Hanger Inc (HNGR) 2011 Q1 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger Orthopedic Group first quarter earnings results. (Operator Instructions).

Thank you. Mr. Tom Kirk, President and CEO of Hanger Orthopedics, you may begin your conference.

Thank you, Stephanie. Good morning to all, and welcome to Hanger Orthopedic Group's discussion of our first-quarter results. This morning, I'm joined with George McHenry, who is our EVP and Chief Financial Officer, and Tom Hofmeister, who is our Chief Accounting Officer and Director of Investor Relations.

Before proceeding, let me ask Tom Hofmeister to review with you our declaration on forward-looking statements. Tom?

Thank you, 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 related to future results during this call 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. These include, but are not limited to, the Company's ability to enter into and derive benefits from managed-care contracts, the demands for the Company's products and services, and other factors identified in the Company's periodic reports on forms 10-K and 10-Q, which are 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, I will turn the call back over to Tom.

Thanks, Tom. Let me first lead off with a couple of sort of overarching points on the quarter. Our consolidated sales grew by 12.4%, compared to the first quarter of last year, and this sales performance, combined with cost management, yielded an EPS of $0.19, excluding the cost associated with the wrap-up of our relocation.

This equates to almost a 19% growth on the EPS line over last year's first quarter. It puts us in line with the first call estimates. During the quarter, we experienced an extended period of harsh weather which affected all of our operations. Now, we'll discuss this in more detail later on in the call, but I'm also happy to tell you that during the quarter, the assimilation of ACP, which was the acquisition that we completed in December of last year is proceeding as planned, and so there's some good news there.

Let me turn it over to George, who will review our financial results and our balance sheet changes in a little more detail.

Thank you, Tom. Good morning, everyone. Thanks for joining us today. Q1 was really an excellent quarter when you consider the impact of the weather, which caused us to close over a 1000 days more this year than in the mild winter that we had in 2010. I'll give you a little more color on that in a second.

The important takeaways are as follows. Adjusted EPS of $0.19 represents an 18.8% growth over the prior year, which met street estimates. Our track record of consistent growth and performance continues.

Operating leverage increased by 130 basis points in the first quarter due to the acquisition of ACP. Margins in our core business were down slightly in Q1. If you recall, our operating margins were flat in Q1 of 2010, and then we ended up 2010 with a 70 basis point increase for the full year.

You should expect to see the same kind of pattern this year, and we still expect the 20 to 40 basis point improvement included in our guidance for the full-year. We will break out the margin impact of ACP in future quarters so that you can track our progress.

Overall sales increased by 12.4% for the first quarter. The [comp] sales in our patient-care segment increased by 0.2%. This is compared to internal expectations in the 2% to 3% range.

Let me try to give you some color on the extent of the impact of the weather this year. As you know, Q1 is traditionally our weakest quarter both in terms of gross sales and growth. When you look at our sales performance at patient care, first, it is important to note that our comp sales guidance for this segment was for the full year and not for each quarter, and historically, in Q1, our results were at the low end of our average for the year, below that comp number, as it was in 2010, and our Q4 sales are generally above our performance for the year, with Q2 and Q3 generally falling in the middle of the range.

Our expected comp sales in Q1 would equate to approximately $3 million to $4 million in comparable sales growth for the quarter. We lost over 1000 days more in 2011, as I mentioned a second ago, when you compare that to the prior year in which we had a very mild winter. An average practice does about $1 million in sales, so those 1000 days would theoretically have equated to about $3.8 million in sales for the quarter.

Some of the storms happened in January and February, and we believe we've recovered a good portion of those sales, and that leaves a weather impact of between $1.5 million and $2 million in Q1 that we expect to recover throughout the remainder of the year.

Our backlog has recovered in April, and our sales to-date indicate that our sales performance is back on target, and that is why we are reiterating our guidance on sales.

Our distribution segment reported a 7.5% increase. Distribution sales are generally a bit ahead of patient care in terms of recovering from things like bad weather. Therapeutic services, including the new ACP acquisition, contributed $15.9 million sales increase for the quarter. Our COM rate, at 29%, was 1.1% below last year, due to the favorable impact of our acquisition of ACP. Remember, that's a leasing model, and they have very low cost of materials.

Our patient care business was slightly-- the COM rate there was slightly below last year, and the inventory build for the quarter was not significant, so we're comfortable with the COM rate in our inventory build.

We did an excellent job of controlling expenses. Frankly, when we encountered the bad weather pattern, we held off on scheduled hiring and some discretionary spending was postponed. Also, our-- it's important to note that our rent and occupancy costs were almost $700,000 less last year due to the move of our corporate headquarters to Austin, so the benefits of that move have helped our earnings.

Our depreciation and amortization increased by $3 million compared to 2010, principally due to the acquisition of ACP, and they are, as I mentioned before, a leasing model. That's where their COM really resides. All these factors I have just discussed led to the 18.8% increase in adjusted EPS for the quarter.

Moving on to the balance sheet and cash flow, our AR balance was $110.1 million. We continue to do a commendable job collecting cash. DSOs were at 47 days, which is at the low end of the range we expect, and we're comfortable with our reserve for doubtful accounts.

Our inventory increased by $1.5 million to $99.8 million from $98.3 million at the end of 2010. Inventory turns were at 4.3 times, which is consistent with the past four quarters. Our sales backlog was strong at quarter end. It really had rebuilt at that point, and then moving into April as well, and we believe we're in good shape going into Q2.

Our CapEx was at $5.4 million for the quarter, which was $2.5 million below last year. We still anticipate that our capital additions for the full year will be in the $40 million to $50 million range. Cash flow used in operating activities for the quarter was $11.5 million. That's a $600,000 improvement compared to $12.1 million last year.

As most of you already know, we normally do not generate cash in Q1, and our goal is always to reduce the cash used to as low a number as possible. We did borrow $10 million on the revolver during the quarter and that has been repaid this week.

Our liquidity-- the Company currently has total liquidity of $106.3 million, comprised of $19.7 million in cash, and $86.6 million availability on our revolver. That's with the $10 million draw still in there. Total leverage, per our bank calculation, was 3.43 times, which is well below our covenant of 5 times.

Moving on to the repricing, as previously announced, we completed the repricing of the term loan on March 11th. We reduced our LIBOR floor from 1.5% to 1%, and the adder from 3.75% to 3%, with one step down to 2.75% once we get to 2.5 times leverage.

We expect the change to save us approximately $4 million in interest expense over a full year. Net of the cost of the transaction, which was capitalized and will be amortized, we expect the change to contribute $0.03 in EPS in 2011 and another $0.01 to $0.02 next year.

Moving on to guidance, we are increasing adjusted EPS guidance by $0.03 and re-affirming the sales guidance for 2011 that was established back in February. We expect net sales in the range of $945 million to $955 million, that's a growth rate of between 7.2% and 8.5%. Included in sales growth is the assumption that we will increase comp sales in patient care by 3% to 5%.

