Hanger Inc (HNGR) 2006 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to Hanger's First Quarter Results Earnings Conference Call.

[Operators Instruction].

Thank you. I would now like to turn the conference over to Mr. Ivan Sabel, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you, and good morning. This call contains forward-looking statements relating to the Company's results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Statements relating to future results of operations in this document reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results or performance to differ materially from those expressed in, or implied by, these statements, including the Company's ability to enter into and derive benefits from managed care contracts, the demand for the Company's orthotic and prosthetic services and products and the other factors identified in the Company's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

We are very pleased with the results of our first quarter performance. We continue to focus on increasing net sales while dealing with the pressure of a slightly negative reimbursement environment. As you know, we experienced an overall growth of sales of 5.6% compared to the first quarter last year with our patient-care centers achieving 3.9% same store sales growth and our distribution business at SPS registering a 30.7% growth in their sales.

A key contributor to the HPO patient-care sales growth was our Linkia contracts, which grew by 1.6 million or 20.3%. This provided more than a third of this division's growth. Our overall increase in sales is the largest since the third quarter of 2002 and we are proud to say it's the fourth consecutive quarter of sales growth at our core business. We have also shown discipline in our management of materials, direct labor, and fixed assets, which offset the impact of inflation on our business. The increased revenue countered some one-time costs, which included an extra day of labor and also allowed us to continue to make investments in the infrastructure and rollout of our key development projects, which will pay off later this year, George and Tom of course will go into additional details during their presentations.

We remain committed to our investment strategy in Linkia and Innovative Neurotronics, we believe they are beginning to show results. Linkia is also contributing and we anticipate reporting initial sales at Innovative at the end of the second quarter. I would now like to turn it over to George.

Thank you Van. First I would like to direct my attention to the P&L for the quarter. Sales increased by 7.4 million or 5.6%. The comp sales in our patient-care centers increased by 3.9% or $4.8 million for the quarter and fully a third of that increase came from our existing Linkia contracts, 1.6 million in sales was generated by existing contracts which was 1.3% comp for the patient-care centers. If you look at just the Linkia-based business that increased over 20%, so there's a good momentum developing there. SPS had a very strong quarter reporting a $3.2 million increase, which was a 30.7% increase.

Cost of goods sold, as a percentage of sales decreased by 7/10 of a point, principally due to the impact of the sales increase on labor, which is relatively fixed. Our labor cost increased by $1.2 million as a result principally of annual increases that go into effect on January 1st. But as a percentage of sales and due to that sales increase, that decreased from 22.5% in 2005 to 22.1%. Material cost increased by 1.6 million to 39.1 million or 27.9% of sales compared to 28.2% in 2005 due to purchasing efficiencies.

SG&A increased by 4.7 million in Q1 compared to the prior year due to $9 million invested in our Linkia and Innovative Neurotronics strategies. A $800,000 increase in labor related to one extra business day in the first quarter of 2006 compared to 2005 and it happened that that extra day was the New Year's holiday which took from a Friday to a Monday and consequently we had that labor expense but no additional sales. That extra day will come back as a benefit in the third quarter.

The - we also had 800,000 in non-recurring expenses associated with personnel changes and SOX consulting and $700,000 increase in variable compensation due to the strong collections during the quarter. The balance of the increase was driven by inflationary increases in cost such as labor and rent which were offset by cost savings principally in advertising and bad debt expense. EBITDA at 14.6 million was equal to the prior year's performance. To understand the reason that EBITDA is flat at a high level, I have constructed an earnings [bridge] that I would like to briefly discuss.

First of all, if you look at our business, we have inflationary pressure, which we have referred to as the beast in the past. In the first quarter, that was $2.1 million and I think we've said in the past that that number ranges between $8 million and $10 million, that was entirely offset by savings in advertising, bad debts and material costs efficiencies.

If you then turn your attention to the sales increase of $7.4 million, that generated about $2.6 million in EBITDA. That EBITDA contribution was consumed by the $900,000 investment we made in IN, Inc. and Linkia that I just discussed, the $800,000 impact in the extra day of labor, which we will realize a benefit later in the year, but of course is a comparison issue to '05 and the one-time cost that I discussed relating to the personnel changes in the SOX related consulting.

Interest was 700,000 higher than last year despite an overall reduction in borrowings due to increased variable interest rates. And our income tax provision of 600,000 was recognized for the three months ending March 31, 2006 compared to 900,000 for the same period in prior year. The change in the provision was primarily the result of the lower income from operations, the higher interest expense being the main factor. The effective tax rate for the quarter was 41.4% compared to 41.1% for the prior year.

On the balance sheet, our AR increased by $7.2 million despite a $7.4 million increase in sales. We were very happy with the results in our AR. Our DSOs improved to an all-time low of 59 days compared to 64 days at the end of the year and 65 days a year ago in the same quarter. Inventory increased by $1.6 million to 78.4 million compared to the yearend balance of 76.7. The inventory build was comparable with what we have experienced in the first quarter last year and make sense compared with our backlog of sales and work-in-process.

