Hanger Inc (HNGR) 2004 Q1 法說會逐字稿

Good morning.

My name is Monica, I will be your conference facilitator.

At this time, I would like to welcome everyone to the first quarter earnings Hanger Orthopedic - Linkia conference call.

All lines have been placed on mute to prevent 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, you may begin your conference.

Good morning everyone.

Thank you for joining us.

I'm joined here in Bethesda with Tom Kirk, our President and Chief Operating Officer, George McHenry, our Chief Financial Officer, Glenn Lohrmann, our Controller, and Mike Murphy, our Vice President for Marketing and the person who will be heading up our new Linkia division.

Thank you for joining us.

As you know, we reported first quarter earnings of 16 cents per share and approximately $19 million of EBITDA. Obviously, this was below last year's first quarter, as well as below street expectations and in all candor, our expectations.

Hopefully this morning we will be able to give you an overview of where we are. This is a sales challenge for us. It has been a sales challenge that surfaced approximately this time last year. We started to put programs into effect, which we will bring you up to speed on today. In particular our Linkia program, and what impact we believe that will have on turning the challenge of same-store sales growth into a positive.

Certainly Linkia and the 8-K that we filed simultaneously with our press release and earnings release is the most significant effort that we are attempting to turn our growth picture around with. It's a unique program. We had put a lot of time, effort, and we will put a significant amount of resource, which we'll highlight also today. Excuse me, into our Linkia project.

We have been successful in signing our first major contract with Linkia, as most of you saw. It was with United Healthcare. We believe not only is United a wonderful partner for us to start out with here, but certainly, if not the most significant, certainly one of the two or three most significant healthcare payers in the country today.

With all of that said, I would like to turn it over to George, and he'll give you details around the numbers and then we'll move on to Tom, who will give you some additional detail about our operations.

Thank you, Van.

Thank you for joining us today.

For the quarter, our sales increased by 4.4% due, principally to the practices we acquired last year and in the first quarter, and to continued good performance at SPS or distribution segment where they had a 12.9% increase. Our comp sales in patient care centers dropped by .8% for the quarter.

When you reflect on the probability issue in first quarter strictly a sales issue as were expenses were when we expected them to be. (Inaudible) sales. Labor increased in total dollars by $2 million and as a percentage of sales, by a half a percent from 21.9 to 22.4 in the current year. That was due to a combination of the sales decline I just mentioned long with the salaries that came over with the acquired practices and our normal pay increases, which we have all take effect on 1-1-04 and averaged about 3%.

Much of the labor increase was absorbed by the practitioners variable compensation plan which was dropped by a couple million dollars year-over-year due to the sales decline and the increase in labor that I just mentioned.

Our materials were 27.3%, which was comparable to our full-year 2003.

SG&A, as I mentioned in the release, increased by $2.4 million. $1.7 million of that increase was due to the increase in operating expenses that came along with the businesses we acquired.

If you focus on the balance of the expenses, we are budget expenses were on line where expenses increased. It was either in specific programs that we planned to enhance sales, such as Linkia or our business development people that we have out in the field or where we had to, by law, (inaudible) or 404-type expenses. And lastly, inflationary expenses relative to the salary component of SG&A and scheduled (inaudible) increases. Our core operating expenses were at or under budget.

EBITDA for the reasons that I just discussed, was $19.1 million for the quarter, compared to $22.1 million in 2003. Depreciation and amortization increased by $800,000 in the quarter and that was due principally because we put OPS into service.

And just to give you an update on that I am sure Tom will talk more about it. We have OPS now out in almost 500 practices. We're on schedule to get it done at the end of June, and we're generally pleased with the results to date.

Interest was approximately $1 million less than in the prior year, and that was a result of the refinance we completed in the fourth quarter, and -- where we took out the subcoordinating notes and replaced them with the term B and continued loan interest rates.

On a balance sheet cash, cash decreased by $8.5 million. If you take that in conjunction with the $24 million increase in the revolver where that cash was utilized was really in three places.

