Hanger Inc (HNGR) 2009 Q1 法說會逐字稿

Good morning, my name is Neva and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group's 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)

Thank you. I'll now turn the call over to Mr. Tom Kirk. Thank you.

This is Tom Kirk, President and CEO and with me is George McHenry, our Executive Vice President and CFO and Ken Abod, who is our VP, Treasurer and IR Director. I'd like to welcome you to Hangar Orthopedic Group's discussion of our first quarter results. Before starting the discussion, let me ask Ken Abod, our Treasurer and IR Director, to review with you our declaration on forward looking statements.

Okay, thanks Tom. 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 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 benefit from managed care contracts, the demands for the company's orthotic and prosthetic services and products and other factors identified in the company's period reports on form 10K and form 10Q 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 or future events or otherwise. Thanks, I'll turn the call back over to Tom Kirk.

Thank you Ken. Overall and I think you've seen our press release where last evening we announced net sales of $169.1 million for the quarter, which was an increase of $11.4 million or 7.3% increase from the $157.7 million in the prior year.

Just want to make some broad statements and some summary comments about the quarter. There are several noteworthy points that I'd like to bring to your attention. Our core businesses grew their sales over the first quarter of last year, in spite of some challenging economic conditions and some more severe than normal whether conditions in selected parts of the country. Their outstanding performance on sale enabled us to post up $0.14 earnings per share, which equates to slightly more than 17% growth over the EPS from last year's first quarter. This makes our 13th consecutive quarter where we've met or exceeded first call estimates.

We're continuing to see the benefits of the programs that we placed into operation over the last several quarters and certainly the results of our people's efforts. Examples are a more aggressive marketing program designed to position Hanger as the provider of choice in all of our business lines. We're continuing to education ore referral sources on the benefits of new products in the market. We are increasing the business that we have under contract by Linkia and we are extending the customer and product bases in our distribution business.

And last but not least, we have initiated the government and third party reimbursements for our Walk Aid product. All of these things combined to make a very successful and solid quarter for us. And last but not least, our balance sheet and liquidity are strong, which will enable us to execute our strategic plan without any constraints. Now I'll turn it over to George who will review our financial results and then I'll come back and have a few more words about our operations. George?

Thank you, Tom. Good morning, everyone. for the quarter sales increased by 11.4 million or 7.3% which was principally attributable to the comparable store sales growth in our patient care centers, up $5.6 million or 4.1% of sales.

A $2 million increase or 10.4% in outside sales of our distribution business and $4.1 million in sales that are attributable to the acquired businesses. Linkia sales increased by $1.5 million or 9.1% to $17.5 million for the quarter. They continue to be accretive to our overall sales growth in patient care.

System wide sales for Walk Aid were $1.3 million for the quarter, compared to $3.2 million in the prior year, which benefited form the Good Morning, America appearance. We did not expect the Walk Aid sales in Q1 to exceed the prior year and we remain comfortable with our Walk Aid sales expectations for the year, which are a part of the overall sales guidance that I'll discuss in a second.

Cost of materials as a percentage of sales was 30.2%, which was six tenths of a percent higher than the prior year due to a change in the mix of sales related to a combination of the SPS sales growth, which was higher than the growth that we had in patient care, so that caused some increase in com. An increase in the sales of high tech items like the computer name, which earned higher gross profit dollars per transaction, but lower gross margin and then we had some lost margin on the previously mentioned decrease in the Walk Aid sales.

Personnel costs increased by $3.7 million compared to the same quarter last year, but decreased by 40 basis points as a percentage of sales as we levered our workforce. The increase in dollars was due principally to $900,000 related to merit increases, $1.2 million related to benefit costs and $1.9 million from acquisitions, offset by $200,000 in temporary labor costs.

SG&A increased by $2.2 million compared to 2008 and remained flat at 20.4% as a percentage of sales. The company was able to maintain the leverage of its fixed end variable SG&A, despite the increase in cost. The increase was due principally to a $1.9 million increase in the variable compensation accrual. Since the company reached its profitability goal for Q1, we book a full accrual for the discretionary plans which will take some pressure off future employers.

Other changes included $700,000 increase related to acquisitions and an $800,000 increase in occupancy costs, which were offset by a $700,000 increase in advertising costs and $500,000 increase in other costs.

EBITDA increased by $1.2 million or 6.6% to $19.6 million from $18.4 million in the prior quarter due to the factors I just discussed. EBITDA margin stayed the same compared to a prior year due to the increase of material costs. When you exclude that increase and we do expect our com rate to be lower for the balance of the year, the company improved leverage of personnel and other costs by 50 basis points, which exceeds the range that we expected for the year.