CapEx for the quarter was 2.6 million compared to the 1.6 million in the prior year and it was in line with our expectations. Cash flow from operations, normally in Q1 of every year we are a user of cash because of the seasonally lower sales combined with the fact that we normally pay our bonus compensation by the 15th of March to secure tax deduction. And we also have a bond interest payment made in the first quarter.

In 2005, we used $19.9 million in operations. We've reduced that by $7.1 million this year to 12.8 and obviously the improvement was tracked directly to the good results we had in AR, where we reduced that balance by $7.2 million.

Finally, as far as guidance is concerned we have no changes in guidance that was given both at the end of Q3 and Q4. That ends the discussion on financial results. I am going to turn the call over to Tom Kirk to talk about operations.

Thanks George. Pleasure to be with you this morning. First I will review the events that are impacting our operations for the past quarter and then I will update you on some of our growth initiatives.

Let's take a look at our two key divisions, SPS and HPO in little more detail. As you have heard SPS's sales grew by 3.2 million, which translates to an overall growth rate of 30.7 for the first quarter compared to the comparable quarter last year. This is above the level we experienced for all of last year. SPS continues to offer superior customer service, a full product portfolio and multi-side warehousing with effective delivery, which really differentiates them from their competitors and add value to their customers. They are the only pure OMP distributor with the sales team as a result they expanded the number of customers during the quarter as well as gaining more business from existing customers. They are progressing with their unique selling strategies, which we discussed on prior calls and it continues to pay dividends in terms of higher revenues. We are very pleased with their performance for this quarter, but we do recognize that as the year progresses, they are going to return to a more traditional level of sales increase.

Now, let's look at our patient care division HPO. Within that division, we achieved a $4.8 million increase, which translates to a same center growth rate of 3.9% for the quarter. We continue to experience challenges in this business on the reimbursement front as that the payers look for ways to extract more economic advantage for their business. This is both the public and the private sectors. The data that we have been able to gather from our OPS billing systems and disinfection last year indicates that we are experiencing overall a decrement of about 1% to 1.5% per year on the revenue front. This means, we simply have to work harder to offset business of divisional unit volume and improvements in May.

For the quarter, the majority of our revenue increase that we have mentioned before can be achieved in the four key areas. First, is an increase in Linkia sales as Ivan mentioned earlier this accounts for about a third of the gain. Second area was an enhanced emphasis on our micro-process to new marketing and education effort. The third area was an expanded use of our patient evaluation clinics and the fourth area was the adoption in the substitution of certain lower performing components translating them to new higher functioning components in those situations that can be justified by patient needs. This is an ongoing program.

The balance of the increase in revenue is due to a combination of some special sales development initiatives such as our pathways program which calls for the provision of one items when a specific other item or procedure is furnished. For example, selling a pair of [inaudible] shoes with the each ankle-foot-orthosis. Also, we are maintaining our grassroots business development team effort to strengthen our existing relationships and capture new referral sources. These efforts in total have combined to generate a unit growth rate of above 4% for the quarter. In spite of the improvement in the revenue statistics for the quarter, we are still very active in working for a long-term viability of the reimbursement system. We do this in two ways.

First, by working with our industry association at the federal level, which is you know is necessary to influence the policy makers. For example, just this week, CMS issued its preliminary view of the mechanics of the mandated competitive bidding program. Our efforts helped in bringing OMPs view to the attention of the policy makers such that program advance today is limited to a very small percentage of what they call off the shelf items. It is also limited to only 10 MSA initially and the good news is that it reinforces the necessity to be a qualified provider in order to provide these items and services.

Incidentally, once we examine the final procedure and a trainer decides to participate in them directly or through Linkia will be in a very strong position in terms of our materials cost and our access to customers to be on this work. At the state level, we are continuing to work with the entity correlation of America on Educating State Legislatures on the issues involved with reimbursement caps and how these caps to provide patient to quality care. We have achieved a very positive response in those states where we represented our care and we will continue do so.

As you remember on the prior calls as we talked about the market performance in various regions of the country. We continued to make progress in these regions that were underperforming last year and we are using a combination of personal changes, effective goal setting, and coaching, and the adoption of new processes.

This year's mild winter weather also help, but we are still feeling the bite of last year's hurricanes. For example, we had to close two practices in the New Orleans. We still have more work to do in his whole area, but the good news is the programs are making a difference. I mentioned earlier the sales that microprocessor need contributed to the increase in prosthetic sales for the quarter we grew sales by over 33% compared to the first quarter of last year.

The product line, four microprocessor needs is expanding, which means that we have a broader patient population to serve for these higher value, higher performing devices. Further, our methodology of using patient evaluation clinics that introducing demo the product line is proving to be a very effective clinical sale tool.