Number one, we had $12 million in acquisitions during the quarter. Cash going out the door relative to those. We paid out $14 million in bonuses and then because of the refinance and the subcoordinated notes, we had a slight change in how the interest was paid out, we had $5 million in interest going out, accounting for over 90% of the change.

AR decreased by $4 million, excuse me, 4/10 of a million due to the traditionally weak sales in the quarter compared to year-end. Our DSOs improved slightly by one day from 76.5 days at 1231 to 75.5.

AR over 120 increased to 23.6% from 19% year end. Some of that was due to the weaker first-quarter sales which just changes that ratio temporarily and some of it was due to some issues we're having in two regions with Medicare where they are rejecting claims and, quite frankly, it's something that comes up from time to time where Medicare looks to improve their rejection rates for their own statistics. It leads to us having to appeal the claims. Specifically, leads to a longer lead time to collect the cash. It doesn't lead to any significant revenue off, so we feel ARs in good shape.

Inventory increased by 1.1 million to 61.7 million from 60.6 at year-end, and that was due to a inventory build at SPS in order to meet our purchase commitment related to the sale of SOG in 2001.

Just to update you there, we still have $1 million of that know sale price in escrow to support our commitment on the purchases. That will be released a half million this year and a half million next year. We're on target to meet those commitments, so we don't believe we have any issues there.

Cap Ex for the quarter was $4.7 million, versus $3.7 million last year. On the cash flow or our cash flow from operations decreased by $15.3 million. That's compared to a $4 million increase last year.

First of all, if you look at that sheet, first of all, you have to take $8 million out of last year's change, which was an $8 million tax receivable that was recovered in the first quarter of '03, due to an unexpected benefit in the fourth quarter of '02 from some nonqualified options that were exercised by JL in connection with their contract with the company. That was obviously a one-time benefit.

We still had a change in timing of interest payments on the term-B that I mentioned a minute ago, and it had about a $5 million impact and then AT was just seasonally $7 million less than it was at year-end, and that was just due to the lower sales which led to the lower purchases.

That completes my analysis of the results and I'm going to turn it over to Tom.

Thank you, George.

Good morning to everyone.

I would like to spend a little bit of time going a bit deeper into our operations beginning with sales.

As we reported, sales increased from $126.1 million to $131.6 million, the 20% of that increase was do you to SPSs growth in their outside business. And this is due to the market penetration of some new products that they added last year, as well as the significant event in the SPS picked up an established supplier to the industry about midpoint in this quarter and with that addition, they were able to distribute almost the entire line of products.

These are well-established products, they make a nice addition to the line that SPS currently has. So we expect SPS to continue to increase their market penetration and to continue to increase their outside sales.

HPO is the balance of the increase and it's coming from the two sources that Van mentioned earlier.

The first is the net of the acquisitions that we made in 2003, and some of them that we made early this year in 2004, versus the termination of some businesses that we exited during the end of last year in the commodity side of the business. We talked about this in prior quarters where we didn't feel that these businesses were long-term consistent with our overall strategy.

That's the first piece and the second piece is the same-store sales growth declined from approximately .8%. We'll discuss some of the steps on turning this same-store sales growth decline around a bit later. But I would like to make some comments in terms what have we think is driving this behavior, and we think it's attributable to a number of factors.

First off, we've seen that while the overall economy appears to be turning around, there are still some pockets out there where unemployment persists and specifically, that unemployment spills over into the benefit programs and what we call the health economics of our patients, which is to say their discretionary income relative to the book of expenditures that they have to make specifically in healthcare.

We've seen this begin to turn around in some of the other healthcare delivery businesses. We know that we're further down the chain than those, and it's our expectation that we will begin to see some progress made in this in terms of people coming back in to pick up those services that they have delayed simply because of an economic condition. They can't postpone them forever.

And specifically, as an example, we know that the state of Ohio is running unemployment levels unlike any that have been seen since the days of FDR, mentioned in the recent re-election, and when we look on a geographic basis to the areas where we're still seeing some of this continued weaknesses, it seems to mirror this trend.

