same time, bring those into our patient care centers.

We are maintaining relationships with all of our vendors. And it's not to exclude any, but we're more inclusive, feeling that by bringing that strong dose of clinical reality and supporting in their efforts for product development, we can create a win-win here.

But not to, just rely, totally on the vendors, we've gone out and we are identifying new ideas by talking to inventors, by going to some of the universities, and by tapping into the Hanger people. And we've just put into play in February of this year a technology partnership program, which is almost like an electronic suggestion box, where we actually can share information with the 3,300 Hanger employees that are out there, that are dealing with patient needs, dealing with some of these devices on a daily basis.

Capture those ideas, commercialize them if they make sense, and then share some of the benefit back with them. And thus far, the results have been very satisfying in just seeing the participation of our folks.

(indiscernible) three of those five primary mechanisms, we've been making substantial investment. And those are the tools that we intend to concentrate on, to try and bring improvement to Hanger on an overall basis -- both on the cost and on the sales side.

And at the same time, continuing with some of the other programs that we've discussed in the past -- such as our inventory management, our e-commerce SPS has made great strides on the Ebuy and Esell side and we will be rolling some of that out in order to make it easier to do business with SPS. Also, to lower the transaction costs.

SPS is looking at some warehouse improvements to handle their increased volume. And I would be remiss if I didn't mention the recruiting efforts that we have underway to continue to find high-quality personnel, to recruit them into the Company, advance development and training, to advance them in their career, and at the same time, enhance their skill sets.

And finally, we continued to have a very focused acquisition program, featuring some tuck in acquisitions as we've demonstrated over the last year. And probably, as an overall target, if we were to include the one major acquisition that we made, probably about $30 million to $35 million of additional sales this year, when they make sense. And there are some good ones out there, and we sort those out and believe that they add value, and then we look at the appropriate kinds of rationalization of the site, so that we can get maximum economic value while still working with the new quality people that come into the organization.

Comprehensive program, lots of investment, lots of time, but we believe that Hanger, in the long-term, is going to benefit. And that would certainly benefit our shareholders.

Thank you very much, I'd like to turn it back over to Ivan now for questions and comments.

Mandy, we can open it up for Q&A.

(OPERATOR INSTRUCTIONS) Will Sidon (ph), TJS Security (ph).

I'm just wondering if you can give us a little more detail on your organic growth expectations? I believe you talked about 3 to 4 percent. Can you give us any detail on how much of that is due to pricing, and how much is due to volume?

We're not expecting, nor have we historically had, any real benefit on the pricing side. So, of the 3 to 4 percent that we're anticipating, the majority of that is going to come from two sources. One will be mix, in trying to sell higher valued products, and the second would be in terms of units. As I mentioned, we have a concentrated focus on more units in the orthotics side. So it's really going to be by capturing market share.

And then you also mentioned that you're looking for about 7 to 9 percent revenue growth in '04, including acquisitions that have been announced and that organic growth and your recent contract wins. Is that kind of used in midpoint of your organic growth range, and the 16 million from rehab designs, and the 8 million from the workers comp in Florida? I believe that puts me right around 590 million or so, which would be about 8 percent growth. I believe there's also a couple acquisitions done later last year that didn't quite kick in for the full net last year. Does that all on its own business that's already kind of won (ph)? Does that already get any close to your 9 percent gross number?

Yes it does, Will. That's pretty much what we're looking at, and actually, part of our strategy and philosophy is that when we give guidance, recognizing that we have so many programs out there, we try to be on the conservative side, rather under promise and then overproduce. So that's what you're seeing.

But you've identified all the key items and that's pretty much the way they tally up and there might be some other things out there we can do to bring additional value.

One final question on your share count, you reported about 20.9 million shares diluted. Is that because you reported a GAAP loss for the quarter that that share count is down? The 30.8 million, I believe?

George, can you grab that one?

When you look at our share count for the quarter, it gets a little confusing. Let me try to shed some light on that.

Because there was a GAAP loss reported for the fourth quarter of 2003, we do not convert your options or your preferred stock in the share count because it would be antidilutive. The 20 million -- the 20 million 794 (ph) represents basic shares outstanding during the quarter.

For the year, 22 million 238 (ph), that represents basic shares outstanding, plus the dilutive effect of our stock options, but does not convert the preferred stock. During 2003, both from the quarter and the year, we subtracted the dividend from net income and divided by the share count you see below.

Thank you very much.

David MacDonald, Leerink Swann.

I was wondering first of all if you could give any sense in terms of trends that you're seeing early in Q1 in terms of the same-store numbers, are they still kind of trending where Q4 was looking? And then I got a couple of follow-ups.