Interest and appreciation, interest decreased by $700,000 due principally to decreased variable interest rates which favorably impacted borrowings under the term B and the revolver. Depreciation expense increased by 300,000 compared to last year principally due to the higher level of additions in 2008 compared to prior years.

Our income tax provision remained at 40% for the quarter and then EPS as a result of the factors I just discussed for the first quarter increased by 16.7% to $0.14 per diluted share compared to $0.12 last year.

Moving on to the balance sheet and the cash flow. Our AR decreased by $3.8 million compared to year end and $300,000 compared to the prior year. DSOs improved to 48 days, which is the lowest count ever. Our AOR over 120 days was $13.9 million or a $600,000 increase compared to year end. The quality of our receivables is still very good. We have not seen a spike in write offs but we have been increasing our reserve to be conservative in this tough economic environment.

Our inventory increased by $1.3 million to $87.3 million from $86 million at 12/31, which makes sense compared to our rate of com and recorded sales backlog at the end of the quarter. CapEx for the quarter was $2.8 million which was in line with our expectations

Cash flow from operations in Q1 was a use of $3.7 million compared to $7.5 million in the prior year. The primary cause of the increase in cash flow compared to the prior year was improved earnings and continued excellent AR collections. Keep in mind Q1 every year is a use for us on the liability side. We are paying out our variable compensation plans.

Liquidity for the company was at $89.8 million, comprised of $51.9 million in cash and $37.9 million in availability on the revolver. So we continued to have more than adequate cash and borrowing capability to conduct operations and execute our growth plans.

As mentioned in the press release, we are reiterating guidance that was established during our February 11, 2009 Q4 conference call, which calls for sales in a range of $750 million to $760 million, that's a growth rate of 6.7% to 8.1%. EPS of $0.96 to 0.98, which is a growth rate of up to 14%. And $40 million to 50 million in cash flow from operations. That concludes my comments, I'm going to turn the call back over to Tom.

Thanks George. I'll add a little bit of color on each of our businesses and an overall perspective on our operating environment. Lets start with our patent care division HPO, as George mentioned, they achieved a $5.6 million increase in sales of 4.1%, same center sales growth rate for the quarter. This performance for the quarter is partially based upon the January 1, 2009 5% CPIU increase in our fee schedule. This impacts about 35% of our book of business immediately.

This increase combined with the roll out of last two years increases to our commercial book of business translates to about 2.5% which we attribute to price of the 4.1% in overall growth. Now the balance of the growth is attributable to volume and mix. We estimate the breakdown between those two of about 75% volume and 25% mix.

So let's now turn our attention to what are the programs that drive the volume and mix growth. First, is the continued improvement in our Linkia book of business? I want to remind you again that HPO is the primary vehicle for delivery of most of the services under the Linkia contract. Linkia does not provide patient care. On an overall basis, the revenue from the Linkia designated contracts is up over 9% compared to the comparable quarter last year.

The second factor impacting volume and mix is our continuing education that we give to our referral sources on the enhanced lifelike features of our high performing products such as our microprocessor prosthetic arms, hands, knees, and feet components. Now, we stress these because the improved functionality that they offer to our patients is really better patient care and through the quarter the revenue from the delivery of these product lines combined was up 34% compared to the comparable quarter last year.

The third area that impacts our volume and mix are our patient evaluation clinics. For this quarter, these clinics have produced approximately 20% more incremental revenue as compared to this activity in the first quarter of last year.

And fourth, the fourth area that's impacting our volume and mix are our sales, marketing and public relations efforts by our practitioners and those that support them in identifying specific opportunities in the local business areas to increase market share. And then going out and actually implementing the plans to translate those opportunities into results, so those four areas are what drives primary drivers of our volume and mix.

I want to make a few comments on the overall business climate, because frequently we receive some questions about this that our patient care business faces. Right now we know that the percentage of unemployment stands at 8.5%. If we compared that to the 5.1%, which is where we were last year at this time, it's an increase of about 3.4 percentage points. Some studies suggest that for every 1% increase in unemployment, roughly 2.5 million people lose their insurance coverage. This includes of course both the worker and their dependants.

Since some families have two working members, perhaps the other partner's insurance may mitigate this impact slightly, but I think this is a pretty good statistic for us to work with. Thus far we've not seen any evidence that the challenging financial environment is translating into patient care delays. We watch this very closely.