So we believe as the economy turns around, as the jobs pick up and as the benefits change in terms of co-pays and deductibles, we can expect to see some improving activity pending upon how rapidly this occurs.

The next area that seems to be impacting our same-store growth is the unit sales.

While unit sales are flat, what we have seen is continued competition from the mom and pops. They're a necessary part of this industry, they're out there. We designed some strategies to go after this growth. We'll talk about those in a minute. But it is a factor that we face on a daily basis, particularly when people are trying to do price shopping because of low levels of discretionary health spending.

And the third factor, it continues to be present in our business, is that of price pressure. We know that Medicare is on a search to constantly reduce cost. This mantra seems to have been picked up and adopted by some of the third-party insurance payers. And as a result, when we went through the negotiation period last year, we ended up seeing some very aggressive negotiations from these folks to the point that part of our strategy was to not accept that business, to walk away from some of it so that we can better position ourselves for some of the things that we'll be talking about a bit later in our national contracts area.

But those three factors combined to give us this sluggish same-store sales growth.

Let me go back now, we'll come back and talk about the cures for those in a minute, but let me go back and talk a bit more about the P&L.

George has talked about the components in our costs-of-goods sold. This has given us a gross profit while increasing from 65.4 to 66.2 on a percentage basis there has been a slight decrease, and we're working to fix that.

Obviously, sales is one area. The second area, improved efficiencies in our processes. We continue to work through our SPS subsidiary with the vendors to try to capture the best value, try to get most favored nation pricing on all of our own and be aware of whatever new products are coming out there that can lower the price point and still meet the medical and clinical necessity of our practitioners. We have had good success with our vendors. We expect that to continue in the future.

The second area is, as I mentioned, we made a couple of key acquisitions. They were made about midpoint during this year. And we're working with those vendors to get them into our processes such as best value, and some of the other improvements that we have made and -- in our business model, and we think that by incorporating those changes we will be able to improve the gross profitability of our business.

Going back to the sales issue, because as Van said, it's all about sales. I would like to talk about that, where we are and what we're doing.

Our strategy has been from sometime to use our size and scale to increase sales. We believe that having the national footprint enables us to do some very unique things. And we had confirmation of that as we were out in the field trying to implement some of the contract changes.

But the first thing that we recognize if we were going to increase sales, we had to continuously improve our processes. For that reason, we identified two specific needs.

The first one was the need to get on a common platform so that we can do our billing and collecting in a uniformed way. Simplifies training, Simplifies our personnel moves and it also gives us a lot better access to data so that we know and understand our business. This is the system that George referred to as OPS.

We have less than 50 patient care centers left. We still anticipate completing that rollout by June 30. Turn our attention, obviously, to the new acquisitions that have come into the family, and we have a couple of small central billing offices that we'll then convert over as the last step.

We believe this is going to greatly assist us in handling higher throughput through our system, enabling us to offer services that we know that our contracting parties want.

The second area was to look for a better patient flow process.

And we have talked about Insignia as being the answer to that, and we continue to expedite the rollout of Insignia, which is our laser-scanning system, because not only do we believe that it improves our process and our productivity, but we also believe that it improves our capacity to handle more patients.

We can scan in a fraction of time compared to what it would take to do the normal casting methodologies. And our practitioners that have these scanning units have reported increased productivity, increased working conditions and higher levels of customer satisfaction. With our next graduated class, we'll have about 160 users out there. It's our intent to continue this rollout and by year end, have approximately 300 to 400 users out there depending on how we can work with the manufacturer and supplier of these items and how rapidly we did can get these people in for our educational classes.

Those two things are key to setting us up for going out and bringing more sales volume into the system. We have six separate initiatives. While they're integrated together, we think of them and track them separately in terms what have we're doing out there.

First, in order to increase sales, we reported to you that we recognize, about a year ago, that were entering into this period of same-store sales slowdown. We brought in a marketing professional, Mike Murphy, we built a team around him, those people were trained last year and hit the ground running in January of this year. We've seen some of those folks report results of 11 to 15% same-store sales growth. But as you would expect, not all areas are moving at that level.

