Hanger Inc (HNGR) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to Hanger's second-quarter results conference call. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Mr. Ivan Sabel, Chairman and CEO. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for participating in our second quarter 2006 earnings conference call. Before we get started I need to read our Safe Harbor statement.

This document 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 call 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 and 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.

Now, on to the results of our second quarter. Pleased to say that our revenue reached its highest level ever at 152.9 million. Our sales growth was the result of 0.2 million, or a 0.1% increase, in same-center sales in our patient care business, and a 3.4 million increase, or 31% increase in sales at our SPS distribution unit. These results were in line with our expectations, in particular at our patient care division, where we were comping off a record second quarter revenue in the same quarter in 2005.

We also ended the quarter with a very strong work-in-process backlog that exceeded the same period last year. In addition, as you know, we completed a global refinancing of all of our debt in the second quarter, and put in place a more flexible and accretive capital structure with extended maturities that will allow us to concentrate on achieving our long-term goals, including selective densification of existing market areas through acquisitions. We recently completed one of these and we are currently investigating others to determine if they meet our market-based strategies.

We also recently announced a Linkia contract with Great-West which will go into effect August 1st, and coupled with our Cigna Linkia contract, we now have two full network management contracts in place. As we told you last quarter, Cigna has already approved our provider network strategy, and they actually have begun sending out termination notices for the providers that will not remain in the network. We, of course, continue to see interest and are having ongoing discussions with other providers in considering similar relationships.

At our Innovative Neurotronics division, we completed our training program on its first product, the WalkAide, and now we have over 550 of our practitioners that are credentialed to fit this device to patients. Tom Kirk will, of course, go into further details on our national and international sales and marketing efforts during his presentation.

Our collections remain strong. DSOs continue to be at historically-low levels, and our free cash flows, when adjusted for interest payment related to the refinance on our new quarterly variable compensation payment, are actually higher than last year.

We continue to feel that although there are still challenges, that our programs and projects that we have invested in are gaining traction, as evidenced by our performance here in Q2.

Of particular note, the government has just announced that the CPIU for 2007 will be 4.3%. Many of you know that we are mandated to have that increase in next year's fee schedules, and the only way that will not happen is if Congress would take action to reduce that amount as they consider the overall needs of all healthcare providers within the Medicare system. Obviously, we are working closely with our trade associations, and in particular, key members of Congress, to explain the importance of this increase in order to maintain quality patient care and a healthy O&P profession. Whatever increase we are granted, it will have an immediate impact in '07 on about 40% of our book of business, with the balance phasing in over the next several years based on contract renewal dates.

I'd like to now turn it over to George, who will go into the details of our financials.

Thank you, Van. Good morning, everyone. I'm going to start off my comments on the quarter. Since Van gave a pretty thorough analysis of Q1 sales, I'm going to begin with the cost of goods sold.

As a percentage of sales they increased by 1.4%, principally due to an increase in the cost of materials. Our labor costs increased by $500,000 the current quarter, due to a reduction in headcount and lower commissions.

The material costs accounted for the increase in the cost of sales. Both in dollars and as a percentage of sales they increased by $4.1 million compared to 2005. Approximately 2.8 million of that increase was due to the $3.4 million sales increase at our distribution entity, SPS, which because it's a distributor has a higher material cost, roughly 82.3% of sales, and the balance of the change was due to a slight change in our sales mix.

SG&A decreased by $700,000 in Q2 compared to the prior year, principally due to a $900,000 reduction in bad debt and a reduction of 500,000 in labor costs, which was offset by a $700,000 increase in our investment in our Linkia and Innovative Neurotronics [growth] strategies.

EBITDA, as a result, was $19.8 million, a $400,000 increase compared to the prior year. And the principal reason for that increase was our effective cost control. Our interest was $500,000 higher than last year, principally due to the impact of the refinance and increased variable interest rates. The Company did pay some duplicate interest on approximately $10 million of the old debt that was not liquidated in the tender offer. The remaining bonds were called in June, and were actually just liquidated last week in July. (indiscernible) total debt increased by approximately $30 million as a result of the finance refinance, in order to finance approximately $15 million of the preferred call and to pay costs and fees associated with the refinance.

