Hanger Inc (HNGR) 2008 Q1 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger 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. Kirk, you may begin your conference.

Thank you very much, Phyllis. Good morning, everyone and thank you for joining us on our first-quarter 2008 earnings conference call. This morning, I will be opening up our remarks followed by George McHenry who will take us through the financials and then I will return to give a little color on the operations.

But before we get started, I need to read our Safe Harbor statement. During this call, management will make forward-looking statements relating to the Company's results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements.

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

Now, let's turn to the results of our first quarter. Overall, we had sales growth of 9.6% with an improvement in our operating income of 14.5% and an increase in our operating margins from 8.6% in Q1 of 2007 to 9% this year. We also reported a 100% increase in net income that took us from $0.06 per diluted share to $0.12. This quarter represents the ninth consecutive quarter in which we have met or exceeded First Call consensus estimates.

Finally, we are pleased to increase our EPS guidance by $0.05 per diluted share taking our range from $0.70 to $0.72 per diluted share to $0.75 to $0.77 per diluted share.

Now George McHenry, our CFO, will take us through some of the numbers in detail.

Thank you, Tom. Good morning and thank you for joining us. First, changes on the income statement for the quarter, sales increased by $13.8 million or 9.6%, which was principally attributable to the comparable store sales growth in our patient care centers of $5.5 million or 4.2% of sales. We had also a $3.4 million increase or 25.7% in outside sales of our distribution business and the final piece of that change was a $4.9 million sales increase related to acquired businesses.

Linkia sales increased by $1.2 million or 8.2%. That is part of the $5.5 million I just talked about in our patient care centers, so it was accretive to our overall growth. They had total sales of $14.9 million for the quarter. We also easily had our best quarter so far in sales of WalkAide, selling $3.2 million at both retail and wholesale levels. Cost of sales as a percentage of sales was 50.1%, which was 3/10 of 1% lower than the prior year due to improved utilization of our labor and the material accrual rate for the quarter was equal to the prior year's experience.

SG&A increased by $5 million compared to 2007, but decreased by 2/10 of 1% as a percentage of sales. The Company was able to improve its leverage of its fixed and variable SG&A despite the increase in costs. The principal reasons for the dollar increase was -- in SG&A costs -- was SG&A that carried over from the acquisitions that I just mentioned of $1.8 million, a $1.4 million increase in the investment in our growth strategies, principally to fund the infrastructure and the clinical trials at IN, Inc. and $1.8 million related to a combination of merit increases for our employees, inflationary increases to our fixed cost as an additional overhead to fund our sales growth.

EBITDA increased by $2.3 million to $18.4 million for the quarter from $16.1 million in the prior year. That is a 14.3% increase due to the factors I just discussed. EBITDA margins improved by 0.5% to 11.7% compared to 11.2% in the prior year as we improved our leverage of fixed costs. Interest increased by -- I am sorry -- decreased by $1.1 million due principally to decreased variable interest rates, which favorably impacted the Term B loan.

Our income tax provision for the quarter was 40%, which was 1.6% lower than the prior year, but comparable to the rates for the full year in 2007, so that has been consistent. Our EPS as a result of the changes I just mentioned for the first quarter increased by 100% to $0.12 per diluted share compared to $0.06 in 2007.

Moving onto the balance sheet and the cash flow, our AR, again, some really stellar performance in our O&P operations there. It decreased by $6.1 million compared to the year-end and $300,000 compared to a year ago. DSOs improved to 51 days, which is our lowest count ever by four days. AR over 120 days was $15.4 million, which is a $700,000 decrease compared 12/31/07 and it is the second-lowest balance ever, so the quality of our AR remains good.

Inventory increased by $1.5 million to $83.7 million from $82.2 million at the end of the year. Our CapEx for the quarter was $3.1 million, which was slightly under our expectation. Cash flow from operations in Q1 was a use of $7.5 million compared to a source of $2.2 million in the prior year.

The primary cause of the decrease in cash flow was a higher payout of incentive compensation in the first quarter of 2008 due to two factors. First, in 2006, we had made three quarterly advances and we switched to one semiannual advance in 2007 on our practitioners incentive compensation plan, so that decrease in payments had an impact on the liability at year-end and required a larger payout at the end of the year. We also had improved performance in 2007 versus 2008. Those two reasons accounted for an $11 million increase in the payout and obviously that change would actually make our cash flow in Q1 '08 about $2 million higher than the prior year.

