Hanger Inc (HNGR) 2007 Q1 法說會逐字稿

Good morning. My name is Lawanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger Orthopedic first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Mr. Sabel, you may begin your conference.

Good morning and thank you very much, Lawanna, and thank all of you for joining us for our first quarter 2007 earnings conference call. Before we get started I need to obviously read our Safe Harbor statement. During this call, management will make forward-looking statements relating to the Company's results of operations. United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements relating to future results of operation in this document, 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, 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.

Now, let's get on to the results of our first quarter. I'm very pleased to report net income of $1.8 million, or $0.06 per share, and a 2.5% revenue growth for the quarter ended March 31, 2007. Our reported EPS grew from a loss of $0.03 per share to an income of $0.06 per share compared to the first quarter last year. Growth that we were able to generate was in spite of some challenging weather impacting our Northeast and Midwest markets. Of note was that the sales growth in our first quarter was primarily the result of a $3.3 million, or 2.6%, increase in same-center sales at our patient care business.

The sales in our distribution segment was essentially flat due to the very difficult comparisons of the first of last year where SPS grew by over 30%. Contributing to the sales growth in our patient care centers were the continued ramp-up of our Linkia contracts and the impact of the previously-announced Medicare price increase.

With regards to our other initiative, WalkAide at Innovative Neurotronics, many of you have heard that we are in the process of applying with CMS for coding and reimbursement and we would like to take this opportunity to provide the investment community with greater insight into the coding and reimbursement application process, as we understand it. So as such, let's step back and look at what the process entails. The first nuance we would like to clarify is that at a high level the approval of the unique reimbursement code and the approval of coverage and reimbursement are separate processes and decisions that are not necessarily linked.

CMS views of the approval of a unique code as a cost benefit decision that is based on whether there is and or will be sufficient amount of claims volume to justify the administrative cost of implementing a unique code. As such, the approval of a unique reimbursement code for WalkAide does not mean that we can begin receiving reimbursement, nor does the denial of a unique code imply that we cannot receive reimbursement. In fact, CMS has already issued a preliminary decision where they indicated that our initial application has not yet demonstrated sufficient sales volume to justify the establishment of a unique code, but they indicated that we can utilize the 99 miscellaneous code for WalkAide.

We just recently on May 3 had a face-to-face meeting with CMS where we submitted updated sales information that illustrated a further sales ramp for the WalkAide and presented our case, again, for a unique code. The results of that meeting will be disclosed to us sometime in September.

With that said, CMS may still determine that our current sales volume remains insufficient. Although we would ideally like to have a unique reimbursement code for WalkAide, we view the coding decision as neutral to us because it is not a determinant of whether or not we will receive reimbursement for Medicare, and they have already authorized us to build for reimbursement under the 99 miscellaneous code.

So let's understand the second and more critical application process for CMS relates to coverage. And this does impact whether we will receive reimbursement. For this process, we have to, first, finalize our clinical trials, compile the efficacy data and complete the health economic study, and then submit our application. This information will be the basis for CMS to make a decision on what indications will be covered and, thus, what we will get reimbursement for. We are confident we have an effective product, but we now have to support this with the quantitative data and present our case to CMS, and we anticipate we will have an initial look at that data by the end of this summer.

With all that said, and what we have described thus far is a process for receiving reimbursement from the government. Bear in mind that once we have compiled and analyzed our efficacy data and the health economic study from the clinical trials, we will also be about to begin petitioning the commercial payers for reimbursement as well, and their decision regarding reimbursement is not necessarily tied to the decision by CMS. We hope that the reimbursement application framework that I have just outlined provides you with a better understanding process we are pursuing. However despite not having any third-party reimbursement, we still have been able to generate almost $3 million in WalkAide-related sales less than the one-year since we launched the product.

Lastly, during the first quarter of 2007, we also received other positive news in terms of, one, the dismissal of the class-action complaints that were filed by Twist Partners and other plaintiffs alleging securities law violations, primarily related to alleged billing improprieties at one of our Hanger patient care facilities. In this ruling, the court dismissed the complaints with prejudice and confirmed our assertions that the claims were without merit.

And, second, I am pleased to report that the improved outlook from S&P and the ratings up rate for Moody's, which will directly enable us to lower our cost of debt under our credit agreement by an additional 25 basis points, was just recently received. At this point, I would like to turn it over to George to go over the financials.