Furthermore, the team that's on the ground represents 25% of our geographic area. We anticipate that as this takes hold further into the year, we're going to see positive results from this because these people are not just out selling Hanger. They're selling our solutions and partnership. Clinics, regional hospitals, et cetera.

The second area is continued pressure, continued push. Our practitioners and the folks that are out in the field, and this takes place in the form of what we call our patient evaluation clinics. It takes place in what we call our in-services, and it's the day-to-day, face-to-face contact to improve our relationships with our referral sources. And to that end, we have brought up a whole new variety of patient evaluation clinics and orthotics, we (inaudible) it, put it out there and the results have been outstanding.

What we're going to do is explode that through the year, driving harder into the orthotics area. We have been active for quite sometime on upper extremity and lower extremity, and this will be a nice complement to that.

To assist our folks to doing their in-services and educational works, we we have revamped some of our videos, which we call Leadership in Learning, which is a key educational component going to physical therapists because they receive CEUs CEUs. Builds a relationship, helps establish confidence between our practitioners and referral sources and allows for better face-to-face contact.

The third area is in our contracts.

We have revamped our contract administration group with the implementation of OPS. We had the opportunity to go through and look at all of our contracts and these people are out in the field looking at contracts to make certain that all of our contracts are up-to-date and we're getting specific value for the terms that we have negotiated.

In essence, by doing this, we are trying to move the model from simply negotiations on price but pointing out to all of our contract partnerships that, in fact, we have more to offer. We can help them on an economic front and on a clinical quality front at the same time. And that's working.

As a result of that effort, we also determined that there was an appetite by the big national providers. National insurance companies. And they, too, had the same desire. We see them consolidating. As they consolidate, one of the things they would like to rid themselves of is increased hassle, particularly from a very, very small percentage of their action, which is the O&P industry.

In some cases, they have 1,000 to 2,000 contracts to cover a network sufficient to ensure peer delivery to their membership. So as a result of that, Mike Murphy and his team, through their efforts, have developed the focus model. We formed the subsidiary, Linkia, as we have announced and as we reported earlier, we signed our first national contract in that area in significant size next (inaudible) of the size of the player.

There are others in the pipeline. We're expecting this to have profound impact on our business in the future. And we're building the mechanisms necessary to deliver those things that can add value. Most importantly, it stops the price erosion that I spoke about earlier because we're delivering value to these folks and taking costs out of their equation.

The sixth area is in our new products.

We have been, for a long time, technology implementer. As evidenced by our above-market rate of penetration of our computerized needs, C-legs they're called, other new products in the upper extremity area, other new products in the orthotics area. We're going to continue to make that push. And this year, we're certifying some of our practitioners on a vacuum-assistant, suction system that we're working with one of our vendors to roll into the field on mass, a mass rollout basis.

At the same time, we will be announcing later today that we have formed a small subsidiary called Innovative Neurotronics and have signed our first licensed agreement with the university called -- it's actually a spinnout of the University of Alberta in Edmonton. Alberta is focused on functional electrical stimulation, so we will be building upon the work that this company called Biomotion has done in piloting and obtaining preliminary FDA approval to bring this new family of products to the market.

And so that's not going to be an '04 event, but I think it's evident of our continual march in terms of trying to identify new market areas and get these new products into the marketplace.

And the last set of initatives quite important to us is a collection of things that really enhance our ability to deliver here. Those cover a number of fronts.

The first one is with our people.

We have expanded our recruiting area. We've had great success on the international field. We're working very closely with all the O&P training schools to ensure that we get our fair share of the residents coming out of those schools. We're adding in additional development and training into the company to make sure that people are computer-literate so that as we move more toward this digital enterprise, that people are in lock step with us. As part of that digital enterprise, SPS is installing an e-commerce system to make them easier to do business with from the standpoint of their patient and the HPO practitioners.