Now, also during the quarter, we were active on some other revenue enhancing fronts I will just mention these briefly for you. The sales of our upper extremity prosthetic products and services increased over the first quarter of last year, we believe the combination of Hanger geographic reach and our broad product portfolio make us the favorite provider among the case managers, who are the key decision makers in many of these types of cases.

On an other front we have increased the number of lower extremity patient evaluation clinic by 15%, these continued to be a very effective method to bring the patients back into the patient care centers for a check up and it normally results in our identifying some additional service or maintenance that is required by these patients. It is good primary care for the patient as well as great source of revenue.

This year the target is to increase the number of these events to 400, and another front let's take a look at the prosthetic side, where we participate with the major supplier during this quarter in the launch of a new powered lower extremity processes that actually receives its operating signals from the sound leg, totally new type of device. This exciting development is receiving national press, which was possible to our clinical expertise, project management and public relations efforts. No one but Hanger could have work with the supplier to make this possible.

While the national rollout it is still ongoing, we've already received commitments for orders on some of these devices and by the way they bill out at north of $75,000 each. And, we are currently in discussions to develop similar programs for other new prosthetic device.

On prior calls, I mentioned we have developed and bought to market a new line of high quality issues, which branded and answered to. These are product features that occurring benefits to our patients and we promote these to our practitioners to independent orthotic and the physical therapist as well as the podiatry markets. Internally we measure our performance and what we have seen is during this quarter, we achieved a 10 percentage point increase in the number of pairs provided when we provide certain based code procedures, and this is similar to what I mentioned before when we provide an ankle-foot-orthosis, why not provide a good pair of shoes with that. And so by measuring the relationship between those base codes and these add on items, which customers have to buy anyway, we can track our performance. It is our intent to move this percentage higher through the year.

Finally, we continue to see increased sales in the area of sports environment as well as increased number of cranial helmet.

Now, before I move to provide an update on the other projects we have underway, I also wanted to mention that our profit improvement program which was initiated last year has provided the basis for controlling our costs and collecting our accounts receivable that George mentioned earlier. We intend to keep these programs underway in the field and depressed for continued roll out of our process improvement such as our work flow program that was one of the keys to our being able to lower our bad debt expense through enhanced collections.

Now, let's take a quick overview of the projects underway to leverage our fixed cost model in patient care by building new sales. Also, I add a little bit of color on the new business development initiatives that we are driving, add some new sources of revenue in diversification of our cash flow sources through our core business.

First, let's talk about Linkia. We completed some of the final details in the electronic interphases in the infrastructure is in place during this quarter. On the marketing side, we're continuing our discussions and negotiations with the key national healthcare management companies, there continues to be interest in our concept and we have advanced the discussions in one case to the final negotiation stage during the quarter.

As you recall, we signed an agreement with Insignia last year. Now, we are working with them on the final steps of launch for the provider network. As mentioned on the last quarter's call, Insignia has approved the network strategy and the provider network all that remains as the final steps of dismantling the old network and the building of the new. The Linkia network credentialing process was completed in December and it is going to be employed in constructing the new network.

On another side, the number of Insignia trained users and scanning systems in the field has not changed since the last quarter. We have told you that our emphasis is going to be on optimizing the systems and the network that is in place and really taking a good hard look at enhancing our fabrication capabilities. We continue to do that because we see that the number of scans continuing to increase as our practitioners become more proficient on this tool. Also, on the Insignia side, we are continuing to development of other Insignia applications, for new sources of revenue and diversification. We are focusing on the refining of the marketing and the supply chain approaches for the burn garment in the custom and diabetic footwear products market.

During the quarter we met with key outside company that would be part of the testing of our marketing and manufacturing strategies for these products. Also, during the quarter, we identify another potential area that could benefit from the application of this technology. We have decided that we will investigate this area after we make progress on the existing developmental areas that are under study.

Another exiting opportunity is the walk aid product by our innovative Neurotronics subsidiary. I have spoken to you about the background and history of this product on prior calls, so now I will direct my comments to providing an update on the status.

The introductory training of our orthotics took place during our education period in February. To-date our clinical teams have trained almost 350 practitioners and this work will continue through the second quarter. We made the decision to accelerate the training forever possible.

The clinical trials and I work with patients during the training sessions have demonstrated the outstanding efficacy of this device is awesome for the patients that are suffering from the condition of footdrop primarily resulting from a stroke. The pilot introduction has been completed and we identified some design modifications that were necessary. These have been made integrated into the manufacturing and documentation processes. Commercial production is occurring in this week and product is being shipped to our SPS warehouse.

The tracking software that's required by FDA for a class 2 device of this type has been installed and tested improvement. And we are continuing our work with our outside consultants to quantify the benefits to help economic study and to prepare for our application for code coverage and price to CMS. We have also educated the field personal on how to handle the paperwork on administration and billing initially payment will be directly by the patient, but we intend to follow that by billing on a miscellaneous code until the code can be secured.