Thank you, Van. Thank you for joining us this morning. First, I'm going to make some comments on the income statement. Won't make any further comments on sales, as Van has already discussed most of the changes in the sales, and Tom Kirk will also give you some more color in a second.

On cost of sales as a percentage of sales was 50.4% for the quarter, which is 4/10 of a percent higher than the prior year due to an increase in material cost. Q1 performed better than the full year last year, so to look at the material rate for the quarter, you should really compare it to the full year last year. And the first quarter of this year was 50 basis points less than the actual full year last year due to the impact of the Medicare rate increase, so the cost of materials, overall, and the cost of sales, overall, came in where we expected them for the quarter.

SG&A decreased by $500,000 compared to the prior year due principally to continued emphasis on cost controls. There really wasn't any one factor that led to that decrease. EBITDA, as a result, increased by $1.5 million to $16.1 million from $14.6 million in the prior quarter. EBITDA margins improved 11.2% compared to 10.4% in the prior year due principally to that decrease in SG&A expenses.

Interest and depreciation, or interest, decreased by $160,000 due to the impact of the refinancing and the repricing of our debt. And our depreciation was $60,000 higher than the prior year due to slightly higher capital additions. Our income tax provision was 41.6%, which was comparable with last year's rate and with our expectations for the year, so far.

Our EPS of this results for the quarter was $0.06 per fully diluted share, compared to a loss of $0.03 in the prior year. I would like to point out that it was slightly more diluted to our earnings per share calculation in Q1 not to convert the preferred stock and that is due to our seasonally low income. Actually, the difference was very slight, it was only $0.001 more dilutive to not convert.

So you would have noticed a lower share count in the press release. We expect that computation to swing back to one in which you convert the preferred in Q2. And we should end up with a share count of just under 30 million shares depending on the stock price. So you should not change your share count in the model, as to the lower numbers, we expect it to revert back to the other calculation for the remainder of the year.

On the balance sheet and cash flow, our AR decreased by $6.1 million compared to year-end and by $2.2 million compared to the prior year. Our DSOs improve to 56 days, which, again, is our lowest DSO ever. We are pleased with the result and our AR over 1/20 was $18.1 million. Now that was a $500,000 increase over 12/31 results, but you should keep in mind that that was our lowest reported balance ever and this is our second lowest reported balance ever. So our AR quality is still good. Our inventory decreased slightly by $300,000 to $75.5 million from $75.8 million last year and SPS accounted for that decrease, as they managed their inventory well.

On the debt side, as Van mentioned, we had received an upgrade from Moody's in our family rating to B2 and the term loan agreement calls for an additional 25 basis point reduction from the current 225 basis point adder on the term loan now that we have been upgraded by Moody's as well as the S&P, and once we file our March financials with the administrative agent and prove that our leverage, as calculated for the agreement, is below five times. And it was 4.85 times as of 3/31/07. So we have met their requirement and expect to make our filing next week. The annual savings for each 25 basis point reduction is just over $550,000, but keep in mind that our actual savings will depend on fluctuations in LIBOR.

CapEx for the quarter was $4.1 million, which was in line with our expectations and our budget of $17.5 million for the year. Cash flow from operations was $2.2 million in Q1, as compared to a use of $12.8 million last year, a $15 million improvement. That is due principally to a combination of the improved earnings as well as a change in the timing of the interest payments on our bonds, which are now being made in the second and fourth quarter, as opposed to the first and the third. That shifts approximately $9 million in the semi-annual payment into the second quarter, which is one in which we traditionally have a better cash flow. So that is a good change, in our view.

Lastly, guidance, we are reconfirming our guidance for 2007, with sales in the range of 620 to $630 million, 3.5 to 5.2% growth, and EPS of $0.59 to $0.61, which is a 20 to 24% growth at range. Although we do expect to save interest cost due to the 50 basis point decrease in the adder on our term loan from the two events we have had so far this year, the increase in our stock price will increase our share count for the EPS calculation, so our view of projected EPS growth has not changed.

That concludes my comments on the results. I am going to turn the call over to Tom Kirk now.

Thank you, George, pleasure to be with you all this morning. I will start by reviewing the events that impacted our operations for the quarter and then I'll give you an update on some of our growth initiatives.

So let's first take a look at HPO and the SPS stories in more detail. HPO, our patient care division, received a $3.3 million increase (technical difficulty) same-center sales growth rate of 2.6% for the quarter. With the new 4.3% CPIU increase, which impacts about 40% of our book of business, we have been able to counter the negative price trend that we experienced in most of our recent quarters, and we have discussed that with you on prior calls.