Income taxes -- we recorded a benefit of $4.6 million for the quarter. That was the result -- and -- as compared to a provision of $2.8 million for the same period in the prior year. The benefit recorded in 2006 was a result of the loss generated by the $16.4 million in costs related to the refinance. The refinance caused the effective tax rate for the quarter to increase to 44.6%, compared to 42% in the prior year.

The cost of the extinguishment of debt caused a decrease in our estimated taxable income for the year, which caused certain addbacks in the tax provisions, such as (indiscernible), to have a greater relationship to total taxable income, and that in turn increased our rate. I'm concentrating on this explanation so that you understand that this higher rate will be applied to the remainder of the year. It is not indicative of a permanent increase in our tax rate, it's just a factor associated with the refinance that we just completed.

EPS -- we reported pro forma EPS of $0.13, excluding the extinguishment of debt and including the impact of the new capital structure as if it was in place on 1-1-2006. We provided a pretty straightforward reconciliation to GAAP earnings in preparing that pro forma in our press release.

For the six months our sales increased by $10.6 million, or 3.8%. Comp sales in our patient care centers increased by 1.9%, or $5 million for the year, which is in line with our expectations for the first six months. A $2.3 million increase in Linkia sales accounted for approximately 0.8% of that increase. And if you look at just the Linkia business, that increased in the first six months by 13%. SPS external sales increased by $6.6 million for the year, or a 31% increase. So they continue to have strong results.

Cost of goods sold as a percentage of sales increased by 0.4%, principally due to an increase in cost of materials. Labor cost increased by 700,000 but increased by 0.2% as a percentage of sales in the current quarter, due principally to the sales increase. Material costs increased by $5.7 million versus 2005. As I mentioned before when I discussed the quarter, in the case of the six months, virtually the entire increase was due to the fact that we had the $6.6 million increase in sales at SPS and the related higher material cost. So it's a mix issue.

SG&A increased by $3.9 million for the year, due to a $3.1 million increase in labor costs, primarily due to merit increases and increased labor in general, a $1.6 million investment in our Linkia and Innovative Neurotronics growth strategies, all of which was offset by a $1.7 million decrease in bad debt. As a result, EBITDA was reported at $34.4 million, and it increased 400,000 compared to the prior year. Interest was $1.2 million higher than the prior year, principally due to the impact of the refi and higher LIBOR.

Income taxes -- we recorded a tax benefit of $4 million for the first six months, compared to the $3.7 million provision in the prior year. Again, the reason for that was the same as I mentioned for the quarter.

On the balance sheet, AR decreased by $5.6 million, despite the $10.6 million increase we had in the first six months. And our DSOs were pretty steady at 60 days, compared -- a significant decrease compared to the prior year, when we reported 66 days, and a slight uptick versus Q1, when we reported 59 days, which can be expected since June had a higher sales month by approximately $1.2 million when you compare it to March.

Inventory increased by 1.7 million to 78.4 million, compared to the year-end balance of 76.7. The inventory build makes sense compared to our backlog of sales and our work in process and (indiscernible) purchases.

Our CapEx for the second quarter was $2.6 million, compared to 2.4 million in the prior year. For the year CapEx was 5.2 million, compared to $4 million last year. Both numbers were in line with our expectations, and we still expect CapEx for the year to be in the range of 12 to $15 million.

Cash flow from operations was $17.1 million in the quarter, compared to 23.7 in the prior year, a decrease of 6.6 million. However, the current year was impacted by a $6.1 million acceleration of interest payments on our old bonds due to the refinance. And we also did make a $2.4 million quarterly advance to our practitioners on the incentive comp plan, which we had not done in the same period in the prior year. We take those two differences and add them to the cash flow, we actually were $1.9 million higher than we were in the prior year for the quarter, and $9 million for the year. So we still reported very strong cash flow (indiscernible).

I will now turn the call over to Tom Kirk to comment on operations.

Thanks, George. It's good to be with you this morning. We'll spend a few minutes reviewing the events that impacted our operations for the quarter, and then I'd like to give you some color and an update on some of our growth initiatives. First let's look at our two business units.

As you've heard, SPS's outside sales grew by 3.4 million, which translates to a growth rate of 31% for the second quarter compared to the comparable quarter last year. Just as we said in the first quarter, this is above the level that we experienced for all of last year.