Our goal remains to improve adjusted EBITDA leverage in our core business by 20 to 40 basis points. Our full-year EPS guidance included in the cost of relocating our corporate office and the-- I'm sorry, excluding that cost and the acquisition of ACP is being increased by $0.03, due to the impact of the repricing of the term loan, and we're moving that to a range of $1.66 to $1.71.

That concludes my comments, and I'm now going to turn the call back over to our CEO, Tom Kirk.

Thanks, George. I would like to spend a few minutes talking about our divisions and segments and what went on during the quarter so I can provide a little bit of color for you. As George has mentioned, our patient care segment achieved about a $300,000 increase, or about 0.2% same-center sales growth for the quarter compared to Q1 of 2010.

As George has already explained, this was below what we have come to expect in our first quarter, and the primary reason for that performance was that significant increase in the number of closed clinic days compared to 2010.

In some cases, even when we were able to open the centers, the patients couldn't navigate the roads and the conditions, so they were unable to come in for appointments. Not only were they not able to see Hanger's practitioners, but they were also canceling appointments with the doctors, and we checked with our referral sources, and they saw a similar phenomenon.

As George had mentioned, we did recapture some of that business, and what we are currently doing is we are making sure that we are working with our patients to get them into this process and make those appointments so that we can provide the kind of care that they need as the year goes on.

Also, I wanted to mention again-- I think we've said this during our last call, that CMS did not provide for a fee schedule increase in 2011. This was the second year in a row. We didn't receive one in 2010, either.

So, we did, from a pricing perspective, achieve a modest benefit from the rollthrough of our 2009 price increase, which we did get from CMS, and as we've explained in prior calls, it takes about a three-year transition for that to migrate to all of our contracts, so we do pick up a little bit on the tail of that, as well as-- and I will mention in my Linkia comments, Linkia has been active in going out and securing some modest price increases.

So, as we step back, we're not getting very much help from the pricing side, so it really comes down to a volume and mix gain in this environment, capturing share and continuing to provide the best possible patient care.

So, I had just mentioned Linkia. Let me talk a little bit about some of the projects that we have underway to handle that volume and mix situation. First, the continued improvement in our Linkia book of business, and I-- we want to remind you again that HPO is the primary vehicle for the delivery of most of the services that are run through the Linkia contracts.

On an overall basis, the revenue from the Linkia designated contracts, which are the large regional and the nationals, was up about 1% compared to Q1 of 2010. Now, this is below what we've come to expect from Linkia, but if you think of what was going on, that the patients were unable to come on, that volume of business flowing through the Linkia contracts with those large providers out there-- payers, excuse me, naturally would be lower, again, attributable to the weather.

Second, we continue to educate our referral sources on the enhanced, life-like features of our high-performing products, such as our advanced suction-suspension systems, our microprocessor prosthetic arms, hands, knees and feet components, and for Q1 of 2011, the revenues of these product lines were up about 15% compared to Q1 of 2010, due primarily to the introduction of some new products and programs, as well as this continuing education efforts to work with our referral sources.

The third mechanism we employ are our patient evaluation clinics in which we call in our patients for an education session on their fit and function. This is a great example of good patient care that provides incremental revenues.

Revenues from this source provided about $4 million of incremental revenue for the quarter, a little bit under what we've come to expect, but I think it's in line when you consider that the weather did take a toll on our ability to get the patients into these clinics.

And the fourth mechanism that we use are our sales, marketing and public relations efforts by our practitioners and all the support staff that help them identify opportunities that are specific to their local businesses, such as the opening of satellite offices and the launching of new marketing and education programs, and so we have continued with those.

A couple of words on the general economic environment I think are in order. At the end of Q1 2011, our unemployment rate was 8.8%, which compares favorably with the 9.7% at the end of Q1 of last year. So, while this is moving in the right direction, some of our patients are still having difficulty in identifying other sources of assistance on their reimbursement, co-insurance and copay, and our practitioners are dedicated to continuing to offer assistance as needed to the patient and helping them find alternative sources of funding, whether that's at the local level or through charitable mechanisms that are available for them.

In addition, some of our patients report that their disposable income is being challenged a bit by rising prices for energy and food, and so we are, in a sense, in competition with all of their daily needs, and that's why it's essential for us to work with them to try and find ways that they can secure the funds that are necessary to get their devices.

In early April, more than 100 practitioners, patients and interested parties attended the policy forum to lobby the new 112th Congress. We were successful in having the parity bill, which, by the way, is now referred to as the Insurance Fairness Act for Amputees, we had that reintroduced into the Senate, and we have lined up sponsorship for the House, so we expect to see that move into the House shortly.

We also were successful in getting the Veterans' Bill of Rights introduced into the House, and we are now working on sponsorship for the reintroduction of the Medicare Improvement Act during this year, and we had some very positive meetings with Congressmen and Senators regarding this bill, and they do understand that this bill actually saves money by eliminating fraud and abuse. So, we think we're going to have good sponsorship on that.

In doing these legislative efforts, we are aligned with the Amputee Coalition, the American Orthotics and Prosthetics Association, the National Association for the Advancement of O&P, and the O&P Alliance, as well as member advocate associations such as the Diabetes Association and MS. It's really a coalition of associations that really gets the attention of the legislators and drives the point home.

At the state level, particularly involving the Medicaid, healthcare providers are facing challenges as the states struggle to balance their budget. At present, we are working with each state on an individual basis in terms of education, communication and public relations that support our patients. Here again, we are working closely with all of those associations to make sure that our patients are up-front in explaining their need for good patient care, and I'm happy to report that we have had success in California and Nevada in turning around some of the planned Medicare cuts.

Right now, it actually just occurred yesterday, we filmed a national PR campaign which we are going to be working through a PSA group to take out on the national scene to stress the effectiveness of what we do in terms of how this is a good investment and not a cost, and if that care is not provided, that the other costs outweigh the investment in good patient care in orthotics and prosthetics. It's going to be a very effective device, and we have used local PR efforts of this type in Nevada and Carson City to try and turn around that legislation, and we were successful.

Okay, let's turn our attention now to SPS, our distribution company. Their outside sales are up approximately $1.6 million, or 7.5% compared to the first quarter of 2010. As George had explained, the lead lag cycle on the distribution business is a bit different than it is in the patient care division.

They experienced in the early part of the quarter the same sort of weather phenomenon, but as the weather started to break in parts of the Company, naturally, their order book started to fill, so, historically, we see them leading the patient care segment, and they had a good second half in March, so it is encouraging to see that the industry is coming back, and that this was a temporary phenomenon.