Our latest data and analysis indicates that we have brought the 1.5% price decrement back to at least initial position. Volume and mix account for the remaining one plus percent. This indicates that we have to work harder to capture more increases in unit volumes and improvements in our mix.

For the quarter, the majority of our revenue increase was attributable to four key areas. First was the CPIU increase in our fee schedule that I just mentioned. Second is the continuing improvement in our Linkia book of business. Remember that HPO was the primary vehicle for the delivery of our services under the Linkia contract. On an overall basis, the Linkia-designated contracts are up about 3.7% for the quarter.

Third driver is the continuing emphasis on our high-performing products, such as the microprocessor knee marketing and education effort. For the quarter, this product line was up about 35% in terms of both (technical difficulty) delivery for those products. Fourth is our use of our patient evaluation clinics, which have proven to be excellent opportunities for both our patients, latest products (technical difficulty) that their current devices are correct in terms of fit and function.

In spite of some of the positive events in our revenue statistics this quarter, (technical difficulty) we are still actively working on the long-term viability of our reimbursements (technical difficulty). We do this by collaborating with our industry (technical difficulty) programs that are absolutely necessary to (technical difficulty) policy (technical difficulty). One notable outcome during the quarter was that CMS announced that off-the-shelf orthotics would not be (technical difficulty) competitive portfolio during this first round, which is (technical difficulty) initiated in 2007.

While they may change their mind in 2009, (technical difficulty) by that time the administrative (technical difficulty) battle-tested (technical difficulty) Hanger decides to participate in directly (technical difficulty) Linkia will be in a very strong position in terms of our material costs and access broad customer (technical difficulty) working with these associations on the details of the qualified provider quality stands and the enforcement provision for these (technical difficulty) CMS' long-term goal to ensure that they are only reimbursing qualified providers for the work that is performed.

At the state level we continue to support the ACA (technical difficulty) Coalition of America, on educating state legislatures on the issues involved with reimbursement caps, how these deprive patients of quality care. Six states asked parity in 2006 (technical difficulty) they're actively working with another six capacity (technical difficulty) 2007.

We did have several markets that were impacted by severe storms during the quarter. Typically, those in the Midwest and the Northeast Van mentioned earlier. Now, we normally allow for some interruption due to winter weather, but in some of our PC (technical difficulty) located within these markets, the impact was particularly hard and/or they endured it (technical difficulty).

Now let's turn our attention to SPS. Their outside sales were essentially flat compared to the first quarter of last year, as we anticipated (technical difficulty) during the second half of last year. You have to keep in mind that that first quarter of last year is a difficult comp period, but they grew in excess of 30% compared to the first quarter '05.

They continue to offer superior customer service, full products portfolio, and multisite warehousing with effective delivery that differentiates them from their competitors and adds value for customers. This will win long-term. In addition, they are exploring some changes (technical difficulty) at work that will allow them to provide even more service to their customers. Also, we are finding that as the Linkia network grows, SPS is in (technical difficulty) position (technical difficulty) by physician high quality and value (technical difficulty) partner.

Now on the subject of (technical difficulty) building our share with some of the healthcare companies have under contract. To support our full Linkia contract, we built-out the network over (technical difficulty). That is up by over 20% since last the time we (technical difficulty). On the marketing side, we're (technical difficulty) discussion and negotiations (technical difficulty) national and large regional healthcare management company (technical difficulty) the firm workman's compensation segment.

Now let's have an update on the WalkAide product that WalkAide product that Van mentioned earlier. Van has already described the process and the status of the application of (technical difficulty) I'll go directly to providing some color on their accomplishment first quarter. HPO, as you know, has had most of its practitioners trained and are holding patient evaluation training seminars around the country, gaining traction and resulting in higher sales. SPS is offering training sessions and seminars for the independent. Several have been held during the first quarter or are planned for the remaining quarters of this year.

Two new institutions, one in San Francisco and the other in Washington, DC, have submitted their clinical trial protocols to their internal review boards in order to launch new clinical trials. These are going to be supplementary (technical difficulty) [five] existing venues. (technical difficulty) how important that is based on the description (technical difficulty) gave you.

