Hanger Inc (HNGR) 2012 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 2012 results conference call. (Operator Instructions) Tom Kirk, Chief Executive Officer, you may begin your conference.

Thank you, Stephanie. Good morning and welcome to Hanger's discussion of our first quarter results. Before starting the discussion, let me ask Tom Hofmeister, our Chief Accounting Officer and Director of Investor Relations, to review with you our declaration on forward-looking statements.

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 the future results of operations 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 Form 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.

Well, thank you, Tom.

Overall, the quarter contained several noteworthy points. Consolidated sales grew by 8.8% over the first quarter of last year. This sales performance, combined with effective cost management, yielded diluted EPS of $0.22 per share. This is an increase of 15.8% compared to the adjusted diluted EPS of $0.19 per share for the first quarter of last year.

Our operating cash flow for the quarter was strong at $1.3 million, compared to a use of funds of $12.3 million for the first quarter of 2011. Now I'll turn it over to George, who will review our financial results and balance sheet changes in detail.

Thank you, Tom, and good morning everyone.

Q1 was an excellent start for the year. Good weather did have a favorable impact on our sales of patient care, as well as distribution and the rest of the business performed very well overall.

The important takeaways, first on the P&L, are as follows. Diluted EPS, as Tom mentioned, was up 15.8% over the prior year, which beat Street expectations. Keep in mind the prior year did benefit by $0.01, by an adjustment for nonrecurring moving costs.

Overall sales increased by 8.8% for the first quarter. Comp sales in our Patient Care segment increased by 7.1%. The excellent weather did help our sales, especially compared to last year's bad weather. To give you an example, we lost over 1,000 days of sales last year and we lost very few days this year with the good weather, so we were up against a relatively easy comp comparison.

Our backlog increased compared to 2011 going in the second quarter, but it does remain more difficult than it has been in the past to get preapprovals in order to start working on a patient's device. We still believe that our guidance for sales growth of 3.0% to 5.0% of patient care makes sense over the full year.

Our Distribution segment reported a strong 11.9% increase, contributing to this increase was better penetration in the Midwest due to the impact of the Chicago distribution centers that we added last year.

Therapeutic Services reported a $900,000 decrease in sales, principally at ACP. As we reported in our Q4 conference call, we expect ACP to grow revenue, quarter-over-quarter, starting in Q2 and then grow year-over-year starting in Q4. ACP also did an excellent job of controlling their costs.

Our com rate of 29.4% was 0.04% higher than last year due to a combination of higher distribution sales at their normal 79% com rate and a slight change in the mix of sales at Hanger Clinic, as we increased sales of our more sophisticated prosthetic devices.

We got good leverage out of our labor during the quarter. Other operating expenses increased by $4.7 million during the quarter. Approximately $1.0 million of the increase was associated with acquisitions that we made in 2011.

Approximately $3.0 million of the remaining increase was related to higher bonus comp due to increased profit; the increased cost of the WalkAide trials, which we successfully filled in the second quarter; a benefit from an actuarial evaluation of our insurance reserves in 2011 that did not reoccur this year, and bad debts was 1.8% in Q1 last year, which was lower than our 2.3% average for the full year and the 2.2% that we incurred in Q1 2012. So there were some onetime Q1 benefits last year and there were some onetime costs this year.

D&A increased by $1.0 million, compared to 2011, principally due to acquisitions made in the Patient Care segment during the second half of 2011. All of the factors I have just discussed led to the 15.8% increase in adjusted EPS for the quarter.

Moving on to our balance sheet, our AR was $133.3 million, which was $5.5 million lower than year-end. DSOs decreased to 51 days from 54 at the end of the year. The decrease was due to our seasonally lower sales in Q1 and it's a normal event for us. We are comfortable with our reserve for doubtful accounts.

Inventory increased by $6.4 million to $120.5 million, from $114.1 million at the end of the year. Inventory turns were 3.8 times. The increase in the inventory balance and a decrease in turns were both due to the strong sales backlog we had coming out of the quarter, which results in an increase in work in process. With a strong backlog, we believe we are in good shape going into Q2.

CapEx was $5.3 million for the quarter, which was equal to 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 from operating activities for the quarter was $1.3 million. That's a $13.6 million improvement, compared to a $12.3 million use in 2011. We generally have negative cash flow in Q1, as we were paying bonuses from the prior year and taxes, so this is really a great result.

Liquidity. The Company currently has total liquidity of $131.7 million, comprised of $32.2 million in cash and $99.5 million in availability on a revolver. Total leverage, per our bank calculation, was 2.95 times, well below our covenant of 5.0 times.

As far as guidance is concerned, as detailed in the press release we are reconfirming guidance for 2012. Our guidance includes a range of earnings and revenue growth and we think it's really too early in the year to change our guidance at this point. We will look at it again at the end of Q2 when we have a better feel for the entire year.