SPS is capturing market share by relying on their superior customer service, their full product portfolio, and a multisite warehousing and effective -- very effective delivery effort. As a result, they've expanded the number of customers, as well as gained more business from existing customers.

They've done this, for example, by increasing their face-to-face visits by almost 40% compared to last year, through a program of improving time and territory management. And they're picking up additional sales of higher value-added products that are available to the independent O&P practitioners only through SPS or direct from the manufacturers. This year they're also benefiting from having brand-new orthotics and prosthetics catalogs in the hands of the consumers.

We continue to be pleased with their overall performance, but we recognize that as the year progresses, they're going to return to more traditional levels of sales increases, which we expect to be in the range of the low to the mid-teens.

Now let's turn our attention to the patient care division, HPO. We achieved the $200,000 increase in sales, which translates to a same-center sales growth rate of about 0.1% for the quarter. As you know, we continue to experience challenges on the reimbursement front here, as payors continuously look for ways to extract economic advantage for their business. And those payors may be government or they may be private. And our data continue to suggest that there is a decrement of about 1.5% per year owing to this price decrement. This means that we have to be creative; it means we have to work harder to find opportunities to pick up new accounts and new businesses, as well as changing our product mix.

This quarter we overcame these reimbursement challenges by aggressively pursuing additional revenues from five key areas.

The first was increasing the volume of business through the Linkia contracts. As George mentioned, these were up about 9% over the comparable quarter last year and almost 14% for the year.

The second is the marketing of our microprocessor knee systems. Deliveries for these units increased by over 10% for this quarter compared to the second quarter of last year, and for the year were up slightly more than 25%, though we have to keep in mind that this volume increase tends to offset some of the lower unit reimbursements that we're seeing.

Third, we believe that we are providing better patient care through our patient evaluation clinics. We call these PECs, and what these do is bring our patients back into our centers on a timely schedule that is consistent with their medical condition. It's much the same as the dentist calling you back for the routine cleanings and service. These programs generated almost $8 million year to date, which is $1 million over the comparable six months in 2005.

The fourth way is by specifying higher-functioning components for lower-performing units when medically justified, and also the linking of certain devices to base codes for better patient care and convenience. We call this latter methodology our pathways program, and we spoke a bit about this during the last call. Happy to say that it continues to gain acceptance among our practitioners and patients.

For example, we've introduced the concept of providing high-quality shoes, which we have branded as ANSWER 2, with the provision of certain orthotic and prosthetic devices. To quantify this, we've sold 54% more pairs of the ANSWER 2 shoes this year, and 30% more pairs of all shoe brands in 2006 as compared to 2005. The program is working.

And the fifth way is that we are maintaining our grass-roots business development and public relations efforts to strengthen our existing relationships and capture new referral sources at the local level, as well as introducing new products to the medical community.

For example, during the quarter we participated with a major supplier in the launch of a new powered lower extremity prosthesis that actually receives its operating signals from the sound leg. We held 10 local media days throughout the country and received quite a bit of local and national press. The rollout is still ongoing within our individual practices, but to date we've already sold two of these high-end devices. And these bill out north of $75,000 each. We are currently in discussions to develop similar programs on other new prosthetic devices.

So, coming back to the big picture, we've told you in the past that we have geographic variances among our markets. We have highlighted some of the markets where we installed some profit and sales improvement programs, and those programs are taking hold in the regions that we discussed at the end of last year and the end of the first quarter. But we still have some other challenges out there.

For example, we have promoted an associate market leader in one of our West Coast markets to the leadership of that market. We are confident that this will result in improved performance in this region in the coming quarters. And we still see some areas of economic anemia in the states serving the automotive industry. The combination of layoffs and uncertainty has acted on a damper for our patients in terms of coming in and receiving the care that they should receive, and obviously, this translates into the same damping effect on our revenues. We're going to continue to make adjustments on a region-by-region basis, recognizing the economic, the demographic and the weather differences across our portfolio of businesses.

Before I move on to give an update on some of the other new revenue projects we have underway, I wanted to mention another project program that we've had in place which we've called our profit improvement program, which was initiated last year. And it's really provided the basis for controlling our costs and collecting our accounts receivable that George mentioned earlier. These programs are still in place and we intend to keep them underway and to press for continued implementation and rollout of process improvements, such as our best value materials program and our workflow programs. Both of those are directly related to the success that we've achieved on the numbers in cost control.