However, we have been working with some of our patients to help them identify other sources of assistance on their co-pays. In addition, many workers who have lost their jobs have secured coverage via COBRA and certainly the government subsidy in this area has helped in making this insurance affordable and making sure that our patients are coming in for proper care. While we've seen an increase in the number of folks that need help on their co-pays and those that have lost their jobs that have picked up on the COBRA, we haven't seen this translate into a material negative impact on our sales.

We also must remember that different sections of the company are more profoundly impacted by this recession and certainly a state such as Michigan where we have low market share is really suffering in this environment. But rest assured that we continue to monitor all of our maintenance codes and stay very close to this and work very closely with our patients to make sure that they have the financial wherewithal to get good patient care.

Also impacting our environment is the regulatory and legislative front. We have been continuing to support the Amputee Coalition of America on educating state legislatures on the issues involved with reimbursement caps and limits and how these deprive patients of quality care and doom them to actually lower levels of mobility. Happy to say that there are now 15 states that have passed parity, remember when we last spoke with you there were 11, so we've picked up 4 more. And almost 30 more are working on parity legislation at the state level.

On the federal level, the Medicare orthotics and prosthetics improvement bill will be introduced into the house very shortly, which is going to tie reimbursement to the qualifications of the provider. This is going to improve patient care, while at the same time reduce fraud and abuse by excluding non-qualified providers from payment.

Also, support is building for the National Orthotics and Prosthetics Parity bill which will remove caps and limits from existing medical plans operating under ERISA. This bill, we have to remember, is not a mandate for coverage, rather it simply states that O&P benefits must be (inaudible) with other kinds of medical treatments.

Several of the states that have passed parity have estimated that the incremental costs is less than three one hundredths of a percent of the total insurance reimbursement on a per member per month basis. Very compelling argument in terms of taking care of patients and making the investment today and avoiding more substantial investment in the future in the way of costs. We expect this bill to be introduced into the senate in the coming weeks.

Okay, now let's turn our attention to SPS, our distribution business. Their outside sales were up approximately $2 million or 10.4% compared to the first quarter of '08. Their success is in continuing to build sales through their core distribution business is really attributable to three major areas. First is their superior customer service.

Second is an intensified sales and marketing effort, which includes additional education and training forces for their independent O&P practitioners. And third is the addition of some new standard and high tech products into their product portfolio which enables the purchasing practitioners to handle all of their needs with one visit to the SPS electronic website or, in the case of some, just one phone call. All three of these combine to help gain some new large contracts and increase their market share.

And if we remember back in 2007, we made an acquisition in our distribution business of a company called Sure Fit and Sure Fit sales are running ahead of the sales that we had in the first quarter of last year. we're seeing some of the anticipated benefit of linking the relationship with the podiatrist that Sure Fit has with our patient care business by expanding the relationship because many of the podiatrists actually have the license to do surgery and when they do partial feet or total feet there is a natural need for a prosthetic -- or a prosthesis in which case our prosthetists come calling and serve that need.

At the same time, SPS has been working with the podiatrists to expand the line of products that is available to the podiatrist, going beyond the basic product line that we've picked up in the acquisition. Sure Fit is upgrading its shoe designs and styles and is preparing to launch a scanning system to better service its practitioner and physician customer.

Now, let's turn our attention to Linkia and I'll provide an update of their activities. Linkia continues its dual mission of A, building its share of the key health care companies book of business, and B, negotiating a fair price for the services provided by the practitioners within its network. On this point, they are expecting to reach favorable outcomes with two large healthcare payers this year on price increases. These demonstrate that payers recognize the value that Linkia brings to them in helping them control their administrative costs while ensuring good clinical care and high levels of customer satisfaction.

The network consists of the Hanger patient care centers and independent providers. The number of independents is held pretty steady and is currently at about 310 and we expect this number to fluctuate from time to time, depending on our book of business and of course the success of our acquisition program.

Linkia's book of business revenues for the quarter was up over 9% compared to last year's comparable quarter. In addition, Linkia's continuing with the piloting of other services that they could incorporate into their model to provide benefit to these payers, and on the marketing side, they're continuing discussions and negotiations with the key national and large regional health care management companies, as well as some of the firms and the workman's compensation segment.

Now, let's talk a little bit about Innovative Neurotronics. Innovative Neurotronic sales were below those of Q1 2008, as George had mentioned. This is because last year sales were very positively impacted by a large international order in the first quarter and coverage by Good Morning, America. However, as George did say, we are on target with our sales level that is in accordance with our guidance for 2009 and we're seeing the benefits of the events that occurred during the fourth quarter of last year.