My final comment is to talk about guidance. As mentioned in the press release, we are increasing our EPS guidance for 2008 by $0.05 from a range of $0.70 to $0.72 to a range of $0.75 to $0.77, so that is a growth range of 17% to 20% over the prior year. That is principally due to the favorable change in variable interest rates that I just mentioned. We're not changing our sales guidance of $670 million to $680 million at this time. The does it for my comments. I'm turning the call back to our CEO, Tom Kirk, who will give you some color on the results.

Thank you, George. I will take a little bit of time to add some color on the business drivers from an operations perspective. First, let's take a look at HPO, our patient care division. They achieved, as George mentioned, a $5.5 million increase in sales or a 4.2% same center sales growth rate for the quarter.

Performance for this quarter is partially attributable to the rollout of the January 1, 2008 2.7% CPIU increase, which impacts about 35% of our book of business. This, combined with last year's increase, translates to about 2% of the 4.2%, which means that price is a little bit less than half of our overall same store sales growth rate.

Now the balance of the growth is attributable to a combination of volume and mix. The first quarter is our lowest revenue quarter and some of our contracts are just ramping up during the quarter, so we will have a better view on the impact of price at the end of the second quarter.

Now the programs that are driving our sales for the quarter are concentrated in four key areas. First is to continue the improvement in our Linkia book of business. Keep in mind that HPO was the primary vehicle for the delivery of services under the Linkia contracts, so on an overall basis, the revenue from Linkia-designated contracts was up over 8% for the quarter.

The second area of concentration for us is the continued emphasis on our higher performing products such as microprocessor prosthetic hands, knees and feet componentry. The revenue for this quarter from the delivery of these productlines is up about 30% compared to the comparable quarter last year.

The third area that we use to try and stimulate and drive our sales are our patient evaluation clinics. Now this year, they have produced approximately 300% more revenue than last year, primarily owing to a slow start last year, but we really came out of the gun right away. The President of our division, Rick Taylor, insisted that all of our facilities have a patient evaluation clinic this year. It's good patient care and takes better care of our patient, gives us an opportunity to diagnose their needs and improve their fit and functionality of their devices.

The fourth area for our sales programs is the continued action of our sales, marketing and public relations team that are out there on a day-to-day basis supporting our practitioners by identifying opportunities specific to their local businesses and then assisting them in the implementation of these activities so that we can translate those plans into sales.

I also want to mention on the legislative front, we continue to support the Amputee Coalition of America on educating state legislatures on the issues involved with reimbursement caps and constraints and how these issues deprive our patients of quality care and doom them to actually lower levels of mobility. The good news is 10 states have passed parity so far and 14 others have or will introduce legislation this year.

On the federal level, we are working with the ACA. We managed to get a bill introduced into the House for national prosthetic parity and a bill is expected to be introduced shortly in the Senate. If you look at the insurance contracts, about half of them fall under national ERISA and the other half our legislated under state rules. So it is about a 50/50 split there, so that is why we are working on both fronts.

We're still working with our trade and professional association on the details of qualified provider quality standards and the enforcement provisions for these standards. Our long-term goal here is to make certain that CMS and the other payers are following the laws and the regulations by reimbursing only the qualified providers for the work that is performed. That isn't happening today, but we're taking steps to try to make sure that these rules are enforced.

Okay, let's take our attention now to SPS. Their outside sales are up approximately $3.4 million or a little more than 25% compared to the first quarter of last year and this is excluding the SureFit business which we purchased in July. Success in continuing to build sales in SPS' core businesses is attributable to three major areas.

First is leveraging the location provided by the new warehouse, which we opened in early July in Harrisburg, Pennsylvania as a steppingstone into the Northeast market. Second is SPS' superior customer service, which has been the impetus for their gaining some large new customers and actually picking up on some of the customers that defected a year or so ago. Finally is the addition of some new products into their portfolio. SPS continues to expand their product portfolio so that they are the go-to supply house on a one-stop basis.

Now regarding SureFit, we're in the process of integrating that into the Hanger family, but the good news is that their sales are up about 10% over the comparable quarter last year and we are enhancing their sales efforts and doing some fundamental re-engineering within their manufacturing and back-office processing.