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

Thanks, George. I'll add a little color on the business conditions, the drivers, and the results from an operations perspective.

Overall, sales in our Patient Care segment increased by $12.6 million, or 8.5%. Our Patient Care same-center sales increased by $11.4 million, or 7.1% for the quarter compared to Q1 of 2011. Now, we did receive a 2.4% fee schedule increase, but we'll see a little less than 1.0% of this in 2012, with the balance reporting to us in 2013 and 2014. And those of you who have been following us know that it takes about 3 years for those fee schedule increases to saturate into all of our contracts.

During the quarter we did stress the programs to help us increase revenues and capture market share. These are, first, the continued improvement in our Linkia book of business and I always say this, because I think it's an important fact.

Let me remind you that HPO, our Hanger Clinic, is the primary vehicle for the delivery of a substantial majority of the services under the Linkia contract. On an overall basis, our revenue from the Linkia-designated contracts was up 6.1% for the first quarter, compared to the first quarter of 2011.

The second feature is educating our referral sources on the enhanced lifelike features of our high-performing products such as our advanced suction suspension systems, microprocessor prosthetic arms, hands, knees and feet components. For Q1, the revenues from these product lines were up by about 13%, compared with Q1 of 2011.

The third facet is our Patient Education Clinics in which we call our patients in for an education session on their fit and function of their device. This is an outstanding example of good patient care that provides incremental revenue. Revenues from this activity provided about $3.8 million of incremental revenue for the quarter.

And the fourth facet are our sales, marketing and public relations efforts by our clinicians and those that support them in identifying opportunities specific to their local business, such as the opening of satellite offices and the launching of certain market programs.

At the end of the quarter the unemployment rate was down to 8.2%, which was down slightly from the 8.3%, which was the level at year-end. Now the good news is we're moving in the right direction. It seems to be taking a little longer than we all thought. But, nevertheless, we continue to do everything in our power to help our patients get through this recovering economy to make sure that they get the device they need and work with them on alternative sources of reimbursement.

On the legislative front, we continue to advocate for our patients and for fair regulations. We were successful in having the Insurance Fairness for Amputees Act introduced into the Senate and the House. Now 20 states have passed the equivalent of this insurance fairness, which we used to refer to as "parity", so it gives us a nice springboard to go for the national coverage.

We also were successful in introducing the Medicare Improvement Act into the House and the Senate. We believe this bill can save $250 million over 10 years by reducing and/or eliminating fraud and abuse and with yesterday's announcement of CMS discovering about $450 million of fraud, this bill is both timely and necessary. Both of these bills have very broad bipartisan support.

On the veteran's side, the Veteran's Bill of Rights has been introduced in the House and we're working for support to get it into the Senate.

All these have been made possible by working with the Amputee Coalition, the American Orthotics & Prosthetics Association, the National Association for the Advancement of O&P, the O&P Alliance and Member Advocate Associates such as MS and diabetes, etcetera, to advance these bills. It's really a team effort.

At the State Medicaid level, healthcare providers are facing challenges as the states struggle to balance their budgets. At present, we are working with each state on individual basis in terms of education, communication and public relations that support our patients.

Here again, we're working closely with the entire Patient Advocacy Association to ensure that they receive the care they deserve. We've had success in California, Nevada and Minnesota. Arizona, Texas and Florida have implemented some fee schedule changes in the form of reductions, or they've excluded portions of their population from coverage and we're working to battle these.

The Amputee Coalition, supported by AOPA and Hanger, has launched a comprehensive study of patient data to quantitatively document the cost effectiveness of the services we provide. After completion, this will be married with a strong advocacy campaign to make certain all the policy-makers at the state and federal level understand the significance of our findings and the benefit we provide. We don't expect to be launching that until into the Q3 or Q4.

Now let's turn to SPS. Their outside sales are up by approximately $2.8 million, or 11.9%, compared with the first quarter of last year. SPS did line up some new customers near the end of Q4 of last year and these are providing benefits throughout 2012. SPS is seeing continued ramp up on the ordering software system that was installed in Q3 and as George mentioned, the Midwest distribution center continues to grow in volume.

During the quarter, SPS and primarily Hanger Clinic launched a materials cost reduction program. Over time, this effort will be extended to all of the divisions and functions within Hanger.

The SureFit Shoe and Insert business continues to gain traction with Hanger Clinic practitioners, independent practitioners and podiatrists. For the quarter, their revenues are more than 10% over the same period last year.

Okay, now let's turn to Linkia. They continue to execute their dual mission of building volume while negotiating a fair price for the services and the value they provide to their customers. Their book of business, as I mentioned, is up about 6.1% for the quarter and they continue to advance their two emerging offerings in post-mastectomy services and prosthetic and orthotics claim review services and these are being well-accepted by the insurance companies.

On the marketing side, there are continuing discussions and negotiations with the key national and large regional healthcare management companies for their commercial and state Medicaid book of business, as well as working with firms in the Workman's Compensation segment.