For example, the approval of coverage by CMS for incomplete spinal disorders has permitted Medicare to reimburse, effective January 1, 2009, for this indication. And, the overturning of the standing non-coverage decision in Q4 of last year, along with a specific code that the Walk Aid was granted, has permitted Innovative Neurotronics the opportunity to present the Walk Aid to commercial third party payers.

Each of these claims are being handled on a patient by patient basis and we are receiving reimbursement across all of the indication from our third party payers. INinc Has put in place a proactive team to advocate for payment on behalf of the patients and currently there are more than 200 applications in the system. We will be expanding the team dedicated to this service and it is available to all practitioners, both inside our patient care division as well as outside in the form of the independents that are also selling the Walk Aid.

We are analyzing the data from the clinical trials for our stroke patients which we've talked to you about historically while continuing to work with the appropriate agencies and associations to look for the best measurements for all the indications.

For example, CMS is reviewing the standards by which they judge their stroke rehabilitation progress. Obviously we're following this very closely and will comply with their decision on the parameters they want to see. In addition, certain patient advocate groups and research hospitals have expressed interest in launching their own studies on indications that are germane to their specific membership. This dual track of public and private is the same progression that we went through to gain reimbursement on our microprocessor needs and other O&P products.

So this is the way its done, which is to complete your clinical trials, together the statistics, present those for evidence and all the while, working with the groups that are advocating for their patient populations. And we are confident that this is the best route and as we have stated publicly, 2009 is really the transition year for Walk Aid. We really expect to see the benefits of full reimbursement in 2010, but I don't want to discount that our guidance for 2009 does continue a pretty healthy increase in sales roughly 50%.

Finally, a few words on acquisitions and other development projects. We're continuing to pursue our strategic acquisition program. In 2009 we are targeting to complete acquisitions, which would have about $20 million in annualized sales benefit for us. Our strategy is to look for tuck in candidates that have strategic value to us in the form of location, quality practitioners and/or favorable product service mix.

On the development front, we've made some progress with the pilots that we initiated in Q4 and the early part of Q1 and we anticipate a public launch of these piloted projects a little later this year.

In closing, I think the results of this quarter demonstrate that our programs continue to generate positive results. However, we do recognize that in this environment of volatile unemployment and financial conditions that we must be extra vigilant with respect to revenues and of course managing our costs. So that's pretty much it for the quarter, let me turn it back over to Neva, our operator, for our questions. Thank you very much.

Thank you. (Operator Instructions). Our first question comes from [Brian Sofino]. Please, go ahead.

Good morning. This is actually Brian Sofino on behalf of [Adam Feinstein].

Morning.

Morning. Just wanted to get -- see if you guys could give us a couple housekeeping details here. As far as the impact from leap year and I guess the poor weather, do you guys have any indication in terms of what that did for your same store number?

Well, the extra day from leap year last year would have given us about 1.2% in additional sales. That was -- that would be roughly what the impact should be from leap year. it's a little more nebulous to try to assign a value to the weather, there clearly was some severe weather in the Midwest in particular and did some studies and determined that roughly half our practices were impacted at one point or another by weather, but whether that was more severe than the prior year is really hard to tell, so we're not assigning any value to that in numbers.

Okay, and then in your -- did you give a bad debt number for the quarter?

Bad debt expense was at 2.2%.

Okay.

So it's tracking to historic norms.

Right, right. And then, George, I think you said that your SG&A, did you say that was up about 1.2% year over year?

No, it was up in dollars, but not as a percent.

Okay.

Our SG&A, other than -- other than labor was from a margin standpoint at the same level as the prior year and that's with a higher variable compensation accrual.

I got you. But that's not something that we're going to see going forward with your new presentation in terms of just breaking out SG&A on its own.

That's correct.

Okay.

The new presentation is going to concentrate on our personnel costs and then all other SG&A will be in one category.

Okay, okay. Great. And then, with your guidance for revenue, the 6.7% to 8.1% growth, can you kind of break out what portion of that relates to kind of same store and what relates to kind of acquisitions that you made in 2008 as before -- that are not included in the year over year same store number?

The com assumptions in our sales growth assumption is 4% to 6%, the benefit we should get from acquisitions that were made in 2008 and 2009 are in the range of about $8 million.

Okay.

So that's included in the total -- that's $750 million to $760 million, and of course we have some assumptions in there for SBS growth as well.