Okay, now let's take our attention over to Linkia. Linkia continues its dual mission of building its share of key healthcare companies' book of business and at the same time, negotiating a fair price for the services provided by the providers within its network. The network consists of the Hanger patient care centers and independent providers, which has grown to 286 today. Now at some point, that is going to flatten off because, as we build that network, it is consistent with the network strategy of the insurance companies. So we won't expect to see the network grow at historical rates, but our effort here and our objective is to provide good access to the insurance companies' membership.

As I mentioned earlier, Linkia continues to increase their business as a provider network manager as insurance companies recognize the Linkia value and trim their network. On the marketing side, we are continuing our discussions and negotiations with the key national and large regional healthcare management companies, as well as firms in the workman's compensation segment. Linkia has obtained one price increase, which will be effective in May and is in negotiations with another large carrier, so they are performing both of those missions that we discussed earlier.

Lastly, Innovative Neurotronics. As George mentioned, it had its best quarter ever as sales continue to pick up. We did benefit from a program on Good Morning America at the end of January where they featured the WalkAide and they described it as a medical miracle and a brain in the box. This produced thousands of leads, which we have been pursuing.

In addition, we're beginning to really see some traction on the international side, so all four pieces, which is Hanger, the independent O&P providers, international and then the direct salesforce of Innovative Neurotronics into the rehab centers, are all starting to see improved results.

As you will recall, the key result that we are looking for is getting our clinical trials and studies completed and filing for coverage and reimbursement and we've put some extra effort into that during this quarter and we believe that the current progress of our clinical trials places us on a schedule to hopefully have resolutions of those coverage and reimbursement questions by the end of 2008 or at the latest, early 2009.

Finally, a few words on the acquisitions and some of our developmental projects. We are continuing to pursue strategic acquisitions. With respect to O&P, we are looking for tuck-in candidates that add strategic value to us in the form of their location, the quality of their practitioners and/or favorable product service mix.

On the developmental front, we are continuing to make progress in preparing to move a couple of the development projects that we have in the products and in the channels area into commercialization later this year.

So in closing, the results of the quarter demonstrate improvement over the first quarter of last year in terms of sales, but also we improved leverage on our fixed costs by over 50 basis points. However, we recognize that the environment in which we operate contains challenges and this is why we are stepping up our efforts on revenue generation, new projects, cost control and leveraging our fixed costs. Thank you. I will now open up the line for questions. Phyllis, if you would please.

(OPERATOR INSTRUCTIONS). Larry Solow, CJS Securities.

Good morning. Just kind of discuss -- have you seen any weakness or any impact from the economy or anything out there? Obviously prosthetics and whatnot you wouldn't think would be impacted, but maybe on the margin, they are.

We haven't seen it yet, Larry, but our business traditionally lags a bit behind the general economy and the way that it may end up being manifested is --we have seen this in prior historical periods -- is that if people end up losing jobs, which means they lose their insurance coverage, then the copay becomes a bit of an issue. Most policies require a 20% copay on behalf of the patient, so that can act as a deterrent -- they cannot postpone forever -- but sometimes it tends to delay what I will call routine maintenance on their devices. So we haven't seen it yet. We are looking at those states and those regions where we feel that the economy may be most profoundly impacted, but it hasn't shown up yet.

Okay. Then just a follow-up to that. I know you guys, the last few quarters, have talked about business kind of performing pretty well across the board. I know there were maybe a couple of areas that were a little light and I think you've put a new manager in place in one of them. Any update on that?

That region is coming back under the direction of the new manager. The first quarter is always a tricky quarter to try and draw in for single point data is not good simply because the weather patterns can have an impact that is perhaps more profound than anything else. So we did see a little bit of severe weather in certain locations and typically what we see are our southern regions perform a little better in the winter time because they don't have the same issue. So we are watching that very closely and as we've hopefully demonstrated in the past, if we have any areas that come up a little bit short, we try to move in and make a change pretty quickly, but nothing to report for this first quarter in the way of any major difference.

Okay, great. Thanks.

Adam Feinstein, Lehman Brothers.

Thank you. Good morning, everyone. Just a few questions here. Obviously you guys are making good progress on the margins. Last quarter, Tom, you spoke a little bit about the opportunity there and last year, the variable comp had gone up a lot. I know you guys said you don't expect to see a repeat there, but just wanted you guys to speak more about the operating leverage and the opportunity and just -- I know you were looking over a lot of things, so just curious in terms of where you still see opportunity for margin growth.