And to facilitate this we put into place an agreement with CareCredit, a division of General Electric to offer our patients interest-free financing for up to 18 months, as long as they have a small deposit and meet certain credit ratings. We are ready to go on our in-house distribution channel and now we are laying plans to investigate other domestic and international channels later this year.

Now, leaving WalkAide, we are progressing on another front, which is the new delivery models to provide a bundled orthopedic rehab solutions package to our patients and referral sources. Our pilot operations, which we have discussed in the past performed very well in '05, certainly approving a proof of concept and demonstrating their capability to substantially increase sales, significantly increased sales.

During the quarter, we have been pursuing and evaluating the best way to expand this concept nationally and added benefit to this entire area it is the natural capability across selling with the custom core business. This permits us to provide a comprehensive total care package to our patients well giving assurance to their doctors that they are in good hands with a single source of responsibility and a continuing high quality care.

In closing the results of this quarter validate that the projects that we put into place last year are correct and most importantly that our personal are using them and generating positive results. We all recognize that there is more work to be done and we must maintain a focus on majoring our progress against our establish metrics.

As we looked at 2006, the remaining quarters of 2006, we are concentrating on delivering additional revenues in Linkia the WalkAide and of course our revenue and profit and cash improvement projects. Thank you. I'll now turn it back over to the Ivan for the Q&A session.

Okay. We can open it up for questions and answers.

[Operator Instructions]. Your first question comes from [Mark Wise] of Citigroup.

Yes. Hi. How are you guys? Just a couple of questions. I just really want to focus on the margins. It's the lowest I have seen despite your pretty okay that in your growth. When do you think that margins will be moving up and really the question is how, I think the cost cutting that you have over the last bunch of quarters are pretty much done with the low hanging fruit?

And you guys talk about the inflationary pressures as pressuring, so kind of what are you doing about to get those margins back up and when will we see a sustained level of margin expansion?

Mark I think, you know, just initially the respond to that, keep in mind that there were several one time event here in the first quarter which obviously, depressed some of the margins. And secondly, it's on, this is our seasonally weakest quarter, the first quarter.

So I think you are going to, you know, traditionally if you look back in history, you will see the margins start to expand after the first quarter, as we go into Q2, Q3 and Q4. And obviously, what really is going to more drive margin improvement is improved sales. And we believe that we are starting to validate the efficacy of all the investments that we have been making over the last 12 to 18 months in Linkia in the WalkAide program etc. that will actually yield us increased sales which obviously increase the margins. Well, still bearing with the inflationary pressure, George and Tom if you want follow up on that.

I would just add to that lines that some of the tools as Ivan mentioned that we put in place are absolutely spot on to the goal you've identified and that they allow us to increase our productivity of handling new sales, so that if you are taking insignia for example, it will allow our practitioners to process patients more efficiently thereby you don't have to add any additional cost in terms of fixed labor, we will do it within the same structure of our patient care centers. So, it will be able to effectively service them right off the fixed cost we have, and that's going to be the key. So, part of those investments have really been capacity expanders to meet that goal.

And at large, I think I would point out is as George mentioned earlier, cost of labor as a percentage of sales is lower - yet is lower than it was first quarter of 2005, so that margin is improving is well as cost of materials we are seeing you know, holding the line with down with no pricing increases and increasing cost? So, you know going to back to Ivan's point, there are some items below the gross margin line that are one time in nature and non-recurring that are affecting it, but bear in mind first quarter is always the weakest.

And regarding to, you know, revenue from Linkia, will you share with us what those margins are and what do you think those margins can be in the future?

Well, one of the issues on, trying to provide more visibility in there is, we would actually work against our sales of as I mentioned, we are in negotiations at the present time with some of the other national large regional healthcare carriers and as a result we are reluctant to expose that kind of information, because we think that could count on our negotiating strategies with them. And in order to secure that business, we go back in fourth several times on the volume discount and the discussions of performance. And so, we are adamant about not revealing that simply because we think that could work against the best interest of our shareholders.

Fair enough. Just last question, I know that when you guys were at our equity conference you were talking about practitioners moving closing up their shops moving over to Hanger I saw from what you reported yesterday that the centered numbers of centers are actually down sequentially but the practitioners are up. Can you just flash that our a little bit and see if that, I know you guys don't want to talk about the trend but is that trending now does maybe like the second quarter that you seen this already.

Yes, what we did and what we were referring to is that several people out in the field because of the continuing economic and regulatory pressures have come to us and they're small 1 or 2 man shops, and said it's not worth the hassle any more. I don't want to run this business my elf. How can we work at a deal with Hanger so we have absorbed them into our system mainly purchasing them for the value of their working capital.

We have terminated that operation as a standalone operation and borough again to our center. And so they have become employees and with that we have also of course during their book of business with us, and its another way that we are trying to leverage our fixed cost. And the reason that you have see a bit of a decrease is that I mentioned we had due to weather particularly in Orlando, we had to close the couple of practices down there.