Now let's turn our attention to a quick review of the projects that are underway that we're using to leverage our fixed-cost model in patient care by building new sales, and helping our overall corporation by bringing in some new business opportunities.

First, as you've heard, we've reinitiated our acquisition program. I just want to be clear that we're considering candidates that have strategic value to us in the form of location, quality practitioners, and/or a favorable product service mix. We intend to be very judicious in the selection process, and we know that we can add value through the adoption of the Hanger processes into these new acquisitions.

Next, let's talk about Linkia. We have begun the actual implementation of taking over the Cigna provider network. As Van mentioned, the termination letters have been sent to the providers that will not be in the network on a go-forward basis, and we are working with Cigna on building out the new network.

We've also signed a second provider network management agreement with Great-West Life and Annuity Insurance Company that will take care of their 2 million members. From a marketing perspective we have made, or we are in discussions with all of the large regionals or national healthcare insurance and health management firms. All see value in the concept.

The number of Insignia-trained users and scanning systems in place has increased only modestly since the last quarter. We're up about a dozen trainees and one new regional (indiscernible). As we've mention before, this year, 2006, our emphasis is on optimizing the units that are in place and maintaining an adequate flow of scans through the network to our fabrication capability. We have been seeing the number of scans increase as our practitioners have become more proficient on this tool and we've expanded the number of applications.

We're seeing increased sales from some of the new applications for Insignia in the areas of sports and burn masks, as well as increased numbers of cranial helmets. And at the same time, we are continuing with some of the alpha and the beta tests, and exploring other applications where we can use this technology to add value.

Next, let's turn our attention to the WalkAide product. We've talked about this in the past. It's being introduced by our Innovative Neurotronics subsidiary. I think you're all familiar with the background, so maybe let's skip right to the commercialization status.

As Van mentioned, the training of our in-house orthotists has been completed. The tally is about 550. The product has been commercially available since May 1st. That's slightly later than we originally anticipated by about 30 days, but we took the extra time to make some final enhancing modifications, so we'd be ready to go with product that we felt best met the needs of the patients we're serving.

Our tracking software that's required by this FDA Class 2 device has been installed, tested and is operational. The Hanger marketing effort now includes patient evaluation clinics. I've mentioned this before and how we use this on the prosthetic side. We've initiated this for the sale of the WalkAide. Two have been held and 47 have been scheduled for the remainder of this year.

Our Website is live. We encourage you all to visit that, which is ininc.us.com, just to see what this is all about. To date we have sent out over 800 patient information kits to prospective patients and their family members. These leads, of course, are all being followed up and pursued.

Unit sales are ramping up, particularly since employing our patient evaluation clinics. SPS is making plans to introduce the product to the independent O&P practitioners, another distribution channel. Our ininc team exhibited at an international symposium in Europe and received 21 applications from highly-reputable distributors to take over international sales representation in discrete geographic areas.

Our continuing clinical trials -- our clinical trials are continuing at four rehabilitation sites, and the fifth one is in the ramp-up stage. And we are continuing to work with our outside consultants to quantify the benefits through a health economic study and to prepare our application for code coverage and price to CMS. We will submit this in January 2007, and that will give us the capability to go ahead and bill Medicaid and Medicare on what we call a miscellaneous code until the final code is in place. Actually, that's the way all new products are brought to market. That's the way we worked with the manufacturer on some of the microprocessor knees, so we know this system very well. We're also investigating the administrative and the clinical requirements of penetrating other domestic channels that are available to us.

Last but not least, we've just been advised that the WalkAide product has received the coveted Frost & Sullivan award for the most innovative medical device in this space. This award not only recognizes the product's design features, but also considers its overall benefit to the patients and its commercial potential. Needless to say, we're very enthusiastic and optimistic about this product.

And finally, Van mentioned the announced 4.3% CPIU increase for 2007. I have to tell you that we are actively supporting the associations to make sure that this stays in place, and at the same time we are continuing our support of the Amputee Coalition of America and our state O&P associations by proactively going out and testifying at state legislative hearings on reimbursement parity issues and their absolute necessity in providing quality care to our patients and keeping the profession viable and healthy. We are experiencing great success from these efforts.