I think a couple of ways. Certainly, one of the most profound ways that we can do it is through product mix and that is why we like to highlight changes in the mix toward the newer technology products because that does help us. Certainly provides more EBITDA dollars and in some cases, it even gives us better margin, so that is number one.

When we come down below the gross margin line, we have, as you have seen, over 650 patient care centers and they light up everyday and the people come to work. We believe there is some excess capacity in there and what we were referring to when we last spoke was a program to better utilize those facilities and those people without adding incremental cost and that is where we are laser-like focused this year and so we have been working with each of our division presidents to monitor and actually set goals to ensure that we get that kind of leverage that we know is out there. And this is just an issue of what I will call turning a flashlight on spending and proactively providing goals and very quickly monitoring performance against those goals. It is the old adage of what you inspect, they respect and so we are using that adage to bring focus on cost containment in the discretionary areas. Obviously, our rent goes up, our utilities go up, but things like office expense, travel, outside contract labor we are monitoring very closely so that we can squeeze a little more leverage out of this model, which we believe is possible.

Okay, sounds good. Just a couple of follow-up questions. Just the patient center count, I was trying to figure out has it gone up relative to last quarter? Was that all through the acquisitions you guys have done?

Primarily through the acquisitions, but we had a couple of start-ups that actually reached maturity. So it is about 90% coming from acquisitions.

Okay. I apologize if you mentioned this before, did you give a bad debt number, George?

No, I did not. Bad debt expense?

Yes.

Would be 2.3% for the quarter.

And how does that compare with the prior year?

It is about half a point better than the prior year. It is about 0.2% better than the full year.

Okay. There was a question earlier about the economy and the impact. Would you expect bad debt expense to go up in this environment or do you think the current trend is a sustainable trend?

We think it is a sustainable trend.

Okay. Any historical precedent? Just the last time we saw an economic slowdown, any anecdotes in terms of just what happened to bad debt expense?

Our bad debt expense stayed pretty steady the last time we had a small slowdown. I think where Hanger is a little different now than they were then is that we have better systems and better workflow than we had and that gives us an opportunity to really stay on top of it and we think if you manage that part of your relationship with a patient you can do pretty well. They understand they have an obligation.

Okay. All right. Everything sounds very good. Thank you.

Dawn Brock, JPMorgan.

Good morning, guys. Two things. First, would you mind just giving us a little bit more color on the really great growth on the microprocessor and electronic componentry side, as well as the patient evaluation clinics? Both of those areas really seemed to be booming in the first quarter.

It is probably a continuance, Dawn, of the trends that we saw last year. We had reported that we were into the double-digit growth on our microprocessor products and what specifically is happening here is a combination of two things.

First is that the number of suppliers that have brought microprocessor type products onto the market has increased dramatically over the last couple of years. It is going to take a little bit of traction time to get the product up and get it tested. We typically will work with companies to assist them in providing an interface to patients. But now the product range in terms of selection is so much broader such that historically you could only put a microprocessor knee on a very high level kind of person, but now they have developed what we will call microprocessor-light, so they can bring advantages to patients that don't have the same critical activity level.

So the first and foremost thing that is going on is manufacturers developing products for a broad range of our patient base and with that availability when we have our patient evaluation clinics, we now can talk to a broader range of patients and tell them about the advantages of some of these microprocessor products. So having the products available was a key and necessary element for driving the product mix change.

And then secondarily, you need the mechanism to do that and that mechanism in our case are our patient evaluation clinics where we go back through the files and we pull the records on our patients that have those types of conditions that we believe would match up nicely with some of the new processor products in a very organized discipline fashion. We send them cards, we follow up with phone calls to confirm their attendance. They come in. We have several practitioners. In some cases, we bring in visiting practitioners that are regionally or nationally known to assist in their evaluation, get them the best possible treatment, tell them of the advantages of some of the new products and then suggest that they go back and talk to their doctor about those such that he can evaluate them and give them a script.

So it is a comprehensive program that goes from product to service delivery and by emphasizing that every location have at least one patient evaluation clinics, we are making certain that we take advantage of that mechanism. It is no different than what you're dentist does twice a year when he calls you back. It is a timely reminder and it does bring this back front and center in front of the patient and while we believe that we would get some of that business anyway, what our records have indicated when we have tried to look at this on a historical basis, about 40% of the revenue that is derived out of these patient evaluation clinics probably we wouldn't have seen, people wouldn't have known about the product or they might have just stretched this out for a longer period of time.