I also want to comment on the progress of our six rehabilitation sales representatives. Physical therapists, they have initiated WalkAide sales in (technical difficulty) inpatient and outpatient rehabilitation facilities. Eight major rehabilitation (technical difficulty) purchase WalkAides (technical difficulty) incorporate into their protocol.

WalkAide's website continues to score a high number of hits. There were almost 5700 requests for information through the website or our toll-free number in the first quarter. WalkAide has been featured on television shows five times during the quarter, including the Montel Williams special show on multiple sclerosis, where it was referred to as the new technology of the future (technical difficulty) disastrous effects of this (technical difficulty). 281 stations carried this show to an estimated audience of 2.8 million viewers. In addition, WalkAide has been featured in over 20 journals and magazines during the quarter.

Finally, IN Inc. has supplemented its existing staff with finance, quality, manufacturing, and international marketing directors. Interest among the international applicants remains high and with these new directors (technical difficulty) the new director for international. We will be pursuing these opportunities on a full-time basis.

Finally, a few closing words on acquisition. We made one small acquisition during the quarter and as we have previously stated, we are only considering candidates that have strategic value to us in the form of locations, quality, (technical difficulty) from their protection practitioner standpoint, and/or favorable product service characteristics. We have ongoing discussions with other candidates that meet these criteria.

In closing, I think the results for the quarter validates that the projects that we have put into place last year are correct. Most importantly, our personnel are using them and gaining positive results. We all recognize there is more work to be done. We must maintain our focus on majoring measuring our progress and establish metrics.

As we look to the balance of 2007, we are concentrating on delivering additional revenues (technical difficulty) all four of our businesses -- HPO, SPS, Linkia, and WalkAide -- while investigating new sales opportunities in our delivery channel and product. That ends my remarks. Thank you very much.

I will turn it over to Ivan Sabel to him manage the questions.

Okay, Lawanna.

Thank you.. (OPERATOR INSTRUCTIONS). Dawn Brock, JPMorgan.

Good morning, gentlemen. A couple of quick questions. Let me just make sure that I got this right. The price versus volume, it was about 1% from volume versus price, as far as the 2.6% same-store number was concerned?

That's right. We feel that the price increase translated back to about 1.5% increase, Dawn.

Okay.

The remaining volume and mix characteristics account for the difference, or about 1.1% combined.

Okay. Perfect. And just, you know, you talked a little bit about the decrease in SG&A. It looks like it was a decrease in later. Where was that?

Dawn, it was not in any one specific area. Our healthcare cost was lower than expected. The balance of our labor was where we expected and we had some other decreases in expenses, like professional fees, but there is no one account to point to, to account for the difference.

Okay. And just, I mean -- tell me if I'm barking up the wrong tree, but on the healthcare side, I mean, you know, last year -- actually probably late '05 -- the bonus system was changed and, you know, the healthcare costs were rolled into the incentive program. Did that have any impact on this?

No, no. This was just our straight healthcare claims were lower than they have trended in the prior year.

Okay. Just a few other things. Cost of materials, do you see any relief on the horizon, or do we think that the CPI increase is going to continue to be kind of offset by the increase in materials.

I think, Dawn, that we are going to continue to stay under CPI-type of inflationary pressure on the materials. It is coming back again that most of the materials that we use, or a great percentage of them, are related to key metals -- and we all know that metal prices are up -- or they are derivatives of oil, through certain kinds of polymers. So we expect to see continuing pressure in that area.

That is why we have redoubled our efforts, in terms of sourcing appropriately, using our volume where appropriate, (technical difficulty) that our patient care centers buy as much as possible through SPS, and last, but not least, just going back and reviewing our fundamental processes on how we use materials, lower amounts of rework, and to become more efficient. So it is going to be a continuing struggle.

Okay. Understood. On the Linkia book of business, I know you said, Tom, that it was up 3.7% year over year. Can you break that down into a dollar amount for the quarter?

Yes, let me get back -- I will pull that out and get back to you in just a couple of minutes, okay?

That would be great. And just lastly on the acquisition side, I know you said you did one small acquisition in the quarter. I mean, what are you guys seeing as far as supply out there, attractive targets? You know, we know that the refinancing allows you some more flexibility at this point. What are you just seeing as far as the environment is concerned?