In closing, I think the results of our quarter validate that the projects put into place last year are correct, and most importantly, that our personnel are using them and they're generating positive results. We all recognize that there is more work to be done, and we must maintain our focus on continuing these programs and measuring our progress against our established metrics. As we look to the second half of this year, our concentration will be on delivering additional revenues from Linkia, the WalkAide product, and of course all of our revenue and profit and cash improvement projects.

So thank you, and with that I will turn it over to Van, who will moderate our session on Q&A.

Thanks. Lisa, you can open it up now for Q&A.

(OPERATOR INSTRUCTIONS). Raj Kumar, Lehman Brothers.

This is Raj Kumar filling in for Adam Feinstein. I had a quick question here. Do you have -- what is the contribution from Linkia contracts to the same-store sales in this quarter?

In the quarter, the increase in Linkia sales was $865,000. You can compute what that was in terms of comp.

Thank you. And I understand in early 2005, Hanger had put some -- initiated cost-cutting initiatives. And I understand that the expected contribution was about -- expected (indiscernible) was about 10 to $11 million. Could you give us more color on how these cost-cutting initiatives are going?

What we had reported on the follow-up of those things at the year-end call -- those are still in place, by the way. There were four of those, and so what we have seen was, number one, was to actually go in and reevaluate headcount relative to corporate and service units. We made some changes, some decrease. We suggested that there would be roughly $2.5 million resulting from that effort, and we documented that in the form of labor cost savings.

Number two was to look across our G&A area, and certainly we have done that. We have tracked our travel and entertainment, communications expenses, and we were able to achieve that. That was in place, and those projects are still continuing. We are constantly, as you know -- just take telecommunications. Prices are going down. So we are constantly negotiating with our suppliers to ensure that we get the best possible deals that are out there. So they're still underway. But as far as last year, that was successful.

The third area was in materials. We had forecast that we would see -- and by the way, all these numbers are before the participation, to the extent that it exists, in our variable comp plan. Because obviously some of these savings reported over into consideration for variable comp. So going back to the third, it was in the area of materials, and we had forecast about a $4 million savings. We reported that we could have documented about a $4 million savings. But regretfully, because of increases in the price of oil, which reported into many of our polymer and petroleum derivative products, and increases in the metallics of aluminum, titanium, and even steel, we didn't get the full benefit of that before. We felt that we had only gotten about 1.5 of that because of the severe price escalation that we saw. In spite of our best efforts, many of these things (indiscernible) commodity.

Last but not least was in the area of workflow process improvement, where we said that we were going to do a better job on processing and collecting our receivables, and ultimately that would translate back into a lower bad debt percentage. And I think the information that George gave really speaks for itself, and what we saw in the first quarter was 59 days DSO, 60 days DSO for this quarter. And you've seen our bad debt percentage come down, as evidenced from the -- one of the major factors in decreasing our SG&A.

So as we reported at the end of last year, that was one that we wouldn't see immediately full benefit, because, as you know, it does take a little time to prove these things up with your auditors. But we are seeing the translation of that.

So these programs are all underway. I guess in total, given the conditions, we were successful as we could have been. They are ongoing. And given enough time here through these quarters, we are seeing that we are actually going to achieve our goals.

One last question before I jump off. This quarter we saw a sequential decline in the number of practitioners, [to] about 20. Can you comment on that please?

Sure. What you're seeing there are the impacts of two things. One is we continue to rationalize the business in the best way that it makes sense, consistent with two things -- one, having the appropriate provider network from the insurance company's perspective; and secondly is looking at where the opportunities really are and how we can best service them. So we're doing a little bit of rationalization, and when that occurs we always try to focus and keep our highest-performing employees.

At the same time, as you know, there is some ebb and flow in this business. And as a result, we have lost some people through what I would call voluntary. That's pretty much normal, though. We have seen historically through the periods about a 7% voluntary turnover. That's retirement. That is people that decide they want to go into business for themselves. Obviously, we get some of that back through SPS. But at the same time, we have a very full pipeline of people that we are bringing in to serve their internships out of schools, they're in the process of serving a residency with us, and we have doubled the number of people in that pipeline over the last two years through our education and HR team. So we're not concerned with the number of people. We think we're continuing to focus on the best, and we think we've got a good pipeline of others that are coming into the system because we've enhanced those recruiting programs.