We're taking a look at our shared fabrication model. We've brought in a Director of Shared Fabrication to assist us in looking at that and optimizing that to make sure that we are ready, willing, and able to handle increased patient flow to be a better service to our practitioners so that they can do the professional job that we expect of them.

And last, but not least, in this sixth category of initiatives, we continue to identify selected acquisitions that are in key areas of importance to our business, both in the delivery of healthcare and we continue to look around the perimeter of our company to find other small companies that can make a contribution in assisting us to satisfy the needs of our patients, our referral sources are further exploiting our network of 600 patient care centers.

We believe when you put all of that together, while that's not going change things around in the second quarter as these things come to play in the third and fourth quarter of this year, particularly in 2005, that we are going to solve that sales problem. We believe the operations are running in fine order, we're meeting our expenditure target. We're totally focused on sales and we think these things are going to provide us with the keys to solving that problem later this year into next year.

Thank you.

Turn it over to Van for questions now.

Thank you.

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

At this time, I would like to remind everyone if you would like to ask a question, press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster .

Your first question comes from the line of Will -- I'm sorry, Adam Feinstein of Lehman Brothers.

Okay.

Thank you.

Adam?

Monica?

One moment, sir .

Adam, would you please press star 1 on your telephone keypad again?

Your line is open.

Okay, can you hear me now?

Yes, Adam.

Okay. Great.

Thank you.

We can now hear you.

Great. Excellent.

Maybe just talk a little about, you know, just -- you outlined all of the issues in terms of the revenue growth, Tom, I think just talk a little about as we think about of both volume and pricing and how that would have broken down for the quarter or so.

You know, sounds like most issues are somewhat related to, I guess, the pricing, but certainly you were talking before about just copayments and people utilizing less healthcare impacting you guys. I wanted to get more color in terms of volume and pricing then a follow-up question.

On the unit side for the volume, first off, we have seen just a slight pullback on the prosthetics, a slight increase on the orthotics for the quarter. Our sales of what we call our high-tech items are down slightly. The C-legs compensated by just a slight increase in price there long-term. We think that that is something we have to watch very closely.

So our volume net-net is about flat to just slightly down from the first quarter of last year. On a apples-to-apples basis, when you go back in and take out some of the contracts that we walked away from, through last year as part of our national strategy on contracting, that would lower our unit volume because, obviously, that revenue in the form of those patients didn't show up in about three of our key geographic areas. And then when we look at the termination of some of our commodity businesses, some of the rehab EME businesses that we moved away from, that reduces the overall volume as well.

So, on an apples-to-apples basis, we're probably less than a percentage point in variance in the big kicker that drove us down to the point A for the most part is a business that we walked away from or closed. So I think sort of checked off the -- the erosion on businesses that we're walking away from by our national contracting strategy.

We obviously, other than a small presence and one related DME business, we're not in that business anymore, so we think that we're going to continue to struggle on this same-store sales growth, but hopefully the solutions we took into place will back up.

So net-net, about flat to slight deterioration, we closed business and walked away from some business but continue the challenges ahead.

Okay.

And just a follow-up.

You admit to comments before just about the economy impacting volume some. So I guess my question is, you know, how much of the bill does the patient pay typically if you have any sore numbers to give there, and have you seen bad debt go up, you know, with that trend taking place more broadly.

Thank you.

Typically the patient co-pay amount is 20%. Sometimes they have secondary insurance to cover that and sometimes they don't. That becomes the issue. It's all in the 20% area.

Because typically what we see is these are all preapproved expenditures per the coverage they have in their plan. So it's 20% but that's not to say the 20% is at risk because some of them have other coverage. It's when they lose the other coverage and the Cobra falls off that they start thinking long and hard about whether I should go back in and get this changed out at this time and try to stretch it through another year.

Adam, if I could just also follow up on your, the first question that you asked.

You know, we came off of a relatively strong December in the fourth quarter. We then found ourselves with a rather weak January, a more or less flat February and the trend in March was up in the 3-plus or so percent basis. We have seen that trend follow through here in April. It's much too early to declare victory.