We can't even find the patients any more, we know that the population in Orlando is one-third of what it was before, so we closed some of those. And the other one that you see are part of the normal evaluation that we go through not only for the integration of a new acquisition, but constantly looking for way to better utilize the footprint we have. So all of that leveraging fix cost, you know, we have two practices that are six miles partly and why not combine them into one when it's convenient and by that I mean may be when the leases expire rather than renewing two small ones we will go out and get one that's halfway in between and get a large lease.

So that's just a normal ebb and flow and why you see the number of practitioners going out is because we are constantly bringing it new practitioners, some of that come from outside the organization, some of that come directly out of the school. So we do absorb them when they are available or they meet our standards.

Thank you very much.

Your next question comes from Kevin Fischbeck at Lehman Brothers.

Hey, good morning guys.

Well, good morning.

You said in the comments that moving to your contribution was $1.6 million or it's higher being year-over-year how much was it actually in the quarter?

That was it, that was quarter-to-quarter.

You have the quarter to quarter change?

Yes, that was the change from last quarter to this quarter.

But do you have any absolute number for what the revenue was?

We do, but we have a I may have to give that to you off line which should have that schedule in front of me.

Okay that's fine. And then, you know, you talked about one time cost I guess you would be giving a little more color on the, it's the point I am being related to walk it. Is the dose and Linkia, this cost go way or it was just offset by revenue as those broken issued structure taken.

They are going to be offset by revenue Kevin and the reason for highlighting versus we were doing the comparison between first the two first quarters. Both of those entities are larger in more suffocated then they were in the first quarter of last year. So systems personnel and where we are in the actual role out because I had mentioned we are using some consultants that it is the ramp you, those cost will stay in place but they will be asked that certainly as we go forward with the increased revenue whether that some Linkia or WalkAide.

And as we, Kevin as we train the balance of the innovative training gets rolled out, a lot of that training cost were obviously anticipate those certain tail off. You know the travel and the hotel, the food all the stuffs because into the training course.

Okay, that work or away then you give leverage on the rest.

And Kevin, of that 900 000 in Q1, about 200,000 was directly related to travel to get the training done.

Okay. And then if you could cover more about SPS, you know, that business seems to be more or less increase sequentially each quarter and I know time of about the growth rate coming down, I guess that make sense somewhat but I mean that number in the quarter was still a good base and that issues the policy improvement sequentially throughout the year, is that right or is there anything in the quarter kind of from that number of go to higher and normal?

There is no artificial step function in there point that I was making when we look at last year and we look quarter-over-quarter on their performance that was more in the 8 to 9% one quarter over the next. So we know that also towards the end of last year as SPS brought in some new products there were not the big one to be announced that in March of 04.

But as they brought in new products and they started to employ this buying group selling strategy, they ramp up their sales pretty quickly so we think on comp basis as we go through the year, we are not going to see certainly by third quarter well we would love it and we won't object, we are not going to see a 30% increase when we get the third quarter this year of the third quarter last year. But we still do expect them to event from this level throughout the quarter, I mean on subsequent quarters.

Okay and then I guess if you could comment a little bit more on competitive bidding and I know you talked about you know how you think that the accreditation criteria to be pretty important.

As you will see, just kind of remind us how much in your revenue would be exposed to that and then anything else in that rate that looked interesting. I know that there was, I think it was the ability to kind of form an agreement, that maybe Linkia might be able to take part in, rather than kind of just Hanger yourself and trying fast there.

Sure. First half, as I mentioned, we in working with the associations advanced to CMS a list of the cost that we thought could qualify under competitive bidding. Obviously those are the ones that don't have a custom element and they're the ones that we felt that any one could apply and not harm a patient. The number of those was about 16 that we felt really could meet those qualifications and when we then translated that back into our book of business it was less than 2% of our annual book of business. So we don't think we are going to see in any way a significant impact on this.

On the positive side, when CMS finally completes all of its study, hears the comments and publishes the final procedures, we are going to take a good hard look at that for two reasons. One is that we think that Hanger with our broad network, which can be extended if we choose to use all of the participants and providers in Linkia, is well positioned to go out and bid this in any metropolitan specific area that the government wants to include. Net-net we know that there is probably, if we look at towns over 100,000 population in the United States, there is 250 of them, but the government is talking in terms of maybe half that number totally.

We're there and we can provide broad coverage and the other thing they're very concerned about is access to patient so the patients don't have to travel 50 miles or so in an urban area. We've got it, we've got the network, we've got the access, we don't have to [bid] to put in thing in place. And we can do it with the electronic capability of Linkia, so we think that could be a significant enhancement we think with our volume that we can get that product at very attractive rates. So, we think that those 2 things combine to give us a very nice position to go in and bid on that and to be successful in doing, that's the first reason we think we've got those characteristics.