Henry Reukauf, Deutsche Bank Securities.

Just a follow-up to the last question. Are there any more cost savings to come, or are we kind of now done with those?

As I mentioned, the programs are continuing. The two major areas of focus that we have clearly in our sights are, number one, we don't anticipate that we're going to be able to knock the socks off of materials reduction. But we are working with our SPS team to identify ways to lower material costs. That's coming through creative sourcing, it's coming through some other technologically-designed products that meet the need that perhaps are not quite as expensive, and it's coming through concentration of volume, and then trying to work with our vendors to bring that volume to them so that we can reduce cost. So materials is continuing, and we just can never let up on the materials side.

The other area is SG&A. There is constant cost creep that seems to be in the system. As you're aware, Henry, we're heading towards some inflationary times. So that shows up in -- whether we're talking about copiers, whatever. We've put programs into place by taking our volume and putting it on a national office supply company, so that all of our patient care centers, as well as our divisional headquarters, all buy through one vendor. We implemented that program last year. So we continuously try to go after this.

And another example is the telecommunications that I saw. New technologies are out there. So we evaluate on a continuous basis everything from Blackberry use, is there something better -- better, faster, cheaper -- all the way through the paper in the office. So those two things are underway. And needless to say, just reflective of my comments on the practitioners, we're continuously looking at our network, patient care centers, and the backup support through fabrication to make sure that we're as efficient as possible.

So normal blocking and tackling, best you can. But the cost savings from last year's plan are basically in place, and now it's just a continuation of the blocking and tackling and looking for the best things you can do?

That's correct, Henry. To add to Tom's comments, the orders we have out to all the overhead departments to the department managers is to keep their '06 expenses at '05 levels.

Just on the 40% of the business that gets the 4.3% increase, assuming Congress doesn't step in and change something, that's the way we should look at that 40% of your topline, times 4% increase?

That's correct.

I missed the first five minutes of the call or so. Just in terms of the topline growth, same-store or same-center growth, I think 0.5%, with a 1.5% decline in price per year, which you cited -- you're getting about 2% volume increase -- that's about what you continue to expect? Or do you think with Cigna you'll be able to see some more? What do you think the impacts of that will be? And just generally where do you see the volumes going?

I think your numbers indicating the offset there are pretty much on target. We do see that there would be some incremental additional business above that to the extent we're successful in bringing in some of these other provider network contracts to Linkia. We are expecting to see incremental business in certainly the two that Van mentioned earlier, which was Cigna and Great-West. So we're going to get more on top of that, and then WalkAide would be on top of that also. So I think that you've outlined pretty much the base business there.

Do you have any expectation for a thought above, say -- you can kind of be flat. It sounds like flat topline offsetting volume, offsetting price declines to a degree with Great-Western and Cigna. Do you think that bumps it a point, or you just kind of wait and see with that, in terms of volume?

We're still comfortable with the guidance that's out there, Henry, that had our sales in the, I believe, 600 to 603 million range. And I think you can take from that that we should see some acceleration in our sales volumes in Q3 and Q4.

Arnold Ursaner, CJS Securities.

The first question I have is same-store sales -- obviously, in Q2 you were up against an impossible or very difficult comp. Could you comment or remind us again of the comp we have in Q3 as it relates to Katrina, and what your view for same-store sales in Q3 might be?

Katrina did impact us a bit, as you certainly are aware. Our Q3 sales last year were slightly lower than the Q2. Q2 was a bit abnormally high for the seasonality that we normally see. So we will be -- as you know, Katrina was not a major impact on the business. We have suffered the closure of a couple of facilities that are still closed; we're still waiting for the people to come back.

So as we look at Q3, we intend to keep the pressure on in those five areas that we mentioned. We expect that we're going to have some incremental volume coming out of the ramp-up effect of our Linkia contracts, and we certainly -- in the case of Innovative Neurotronics, I think it's safe to say that we have seen -- since the product's been available, we've seen a doubling in the delivery of the number of units on a month-by-month basis. So we're getting some traction there.

So as George has indicated, we're still comfortable with the overall guidance that's out there and some of the numbers that the analysts have put together, and we are expecting to see us go up a bit.