So when we report those revenue statistics, we are only capturing about 40% of the incremental revenue that we see coming out of each one of those clinics and that is how we are tracking it. It is pretty easy to track the products that we put on the patients because we have our coding system, as well as all of these products are run through SPS and SPS and the patient care division track those products in terms of the numbers and we have a special group that does that. We follow very closely on both sides of the product and service revenue.

Okay, excellent. Thank you. My second question is around pricing and the commercial market. Look, you have gotten the CPI increase now two years in a row. How are the renegotiating of contracts going on the commercial side? Are they moving up? I know you noted in your commentary that you had one price increase out of Linkia. Just on the entire book of business, what are you seeing in the commercial environment?

On an overall basis, just to give you a historical perspective, last year, we had a similar experience with Linkia. Remember that Linkia was managing large, regional and national and they were successful in getting some price increases last year as well and they have gone back again this year with similar kinds of performance. So what we are seeing is the insurance companies understand what is happening. After a three-year freeze, the industry is certainly, we like to think, entitled to earn a decent return on our investment and so the insurance companies are recognizing that.

In addition, which facilitates the discussion, is the value that Linkia brings to them in terms of administrative simplicity and good quality care. It does make the discussion a bit easier, but we are seeing similar behavior with the insurance companies even at the local level on contracts sometimes as small as an individual hospital or clinic. Certainly people recognize that we need to have price increase in order to sustain the level of coverage and there is only so low that people will go and then what ultimately happens is the people refuse to bid on contracts and then they are left without service or alternatively, perhaps some of the other folks that may take a low contract find other ways to get revenue into that contract, which doesn't serve anyone.

I think there is a pretty understanding base of customers and payors out there in terms of the level of increase and frankly when we look at that level of increase, it pales in comparison to what we have seen in other areas of inflationary pressures. We are finding that they are pretty respectful as long as you can demonstrate the value that you bring.

That is very good color, Tom. My last question, just drilling down into that a little bit more, I remember that in '03/'04, you were seeing discounts off the Medicare benchmark of up to 30%. Has that really been reined in a lot? Can you just give us an idea of where maybe the average commercial contract is today?

It has changed dramatically since those days, Dawn. I think people -- payers still try to negotiate the discount as large as possible, so what they have found is that the provider base has become more resistant to those kinds of levels of discounts. Frankly, you just can't make money down at those levels. They have backed off of that and we, rather than fighting the discount battle, have decided to take the fight in a different direction and offer them better service with cost reductions and better quality by relieving them of administrative costs. We think we are helping them accomplish their overall goals and they don't have to look just at the amount of discount to get there.

There really isn't an average across the industry that I would be comfortable quoting. I think every company would have their average amount of discount, whether they were small mom-and-pops or Hanger. We, out of respect for our payers and frankly to preserve our negotiating strategy, we never talk about discounts or average discounts for the obvious reasons. So suffice it to say that we do find that a lot of people would love to get into some of our contracts, so that leads us to believe that our discounts are not as great as a lot of the other providers out there and we think it is because of the Linkia advantage.

Very good. Thank you.

Mike Petusky, Noble Research.

Good morning, fellows. Nice quarter. A few questions around WalkAide. You guys said that you had done about $3.2 million in business in WalkAide in the quarter. What was the previous best performance in WalkAide for a quarter?

At the overall enterprise level, it would have been slightly less than $2 million.

Okay. Where are you getting that traction? Are you getting some of the traction in SPS? I noticed that you didn't mention WalkAide as one of the factors driving the increase in SPS, but I guess was it?

Certainly SPS is the key distributor into the independent network and into HPO, so they did benefit from that as well. I just grabbed the top three that I saw, but WalkAide we were considering as part of -- I made that one comment of them expanding their product portfolio.

Yes.

We are still looking at WalkAide as a new product in there because it does have actually a microprocessor on it, so it's in there along with some of those microprocessor devices that we spoke about.

Do you, by any chance, have it broken out between how much the WalkAide business was via SPS and how much of it was, I guess, internal?