Early indications are -- we're pretty much the way we had ended up on the Q4 side. We're not at the point yet where we have a real clear picture on this. It doesn't look like we've had a little bit of bad weather out there, I think there's still a little bit of apprehension as the economy picks up, we're beginning to see some steam on that side. And we think that was one of the reasons that our orthotic business was down a little bit last year.

First quarter doesn't look like its -- the industry is going to be coming out of the box on a breakaway here. It's going to be in the range of about where we finished up on Q4, maybe a little less, maybe a little more, depending on the economy. Any additional weather kinds of issues, and just how much traction we can get on some of these other programs.

Guys, either George or Jason, can you guys talk a little bit to DSO's? The billing and collections and some of the workflow improvements? How much working capital can we squeeze out of DSO's? How would we expect DSO's to improve in 2004?

And also, if you guys can talk a little bit to what you think drove the dramatic improvement in age receivables, really, over the back half of the year?

First on DSO's, DSO's as I mentioned before, were about the same as last year. We think, as we continue to move towards getting on one platform, it's going to get us to the point where at end of this year that we should be able to improve the DSO's, because we will be able to switch to direct bill to Medicare from all our practices. And we won't have to rely on any portals or any other methodology.

So that would positively affect collections on about 32 percent of our sales.

The other thing we're going to continue to work on is to also establish electronic billing with our large payers. We've made some progress in national contracts, I think that could certainly help us with regard for those payables. And if we can go electronic on that end, that also should help us with our DSO's.

If nothing else changes, I think we've said pretty continuously over the last year, year and a half, that high-60s is probably best we can do, if nothing else changes.

I think if we make inroads in these areas, that we can probably do even a little bit in that over time. And that certainly will be a focus for this year.

In the aging, that really cleaned up. Because, number one, we don't want to bring any junk into the conversion of the new system. So, I think we've continuously improved our process in terms of evaluating bad debts, and having the practices get those off the books so you don't just spend time on them. And I think that was a big factor in our improvements.

Also, we've had, like, three years now where we have kept our collecting percentage up. So that's part of it as well.

George, is there also on the age receivables kind of a floor here? I mean, is there a certain section of the market where you're always going to have workers comp or something like that, where you're always going to have extended receivables? How low can that age receivables number go?

Sitting here, I don't think 19.2 percent over 120, I think that's pretty close to the floor.

Like you mentioned, workers comp, they pay you well from a margin standpoint for the most part, but they don't pay fast. And there's private payers that don't pay fast.

I was wondering if you guys could talk a little bit -- just a little bit more color on acquisitions? And one of the things you mentioned in terms of cost was acquisition rent, in terms of the acquisitions on a go forward basis, should we expect those to be in market, out of market, is it going to depend on the situation? And then, can you also talk a little bit about how long it takes before your increased size is able to renegotiate some of those rents and bring them down kind of in line with corporate.

What we're looking at, I wasn't sure if I understood exactly what you meant by in market or out of market.

I mean, will they be kind of tuck ins where they are complementing an existing practice? Or are you guys looking more actively at establishing a beachhead in a completely new market?

Got it. Our first focus is to look for the tuck ins. We made couple of very successful acquisitions last year, and they were practically seamless in that they just merged right into the areas. And actually, we were able to achieve some benefit through rationalization some of the facility. But at the same time, as we saw with RDA acquisition, it opened up some opportunities for us to expand into some new -- not absolutely virgin areas, but some new areas where we wanted to have a much stronger market presence.

So it's going to be a little bit of both. It'd be unlikely that we would be go out and make a major acquisition in a brand-new area, although -- I will qualify that by saying in some of the states where we don't actively have a presence, there are some very fine practices out there. And if those became available, we certainly would become very interested in those.

And in terms of the rent situation, what we usually find is that the rents are primarily a very local issue. We're dealing with landlords, in some cases, the landlords may be the medical facility, the landlord may be the doctors groups. And it is really a region by region, and we're almost forced into compliance with dealing with -- if we want the locations, which are key in terms of traffic and proximity to the medical centers, we're negotiating each one on a one off basis. And in spite of the fact that we've got significant volume behind us, it's very difficult to bring that into these competing -- into markets where we're competing with other folks that would love to get into those locations because, again, of the proximity right to the docs group.

So, we do everything we can, we work with some national partners on this to try and identify ways to enhance our position, try and identify ways that -- if we don't get the exact rent we want, we get it in the form of PIs or something, if we have got to do some modifications or building out.

But it is something that we know that it exists, but the rent market seems to march on in terms of 2 to 3 percent a year these days. I will tell you that all of the deals that we put together are backed up with a strong sense of analysis, so that we clearly understand what our local market rates, we recognize we may have to comply with that, but we are not paying over market rates and we've got all the evidence and information to bring that to bear. But it's something we have really intensified our efforts to put more resources on, and even put in and electronic tracking system in '03.