And also, as I had mentioned earlier, we came out of the second quarter with historically-high work-in-process numbers. So there's a lot in the pipeline; which, you know, given the fact that it gets delivered here in the third quarter, which is what we anticipate, I think that adds to our comfort level here. Because we really came out of the second quarter with historically-high [whips].

My second question relates to Linkia. In the past you've given us annual guidance for Linkia. Now that you actually have contracts and have been running it for a while, it seems surprising you're no longer giving any guidance on what you think your revenue contribution from Linkia will be. And since it's essentially pretty critical to the investment theme, could you perhaps share your views of Linkia revenue for both the balance of this year and for next year?

One of the things, just a clarifying statement here, is that remember Linkia is a contracting organization. It derives the ability to satisfy contracts in two sources. One is it reaches out to our HPO division. And where they have facilities in place consistent with the insurance companies' membership, that business just runs right through HPO and it reports into the HPO business. Alternatively, now that we've got the provider network contracts, which we have two that we just mentioned, it will be providing some services to those people. We expect that split to be 60/40, 50/50 on these contracts. So it will derive a little bit of interest, so to speak, or (indiscernible) as business passes through and they provide the electric service, electronic service capability.

So when we speak of Linkia, typically what we're talking about is the amount of business that Linkia will be bringing. When we've historically said that -- and for example, the Linkia business could be up by 15 to $17 million -- that was based upon the amount of business that the Linkia contract would provide the HPO. Because the other people that are out there, they're going to get the benefit of that business, and Linkia would only see some service revenues coming off of that.

So those numbers that we've put out in the historic past are the ones that directly relate to HPO. So as we look at the Linkia business, given that the ramp-up is going to be lagging a little bit behind where we've said we were going to go, it makes it a little more challenging, if you will, to hit the overall sales target that George has indicated. But we think that with some of these other programs out there, we're just going to push harder on those -- and you've heard some of the statistics of being up 25% year-over-year -- so that we can equalize out.

If we step back from Linkia and say what are these new contracts really going to bring us, we're back to the same kind of numbers that we had. Overall, when we looked at what would be the Linkia increase year over year, we were forecasting something in the 17 to $18 million region for '06, and said that we'd probably get maybe another 8 to 10 on top of that, given on the contracts we had. That's still good. We're just going to shift it maybe one quarter out, so we could still expect to see that same kind of performance of the Linkia contracts flowing into HPO as we originally spoke about, except it may be delayed by a month or two.

I may be confused by apples and oranges, but I think you indicated you had 865,000 in sales from Linkia. And I'm trying to equate that with the roughly 15 to 17 million you've discussed in the past. While I appreciate it's back-end loaded, maybe I'm just missing the connection between the two numbers you've given.

What we're talking about with the 800,000 number -- Linkia is a contracting organization, so it has some contracts that are preferred, it has -- the two new ones are exclusive. So what George was referring to is the traditional book of business coming out of the preferred contracts, where there is no obligation to give us the business. There is really -- the increase in business derives from our ability to satisfy customers and perform better than anyone else. And that's what we've historically had. So what George was reporting is the fact that insurance companies are quite satisfied with what we've done, and so we've been growing that traditional piece. And that's the migration that he was referring to. And then you take the new business coming out of these exclusive contracts, and that goes up on top of that.

The 865,000 that George referred to was the increase quarter over quarter. That's not the total. That's where you're mixing, I think, total numbers with increase numbers.

What was the revenue from Linkia, if you have such a number?

It was 10.33 million [for the quarter].

(OPERATOR INSTRUCTIONS). Ray Garson, UBS.

You touched on a couple of things that you're doing to stimulate sales in the distribution business. Within the current quarter, obviously, pretty strong growth. Are those actions expected to continue to fuel kind of that type of growth through the balance of the year, or was there something more unusual about this quarter that really bore additional fruit?

I think two things are going on. Many of these programs that I just discussed have really hit full force in Q1 and Q2. And when we compare back to Q1 and Q2 of last year, that's why you see that profound impact. If you look back on SPS, their business ramped up in Q3 and Q4. So although these programs are going to continue in place, they're going to continue doing the same thing, we don't expect the same-store sales increase quarter over quarter to be as dramatic in Q3 and Q4, for two reasons. One is last year they improved. As the year went on their book of business went up. And secondly, the big impact of some of these programs is already in place -- the new catalogs, the change in the way the sales department is approaching its mix of customers, etcetera, etcetera. So we expect it to come down on a comparative basis to more modest levels. I think I mentioned low to maybe mid-teens is where we would expect to see it for the remaining quarters.