One month, obviously, doesn't create a data point, but the trends certainly of some of the efforts that we have been making when we thought we saw and, in fact, did see progress in the latter part of the year, especially in December, that it fell off substantially January, came back to, as I say, about flat February then has been climbing March and that trend continues into April, so we're -- we're somewhat mildly encouraged by that.

But, again, one, one month, of course, doesn't make it is that point, and we're far from declaring victory on that. I wanted you to know what the trend at least is.

Okay.

Thank you.

At this time, I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster .

Your first question comes from the line of Will Sidon of PJ Securities.

Good morning, gentlemen.

I'm trying to get a sense of what the margins will look like on this new United business.

Can you give us a sense what have they look like relative to your overall margins for the $50 million revenue.

Well, I think we got to -- good morning, Will.

Sorry.

We have two things going on there, Will.

First off, the whole play and strategy is to further leverage what is a, within limits, the fixed-labor cost model. The theory would say if that business reports in, we would be able to leverage our practitioners on the ground, hence the reason for the capacity in the throughput issue. So we have expectation that those margins could be higher.

However, in the short-term, we have to lay out some expenditures to build this because as we had mentioned, they're looking to us for more than just coverage from a practitioner point of view. They want utilization management, they want claims adjudication, they want electronic billing and so they want us to handle the hassle. We're not, by the way, taking the risks that we're not going that far.

So in the short-term, we would expect that that business might -- it will be certainly accretive but in the short-term, we're not expecting it to come in with margins that we would anticipate in the longer-term. In the longer term, the margins could, depending upon how it ramps in the levels of capacity, we know that the way it reports in geographically, the devil's in the details. If one practice is overloaded, they're going to have to get some help. While another one on average has people pretty low.

So, once it reports in, we expect it to be slightly above where we are on an all-in basis, depending upon how the calculation works. So probably a little bit better than the 20% mark that we have had out there in terms of the over all target for our company when you factor in all of the expenses.

Okay.

And can you say, was there additional marketing expense related to Linkia in the first quarter that we didn't really see any sales benefit from yet?

Expenses related?

Just minor so far. As we have just announced this, we have made expenditures on the team. We've not made expenditures in the process in building the full team out.

Our sales and marketing team, obviously, and the development of models and proposals, we started to incur some of those expenses at the end of last year. They've flown into first quarter. We've not yet really turned the spicket on what those things are, but we're ramping up quickly.

Got it.

And when I look at second quarter, I should probably figure that some of those expenses will be ramping in and you also have some expenses related to OPS that should be hitting as well?

The, first of all, on Linkia, it will probably occur in the area of $500,000 to $800,000 in overhead costs in the quarter as we ramp that up, and that's going come ahead of the revenue, although we have a contract kick in 5-1, you know, we believe that we're not going to see revenue growth from that until sort of the fourth quarter, depending on the speed of the transition. So you should expect to see some costs there.

OPS, we'll have about the same cost component as second quarter as in the first quarter. Which is basically increase -- we're using our personnel to roll yet out. We had an increase in travel relative to the training and relative to the training, relative to the trainers that are going out and rolling this thing out, plus we had a couple hundred thousand dollars in miscellaneous computer expenses on top of that as we changed that equipment that needed to be upgraded. Probably about a half million dollars, which was -- will hit second quarter, which is comparable the way it hit the first quarter.

Got it.

My last question is related to the Florida contract that you had near the end of last year.

When should we begin to start seeing revenue from that flow flew?

This is Mike Murphy.

We have, unfortunately, had to put the implementation of that contract on hold. One of the things that we agreed to with this particular payer that in order to make the volume work, we had to be on electronic connection. And they're having some administrative challenges and we're postponing that. We expect that to pick up in the next 60 to 90 days.

So at this point in time, we're not projecting the impact of that contract to be as large as we originally thought.

Got it.

Thank you very much.