Dawn, this is Van. We -- this is still a very attractive environment in terms of acquisitions. There is still a lot of interest on behalf of some of the independents that want to join forces with us. We are just being very careful in order to make sure we do, number one, strategic acquisitions, as Tom pointed out. We want quality acquisitions. There are a number of them out there. We want to make sure that it is strategically fills our network requirements as well as our densification requirements. So the atmosphere and the environment for acquisitions has really remained pretty much the same as it has been in the last year or two.

And, Van, just to follow up on that really quickly, I mean, are you seeing a lot of these attractive targets, you know, within the Linkia network? I mean it seems like a very, very natural relationship or natural partnership. Is that where you are seeing a lot of the attractive targets?

Yes, I mean we -- the whole -- as Tom pointed out, we are now in excess of 200 independents that have joined the Linkia network. And to be honest with you, in order for us to get them into the Linkia network, we are looking for the eight players, the quality players, because it obviously is a direct reflection back on the effectiveness of Linkia and the kind of quality care that we are able to provide. And so it is a natural area for us to look at. It gives us the ability to work closely with those independents and, in fact, may at some future date turn into an acquisition opportunity. And several that are currently under discussion do come from that pool.

Okay. I have one last question. I promise I will give everybody else an opportunity. The difference, or the volume that you are seeing on the WalkAide side, what percentage of that would you say is actually coming out of the AFO volume versus actually additional volume that is being generated by the product?

It is primarily additional volume by the product. This is not an either-or at this point. I mean, our AFO volume continues to track as it has historically, so these are people that want to access the new technology and, in many cases, are new patients that either have not had an AFO previously, or, in fact, are getting both an AFO and a WalkAide. The AFO to be used when they are not using their WalkAide product. So there has been no degradation of our AFO business up to this point.

Okay. Excellent. Thank you very much.

Dawn, Tom has that number for you.

Oh, perfect.

3.7% translates to about $0.5 million increase across their whole book of business. I wanted to double check that. Obviously with the ebb and flow, some are a little higher, some are a little lower. But it averages out to be about $0.5 million (technical difficulty)

And that would be incremental over last year not -- that would be purely intercompany, not consolidated?

That is incremental over last year.

Okay. Perfect. Thank you.

Raj Kumar, Lehman Brothers.

Thank you. This is Raj Kumar in for Adam Feinstein. I just have a couple of questions here. Cash flow is better than expected, so I just wanted to get your sense for what's the cash flow going to be for the year? Are you expecting it to be up, or maybe same as last year? Could you give more color on that?

Sure, Raj. The cash flow was up versus last year and we expected that in the first quarter, because we knew that the timing of the interest payment had changed and expected higher earnings. Our overall expectation for cash flow this year is that it is going to free cash flow will be comparable to last year. we do have a slightly higher budget for CapEx, at about $17.5 billion million, compared to last year, but we do expect the cash flow to be slightly higher than last year and offset that increase.

Okay. Thanks. And do you have a WalkAide sales number for the quarter?

We have not started to report that number yet, Raj, as we're still -- we don't even have a full year to comp. And I think as we get into the year a little bit further -- we are just opening up all of these delivery channels -- we will give you more color on that.

Raj, as you may remember, the initial launch was last May and I think what we will be able to do is start giving you comparable numbers as we go into the balance of the quarters this year, because then we will have something to compare to. But in the 10 or 11 months of sales as of this point, we are approaching something in excess actually of the $3 million range. And of course keep in mind that none of that, for the most part, has been reimbursed by any third party. Those are all private sales that are occurring as of this point.

All right. Thank you.

There is just one other point on that, Raj. Is as you are thinking about your model, remember that we are running three distribution panels for this product -- won through HPO, one through SPS and then IN Inc. through its international outlets (technical difficulty) rehabilitation centers. So all three have different price points, so it ends up in a blended mix compared to (technical difficulty) just can't take the sales and divide by the average selling price that is out there in the marketplace.

All right. Thanks.

Arnie Ursaner, CJS Securities.

Hi, good morning. First, a comment. I think it would be helpful for all if you limited questioners to one question and a follow-up. My question, if I may ask it, is you had $1 million decrease in non-labor related expenses, which was pretty helpful in the quarter. Do you expect those to continue in the second quarter and going forward, or are they more one-time?

We do have a pretty aggressive budget for SG&A this year. We expect to manage it close to last year's number, with the exception of our investment in IN Inc. as we move forward with that. So to answer your question, we do expect maybe the SG&A to track at a slight increase to prior year going forward. We don't expect it to be lower than the prior year in the ensuing quarters, however.