They continue to be effective by promoting their expanded product line, their new electronic ordering capability, and their outstanding customer service. The SureFit business that they acquired a couple of years ago continues to gain traction with the Hanger practitioners, the independent practitioners and the podiatrists, and during the quarter, SureFit completed the mailing of their new catalog, launched a new website, and they also completed a lean process improvement in their manufacturing facility which dramatically reduced their turnaround time.

Let me come back to Linkia for a second and tell you what's been going on there. Some exciting things. They continue to execute their dual mission of building volume while negotiating a fair price for services and the value their provide to their customer. Payers tell us that they recognize the value that Linkia brings to them in helping them control costs while ensuring good clinical care and high levels of customer satisfaction.

During the quarter, Linkia was able to negotiate some modest price increases even in the face of the Medicare situation with two of our national carriers. Their book of business, on an overall basis, as I mentioned before, is up about 1% for the quarter, but we think that's going to return to normal levels as we proceed through the year.

Linkia continues to advance the pilots that are offering other services, thereby increasing the stickiness of their model, and these additional services provide benefit to payers. One of these was completed in the fourth quarter and is currently being offered to payers and receiving considerable interest, and as a matter of fact, this was the business called PROPS, which is a Prosthetic Review of Orthotic and Prosthetic Services, basically an invoicing review.

They have signed a contract with one national provider, and they have got several others that they are in discussions with, and the other pilot that is underway is to built out a mastectomy network, and they are building and recruiting for that network now, and they have already secured an interested party. Haven't booked the contract yet, but they are generating significant interest around these, demonstrating that Linkia and its provider network management model truly adds value to the payers and is unique in the industry and is a benefit to Hanger overall because it doe assist us in negotiating these contracts.

Finally, let's discuss the therapeutic solution segment which consists of Accelerated Care Plus and Innovative Neurotronics. Sales for this segment were up by about $15.9 million compared to Q1 of '1, principally due to the acquisition of ACP.

I am happy to say that ACP's assimilation into Hanger in terms of key processes and systems was largely completed during Q1. We've got a few other things that we have to do, and we'll be phasing them in during the year when it makes sense to do that.

The top line performance is in line with the expectations that we set during our announcement of the acquisition and our budgeting efforts, which was a direct feed and component of our overall guidance, so that's tracking as we expected.

We have launched two pilots to determine the best method to capture the synergy between our patient care division and ACP, one in Arizona and one in Florida. We are following these very closely, and the results will guide our national rollout later this year, and as we explained, this is one of the benefits that we anticipated, which is levering the ACP footprint for our orthotics and prosthetics business.

But, as we've said before, the focus for ACP in 2011 is to continue to build the business that we've purchased by using the mechanisms in their value proposition which have worked so successfully in the past, and we expect them to continue to do so.

Innovative Neurotronics has been working on preparing the launch of a new pediatric FES system, along with the new WalkAide pediatric system, and a revised version of the original WalkAide with higher reliability and greater simplicity.

We expect both of these developments to be favorably received in the field, and we'll be rolling those out in Q2 and Q3. On the other front, we're continuing to work with the clinical sites to go through the IRV and the contracting process for our INSTRIDE pivotal clinical trial.

In total-- excuse me-- in total, we are working with about 30 institutions overall, and the enrolled patients are increasing. As I mentioned in prior calls, our pivotal study, the INSTRIDE study, will be much larger in multi-center randomized clinical trials. Our timeline remains the same as we specified on the last call, whereby we anticipate complete patient enrollment by the end of 2011, but, of course, that's going to be dependent on site enrollment to a large part.

Once the study is complete, we'll submit to the appropriate publications and the regulatory agencies, and we anticipate 2012 submission of data to FDA and CMS.

At the same time, we continue to work with-- excuse me, sorry, excuse me-- with our third-party payers to gain authorizations for our patients to our reimbursement desk, and our success rate continues at the same level as we've mentioned on prior calls, and that's about 70%. About 70% of the ones that come through are approved and move on for reimbursement, and, finally, a few words on our acquisition program.

As you'll recall, we pulled back a bit on O&P acquisitions in Q4 due to the ACP acquisition, and during Q1, we've rebuilt our pipeline and made a small acquisition during the quarter, and in our press release, we've specified the impact that acquisitions have had, those that resulted in the last three quarters of last year and the first quarter of this year on our overall revenue line.

We anticipate coming back to our prior target of $20 million to $22 million of annualized sales. As we've said in the past, the 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, and as I mentioned, we do have a pipeline in signing letters of agreement and letters of intent with some of these, so we are back in the game, and I will say that we are finding that there is a high level of receptivity, which I believe is primarily due to the complexity of doing business in the modern regulatory world.

We're still having practitioners telling us that they came into this business to do clinical care, and in the most recent times, they have been overwhelmed by the sea of documentation and red tape. So, I think it puts us in a very favorable position to achieve our targets.

In closing, let me say we operate in a changing and very challenging environment, with issues like an employment rate that retreats very slowly, energy and food inflation, states trying to close budget gaps and federal regulations concerning healthcare. I'll be the first to say that this was a tough quarter, and I'm proud of our employees' efforts to continue to serve our patients and customers in spite of these adverse conditions.

In addition, happy to say that we held the line on expenses, allowing us to meet our earnings expectations. Thank you. Let me turn this back over to Stephanie for Q&A.

Certainly. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Hey, good morning, guys. George, just a question first on volumes and what you're seeing quarter-to-date. You sound like you guys are happy with what you're seeing so far in the O&P business and the patient-care center business in terms of volumes, but just wanted to ask you-- from a modeling perspective, you said $1.5 million to $2 million was the lost revenue for the quarter. Is that something that we should expect or model, for the most part, shifting into Q2?

We think some of it will come in Q2. It's probably going to come in Q2 and Q3, because the dynamic you can't really predict is-- as Tom mentioned, some of these folks haven't even seen their doctor yet, and obviously that has to happen before they can come see us, so the people that do have scripts we're following up with, we'll get some of those back, but some might fall into third quarter as well.

When you look at $1.5 million to $2 million, it's not really a fiscally material number to our overall sales projections.

Got it. And then, obviously, good job keeping costs down in Q1. How should we think about cost trends as we look into Q2 and Q3? How easy is it or how hard is it to kind of hold the costs where they are now?

Well, we clearly held off on adding some headcount when we saw-- until we started seeing a break in the weather, which we really never saw in the first quarter. Those expenses are still in the budget. We think-- we still think they're-- the headcount additions and the expenses that we deferred are valid projects, and, frankly, they are going to shift probably in the same manner that the sales shift, and you'll have a negligible effect on EPS in Q2, Q3 and Q4.

So, your models are probably in pretty good shape as they are right now, and it's just really a gross up of sales and expenses that you're missing, which are somewhat hard to predict. We'll add the heads and we'll add those discretionary expenses when we see the sales coming in, so we're going to wait and see.