We track by the number of units, but we don't disclose that. Perhaps when Innovative Neurotronics matures into a full-blown business, then I think it would be appropriate to start talking about what's in the various channel. One right now, it is pretty small. Secondly, there are other competitors out there and I think that would be information that could certainly benefit them if they were able to see that one segment was growing more rapidly than another. They may deploy resources into that area to try and combat us. So we are tracking it and we are measuring the performance of the salesforce in each of those channels and as I mentioned, the one that has come up quite a bit, just to give you a little color, was international this past quarter. I think in the future, we will be talking more about those various channels.

A couple more quick ones on WalkAide. You mentioned that you got a nice benefit from Good Morning America. Do you have a way to quantify that, whether it is leads or fittings? How do you quantify that benefit?

The key benefit was in leads. We saw just on the first two days after the Good Morning America show, we saw about 19,000 leads show up. So it was a fantastic response. We were able to capture all of those because they registered into our Website or direct phone calls and then go back and pursue those with follow-ups. So we were looking at the conversion of those leads as the key measure of the success of that program and frankly some of those are still in process. That was the end of January and people came in in February and March and we have been working with them and their doctors to make sure that this device is suitable for them. It really takes several weeks and in some cases, depending on the patient, several months until you move a lead into a patient.

Okay. So we may see some of that continued benefit in the second quarter then I guess?

Yes.

Last question. Given that you guys did have such a ramp up in WalkAide business from previous I guess record levels, Van in prior conference call conversations had said one of the factors that CMS looks at in terms of reimbursement obviously is demand and revenue levels, etc. How important is that to see that kind of ramp as you guys are getting ready for your CMS filing?

The key filing that we are going after that we have talked about is coverage, which means that the device works for its intended purpose and then, of course, reimbursement that they will cover it. Where the numbers come into play is the first step, which is called code and you will recall, we filed for code and their determination was that the numbers weren't sufficient to justify a unique code. We have an E Code; we wanted an L Code. So we are continuing to go back and resubmit applications based upon new market projections and try to show them how this product emulated other products in terms of its technology diffusion, what we expect the full market to be and we think it is precisely this kind of ramp up that can get their attention. They just don't want to undertake this for small quantities, but if you look at where we were when we made the first filing, we had a history of 300, almost 300 devices.

Well, we're well beyond that, so I think we can demonstrate that there is an appetite for this product in that the numbers will be significant. It is all building on the base, but we have been more focused on clinical trials, coverage and reimbursement than we have on going back for making code an issue. We are still making filings, but right now, it is all about the clinicals, coverage and reimbursement.

Last question on that, Tom. You had said in I think the last couple of conference calls that you hoped for kind of a Q3 filing for coverage, is that still on track?

Yes, for the most part. Our intent is to get these clinical trials wrapped up in the end of Q2, Q3 range. We have been working -- we know that we need to have peer reviewed articles, so we have interim results. Each patient generates in the neighborhood of 70 pages worth of results as they go through the entire test. We're working with an outside agency that has been distilling that down so that we know and understand what we are dealing with here and that we understand the efficacy.

And so based on that preliminary information, what we have been trying to do is to sketch out what an article may look like, what would be the points that we would want to reinforce, populate that -- think of it as an outline, populate that outline with the data when the trials are completed. The reason for not using preliminary data is that we have got to demonstrate the number is high enough for statistical significance. So that we will be ready to go with some articles and then working with the principal investigators, it is up to them to take that information and really write a research article on it. We have identified some of the publications that probably would be interested in a prescreening basis. So all of that would be occurring around the third quarter and then we would come back, make the filings on Medicare for the coverage and the reimbursement, perhaps working at a regional Medicare rather than national [beds].

We're relying on some outside sources to help us understand that. Get this information in front of them so that hopefully we can have a determination in Q4 as I mentioned on the call. At the latest, maybe early '09. That is the sequence and what we're trying to do is front-end load as much of that as we can by doing some parallel processing.

Terrific. Great quarter. I will let somebody else take their shot at you now. Thanks.

(OPERATOR INSTRUCTIONS). Jeff Englander, Standard & Poor's.

I hate to disappoint Mike, but this one is going to be fairly easy I think. George, can you just walk us through the cash flow from operations again and what happened on the incentive comp and how we should look at that perhaps modeling going forward?

Sure. To try to -- pretty simply, there were two pieces that caused us do have a larger payout in 2008 than 2007 and just to back up what is going on, in the first quarter of '07, we are paying out whatever our obligation is on the '06 performance. In '08, we're paying out our obligation on '07 performance. If you go back to '06, we, that year, made three quarterly prepayments to the practitioners on their incentive compensation plan.