Okay, and then just one more question here before I jump back in, I noticed that there was like a slight decline in commercial business and other as a percentage of total sales. in terms of just how we should think about that trend, is there something that you're seeing with an impact in the economy or is there something else going on there?

Well, with the baby boomers aging there should be a natural progression where Medicare will be a higher percentage, now with -- over time. Now, with that said, Q1 since it's our lowest seasonal sales quarter can give you some numbers that are a little unusual. So I wouldn't -- we don't expect there to be a 2% shift from commercial to Medicare for the whole year, but we think that's something that's peculiar to Q1. We do expect there to be a shift over time, but not that dramatic in one year.

Okay.

And remember too, it's normally the commercial book of business where people have to contend with the out of pocket that they have to get through so perhaps when we've looked at our feeling was they're being just a little more cautious in trying to eat into their deductible and out of pocket simply because of disposable income concerns. So they're probably trading a little lighter on the commercial side than the Medicare side.

Okay, okay. And I apologize, just one more question here. Are you going to be -- will you be making available the historical debt for your new presentation of your income statement?

Yes, we will and when we file the 10Q, everything will be in the reformatted for prior years.

Great.

And we can supply any comparable information that you need.

Great, great. Thanks for taking my questions.

Thank you, Brian.

The next question comes from Larry Solow's line. Please, go ahead.

Good morning, guys. Just a quick follow up, you think you'll have your queue out within the next couple of days or do you actually -- is there any way we can just get that, the reclassification before then or --

The 10Q will be -- it normally trails our earnings call by about a week.

Okay, got you. Okay, just looking at Linkia, which actually the growth of the quarter was about 9%, which is nice. Is that kind of in line with what your outlook is for the year and then I know on the Q4 call you had mentioned -- excuse me, you had -- in multiple talked with maybe some new national contracts or a partial new contract with Blue Cross, any update on that?

Well, let's take them one at a time. 9% is in the range of where we would see Linkia for the year. Remember last year it was up almost 14%, I think it was around 13.8% for the year. So we'd like to see the 9% come up a bit more, but it certainly is in the satisfactory range for the first quarter.

Regarding the second question, Linkia continues to have discussion with all of the large regional and the nationals about bringing them into either Linkia preferred or Linkia exclusive contracts as well as having discussions with our current customers, current payers about price increasing. So those are ongoing, we remain optimistic.

We think that the valuation of the Linkia model is apparently in two ways, one is that we continue to increase that book of business so we know that we wouldn't be doing that if we weren't bringing administrative simplicity and quality care to the payers and some of the payers have actually reached out to Linkia asking them on a pilot basis to try and develop some other products and services for them that are based upon the Linkia model.

So, we look at that as potential for expansion of the Linkia business, but its extending beyond our normal book of O&P services. So we remain optimistic that we're going to be able to entice these people in with some solid numbers and good performance. So they are ongoing and as we've said over the past few years, over in the Linkia days we were probably a little more irrationally exuberant about how the Linkia model was going to take off and we've since learned that it is -- its not one that's going to go capture all of the business instantaneously, but it is on that through perseverance we can continue to build at near double digit increases.

So we see Linkia doing the job and we believe that we've got a pretty happy and satisfied customer base out there and we're very proud of the independent network that we've put together and our ability to work with those independents in providing value to them and rounding out our network. So we think we've got a very good value proposition with Linkia.

Okay, great. And then I think, George, you mentioned you expect competition as a percentage of sales to trend down during the year, is that what you -- did you state that?

Compared to Q1 yes. We don't -- first since SPS will not be as big a component of sales in Q2, Q3 and Q4 as it was in Q1 simply because of the seasonality issue and we also won't have -- see the impact from the lost differential in the Walk Aid sales.

Got you. And then in terms of Walk Aid, so I guess reimbursement now is just on a case by case basis, when -- is there any kind of timeline or kind of milestones we should look for on when national coverage may come. I imagine maybe we'll get some -- you'll have to file these clinical trail results and any -- how should we view that?

Well, right now, for the incomplete spinal, Medicare is paying us for those. The average reimbursement is about $5,200 and we're filing those and we're being reimbursed for those. We're -- in terms of our stroke clinical trials, we are analyzing that data and then the process once the analyses is complete, we think that could be like 60 day time frame, take a look at the results we're working with some of the principal investigators.

They're anxious to get those results to put some papers together and send those out to peer review journals, we would expect that that process could be 60 to 90 days and upon acceptance by some satisfactory journals out there, we then can take that information back to Medicare and submit it for coverage along with health economic study and talk about reimbursement. So we really see it as a -- as -- when we try to put this on a timeframe, extending out over the next couple of quarters.