Okay-- go ahead.

The important thing, Brian, is that you look at your model on an overall basis. I think George mentioned it earlier that what we've guided people to is the 3% to 5% same-center sales growth for HPO, which is certainly the player we're talking about here, is to make sure that you model on an overall annual basis.

Whether you strike a 4% increase in the middle of that range- and as you look over the year, that you can come into a reasonable average over the year, because some of the uncertainties, we're not exactly certain how it's all going to report in, how fast these people are going to get back into the system, but I think you're going to be pretty safe if, on an overall average basis, you get in the middle of that range for 2011.

So, in other words, Tom, you're still very comfortable with-- confident with your ability to get to that 3% to 5% range?

Yes, we haven't seen anything that would dissuade us from that, so that's why we reaffirmed our sales guidance.

Right, and what I mentioned in my comments was, you're probably going to see something in the middle of the range in Q2 and Q3, and we'll probably exceed it in Q4. That's the track record that we have.

Yes, Tom, and just on ACP, sounds like things are going pretty well, but just wanted to hear more comments from you in terms of what you're seeing in terms of the level of interest from other post-acute or other-care settings, because I know that this is something that you guys have talked about in the past as the potential next-growth area for ACP. Just wanted to hear your thoughts on that.

We have-- I think I mentioned to you at the last call that the ACP folks were actually doing some renovations on their model to adapt it to alternative venues, and they have completed that. They are targeting the ALS as a potential site, and are starting to have discussions with those.

So, we think we're starting to get some traction around that, and don't want to create a false expectation, but certainly that is the goal. They want to advance into those areas, and they've got some interested parties out there.

Got it. Thanks and congratulations.

Thank you.

Your next question comes from the line of David MacDonald from SunTrust. Your line is open.

Hey, guys. Just two things. One, just on ACP, now that it sounds like a lot of that is integrated, can you just run through some potential areas at ACP where maybe you could accelerate now? I mean, I know that you wanted to spend the first quarter, quarter and a half focused on integrating it and make sure that was okay, but are there some areas now where, either through increased investment spend or whatever, we could see some acceleration of some initiatives there?

Sure. That's-- the integration that we're referring to are the sort of fundamental building blocks of the processes and systems for closing the books. We have plans around the payroll which will evolve toward the end of this year, and they'll get integrated into that, so I would call the integration more along the process and systems.

As we mentioned before, focus number one is to leave them as a standalone and continue to drive that growth, so just wanted to make sure that we're all on the same page, we had never intended to integrate them through shared services or any of that. It's just through fundamental processes, because we believe their model works and they have been very successful.

We have made some additional investment in them already in terms of providing them with more CPMs. That's the clinical program managers. As they continue to have new installed sites, in order to accomplish that growth rate that we talked about, they need more people, so we have led with some investment in Q1, because they wanted to come out of the box swinging away, and so we saw fit and said that makes sense, they can do that, they have identified the target, and so they are making some investments in that area.

They continued to make investments in technology and the rollout of some of those other products, like the Omni VR that we've talked about, and they've got those out and are getting a pretty nice reception on that. They are going to do a few tweaks on that product, but we are continuing to invest in that.

So, the two primary areas-- I'll add the third one, which was in response to Brian's question, some of the alternative venues. We're doing a little revamping of the model and going out and doing prospecting work.

So, one is in the core business with the SNFs, and putting more bodies, more boots on the ground, in the field, so we can continue to service the new installs. Two is continuing to make some investment in technology so we can pick up incremental income and provide better service to the SNFs, and three is making some investments in prospecting and model revision to graft to the alternative venues.

But we see the opportunity and want to go after it, and of course you have the one that I mentioned in my remarks, which is running these two pilots so that we can begin to capture some of the synergy and pick up some of the orthotic prosthetic business in these centers, and that would be additional incremental revenue, but that's going to report into patient care as opposed to ACP.

So, we're trying to make it all work and (technical difficulties) is the motto for 2011.

And then I guess just two follow-ups. Any reason to think that the historical growth rates at ACP can't be maintained for at least the next year or two? Secondly, George, can you just spend a second on the acquisitions? Are you suggesting that you guys will do kind of at least that $20 million to $22 million in 2011? And can you give us some relative color on the pipeline as the pressure, I'm sure, on some of these smaller guys continues to increase? Where is that pipeline relative to what it looked like a year or two ago?

Sure. We can do both. I think the first question was on the continued growth of ACP, and if you remember, when we introduced ACP to you, it was, if we looked at their historic levels, they started from a very small position, and therefore, it was pretty easy to grow at some very high double-digit rates, but what we said we were going to continue to drive was in that 15% range.

So, we've budgeted for some stretch goals, but that's what we think is realistic. That's what we based all of our modeling on. That's what we based our valuation on, because we thought that was a realistic level, and that's what we're continuing to see.

So, that's sort of the standard and the goal that we have, and that's happening, so we don't see anything that would threaten or interrupt that at this time.

With respect to the pipeline, what we did was, we pulled back a little bit because we actually diverted the team to help us with the evaluation at ACP. That was critical, and secondly, we put some of these things on hold, so with respect to the pipeline, our target is $20 million to $22 million.

Currently, in our pipeline, we are somewhere between two to three times that amount of annualized sales that are in the pipeline. I think what I've said in the past is that we don't complete them all. When we go through the due diligence process for a variety of reasons, and it may be that we find them unacceptable, or they find our price unacceptable, we probably end up around half of them.

So, we're very comfortable with the pipeline, which has a good distribution in it of some-- a couple of small ones, a couple of medium-sized ones, and by medium, we're talking in the $5 million to $7 million range, and one or two that's even slightly larger than that, and frankly, we have been courting them for a number of years.

But these things happen when they mature to the point when the seller is ready to execute on the deal. So, we've got good distribution, we've got good numbers, so this is looking it's going to be a favorable year, and as I mentioned, we did do a sort of modest one in the first quarter, but we have been intent on signing term sheets, getting letters of-- NDAs in place so that we could get the appropriate information.

So, it's looking like it's all coming together, Dave.

Okay, thank you very much.

You're welcome.

Your next question comes from the line of Bryan Sekino with Barclays Capital. Your line is open.

Hey, good morning, guys.

Good morning, Bryan.

Just a follow-up to the last question on the acquisitions that you're seeing. Are-- as you think about when you integrate those acquisitions, are they-- can they be accretive initially, or is there some sort of ramp-up period where you have to sort of integrate and improve processes in the acquisitions?

There is always a ramp-up. The reason for that is, people do business in different ways, and I think that's really one of the hallmarks of our industry. It's very fragmented. Mom-and-pops grow up doing it the way they were taught to do it. They are on different kind of systems.