And I guess, just one last question, guys -- you obviously gave guidance for revenues for 2004, and you expressed kind of mid-130-ish, I think, on the last call. Is that kind of where you guys are still comfortable in terms of the bottom line? Or are you comfortable with current first call consensus?

First call consensus is what -- around 132?

131, I believe.

When you look in our capital structure, and look at our shares outstanding, and look at our tax rate, I am comfortable with the range we gave down to first call consensus.

Thank you very much.

Adam Feinstein, Lehman Brothers.

This is Faruk coming from Lehman. I have a couple of questions. On the practitioner's side, we saw that it was flat to a little bit down this year. Do we see that trend, the same trend, going forward?

In terms of overall number of practitioners, what we would expect -- because of our acquisition program -- to have a modest pickup in that side. Very slightly.

In terms of our going out and adding a bunch of new people and opening up virgin sites -- that's unlikely to happen. So I think your characterization as flat to increasing slightly would be the correct one for '04.

A couple follow-up questions. You talked about the revenue, and the EPS guidance. In terms of margins, SG&A cost was obviously pretty high this quarter. Some of those costs were probably one time and some of them are probably going to stay. Could give us a sense for where you see margins in '04?

Right now we finished up the year at 17.4 percent EBITDA margin. And over the past few months we've been talking about steady improvement in our margin. We're looking at the costs that we had to incur in the fourth quarter. And although the baseline has been reset a little further south than we had anticipated, looking at vendor negotiations on the gross margin line, and the increased sales that we discussed earlier on the call, we do anticipate the margin to improve slightly during the year.

And lastly, the (indiscernible) preferred that you have on your balance sheet, I know you brought back about 30 million, you still have about 50 million, and that's callable. I understand -- beginning of July, what's your plans with that?

There are a couple restrictions on what instruments we can use to call that. And the $200 million senior note indenture that's currently in place restricts us from refinancing that preferred stock with anything other than proceeds from a common equity issuance.

So, depending on what is accretive and dilutive versus our shareholders, we will evaluate that as the year goes on.

Thank you.

Landy Goldkey (ph), Museinit (ph).

Several of my questions have been answered. I just had one question on the workflow systems that you mentioned, is that rolled out in every facility now, or what's the rollout base on that?

We're continuing to roll that out at the present time. The system has been pretty much standardized, there's a few little local modifications, due to some of the characteristics of one market versus another. But it is a process improvement that is scheduled to flow through all of our branches through 2004, nearly all of them.

So it will (ph) be done basically nearly all of them by the end of 2004?

Yes.

Any other major systems rollouts that you're going to be looking at or implementing in 2004?

Well, we'd talked about OPS, and the target is to have that one finished by the end of June, end of the first half. We're continuing to make improvements on our inventory, accounting and valuation system. We believe that that's an area. We haven't dedicated a big project to that. We've got a small team and a director of our inventory management that (technical difficulty) working on that to make improvements. But nothing slated.

And just to characterize the workflow, that is not a system, like a computer system. This is more of a standard, almost process and procedure filing, patient treatment going from step one to step two to step three. So it's not a case where we're developing a new system and have to go through the additional work of installing a system and doing all that. This is procedures, protocols and filing that greatly simplifies the work, and then standardizes it across. So, while we think we can get significant benefit from that, it's not a case where we're actually putting in a new IT system and face some of those kinds of risks.

Thank you.

(OPERATOR INSTRUCTIONS) Jim Cole (ph), Lombard Security (ph).

Ivan, this question would be to you. With the advances in MRI, both in the cost and diagnostic improvements that have been seen, do you ever foresee use at all in your business, or maybe any of your competitors?

Actually, there's been a number of advances that have been made in transmitting, particularly the spinal area -- MRI images directly to our CADD systems, where we can design and then fabricate spinal supports from a direct MRI imaging.

Particularly promising in the area of scoliosis for young children -- where you're able to get a very accurate image, and then correct that image through our CADD programs and then produce a corrective device that's appropriate the scoliotic condition. So, yes, I think there's still a lot of advancement that can be made in that area. And what that does is not only brings a better product to the table, it brings a -- for the patient -- it brings an increased productivity for us in being able to produce those items. (multiple speakers) that we had been monitoring closely, and actually have done some beta testing with.

You don't currently own any MRI products?

No, we do not.

Thanks.

At this time there are no further questions. Are there any closing remarks?

Yes, I just want to thank everyone for joining us, again, this morning. We appreciate your continued interest and support of Hanger, and we look forward to talking to you with Q1 results. Everyone, have a nice day.

Thank you for participating in today's Hanger Orthopedic Group year-end earnings conference call. You may now disconnect.