And my follow-up question, if I could, is your revenue guidance for the year implies an acceleration. If you are implying 3.5 to 5.2% revenue growth for the year, implied in that is an acceleration in the second, third and fourth quarter. Can you give us a little better feel for some of the drivers of that? How much of that, in your view, would be same-store sales growth, how much of that would be price?

Well, a couple of things will drive that, Arnie. One is, if you recall, when we discussed the 4.3 price increase (technical difficulty) as we told you, while that would apply to the Medicare customers, that it [wouldn't] roll through our contracts. So we have done an absolute scrub down of all the contracts to ensure that we've got the counter parties to the contract onboard. We will be picking up more of them as we go through the year as they come up for renewal, so that will be a key thing that will drive this event. Of course, that I will report in as (technical difficulty).

We also expect that some of the growth patterns within IN Inc. are going to change. We expect to pick up more traction through the (technical difficulty) market, through the independents, all of the channels, really. We think that will add to it. As I mentioned, HPO has a number of internal programs in place -- their patient evaluation clinic. And if you keep in mind that the first quarter (technical difficulty) we are smacked with the bad weather.

That is the quarter where people are coming off and going -- coming off of fully-utilized (technical difficulty) so they are somewhat apprehensive of going out. We get better sales traction in the second, third and fourth orders. That is when our patient evaluation clinic's really start clicking, so it is the normal sequence that we (technical difficulty)

So the drivers are going to be IN Inc., roll-out of the 4.3, the internal programs within HPO, and I also mentioned that SPS has some things underway that we think are going to bring them top of (technical difficulty) last year, once they get fully implemented.

Arnie, to go back to your question and give you a little more specific answer on SG&A, our internal budget is to see that grow in the 3 to 3.5% range. So that is what we expect future -- (multiple speakers) Same-center sales, I'm sorry, in the 3 to 3.5% range, so that is in the -- but when you look at this, you have to think about it in the sense of our overall guidance that hasn't changed, and our overall guidance for EPS as well as sales.

Okay. Thank you very much.

Thank you.

Bob Miller, Greywolf Capital. Bob Miller, your line is open. Mr. Miller, your line is open.

Not there, I guess. Let's move on to the next one.

Henry Reukauf, Deutsche Bank.

Hey guys, just two questions. I guess for the billing on the WalkAide, with the 99, or the different codes that you -- miscellaneous codes that you can bill it for. I think you had talked about hoping for a $4000 price on the WalkAide for Medicare. Would those codes kind of equate to that if you got the coverage that you wanted?

Well first of all, Henry, the current retail price for the WalkAide is 4500. We really don't know what the final price will be once we receive reimbursement from CMS. And so, you know, it could be anywhere $4500 and below. I doubt very seriously that they are going to pay us more than what our usual and customary is on it. In that process, we would receive that under a unique code or under the 99 code. And the good news here is that the only barrier between receiving a unique code and having to utilize the 99 code is that we have to show adequate sales volume presented to justify the administrative costs and effort at CMS to assign a unique code. And we had an excellent in-person presentation just a few days ago.

I don't know -- we won't know the results of that probably until sometime late in the fall, but irrespective of whether they decide to justify a unique code or not, the key to reimbursement is actually rests on our publishing our clinical data, which we start to be able to do in the latter part of the summer, so that we can put in place the efficacy, from a scientific-based standpoint, of the product and what it does for the patient.

We know that the product is going extremely well. The numbers, in terms of people's satisfaction in using the product, continue to be extremely high and the only, in all honestly, the only barrier is still obviously the fact that one has to pay $4500 personally at this point for an out-of-pocket purchase. So things are going exactly as we had anticipated.

Ideally, we would like to have a unique code for it, because we think we have a very unique product. But that really will be totally dependent upon the CMS determination of whether or not they can justify the volume.

Okay. And then -- I see, so it sounds as though the efficacy, at least in your mind and just from what you are saying, is probably going to be there once you just get the data to them. But have you run through any simulation if you were to just not get a unique code, but those 99 existing codes? Would that kind of equate to something in the range of the 4500, 4000 that you are looking for or just not there yet?

We are not there yet, short answer. Keep in mind that the unique code, as Van said, would put us into a classification, which is called the L code, very specific (technical difficulty) CMS long-term goal wants to ensure that each device and each procedure (technical difficulty) performed by the appropriate certified personnel. One of the advantages of having into the L code classification is for the most part, they demand that people are certified (technical difficulty) license fees, etc. So they cannot be sold in an off-the-shelf capacity by, say, some medical supply house that does not have qualified people.