So, we do see a ramp-up in a couple of ways. One is moving them over to our systems, and actually that can be a little bit of a distraction, but we've got to get them onto our billing and collection system that facilitates our visibility into their numbers and actually helps us with the ability to close.

Secondly is we have to introduce them to our SOPs and protocols on how we do things, documentation, when to bill, when not to bill. That's not to say that they are doing it incorrectly, they are just doing it differently, and so we always have that sort of a transition on what I'll call the processes and procedures.

In addition to that, where we can start to bring value is by transitioning them to other kinds of marketing. You hear us talk about our patient education and evaluation clinics, well, we get them into that program as quickly as possible.

That means getting their files set up and getting these clinics scheduled and getting sort of the pros from Dover that come in to supervise those clinics, because that's a key way that the patients see a different person.

Getting them onto our materials program and bringing them into the SPS family, equating them with what we call our best-value program. So, we see a ramp-up that, in terms of overall improvement, can take as much as six months. What we've seen when we go back from a historical perspective is that once they reach that steady state, we are able to transform their EBITDA to sales ratio and increase it, in some cases, by as much as five percentage points.

So, it is a-- while it is a ramp-up, it's a great investment, we get good returns on it, and it's in a business we know, so the risk profile is pretty low, and that's why we think continuing with the acquisition program just makes great sense and, oh, by the way, as we densify in areas, it really helps us rationalize facilities, lower our fixed cost, and certainly provide a better care profile to our third-party insurance payers so that we can help achieve what they have in mind for network strategy.

So, there's all kinds of benefit to this. That's another ramp-up, is getting them onto our contracts, so it does take a bit of time.

Okay, and then just a question on the pricing, here. I know in the past you've talked about the third of your managed-care contracts rolling and getting the Medicare increase for the past three years. As we think about that, is there-- do you think Linkia can kind of get you some additional increases on top of that, or is it just this steady state where you constantly have a third, a third, a third, with the increases from Medicare rolling in?

It's more of the latter, where it's a third, a third, a third, and, as I mentioned, when Linkia can demonstrate that it's adding value, we may get an inflationary pop or something such as that, and they have been successful in getting that, because it's really a shared value model that Linkia brings.

We are saving the insurance companies administrative costs, we are giving them the assurance that they are getting high-quality care. We are providing patient and referral-source satisfaction survey data, and so I think the insurance companies are mindful of this because certainly if you step back and think of the alternative, it's negotiating literally hundreds of contracts, it's receiving multiple kinds of invoices, whereas in the service Linkia provides, it's one electronic invoice, one electronic remittance.

It's administratively clean, so there's value there, and I think as long as we respect what the insurance company's needs are in terms of their internals, we will continue to get the three-year passthrough on the Medicare increases and then occasionally pick up on some other increases through the Linkia value-add model.

Okay, and then just one more from me and I'll jump back in. On the Insurance Fairness Act and the Veteran's Bill of Rights that you mentioned earlier, what are the key components of that bill in terms of parity? Does it provide-- does it require your insurance programs to include the O&P service? I just want to get a sense of the impact for those if they are passed.

Sure. It does not. That would be what is called up on the Hill a mandate, and that doesn't even get out of the gate. That's a dead stop. No one wants to put mandates in today. What the Insurance Fairness Act said is, if you offer an O&P benefit in your healthcare program, that benefit has to be offered consistent with all other healthcare benefits.

Taken the other way, it means you can't put artificial limits, caps, or restrictions on the benefit that exceed any caps, limits that you have on all the other service. For some reason, and I think this was just sort of the insurance way of getting cost down, in the small print, there would be a $2500 limit per life, or one limb per life, and it was written into the O&P benefit so that perhaps this only applied to crutches or DME or something, and in fact, it applies to O&P.

So, 19 states have passed parity. 9 more are introducing legislation this year, and we believe there is another 9 coming behind them. They're for the non-ERISA plans, so clearly, state legislatures have said this makes sense. If I'm buying insurance, I expect to have insurance. I don't want to be told when I get to the reception desk and have to discuss my financial obligation-- oh, we're sorry, but you're capped off and you never knew it.

So, all this is saying-- that's why it's called "insurance fairness." All this is saying is, if you offer that benefit, it has to be consistent with everything else. You can't put these artificial caps on it. So, it removes that burden of disappointment on the patient's behalf, and also them then having to go out and try to figure out where to get this money on coverage they thought they were paying for and they're not.

In terms of the Veteran's Bill of Rights, the veterans have had, for some time, the opportunity to get their care wherever it was most convenient. Recently, what we've seen is that certain of the VA groups have decided that they want to provide the care on-site. Now, this is fine, except if it's inconvenient and doesn't make sense for a veteran.

If the veteran has to travel 200, 250 miles to get back to a VA center, that's really unfair, so this gives the veteran the opportunity to choose the venue for his care. It also removes the burden-- in some cases, for example, we would have patients, veteran patients, for example, coming to us. We could build the device for them, but they were unable to sign off on it because that home veterans' group said "You have to travel back here and bring that device back here and we'll decide if it's suitable for you."

Well, a couple of problems with that. A lot of logistical issues for folks that don't travel well, and secondly, it puts us at risk, or any provider at risk, who makes the device, with all the uncertainty of not knowing whether they're going to get paid because some third party is going to judge whether it works or not.

All the Veteran's Bill of Rights does is it opens it up, provides a level playing field and says any certified or licensed practitioner has the ability to provide these devices, and it asks that that be placed on the wall in all the veterans offices, so it opens it up, makes it fair, allows us the opportunity to service some of these veterans in a convenient venue for them.

So, that's what that ensures.

Okay, thanks a lot.

You're welcome.

Your next question comes from the line of Dawn Brock from Kaufman Brothers. Your line is open.

Thank you. Good morning, guys. The first thing is, I wanted to find out whether or not you could identify just the seasonality of ACP. You say that it's in line, and clearly the $16 million contribution in the segment clearly speaks to that, but would you be able to just give us kind of the seasonality and how that compares to yours?

It's not nearly as dramatic as O&P, because if you think of the nature of what we do, O&P is servicing patients that have to ambulate to get to the site. ACP is going to facilities such as SNFs, where the patients are resident there, and so the only impacts that we have is the ability of the CPM to navigate the roads and get into those sites to maintain the relationships and then help get us some new sites. So, the seasonality is not a factor.

Now, occasionally what we do see is that around the holiday season, for example, at year-end, actually, if you want to get in and see some to make a pitch or to talk to the director of rehab about installing a new device or something, scheduling becomes a bit of a problem, so we don't see that same kind of issue across the board. It's much more level, but in our case, there is an increasing slope to the revenue line because we are projecting this growth, but we would say probably if we would have to get really hard and fast, second and third quarter may be the strongest quarters, with a little bit of deterioration in the first quarter simply because of maybe getting around or starting the new year, and possibly a little bit of deterioration in Q4 just due to holidays and scheduling.