On the private pay side what we're seeing is that we have taken the change in the national law and coverage decision and gone out and we initiated discussions with all the major carriers in terms of the benefit that the Walk Aid can provide.

Empirically when you see a patient on it versus their AFO, there's no question in your mind about the efficacy of the device. So much so that some of the patient advocate associations have become very passionate about this and want to actually find ways to support studies at various independent hospitals and rehabilitation centers so that they can get this underway and use that to appeal to Medicare as well.

And those things -- there's about five or six of those and those thins we have seen some of the plans that have been put forward. We think than they may all com together within the next 60 days and those kinds of studies wills tart on the outside, and with each of these private payers, when we've talked about our reimbursement debts, we are working on a patient by patient basis, as I mentioned, there's over 200 claims in the system already and as our practitioners and the independent practitioners would better understand this process, we expect that to increase significantly.

And as people on the payer side become more conversant with the storing methodologies that we use, which his similar to the way we've done the microprocessors where we do put a comprehensive evaluation together and use that as a screening tool. We just don't want to put anybody in a Walk Aid, we want to put people in a Walk Aid that deserve it and can benefit from it.

So as they become more conversant with the evaluation scoring tools, we expect that volume to increase significantly and that's hwy we are putting additional resources into this and we expect that probably over the next two or three quarters to continue working with these outside payers and so it becomes common place.

So as I mentioned, it's probably going to be fighting on a number of fronts and it's probably going to be a total effort throughout '09 and our hope is that by the end of '09 we could wrap up on the federal side with Medicare. We could certainly have some tests underway with some of these other advocate -- patient advocate groups, and we could convince some of the third party insurance companies to extend the coverage on a more routine basis. So it's probably going to be an overall '09 event in terms of scheduling.

Got you. But clearly you expect a nice ramp up through the year with you—I guess with your full year estimate or guidance is around $15 million in sales. Is that correct?

That is correct yes.

Okay.

50% increase over last year on an enterprise basis.

Got you. and then last question and just this may be a difficult one to answer but just kind of speculation, any early view of what you think there will be, if any impact from on reimbursement and just as accompany a whole from the new Obama administration?

It's really, having spend a couple of days down in Washington last week, there's as many views on this as there are people down there. It is too soon to tell. I mean we haven't spent some time in one of Senator Kennedy's staffers on health care and they're still in the very formative stages. The timetable if you talk to some folks, would say that they want to try and get some bills into the house and the senate before the summer recess and then come back after the summer recess and that would be when the real fun would star as they try to reconcile all this and figure out how it would get paid for.

So we do know that there is a strong push underway to include 47 million uninsured into this program, which would be a very positive thing for us. We don't know that they are trying to make more money available to the states in the form of subsidies to Medicaid. That's also a very positive thing for us.

The thing that we're watching very closely is with this additional coverage, how is it all going to be paid for because the math simply doesn't work through higher taxes and changes in the Medicare advantage program. So, and we still see this competition between sort of using the private payers versus the Medicare, and Medicare offering competition, if you will, to the private payers and how all that's going to sort out, so a lot of different views. Some very strong positives in it, but we certainly are sensitive to how it all gets paid and what might be the reimbursement rate. So it's really too soon to tell, just yet.

Okay, great. Thank you very much.

You're welcome. Thank you.

The next question comes from Greg Williams's line. Please, go ahead.

Good morning and thanks for taking my call.

Morning, Greg. How are you?

Good, thanks. Just going back to the material costs and the com costs coming down. How does that translate, how do you operationalize that? Are you talking to suppliers on a contract by contract basis as they come in or are you actually confronting the suppliers now and just telling them to lower the prices in light of the lower commodity costs?

Greg, the issue I've been talking about, simply a mix issue. SPS is distributor, they have an 80% com rate, HPO on the other hand, runs about 26.7% and the Walk Aid sales have an even better -- lower com rate than HPO's com rate. So when you take that blended issue in Q1 into consideration, in Q2 we expect to have higher sales of HPO, they have a better com rate, that will improve the mix. We also expect not to have that bad comparison that we had in Q1 by virtue of the fact that we had lower Walk Aid sales, we expect the Walk Aid sales to start ramping up. So we expect the mix alone to change the com rate on a consolidated basis.

Okay, thanks for clearing that up. Also looking at -- as your -- at your guidance, does that assume, it looks like libor is down and it helped you guys this quarter. Does that assume the current levels of libor and the favorable interest rates here?