Van, you mentioned a record backlog of work in process. Could you just give us some sense of magnitude, what specifically type of increase are you talking about there?

We closed out the second quarter with about an additional 5 million of work in process. It was about 4 or 5 million.

Great. With respect to the acquisition program, again, you talked about being pretty strategic and a framework that the targets would have to meet. Can you give us some sense of scale of how many transactions you're evaluating, and some perspective for magnitude from a cash perspective?

Right now, in the hopper -- obviously, recognize there is a funnel -- there's about 10, 12 projects. These have surfaced as a result of our analysis of our specific market conditions. We use this word densify around here, and that really means we like to put them in to give us additional juice within a market so that we can leverage off of what's there.

So we're looking at where we are, we're looking at where the patient patient growth is, we want to be in play, and last but not least, it takes a willing buyer and a willing seller. So we know pretty much who's out there, who's interested in selling, and people approach us on a routine basis.

So there's 10 to 12 projects. We're pretty comfortable with that. We recognize that we've got a pretty small staff that goes out and does this, in terms of evaluating and completing the transaction. And then of course we have to integrate it. And there's no real, real big ones out there anymore. So when we talk about an overall program, we're talking about maybe a targeted 15 to 20 million annually as a target basis. But we recognize that we may not get all of those because of all the conditions we've mentioned. We certainly are not in the mood to overpay. We think we can value if we buy them right, and we think we can offer good opportunity for those practitioners that join us. So something in that neighborhood is what we have in hour crosshairs.

With respect to valuation, can you just give us a sense for kind of where the smaller one-off kind of opportunities that you're looking at would -- what should we think about in terms of kind of valuation from an EBITDA perspective?

I think it's too early for us to answer that. Certainly with the pricing pressure that freeze put on our competitors, as well as us, we believe we're going to be paying less than we had historically, which were in the past in the four to five times range. But we don't have enough -- we're not far enough along in the process yet to really be able to evaluate that question.

You mentioned -- I think it was Tom that mentioned in the prepared remarks some management changes in the West Coast region. Can you just give us some perspective? Is there something specific there that warranted that change? Are the things stabilized, or is that kind of something that is developing? Should we take anything out of that comment other than that? Just a little more color there.

No, you shouldn't read anything above and beyond. It was a region that's in Northern California. We made a management change. We were -- it was just time for a change. I think both the former market leader and us both felt that this was a good opportunity. He had some other things that he wanted to go and do, and we were fortunate in that we had a high-quality guy serving as the number two, and he stepped right up into the spot. And as with any change, that brings new programs, new projects, new outlooks. And we think it's going to be very positive. What we've heard back from all the people out there is that they are reenergized and ready to go after this business.

So that was one of the regions that we saw in the past -- it began to happen maybe in the first quarter and then more in the second quarter. We just didn't see the performance to where it should have been, where we thought it should have been. So it was one of the things that we do from time to time, just to optimize performance in our market.

I think that the key reason for us disclosing that is that we do in fact have succession planning in place, not just at the markets, but certainly throughout the Company, so that when in fact we made this decision -- a join decision with the market leader to disengage -- we had someone who was well-versed and well-qualified to immediately step into his shoes.

That's great. I just have two cleanup questions. George, I missed cash at the end of the quarter. You affirmed revenue guidance. Can you just remind us again of the EBITDA guidance for the year? Thank you.

Cash at the end of the quarter was 12.6 million. One of the things that you should keep in mind is that we had about $10 million in leftover bonds that had not yet been called that are sitting in our current liabilities, and that they were tendered in -- I'm sorry -- called in. That finished in July. So you'll see that coming off the balance sheet for Q3. And in terms of guidance, we were guiding in the 77 to $78 million range in terms of EBITDA.

At this time there are no further questions.

Thank you all for joining us. Look forward to talking to you at the end of Q3. Have a good day.

This concludes today's conference. You may now disconnect.