In 2007, we changed it to one semi-annual payment. That resulted in about $4 million less being paid out to the practitioners. The reason for doing that is quite frankly it was an administrative nightmare to have the three quarterly payments. It was difficult to deal with. So that $4 million shifted from being paid during 2007 to being paid in the first quarter of 2008.

The other $7 million that makes up the $11 million total was simply we had better performance that affected -- our collections were great. That affected the practitioner plan and the overall performance of the Company affected the payout on the other plans, the corporate and shared services plans. Now when you go to next year, you will see a comparable number, so the first quarter won't being impacted by a change next year and I'd like to also emphasize that the first-quarter performance from a cash flow standpoint does not affect our estimates that we gave months ago that we would generate roughly $30 million in cash flow from operations this year. It is simply a timing think.

Okay. So that was in the previous guidance, the changes in the incentive comp. Not changes, but the impact of the changes?

Yes, the impact on cash flow. We knew our cash flow was going to be a little lower in Q1 '08. Keep in mind, even at a use of $7.5 million, it is much better than it was three years ago when we also had an interest payment in the first quarter every year. We have evened that out, but when you look at your model, when you look at '09, you should expect that we will have slightly negative cash flow because of this payout in the first quarter of every year.

Great. Okay. Tom, can you just talk a little bit -- obviously you've mentioned WalkAide and the microprocessors sales that helped this quarter and the number of new products you have seen. Can you give us some sense of where overall you think the industry is in new product introductions? Does it continue at this space? Does it start to slow as more products are geared towards these less intensive patients that you have identified?

I think we are just at the beginning of the trend and I think the trend will continue -- I think you're going to see two things. One is that as people become -- suppliers become more knowledgeable about microprocessors and materials, we will begin to see more products show up on the market in two ways. One is a broadening of the product range. Secondarily, more vendors will bring in products because it is a great competitive advantage to have the full range of products. In those areas where we have products today, which are primarily in prosthetics, upper and lower prosthetics, I think you're going to see broader range and more products showing up.

The area of orthotics has I guess also benefited from some new products and those products have not been technologically-advanced products in the sense that they had a microprocessor on it, but they have been advanced in their design. Some of the control features, some of the locks, some of the materials. That has had a good and bad impact on the industry.

One is that some of the more advanced materials have allowed us to move from custom, custom, custom to more in a prefabricated basis so you can put them on, you can do adjustment on the body instead of a total custom mix, but that area of orthotics really has not benefited very much from what I will call the microprocessor technology. It hasn't really benefited from even some of the more advanced materials, materials with memory, materials that have unique kinds of properties to move moisture away from the body in terms of textiles and fabrics and I think you're going to see all of that start to flow into our area in the future.

So they are going to have two major purposes. One is to increase the functionality that a patient has and the stability of that functionality and then secondarily will be to increase the ease of fit and wearability on the patient. So I think with the consolidation of the supplier base that is going on, it gives suppliers more resources to deploy into fundamental research and there is no question that government money that has been flowing into this area via DARPA and NIH grants are also helping to advance the industry, largely as a result of the visibility of some of the war campaigns in Afghanistan and Iraq.

I think, as the civilian population here, we're going to benefit from all of this much the same as the scientific world benefited from the space exploration program. I think we are going to see an array of new products and frankly that's why we are working closely with suppliers to make sure that we can provide that clinical interfaces and most of the suppliers recognize that if you really want to get into that clinical interface after you have finished your design, the one place to go is Hanger because we can diffuse a product much better and faster than almost anyone else in the industry. I think we are just at the beginning of it and we will see a lot more of it.

Great, thanks very much.

At this time, there are no further questions. Mr. Kirk, do you have any closing remarks?

Van Sabel has joined us. Ivan, as you all know, is our Chairman of the Board and I would like to ask Van if he has any closing remarks.

I just want to thank everyone for joining us and I would like to just report that our planned succession with my moving to Chairman and Tom moving into the CEO position has gone flawlessly. It is seamless and I just wanted to again express my complete confidence in Tom and the team here at Hanger to continue to execute our planned growth strategies and our enhancement of shareholder value. Thank you.

That is it, Phyllis. Thank you very much. Thank you all for joining us.

This concludes today's Hanger's first-quarter results conference call. You may now disconnect.