The EPS guidance that we gave assumed that libor is going to stay close to where it is today, there's a little bit of room in that assumption from an integrated standpoint.

Okay, and Tom I think you said that Medicare is currently paying for Walk Aid spinal around 5,200. Maybe I'm getting ahead of myself, but if I look at 2010, 2011 sales, can we assume 5,200 would be a universal price for Medicare if you get coverage with somebody other multiple sclerosis and other ailments?

Right now, they've not set an exact price. They are examining the merits of each patient because the incomplete spinal is a rather small population. So I would say they're in the data gathering stage. I would expect, just based upon how we've seen other things price out through the years, that when the volume tips up and we have to remember that stroke is a very large population, that when they review the data and they look at the health economics data that they would come back and try to extract a bigger discount in exchange for the larger volume.

We've seen that kind of behavior before, so I would be very pleased if they would accept 5,200 and continue to pay at that level, but we don't see that in the cards. I don't know to what level they may go in terms of where they would price it out. But I fully expect to see a much larger discount through our usual and customary when those volumes ramp up.

Okay, makes sense. Thanks again guys.

You're welcome.

Our next question comes from [Daniel Orzowski's] line. Please go ahead.

Yes, thanks. Good morning.

Good morning, Dan. How are you?

Good. Tom, you touched on the upcoming regulations with impacting non-qualified provides, I think it was in October it starts. Do you have an estimate of how much business right now is being performed by non-qualified providers and how that could impact you once these guidelines go into effect?

It's very hard to get that information because it's tabbed up state by state. We have taken a look -- for -- there are three provisions in that bill, on is that by October 1st everyone would have to be accredited. Second provision is that in states that have licensure, that federal government, Medicare could only pay licensed providers. And the third is an attempt to correlate the difficulty or the complexity of the service with the certificate of the provider. So that even gets to be a little more granular.

But we do know in looking at the state that have licensure and we took a look at three states, Florida, Illinois, and Texas. When we've gone into the payments and cross walked those to those that have the license of those states, we found that roughly 70% of the payments in those states were to non-licensed practitioners. So there could be a rather significant ramp up, both coming from the accreditation provision as well as the licensing provision.

And where this is ultimately going to go will be to those folks that don't have the proper education, perhaps they're out as sales people and they're fitting devices, so there could be a pretty comprehensive increase but let me qualify that, Dan, by saying that we're likely to see that increase on the low end of orthotics, because I think its pretty safe to say that you aren't going to have a manufacture's rep out designing and fitting either a custom base or certainly a prosthesis and all the prosthesis are custom.

So this is going to go at the lower end of orthotics. So while the number of billable events could go up, they're not going to be the real high dollar ones, but it certainly would help to clean up the industry, and frankly right now we see some of those patients because they're fit, they're fit in an unsatisfactory fashion. The device doesn't work and then they end up coming back into our patient care center and we then fight to get them a second device because they're payer's already paid once.

So we don't have an exact quantification in terms of what I would mean, but hopefully I've been able to put a little color on where we think it's going to impact and which segments of our product mix it will affect.

No, that's definitely helpful. Thank you. The other question I had was the private payers, outside of Medicare, anything since the beginning of the year or the last six months? Do you see more aggressively discounting out there maybe with the mom and pops or anything different in this environment from historical?

Great question. Certainly they're -- if we look at some of their financial results they're down a bit compared to their historical levels. We've not seen any more aggression on that front than we have over the last couple of years.

As a matter of fact, we've just gotten at the beginning of the year a price increase from one of them and I think -- I don't want to be too confident here, but I think the value that Linkia really brings in saving them money is helping us in the negotiation and certainly evidenced from the fact that we've been able to pick up 9% more revenue flowing through Linkia. If something were watching because as their results fall they have to turn somewhere to try and help improve their financials and that's probably to the health care providers. So haven't seen it yet.

Okay, thank you.

You're welcome. Thank you.

Our next question comes from [Mike Petoski's] line. Please, go ahead.

Good morning, fellows.

Morning, Mike.

I had to be off the call for a couple of minutes and I may have missed this, but George did you give -- on the same store, did you give the pricing volume mix break out?

Price was kind of where we expected it. It was in the 2% range, 2% to 2.5%.

2.5%. Okay. And I want to go back to Walk Aid real quickly, relative to your expectations for 2009 and the first quarter, Tom, how -- should I -- is it safe to assume that the incomplete spinal is a fairly immaterial amount of what you're assuming in the total say $13 million, $14 million, $15 million of revenue in 2009?