The second reason is that we also we know, that in running a business there is a retail side to this and there's a branding and an image. The more patient flow that you can get the better that you can establish yourself in the minds of the providers and then to refer sources and in the minds of the patients, it is a marketing plus, and so we can carry on those kinds of activities which would help us brands that Hanger image as being the premier company in orthotics and prosthetics. So we see, any seasonal benefit for participating in the program in that way but, somebody based on the fundamental procedures in the economics that we see after we better understand the program.

Okay, great. Thanks.

Your next question comes from Henry Rickov of Deutsche Bank.

Yes, good morning guys. I just want to say I was very impressed with the nice internal growth that you have in the top line, I think that maybe the third quarter in a row that you did that, and also like packaging you know, gross margins moved up little bit year and had a little bump in the SG&A but, you know, I think your said take you going take will some that out so look pretty good to me.

But, that question on the top line because that's the one I think key is just overall industry volume you know, your prices down 1.5% you know, right now it seems where is the volume growth overall in the industry, you know, are you just taking market share is it declining, maybe you could just comment on that little bit?

Sure Henry. Thanks for those comments. First of we are serving a population and it depends have to get little micro here depends on the area that country but, on average throughout the United States that if you look at the motorization if you will the aging of society which directly impacts our orthotic business and if you look at health conditions specifically diabetes, directly impacts our prosthetic business. And if you look at the overall growth rates and from those 2 dimensions we are seeing about a 1% to 2% growth rate, some areas of the country obviously of higher which you getting migration.

So fundamentally, we would expect to see about 1% to 2% unit growth rate as more people will need the services. What is happening to offset that bit is that there is better patient care from the doctors perspective they are constantly trying to mitigate the impacts of cardiovascular disease there by saving any amputation or at least pushing it back.

So, there are some trends to go get it against that and that top of that you got the economic conditions within the micro area because people do not go out and seek replacements maintenance or devices. So, when you put all of that together what we think is going on up there is probably maybe 1% to 2% sort of equalizing that in terms of volume the kind of volume growth.

We also see that and we enable to calculate this as I mentioned because probably 1% to 1.5% shrinkage on unit reimbursement. So, where is that put up and how we are able to get these numbers. Very clearly we think, get contact with the patient referral source is key by promoting aggressive marketing programs getting them back in for patient evaluation clinics, bringing them in to demonstrate and allow them to wear the higher margin products allows us to take some share.

This in many cases we are getting patients that are coming back into a had processes came from a different supplier different provider but, because we reach down to the community, we told the doctors that we are there, we bring experts into the region that it brings in traffic you know, our fundamental promise in everything we do is all about clinical care.

And so, we demonstrate that those patients that we can take very good care of them get them to device any system and maintaining it on the long-term basis. It's a little further enhanced when we say, we can get you in and out of here very quickly. We can do in the way with little less intrusive. And so, we try to market our ability to process patients in a very professional way stayed in New York computers digitalization and we think that's starting to pay benefit. And our filled force of business development people, are out constantly promoting this message to retrieval sources. So, the only way that we are able to really grab up a 4% growth in unit volume is by taking advantage of the natural increased in this ongoing and than taking some share way through this programs.

But, I heard you rate that it is directly think that you know 1 to 2% price increase but, with the better patient care that's taking the way about a point to 2 points so it's, you know, overall your net is sort to flat up 1% through that directly?

What I said was, the decrease on the unit price side unit reimbursement of going down 1.5%.

Okay.

We think that, we have been able to drive unit volume of 5 over 4% and of course the missing item in there makes up the difference which is the mix change.

Yes.

We are moving from lowering functioning, lower cost products into higher functioning, higher cost products. So, you get this better patient care. And we.

But, unit growth in the industry is 1 to 2%.

That's right.

Okay. And then the other thing just on side of that on the, systems file that on we ywhat hospitals with them having trouble with bad debt and collection and that sort of thing associate now with basically consumers are paying more for their care how, year-over-year how you seen the deductibles for insured patients, where have they gone up down and maybe by how much?

Simply put, flat to increasing and itdepends on the program the most onerous condition that's out there that impacts the patient wallet, we call, cap that's what I mentioned was the state government. Talk to John Rush, our Chief Medical Officer, works very effectively in all the states and he's made the number of presentations, Iowa, New Jersey, several states, that explained why this frankly is bad policy and saving a buck here costs you 3 down the road and it deprives the patients of their quality of life, and so that burden if that's not fixed in addition to higher deductibles, co-pay as well as this cap provision really hits them right in the pocketbook and in sensitive areas, when we look at the Midwest, portions of the population out there are and will continue to be deprived of their historic benefits that they've had due to some of the economic problems of the big industries out there.

Just on a kind of and how much were the bonus payments in the quarter?

Bonus payments in the quarter on the other hand and maybe [inaudible] they have you call back on.

Okay that's fine. That was it for me but, nice work on the top line.

Thank you, Henry.

Our next question comes from Raymond Garson of UBS.