But aside from that, it's a different kind of model, Dawn.

Well, actually, it makes sense, because that's consistent with the SNF seasonality. So, just after covering that business for a number of years, so that makes perfect sense. Then, I mean, Tom, is it fair to say that if we look at the first quarter and I think you're confirming at least 15% growth for ACP for the first quarter, that we could see that, even if it's marginal, migrate up from there?

Yes. The first quarter, as we said, consistent with your observations of SNFs, could be a tad lower than that, but we are expecting that migration to go up in Q2, Q3 and Q4.

Okay, excellent. My second question is around your comment for boots on the ground. So, when you're looking at the sales and marketing forces for Hanger and for ACP, are you starting to see that there are best practices that are being shared?

Certainly within both of the businesses that is the case. Through routine meetings that will occur in one of our 16 regions, we call them markets, in our patient care business, they come together at least annually, and then we come together nationally once a year, and that's all about sharing best practices, what's working, what isn't, it's about education and how we can get people more knowledgeable on latest products and trends, and how they can go out and effectively put together a marketing and sales plan.

ACP does the same thing. They've got regions around the country, each region has a head, so when they bring a new player into the game, a new CPM, they're attending those regional meanings, they go to elaborate training to make sure they understand what works. I've sat through some of those.

Very clearly, people get up and they have sessions on how I was able to get this account, what did I do? It was key to get a rehabilitation plan in place and work with the director at rehab, so all of those kinds of best-practice sharing from a sales, marketing, product and patient care, are ongoing throughout the year in a variety of venues, but we believe that's a real strength of Hanger, because we have the ability to generate an idea, go test it somewhere, as we're going to-- as we are doing with these pilots, and then we're going to roll it out nationally through training, so we are big advocates of doing that kind of work, and yes it does go on.

Okay. My next question is around the patient evaluation clinics, and it's real simple. Can you just give us an idea of the schedule for the PECs throughout the year, just to give us an idea of-- you know, I would assume that the winter schedule is much lighter than the spring, summer and fall, but probably spring and summer being the strongest, so can you just give us an idea of that and maybe where you lost a patient evaluation clinic session, possibly in the first quarter or where it might have been pushed into the second quarter? Just any color around that?

Sure, I'll do my best. It all occurs at a very local level. The president of that division, whom I think you met, [Rick Kellar], insists that every practice have a patient evaluation clinic every year. In some cases, they will even have two. Some of them are what we call nationals, where we'll bring in a very highly-recognized prosthetist or orthotist, like a Kevin Carroll, and then we have the local ones, where we'll bring in someone that's more local. Kevin, for example, is traveling five days out of five.

He's out doing patient evaluation clinics all over the place. Naturally, the schedule in January has to be mindful of the weather, so typically what you'll see is, we'll be booking them in the moderate states down in the south, trying to get them in there, trying to avoid-- because you don't want to get people lined up and then have to cancel.

The beginning of February, we have our education fair, so naturally that's a bit of a light period, and then we'll come back in March and start to build that schedule, so the first quarter is a bit lighter than the other ones, the second quarter we hit them pretty hard. The beginning of the third quarter, the same way, then the next thing you'll see is, as we get into the vacation season, not only do patients take vacations, but practitioners do as well, and we want them to take their vacations, so it will lighten up a little bit during that period, and then we will come back at the tail end of the third quarter in going into October and early November, we'll come back and hit it pretty hard again then, lightening up a little bit around Thanksgiving and then certainly Christmas.

So, it really follows the availability of the patients and the availability of the practitioners with a mindful eye on the weather. Excuse me. Does that help you any?

Yes, absolutely. Last, you did go through great color on WalkAide, and maybe I just missed it. Tom, did you give us the number of sites and the number of patient enrollees, and if not, maybe just a little bit of color on where you see the schedule moving?

Sure. Well, you know the game here is to recruit in more sites, and we've picked up a couple more sites here, and then, of course, that leads to increasing the patient enrollment. I didn't give the specific numbers, because, as we have now determined, there are a couple of competitive forces out there, and we didn't want to give away our complete game plan on how the rollout is going, and so we have purposefully tried to hold that back a little bit because-- well, for that reason. We just didn't want to give away competitive information.

But, suffice to say we have enlisted a couple of more sites, we have increased the number of patients, and we wanted to give you the positive feeling that we're still tracking on the same schedule. We're certainly aware of site-recruitment as the key to leading higher participation, and as we said, we're working with an outside third party to bring more patients into these sites, so we still have the target of getting complete enrollment by the end of this year, getting our data, and then submitting in 2012.

Okay, perfect, and then my last question is just a comment you made on the new ped device. Was that an adaptation of the WalkAide unit?

It actually was. The cost-- the collar that goes on is adult-sized, it comes in small, medium and large. The electrodes are adult-sized, and so what this really does is, it scales it down to open it up to another patient population for the pediatric world, and, of course, the setup requires that we have different kinds of software, because we're talking about different intensities on the stem and different gating patterns, and so it's not only a device, it's really a system that employs, and we had to develop some new software to back it up, but we think it's going to take us into a new patient population, and one where, when we've tested it, adapt very quickly to the WalkAide.

It's something-- children can deal with anything, and so we've had pretty good trial success, and so we expect this to be running very well, particularly on CP types of patients, and they're the ones that are really afflicted with this disease.

Okay, that's excellent. Thank you very much.

You're welcome, thanks.

Your next question comes from the line of Mike Petusky from Noble Financial. Your line is open.

Thank you. Good morning. Actually, let me follow up on that question about the pediatric WalkAide. Is that a product that's going to need to go through its own FDA process, a la what WalkAide did, whenever it was, five, six years ago, or is that a product that you actually can go out and market now?

It's a product that we can go out and market now. The unit is virtually the same. It's made under the same conditions, the same process, and I know that you're well aware that what FDA goes after is the process controls to ensure the integrity of the device so that when it's put on the patients, it's safe.

So, it's the exact same process. We're just downsizing some things so we don't have to go through that the way we did with the original WalkAide.

Okay. I guess I want to clarify. I understand when you submit the INSTRIDE results, I understand what you're submitting to-- for CMS, obviously, but you also said that you would submit that data to FDA. What, specifically, would that be for?

We've had FDA in this along the whole path, just to-- because we're really talking about efficacy, we thought it was better off to bring the FDA in so that they could understand the trial, what the endpoints were, so we just want to keep them in the loop so that we can get the most favorable outcome and possibly even have some leverage on CMS through this thing.

And on your first question, I don't want to neglect the fact that we've got to do a little marketing along the way, because a new device, we've got to get back and go after the pediatric docs and the others, so there's a little bit of a marketing program on that, as you can well imagine, but favorable reception so far.