So what we are really aiming to do is keep this thing as a high-end clinical device, because there (technical difficulty) scientific class medical basis that goes with it, in terms of how to fit it and how to take care of a patient. That is why want to get up there. We don't want to keep it in miscellaneous code. We can still perform as a miscellaneous code (technical difficulty) provide, and we can still build for it.

But the amount not determine by what type of code we get, the amount is determined, as Van said, by our ability to demonstrate clinical efficacy and translate those scientific results into a health economic study, which (technical difficulty) quality of life and in (technical difficulty) patient last, but not least, cost-avoidance for the payer.

Okay, then just the last one, on Linkia, I know in the fall, late fall, you put through the termination notices to get everybody on board. I think it was after coming into the second quarter that we would really see, we might see some good growth in Linkia. You said it was up 3.7%. Are you thinking a lot more than that once everybody is transitioned and all that is done? What do you think -- what is your expectation for those new contracts on Linkia, where do you think they might go on a year-over-year basis?

Keep in mind that those contracts are a blend between the two types of Linkia contracts -- one we call preferred that we are not (technical difficulty) second is where we are exclusive. So the dynamics of those two contracts are a bit different. When we talk about the 3.7, it is blended across the entire book of business.

On the one set, we are exclusive, we talked about those historically. We are ramping up our business, so we would expect to that they would (technical difficulty) hire than the, let's say, the 3.7 average. For those where we are preferred, it really comes down to our ability to build a relationship and provide superior service. Historically we have (technical difficulty) been recognized by the payers (technical difficulty) our percentage (technical difficulty). So overall, I think the 3.7 represents (technical difficulty) platform, but I am not going to be cavalier enough to say where it could go above that.

Okay. Do you know where it was in the fourth quarter? The increase?

I think it was probably comparable.

Yes, it was.

In the 3.7, 4% range.

3.7 you said?

3.7 to 4.

Okay. All right. Thanks a lot.

You're welcome.

Matthew Ripperger, Citigroup.

Good morning. This is Jie Bao] from Matt Ripperger's team. A couple of questions here. I just wanted to make sure that did you previously indicate that Linkia could contribute 6 to $8 million in incremental revenues in 2007?

No, I don't think we had an exact number on that, Ji. It was part of our overall sales growth estimates that made up the 620 to 630 guidance. But -- I guess I am getting corrected. The range could be in that -- in that dollar amount.

Okay. And my second question is just want to make sure that on the commercial pricing front, the price increase, are those linked to Medicare and, therefore, you just automatically get the increase, you know, as the new prices come up? Or is it still going to be a negotiation process? I wanted to just get a visibility there in terms of the growth on commercial pricing front.

The short answer is it is both. For some of our contracts, they automatically refer back to current Medicare fee schedule. In those cases, we send a notice to the insurance company, we update our fee schedules in our billing software, and we just proceed to implement the (technical difficulty) fee scheduled modified by any of the specific terms (technical difficulty) contract with that payer.

In other cases, it is the second. You have to go out and in the normal course (technical difficulty) current contract expires. Then we have to negotiate a new one, which means that we have to adopt a basis for a Medicare fee schedule and then negotiate the specific terms with that payer. So it is really both. Some are immediately implementable and others have to go through the negotiating process.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). Mike Petusky, Noble Financial Group.

Good morning.

Good morning.

A couple of things. Van, you describe -- just going back one more time to the WalkAide and the code question, adequate sales volume. Have they given you a sense of what adequate sales volume actually means in terms of quantification there?

No. I mean it simply is a matter of what would justify the administrative cost of doing that and it varies. There it is no magic in terms of one specific -- what they want to see is a continued ramp up, which is really the important thing. And we are able to demonstrate that. Just in our face-to-face meetings with the CMS folks, we're able to demonstrate that it is ramping month over month, quarter over quarter.

Okay, so your sense is you are probably close to being able to prove this out?

Well, again, I can't predict, Mike, the decision-making processes of CMS, but, certainly, we are demonstrating that there is increased demand and increased usage. But, again, I want to emphasize, getting a unique code, that's not a magic bullet here. It is getting reimbursement. That is what the key. That comes following the publication of all of the clinicals and scientific data. And whether or not we have a unique code or whether we go under the 99 code, really, is immaterial at that point, until the volume obviously justifies, at some point, a unique code. It's two separate events, very important to understand that.