Thanks. First, I was just wondered, in terms of the charges that you outlined in the quarter that was the one related to the personal changes. Can you just give us a little bit more color there and are there any other additional kind of headcount or other personal things kind of on going?

No there is, to answer the second part of your question first. There are no continuing plans for any additional changes, these were some, what I would call senior mid level management changes specifically at the market leader area, we moved some new market leaders in, we moved some out, and there were contractual severance obligations that were surrounded by those, because as you well know in order to enforce our non-complete you have to pay remuneration for those and those are one time charges and no additional ones anticipated.

Okay, thanks. And then with respective to Cigna contract they kind of talked about the fact that you are getting close to the finish line here. Can you just give us or remind us again your expectations in terms of when that contract will really, you know, start being more meaning full. And to the extent you can just kind of quantify the amount of revenue expected from that contract in your overall guidance?

Yes, I mean we expect the Cigna will have its major impact in the last half of the year Q3 and Q4, because obviously there is a ramping of that. We are in the process of rolling out the network terminations down, and then putting in place the new network, which will be done hopefully here in the next couple of weeks. And as far as our guidance in terms of contribution, I think overall towards we were looking at about 14 million is the number I believe.

To 16...

14 million to 16 million in terms of contribution.

And that's helping '06.

All right. And that's all - that all [inaudible] where do you guys are.

Yes.

Okay. And then, in terms of just reimbursement you appreciate the comments with respect to competitive bidding, but you know directionally beyond that can you just give us some, you know, initial thoughts or any sort of information you got back from various groups with respect to, you know, the prospects and sort of inflationary update or any thing in this following year?

Sure. Let's deal with the Federal Government first. The - I think the popular belief as we understand it today is that there will be no Medicare legislation that will be passed here in '06 because of mid term elections in November. That means that the freeze will expire at the end of December '06, we are already slated for a CPI increase, so that's probably something in 3% or so range. And then, I think we will go back to the negotiating table, as additional Medicare legislation is debated on the health.

You know, historically and I have made this statements before, this is not the first time we have ever experienced the freeze, if you go back 20 or 30 years you see that this is, I believe at least the third time that we have experienced to freeze in my recollection. And typically post freeze you do see some relief. Now that doesn't necessarily guarantee that that will happen again this time, but certainly historically that's been the trend. As far as the private payors are concerned, I think it's a fair statement to say that although we continue to see price pressure I think that they are understanding. And in particular this is where Linkia comes to play.

We are understanding that it can't just be price concession for the sake of price concession where it has to be an economic value provided to this provider in this case Hanger and the Linkia, in order to give them any kind of pricing release. And that's what taken these negotiations to deliver [inaudible] make them more protracted then we would have anticipated because educating the payor that they just can't simply get a discount for the sake that they demand a discount, it has to have an economic value.

In the case of Linkia, it's increased volume and also it can't just be across the board. You know we had different margins in different product lines and obviously had different flexibility and we are trying to reflect that in our contract negotiations and I think we have been successful so far with that. So, I think generally speaking on the private side, although we still continue to see the desire to lower their cost and get additional discount, it's not quiet as egregious as it started out to be and we see a more tempered view of negotiations.

Okay, that's helpful. And then, in terms of the DSO, you know good strong improvement here for several quarters - are we at a point, two questions really I mean, what's really driving your ability to collect faster and then do you think we are at a level that's maxed out or do you see some more room there?

Okay. Let me tack on unrelated answer. Henri Rickov asked for bonus payments during the quarter, in case anyone else on the call wants it, it was $11.5 million. On your specific question on DSOs. The - I guess if you went back two years ago, I probably in my wildest dreams wouldn't have thought 59 days was attainable. But as we get more and more comfortable with our new system the strengths that you get from having 1 billion platform is that of 50 increase the scenario where you can has one workflow. And putting that in place and getting people to understand that and building upon that takes time.

And I think we have seen the provision of a lot of work that we have done in terms of setting standards within the field for how things are done, continuing to train and retrain people. Last year, I think Tom mentioned before in the middle of the year we have a test correspond to out and go to any practice that we could see from the numbers, we are having issues for collections and help them with whatever issues they were have in be it workflow or customer related issues.

And then talk on that, link year is giving us some additional force power, because we have developed a systems and not only electronically build their but to electronically adjudicate the yield deals as they come in, and that's going to us more horse power in terms of our DSO. So, that's answer to your question. We think this is sustainable, now we think 59 days might flip up a day or two in Q2, Q3 or Q4 because we have higher sales volume. But we are now thinking, as we look at the strength in our systems, we look at our ability in the future to go up and signed up more private payors for electronic billing. We sell more a link year contract we think we could probably get this number down into the low 50's and that's going to take time.

Okay, great. And then I had two just numbers questions, did you have the cash balance at quarter end?

Sure, the cash balance was $6.2 million.