Okay, alright, great, and then I guess I'm curious. You're not going to get as specific maybe as you have in the past quarter or two on the activated sites on patient enrollment, and you cited competitors. Is Bioness or another group doing their own thing in terms of CMS or FDA, or you just don't want them to know where you are?

It's a bit of both. We certainly don't know where they are, but we have understood from just some sources that they are contemplating or beginning a trial, and so what our intent here is not to withhold critical information from you all, but not to be discussing where we're going and how many we have and what our game plan is, we don't want to be the stocking horse for anyone here, so our goal is, let's just go, get it done, and then let the results speak for themselves.

Right, and then, I guess, probably a couple for George. Hey, George, the therapeutic solutions revenue you guys cited, I guess part of that is WalkAide distribution. What was the actual ACP revenues in the quarter?

We don't disclose the separate revenues. We're going to leave those in the segment, but it's fair to say most of the revenues in Q1 were from that acquisitions, because you're only seeing the foreign distribution.

Right, so well over 90% would be a fair way to think about it? Okay, and then, George, I don't know if you commented on this earlier, if you did, I missed it, but the tax rate was a little bit lower than we had been modeling. We had been modeling 39.5%. Is 39.5% going forward still a decent tax rate, or should we be more towards 38%?

Actually, I think we're going to average out about 39%. We were a tad under that in Q1, but we think it's going to average out right around 39%, so a little better than what we expected.

Okay, and then, just the last question, in terms of the 3% to 5% same-store comp you guys were expecting for the year, I'm assuming about maybe 1% or slightly better than 1% is price and then the rest of that is volumes. Is that how you guys are kind of thinking about this?

Well, these days, I think-- in prior years, we have talked about 1 to 1.5 price. These days, we're probably down to 0.5 to 1 price, because two years with no Medicare increase, the only price boost that we're getting is that '09 as it's rolling through, so prices having a lower impact-- regretfully, it's having a lower impact, but it means that we just have to crank it up to get more market share, and look at the higher-performing products when there's a medical justification, but we're seeing less and less impact to price.

Now, hopefully, we will see that turn around in '12, but you know what the timing is on that. We never get that word until probably third or early fourth quarter.

Okay, great. Nice battle-through on a tough situation in Q1. Thanks.

Thank you.

Your next question comes from the line of Larry Solow from CJS Securities. Your line is open.

Good morning, guys. Just to-- Tom, one for you. Just on ACP, now that you've sort of had it for about 5, 6 months, let's just hear your thoughts. Positive surprises? Negative surprises? Usually there's a couple of nuances on both there that you might be able to share.

Sure. Well, in terms of positives, I would say that the one thing that we expected and absolutely happened is the quality of the people. I will tell you, working with these folks, they are supercharged, energized, and it's all about bringing good patient care and building a good, solid business. Classic entrepreneurial kind of spirit, and they just go for the goal line all the time, and all the projects we've put together, never once have I heard someone say, "Gee, I don't have enough time, how am I going to get that done?"

It's just-- whatever you ask them to do, they do. So, I mean, I won't say it's unexpected, but it certainly is appreciated, and that makes that business work.

Second positive is that they have some interesting products in the pipeline that are, I think, going to make a difference in the future. They've got a good technology effort up there, and they're working with some third parties. Now, we're not going to see that show up right away, but when we did our evaluation, we tended to discount anything that we couldn't get our hands on right away and said who knows, there's always a risk, and we can't really put value on that.

But that's been a pleasant surprise, that we see that. The other key thing that I think has been very favorably received by their customers is, these guys really know the regulatory environment, and as we have come to work with them and visit some sites, it's really refreshing to see. When they walk into a SNF, the kinds of questions on the regulatory environment, the regulatory payment system, they are the go-to people, and certainly we knew that they had this sort of business, regulatory consulting aspect to them, but we didn't realize how valuable it really is.

We knew it added value, but as we're traveling with them, we see that these are the go-to people. So, I think people, regulatory knowledge, and product pipeline have all fulfilled what we thought we had there in a very pleasant way, so that's been great.

In terms of what were the unexpected negatives, we haven't seen any, Larry. These guys have been-- we did a lot of due diligence around this, and it is sort of coming off much as we thought, so there was a question earlier what can we add in the way of resources, so we are investing in those things, in the products and in the people, because it's there. It's real, and we want to get them into those alternative venues, so we have not come up from any negatives that would dissuade us from the value of the investment we made, or, "Gee, things look like they're going horribly wrong."

Okay, and then just a quick on WalkAide, and not to harp on it too much, and I realize that for competitive reasons, you can't disclose too much, but it seems to me you're assuming a pretty fast acceleration in enrollment. I know that you didn't give your numbers for this quarter, but I think as of the end of the year or in February, you were at 9 sites and 60, 70 some-odd patients, and the goal of having 1000 enrolled by year-end.

It seems sort of aggressive, so I'm just curious on your thoughts about that.

That's-- you have to do a lot of upfront work with these investigative groups that are out there. You have to spend a fair amount of time doing the IRB work and getting those approved, so we have been doing all of that background work, sort of the on-ramp to the freeway, if you will, and the expectation is that we're going to flip a number of these in the coming months here, and-- by using this outside agency, we're going to be able to populate them, so as we're in the approach lane right now, we expect to get up to full speed as we approach towards the end of Q2 and Q3, and really start getting all the people in and getting these moving in the direction we want.

You're right, it is-- make no mistake about it, it is aggressive, but we recognized what we're dealing with, and as we've mentioned before, as we get through this and, at some point out there, what we really want to do is to take a look at the data to see if the trial size is appropriate. The government is not adverse to saying if, in fact, you've reached a point where you have statistical significance and you can demonstrate a positive outcome, I mean, why keep the trials going. We may choose to do that, but we want to take a look at trial size and see if we have some options around that, as well.

And the-- just to remind me, the actual trial, once a patient is enrolled, the time on the device is that-- was that six weeks? Twelve weeks?

Six months.

Six months. Okay, so you're fully enrolled by, just say, the last patients are enrolled, and if you meet your goal by year-end, then I guess you're-- they're complete mid-12?

That's right. We will certainly start compiling data from those that have already matriculated through it, and will just be adding to and not-- hopefully we'll see some strong trends there and we'll be able to build the cogent story, and we'll begin work on a health economics study as well, because we want to be able to go in and back up our requests for reimbursement by demonstrating either cost avoidance or quality of life improvement.

So, we expect, for the latter part of this year, to start getting those things going so that it's not wait until the last patient finishes and then start all of that work.

Okay. And then, George, one quick-- if you-- I think I asked this last quarter, but just to clarify, on the operating margin, or, I guess it's really the EBITDA margin targets, so you're 20 to 40 for the year, essentially that's basically flat for the core business, and then you're adding in the relocation, which is saving you, I guess if you just take the 700,000 times 4, that's like 30 Bps annualized.