Your next question comes from the line of Henry Rukauf with Deutsche Banc Security.

Good morning, guys.

A couple of questions.

The first, in terms of the industry, I can remembered a little while back mentioning that the industry growth rate had been, you know, 2-2.5% overall.

Is that still something that you think holds or has that changed?

Well, with the pricing changes that we have seen and the reduction in terms of reimbursement per unit, we believe that has come down across the industry. Our -- while there are no compiled industrywide standards which makes this difficult and the trade associations have not been success in getting everyone to report in and actually few report in, actually. I guess the best way to describe it is by saying what are the suppliers and what are some of the other O&P companies reporting and these are just through casual, as opposed to imperical data.

The entire industry is flat. When we go to trade shows and talk to those folks about the year-over-year, they're all reporting the same thing. I think, Henry, what is going on here is while two point, the 2.0 to 2.2 is a good, long-term shot. These things go through peaks and valleys, and I think the squeeze on reimbursement is going to pull down that overall, that overall growth rate.

So while we still expect in the long-term the industry to be positive in terms of the number of diabetics and this morning I was just -- there was a thing in the paper about increasing to 41, the number of 41 million, the number of diabetics that are out, there that are showing preliminary signs of diabetes. We know there are 26, 26 million that have it. I mean those things are real. So that is all coming in into our industry.

So long-term, the industry is favorable dynamics. It's getting yourself into a fixture. In the position to capture it and we think with this situation that we're in now where the industry is flat at best, um, depending upon national healthcare policy and some of the other things we have talked about, may improve, but right now, that's pretty symptomatic across everyone that we speak with.

Okay.

Going back on sort of an old topic, but practitioner turnover. Is there anything unusual there, vis-a-vis, say that last year, you know, sequential here that we should know about?

No.

No.

No, there was an increase due to the acquisitions we made. That was a good thing.

Okay.

And as we sort that out, we'll probably have some extra additional people we can use elsewhere in the organization.

Yeah. There's no, there's no issue with practitioner turnover, Henry.

So it's stable there.

Yes, very stable.

I think with Linkia, you said $500,000-$800,000 extra expense next quarter.

I wasn't quite sure for the OPS billing system, was that an extra $200,000 over and above this quarter that you might have to spend? Or is that sort of you're spending extra 200 extra quarter, you spent that in the first quarter and will maintain that extra spend in the second?

We -- we spend about $500,000 in first quarter in additional travel and $300,000 in travel, $200,000 in computer expenses. We're going to have about the same spending second quarter. Those are the two quarters where we're rolling out most of the software.

Okay. So any addition is just the $500,000 to $800,000 for Linkia.

Yeah.

Exactly.

Okay.

And then I know you have guidance out there.

Do you feel the need to change that or, you know, is it still within the ranges that you have given?

Well, you know, we know the street is showing about, on average about 132. We missed by 6 cents in first quarter. We don't think we're going to make that up.

We, if our sales improve in second quarter, we have a pretty good shot of making second quarter. If they stay flatter down a bit, we might miss by 2 cents, but we believe in the third and fourth quarter we'll see the sales pick up and we could probably make that miss up.

Okay.

So if it's 130, if it's at 1 32, you think you will be --

Right around 125, 126, somewhere in that range.

126. Okay.

Thanks very much.

Your next question comes from the line of Michael McGuire of Lerick Swan.

Good morning, gentlemen.

Getting back to the Linkia discussion, when you speak to volumes coming in through those new contracts and you have also referenced walking away from some volumes, had you pursued those contracts, can you just provide framework as to, you know, are you trading volume-for-volume at a better price?

Any color along those linings would be appreciated.

Sure.

This is Mike Murphy.

First off, the walking away from contracts we have done on a target basis and that's where the payer is asking for price concessions that are below what we can effectively provide patient care for. With some of these national contracts that we both have in-house and are in active negotiation, we reinstate contracts that we walked away from at price points that are appropriate relative to the increased volume.

Said another way, the national players we're talking to are looking to consolidate their administration and so we get a pick up in volume if we agree to a discount. The discount is in consideration of increased volume.