6.2. And then you gave CapEx in the quarter it is 26, can just remind us on the full year?

Full year we are predicting between 12 and 15.

12 and 15, okay. And just a final question, just any update with West Hampstead? Thanks.

Yes, I can address that for you. There has really been no significant movement at all. We had I think now it's about 5 weeks or 6 weeks ago, we had a request for some documentation that we had already provided in the middle honestly, we provided it again for them - there has been no response, no follow up on that.

Thanks.

Our next question comes from Todd Corsair of Bear Stearns.

Thanks. A couple that I had were answered. And just at this point and if I missed this feel free to decline but was just hoping you can provide a little color around your expectations with respective to competitive bidding to that proposal out of this point?

Todd, we did address that, but I can quickly just capitalize it for you again. This competitive bidding is, you know, something we've noted about for some time. So the publication of the procedures and rules aas proposed, I mean, came out on Tuesday evening or actually what everyone had anticipated. This is still confined to a very limited number on off the shelf, we are over the counter, small, medium and large type software, the soft good devices somewhere between, probably 25 to 35 [inaudible] codes.

We've looked at these, this is something less than probably, you know, 1% or 2% of our overall business. Ideally the good news in the whole competitive bidding language that's come out is that we are going to in force supplier standards that we actually took a probably center position on with the government in terms of promoting that, that means that there are no barriers to entry for us, there are significant barriers to entry for others.

So, we anticipate that one we will obviously see additional business for those who are qualified and certainly all the buyers are qualified. And secondly we believe that we will be able mitigate any kind of, what I would call severe discounting based on the fact that we are the only people in this field that can provide a network that, you know, either if it's a pure Hanger play of over 600 points of service and if it's a Linkia play it will probably be about 1100 points of services.

So, we think we are ideally positioned both economically as well as competitively to deal with whatever comes out of competitive bidding. They, you know, just to clarify they are only talking about ten MSA's, you know seven, they have already eliminated three in the largest MSA's, New York, Los Angeles and Chicago. From that the balance don't go into effect until 2009 that's the next 80. You know, time will tell how all that will move out, but we are very comfortable with the way the language came out this week and there were no surprises and the positive was the enforcement of what we had been promoting which was supplier standards.

Okay, that's really helpful and I appreciate you recapping it. And just one of the first so you said it's about, in terms of the our codes this is applicable you said it's only - it's under 2% of revenues. In terms of the gross margin contribution it represented as again that much or less?

The soft good area of the business -- custom work side to it comes with very, very low margins.

Yes, that's what I figured. All right. Well, that's actually - that's a very helpful update. Thanks a lot guys.

You are welcome.

Your next question comes from [Scott Bruce] of SunTrust.

Good morning and thanks for taking the question. Hey I just had a question on the, I think it's $800 extra day labor component. I am not sure whether that - you are thinking of that or how we should think of that, whether it should be a one timer or something that stays in there as per the Linkia expenses and just sort of it gets offset by revenues in subsequent periods?

Well, we really look it as a one timer, because what happens in the quarter we had one more day then we did in the same quarter last year. But when we look at the whole year, we get down on the same number of days and we actually get that day back in Q3. So...

It's because the New Year's holiday actually fell on a weekend, it's all a timing event, it fell on weekend as you well know. So, the day off was the first Monday in '06. So it became an '06 holiday, no sales associated with that, but expense was.

Yes, it's not only the flip of the holiday, but the calendar, if you look at the calendar number of the days you are actually, you count them out there is one more day in the quarter and that was last year. And just happened to be a holiday with no sales attached.

So, in terms of thinking you have a run rate SG&A then I can think about that 800 in the, I forget the exact amount, but the one-time personal stuff I think was also 800. So...

Yes...

[multiple speakers] deducted to derive kind of a run rate SG&A.

I think you should, yes.

Yes.

Okay. And if I do that to the EBITDA line then I get about a 50 basis point increasing EBITDA margins year on year which is not so...

That's correct.

Not so un-respectable given where you are in the various trends.

Exactly.

Okay. And just real quickly these Linkia numbers that you have disclosed are they - is this incremental stuff, I mean, I had thought that maybe you had some volume with some of these providers or some of these payors on a non Linkia basis in the past is that, are we talking incremental benefit.

You refer into our comments of explaining the overall sales increase within HPO, yes that is incremental to what we had in the first quarter of last year. And anything beyond this even improves the incremental addition of new business. And we have seen, as we have mentioned on prior call that Linkia quarter over quarter continues to add business, because the first place were non exclusive, the first place that we sign were more based on a preferred and the companies are learning that there is real value in the proposition that we have offered and they are continuing to channel business into Linkia and take it away from others.

You know, so that's all incremental revenue.

Yes, thanks a lot.

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

Yes, I just want to thank everyone for joining us this morning and we look forward to continuing and building on what we have done during the first quarter. Thanks again.

Thank you. Ladies and gentlemen this concludes today's conference call you may now disconnect.