I wouldn't call it an insignificant amount, but it certainly is on the low end of the spectrum. We're not looking at that to drive way the 50% increase in over all revenue.

Okay. So --

It's going to be one of the contributors.

Okay, so I don't understand that. Clearly you must be anticipating some kind of significant kind of institutional coverage decision from private insurers, I assume that -- that must be part of the assumption. Is that right?

Well and if we look last year, the results that we turned in last year were just all based on private individual pay. We didn't have any of these reimbursed last year. We want to match that level of performance. And then on top of it, what we're saying is that we have the coverage coming from Medicare on incomplete spinal and then we've started up this reimbursement if you will, and just since launching that, as I mentioned, there's almost 250 claims in the process and we expect that to go up significantly and each one of those we try to go out and get authorized and they can go to as many as three appeals.

So it's an arduous process, but that is bringing in the third party payers and our hope is that by making them more familiar with the device that they will extend coverage to this, so we're looking at three -- actually let me say four basic ways that this could grow.

Certainly continuing to offer the device as cash pay. Working with Medicare on incomplete, going after the third party payers to have them recognize the value, and last but not least, would be our international distributors. We've added a couple more of those so we fully expect those to start taking root and they are operating in some countries where they're going to get reimbursement this year. So it's really the combination of all of those that we see driving this 50% increase.

And I don't want to get argumentative and really kind of go off on a tangent here, but really I don't think you should be comparing the $9 million to - and then add the growth on. You know you just did a $1.3 million and I think some of the $9 million obviously was driven by the Good Morning, America and all the rest of it. I mean do you see something comparable in terms of kind of free publicity in 2009 that could essentially bring you up more to a true $9 million run rate going forward?

It is, it's a great question. Our PR efforts are always ongoing. One of the major networks did a PR piece that they seemed to like very much and the producer liked just a couple weeks ago. We don't have a definitive date, you know who these things go, they usually end up putting it up almost at the last minute's notice.

But as the device gains in popularity and we see it on more broader basis of population we do expect to see it be come a little more promoted and we've got several b-roll shots but in this case they actually came to our patient's location and filmed the patient and they're quite excited about it and we are looking at how we can enhance our PR coverage because it truly is a device, as I said, empirically, you're just shocked when you see with and without. So that is part of our overall game plan for this year.

Okay, that's great. And last one and I'll get off. I heard you earlier say that you're analyzing the data from the clinicals, but I may have missed it earlier, does that mean the clinicals are now completed?

Yes, we've got them wrapped up. We're -- there's I think a one -- I guess one little last segment on one of the arms that will be wrapped up, but we've begun to start analyzing the data and that will be completed I think in the next two to two and a half weeks.

All right. Wonderful. Thank you.

Thank you, Mike.

We have one remaining question and that's from Larry Solow's line. Please, go ahead.

Just a quick follow up, did you guys complete any acquisitions during the quarter? I know you announced some in the early January for Q4, were there any announced or anything during Q1?

We did get one done towards the end of the quarter that was not terribly material. So there was no announcement.

Got you. and then, one more question, on the innovative neutronics, obviously nothing you can probably specifically announce, but any other exciting products in the works that are -- we may hear something about in the next six to 12 months?

We continued to look at other products in the area of functional electrical stimulations, got a couple of very interesting prospects that we are evaluating. We've not signed, if you would, any deal to bring them into innovative at present. So I would at this point say that we wouldn't have anything definitive or material within the six to 12 months.

But one of the thins we have to remember is that innovative has brought additional capability to the company in terms of better understanding of design and manufacturing and so we are also looking at innovative to really become the incubation chamber for perhaps helping us with some of our orthoses and prosthesis in terms of some new componentry that we may want to produce in house to put on those and we are looking at one such device that one of our fellows came up with as an idea and we -- if you look at innovative neurotronics as being one of the two sources that we can look to.

One is working with our supplier base, where they know the design and manufacturing process very well, and we can partner with them to bring new products to market, or alternatively if its within the skill sets, we could use innovative and as I mentioned, we've got one of those that we're currently looking at right now and we actually have it out on test, and depending on how those tests go we'll be talking about it more probably around Q3.

Okay, great. Thank you.

You're welcome.

There are no further questions at this time.

Well, thank you very much Neva and thank all of you for joining us this morning. I hope you have good day and a very pleasant summer and we'll look forward to talking to you about the end of July. Thank you very much.

This concludes your conference call. You may now disconnect.