But when we do a national contract, we get the pick up of any contracts we may have walked away from, and we get to a price point that is appropriate and fair both between us and the payer and consideration of the increased volume we expect.

So any sort of top-line revenue expectations out of those contracts are truly incremental give or take, you know, a few volume situations here and there?

Correct. Yeah.

The -- the incremental value of the contracts is fairly significant.

Okay.

On the acquisition side, as you go through the course of the year, should we expect a similar run-rate in terms of top-line growth?

I know the key driver was booked in the first part of the first quarter, so just -- could you provide color as to what that run rate will continue over the course of the year in terms of top-line growth from acquisitions.

Sure.

We -- we do have a couple of acquisitions that will fall out of that run rate because they'll reach 13 months with the company and they'll start becoming part of our comp.

Right.

But with the transactions we did in the first quarter, we think they're going to add probably around 4% to 4.5% for the rest of the year.

Okay.

And just lastly, on the SG&A spent for Linkia and Q2, how much of that is potential recurring costs to service the contract?

This is Mike Murphy again.

I'm estimating here --- about half of it is going to be fixed at this point, which means as we bring on additional volume and additional contracts, obviously, we're going to get a pick up in contribution margin remaining 50% will be variable to the contracts. So as we add more volume, we will add additional expense.

Okay. Great.

Thank you very much.

At this time, I would like to remind everyone in order to ask a question, please press star 1 on your telephone keypad.

Your next question comes from the line of Mike Sedesky off Thompson Davis and Company.

Yeah, good morning.

Going back to the Linkia, can you talk about when this United Healthcare will be fully phased in, and also, if you would, talk about the sales cycle.

I would assume these contracts, the national contracts you guys are shooting for through Linkia have, you know, pretty significant sale cycle and talk about if you think any other significant ones could fall here in the next quarter or two.

Thanks.

Sure.

In terms of the actual phase-in for United Healthcare, what we're doing as of May 1st is simply a contract roll-up. We're taking about 20 or so existing Hanger regional contracts that we're consolidating, as well as reinstating any other contracts that we may have terminated or contracts that we didn't have in the first place that. That will be as of May 1st.

The focus right now is making sure the electronic connectivity between the Hanger facilities and United, those pipes are up and flowing in both directions. What will happen thereafter, we will begin working with our payer customers and begin looking at network access on a market-by-market basis and working with local network managers, as well as senior leadership at United to actually determine what they need from an access perspective. And begin the process of consolidating United's network and also getting involved, again, on an electronic basis. It's difficult to say exactly how fast that process will go.

Our own belief is that it will certainly take us through the end of the year, but as we get deeper into the United organization, get deeper into the local markets, we're going to have a better feel for exactly what network penetration will be on the market by market basis and what timing we can expect to increase rather than come in. There are a number of issues to consider, not the least of which is provider laws. In particular, nuances in terms of healthcare deliver, et. cetera. We suspect we'll have clear visibility to the exact timing and visual in the next 120 days

In terms of the sales cycle, we have been in active discussions with a number of national payers for a significant amount of time. If I had to guess, it's on average for about six to eight months from the time we opened conversations to the point of implication. At that point of implementation, in terms of our own planning, we plan about six eight months to try to get the recommendation.

Again, as we get clear visibility to each of these discrete payers, we'll have a better feel for exactly how long the things are going to take. I think your last question, we are in conversation, discussion after discussion with a number of national payers for Linkia.

Okay.

Thank you.

At this time, there are no further questions. Mr. Sabel, are there any closing remarks?

Yes.

Thank you.

I want to, again, thank all of you for joining us this morning and certainly we will continue to update you on progress in terms of building sales here, obviously, and certainly any editions to our Linkia efforts which, we believe is going to be one of the key drivers of this.

We will keep you updated on as we go through the quarter and we look forward to speaking to you about Q2 results.

Thank you again for joining us.

This concludes today's conference call.

You may now disconnect.