So, is it fair to say that outside of the relocation sort of flattish EBITDA margin expansion, outside of ACP, I guess, for the year?

I mean, we'll be up a little. There's probably an opportunity for us to exceed that margin if we get the 3% to 5% comp. There's probably a conservative number given the impact of the move. Now, keep in mind, the move benefited us in Q4, so we're getting 75% of that benefit next year, so I say if we get to the high end of the 20% to 40%, we-- it will be about 50/50 between the move and the expansion of our operating margins elsewhere within the patient care business, principally.

Okay, great, and then last, a housekeeping question, the D&A obviously picked up sequentially in the last few quarters, and I realize that's mostly the amortization for ACP. Is this sort of a good base to use and then it should, I imagine, continue to sort of slowly tick up as your capital expenditures are rising?

Yes, what you saw for Q1 is a pretty good base, and there will be a bit of increase as you see us spending the CapEx throughout the year.

Okay, and then the-- I guess you said you're amortizing the refinancing costs, so how much-- that's on the interest line, I guess. How much was that, about, or the increase of that?

That was just a touch over $4 million, and it's being amortized over the remaining 5.5 year life of Term B.

Okay, thanks a lot, guys.

Thank you, Larry.

Your next question comes from the line of Daniel Owczarski from Avondale Partners. Your line is open.

Yes, thanks, and good morning. Tom, I was going to ask you about the status of these cross-selling opportunities with ACP, and you mentioned the pilot program underway at two sites, and is there anything you can tell us, color as far as the opportunity or your approach or the challenges you face around this cross-selling as you start the pilot programs?

Sure. I will tell you that we spent a fair amount of time just building them. We brought in the ACP people, we brought in the patient care, we had meetings in early January about what's the best way to proceed. We put together collateral materials, because we wanted to go out and have leave-behinds that demonstrated the capabilities of the full range of Hanger services, ACP plus patient care.

So, we took a little bit of time to do that. We examined the dynamics and demographics, and that's why we chose these two market areas specifically to determine what was the best way to get in front and to service the SNFs? Should we be relying upon existing people, an orthotist and a practice, or should we have someone who is specifically dedicated to going around and calling on the SNFs and providing those services, like a certified fitter.

A lot of questions around the best way to do this. What was the best way to describe the value proposition, so a lot of setup time in marketing, a lot of head time just thinking about it, and so we really launched them off about mid-February, and there's a test.

We're comparing two methodologies here at the same time, just because of the different kinds of demographics, and we see those as fitting into most parts of the country. It would be premature right now to start talking about in a quantified way what's the revenue opportunity, because naturally, they're just saturating in, they are describing the marketing approach, they are describing the overall benefit, so, as I mentioned, we're going to be monitoring these things very closely.

We've got a project manager on this. She is tabbing up the results, and what we're seeing, recognizing what's best-practice, and we'll use that to guide our efforts, but there is no question that the opportunity is out there.

We want to thoroughly understand what are the indications, the patient indications that would lead to certain things, like are we better off leading with saying, look, we're experts in doing contracture management. Let's talk about the bracing and how to manage that in conjunction with the PT work, or is stroke rehabilitation, or is it all of them.

So, we certain areas we have little to offer in like incontinence, and so we won't go there. So, it's really putting together the whole marketing approach and then seeing what the benefit is, and as I said, we're comparing two different methodologies, but we use that to guide our efforts, and we'll probably run those through the balance of this year, just so we can get a good database, and as we start getting into our budgeting toward the tail end of the year, then we'll start thinking about, well, how do we roll it out and how do we put the impact into our 2011 budget?

But, I tell you, there's some really hyped-up people out there trying to get this going. They just love it.

Great, thanks, helpful, and then, George, can you just run over those numbers again as far as the impact of the thousand days of closure? Did I understand it that typically-- or you were looking for $3 million to $4 million of growth, and then $1.5 million to $2 million looks like it got pushed out, but then there was also, I wrote down, $3.8 million-- could I just clarify those numbers again?

Sure. The-- when we looked at trying to quantify the overall impact, our average practice does about $1 million, and this was where the $3.8 million came in from, and if you take that and divide it by 260 business days, they are doing the average lost sales per day, when you do that multiplication, would come to the $3.6 million to $3.8 million range.

So, that was the-- we figured the total impact, but some of the storms happened in January and February, so we believe we would have recovered some of the sales before the end of the quarter. The whole thing didn't slide, and so our best estimate is that about $1.5 million to $2 million slid, and, as I mentioned before, we expect to recover that throughout the rest of the fiscal year, which is why we reiterated our sales guidance.

That's where the $3.8 million came from, and the $1.5 million to $2 million is a subset of that.

Okay, got it. Thank you.

Your last question comes from the line of Bryan Sekino from Barclays Capital. Your line is open.

Hey, guys. Thanks for squeezing me in here with one more. I just have a quick follow-up, and Tom, I know you mentioned in the past that for Medicare this year, you're not getting the increase of the CPI used, and the productivity adjustment. Is it your expectation that it's going to be the same for '12, and that whatever the CPI (inaudible) for June is, you'll get some level of productivity adjustment that will determine what your Medicare increase is for '12?

Well, that's not a hard and fast rule. The only-- the first piece is a hard and fast rule, that they look at the CPIU, tally it up from July 1 through June 30, and then, according to law, we should get that, unless Congress takes definitive action not to give it to us, and they've done that in the past.

So, we are entitled to that. The productivity is a little more discretionary kind of program. The Secretary has been challenged to look at ways to improve productivity and make whatever changes she feels are essential to try and drive productivity through the healthcare cost system. You don't want to deny quality and you don't want to deny access.

So, there's no formulaic prescription for how that productivity giveback is calculated. So, as I said, it's very discretionary. Whether it happens and then how it's calculated, so we really have to wait. It's a determination that's made by the secretary of HHS. Now, I want to be logical and be very fair in saying that they've done it once. They froze the Social Security increases for 2 years, so we know that they are very mindful of increases, so I would expect something to happen.

I would be surprised, pleasantly surprised if it didn't, and I would certainly welcome that, but I think the cards, the way they're falling, would lead to-- would get the increase, and perhaps, then, we'd get some sort of giveback on this productivity scale, but there's no way of knowing what that could be, whether that will be consistent with what the secretary declared for this year, which was about a 1%, so we'll just have to wait and see.

Okay, thanks a lot, guys.

You're welcome.

There are no further questions at this time.

Well, I'd like to thank you all for taking the time out of your busy schedule to join us, and we appreciate the diligence that you've put forward in trying to understand us, and also the quality of the questions, so we will go about doing the business the way we've talked about, the way it should be done, with a view to the top line and controlling our costs, and look forward to talking to you probably around the end of July with the results of our second quarter, so thanks again, and have a good spring and early summer. Thank you.

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