Okay. That actually leads into my next question. I thought I heard you earlier say that the commercial reimbursement is not necessarily tied to CMS, but effectively, I mean, if you didn't get something favorable in terms of reimbursement out of CMS, I mean, wouldn't that be, you know, fairly devastating on the commercial side?

Well, you know, again, I can't make a decision on what commercial payers will or will not view this device. We know we have a device that is life-changing, literally, for these patients. I mean, it is, again, going back Tom's comment, I don't know how many people saw the Montel show, but it was celebrating MS week and we had a WalkAide patient that has MS on and she spoke of how life-changing this device has been for her.

So there is no question that this device is working very effectively. And what we need to do in order to obtain the commercial and the government reimbursement is be able to quantify this, which we are in the process of doing. And that is just not a question of if, it is just a question of when.

Terrific. And just lastly, I was wondering if you guys could just comment on your pipeline in terms of potential new Linkia business looking out over the next six, 12, 24 months?

Well, we are in, as we had been for some time now, in constant negotiation and communication with all of the major payers and we have -- that continues to go on. I can't quantify for you any specific closures that may or may not occur.

The Linkia business book of business continues to grow and we do know we are still very, very positive about our Linkia prospects. The fact that we now have over 200 independents that are with the Linkia network I think speaks for the efficacy of what we have been working on and what we have in investing in. The insurance companies are starting to see that as well as the obvious 200 independents that have signed up with Linkia.

If I could just try to drill down a little bit more on that question, would you characterize any of the negotiations you're in with any major payers as late-stage?

I think they are all in serious discussions. I would -- you know we have made -- in the past, Mike and you have followed us for some time, you know that we have relied on what we consider to be good body language and good negotiations, negotiating in good faith with a number of insurers to only find out that they are still dragging their feet. So I think it would be foolish for you or for us to be hypothesizing about what stage or what may or may not come in the way of additional Linkia contracts. The good news is the contract that we currently have continued to grow, the usage continues to grow, and we have vibrant discussions going on with about every one of a major nature.

Fair enough. Great. Thanks, Van.

Adam Feinstein, Lehman Brothers.

Okay. Thank you. Good morning, everyone. I know it's late in the call here, so I will be brief. Clearly, there is some disappointment in the market here today and it seems like from, you know, hearing everything you guys have a lot of opportunities throughout the year. Maybe, once again, if you could just summarize what you see as potential sources of up-side in the future? I know you spoke a little bit about a debt pay down, but maybe you could delve into it in a little bit more detail there. And then just maybe talk about the potential ramp-up with the seasonality in other business, in terms of what we should see in terms of a ramp-up in earnings for the remainder of the year. Thank you.

Well, Adam, I will take a first shot at that. You know, certainly, we believe we are right on track. We are consistent with what the expectations were. I can't account for any disappointment in the market, perhaps they thought we were going to exceed them. But we are right on track. This is, as you know from having followed us for many, many years, first quarter is always our weakest quarter. We had a significant improvement over the first quarter of last year, so that should portend for a ramping to continue as we have projected for the balance of this year.

We have reiterated our guidance for this year. There is nothing to indicate that we will not at least meet and, hopefully as we start to ramp, possibly exceed that. Last year was a strong year and we are now camping against what was a strong year last year. And we are comfortable doing that. The opportunities for, in terms of additional debt pay down as our cash flow continues to build -- I mean we have got historically low DSOs. As our cash continues to build, obviously, we will look at that. We just had two significant upgrades from the ratings services. We now have the whole -- even though the lawsuit was, obviously, under an insured policy, a D&O policy that now is all behind us.

We feel very positive about where we are headed and what the prospects are for the ramping to be able to achieve our goals for the balance of the year. It is a continued execution of gaining market share, controlling our costs, which we are obviously very focused on, and we believe there are a number of growth opportunities out there, not just in the Linkia and in the Innovative area, with WalkAide. Obviously, those are important growth areas for us, but we have other growth areas that we see in terms of new channels of distribution, new channels of product that we are going to be accessing that we are currently under discussions, and feel very positive about the balance of this year.

Okay. Thank you.

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

No, I just want to thank everyone and we look forward to talking to you when we close out the second quarter. Everybody have a good day.

Thank you. This concludes today's conference call. You may now disconnect.