Okay, now let's discuss Therapeutic Solutions. This segment consists of Accelerated Care Plus and Innovative Neurotronics. Sales in this segment were down by $900,000 compared to Q1 of 2011.

First, let's talk about ACP. They continue to market their unique value proposition and to emphasize the clinical and the technology sides of their offering. As we discussed on the calls from Q3 and Q4 of last year, portions of ACP's customer base have been affected by CMS's announcement in early Q2 of 2011 that they were reducing the reimbursement rates for certain physical therapy services.

The SNFs are trying to determine where this could end up and how best to manage their business. ACP is a true partner in this regard and they have been working with the SNFs in order to customize their product and service offering to accommodate the SNF's needs. The new service offering, combined with longer-term contracts and moving into some alternative venues are expected to have a positive impact on sales, especially during the second half of 2012.

Additionally, we launched the national rollout of the programs that capture the synergy between our Patient Care division - which is Hanger Clinic and ACP - and we're working in over 50 sites right now, as we jointly move into the SNFs to see if we can offer that integrated rehabilitative care in terms of orthotics and prosthetics.

Moving on to Innovative Neurotronics, we are pleased to report that we completed the enrollment of the WalkAide INSTRIDE clinical trial on April 26th. This was on schedule in exactly two years to the day of enrollment of our first patient. With 496 patients enrolled at 30 institutions in the United States, the INSTRIDE trial is the largest randomized, controlled study of a walking device ever conducted in stroke rehabilitation. We greatly appreciate the dedicated efforts of our physicians, investigators and their research staffs.

The results of the INSTRIDE trial will form the basis for a 2013 submission to CMS for coverage of the WalkAide. With this significant enrollment milestone, we are one step closer to bringing the WalkAide technology to those who need it most. The last patients to enter should be complete in Q4 and following the completion we will analyze the data and expect to submit to CMS in 2013 for a coverage decision.

Finally, a few words on our acquisition program. Our target for 2012 is about $20 million of annualized sales. As we have said in the past, 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 and service mix.

So, in conclusion, while the unemployment number is down slightly, we know that there remains uncertainty in the economic environment, as well as in the healthcare legal environment. Now, we'll be watching these events very closely throughout the year to identify opportunities.

We believe that we have the businesses in our portfolio to offer our patients, referral sources, and payors integrated rehabilitation solutions.

We are making the necessary investments in systems, people and processes that will solidify our position as the provider of choice for these services.

We know there are still challenges and we will face those, but, rest assured, we will be working diligently as a team to continue to grow and increase our profits.

Thank you. Stephanie, I'll now open up the line for questions.

(Operator Instructions) Bryan Sekino, Barclays Capital

Hi. Good morning, guys.

Good morning. How are you?

Good morning, Bryan.

Good, good. Great quarter. Just a couple questions here. I guess, as we think about ACP and your guidance, you said in the back half of the year you still expect it to be up a little bit. I guess, you mentioned the uncertainty to reimbursement. I guess what are you seeing from the nursing homes that gives you confidence that they'll start to be a little bit more receptive, despite the fact that we've still got uncertainty with SGR Fix out there? Just some color on that would be helpful.

Sure, Bryan. Well, number one, we believe in the value proposition and we think that it really is a key enabler to help the SNFs get better outcomes and control their costs. And so, as the reimbursement bubble seems to be getting squeezed, we think it is a valuable service and then we marry that with the combination of ACPs willing to sit down and to customize their product and service delivery so that they could fit the exact specification of any given SNF.

It makes us think that this is a tailor-made product. It's not one size fits all. And throughout this period, keep in mind that we have been following this strategy and we've also been successful in signing contracts with SNFs, so it's not as if they've just gone radio silent here and walked away. We have to be more creative. We have to be a better partner.

And the last thing that we think is going to start paying some dividends would be toward the end of the year and we're doing this right now. We are marketing into alternative venues like alternative living facilities and looking at home health and so we think all of those things are going to pay dividends to us.

And along the way, maybe as people see some of the ice breaking here, we are getting, right now; calls from old customers that want to come back to ACP. They've tried this on their own. It's not working very well. There's high turnover in the SNFs and that training is really a key component of what they rely on to keep those PTs trained.

Yes and I'd add to Tom's comment. We did grow in terms of net contracts in Q1 and actually also did in April, so the business is growing.

Okay, great, thanks. And just one more. As you think about your guidance for acquisitions, I know you have that $20 million mark that you kind of set every year, but what are you seeing in the smaller competitors, in light of the uncertainty? Do you see them kind of panicking a bit and struggling in the environment, which potentially could be an opportunity for you to ramp up that acquisition strategy?

We haven't seen panic. As a matter of fact, you know the hopes and aspirations in terms of multiples for the independents out there remains about the same. So, in spite of everything that is providing that uncertainty, they've not relaxed their standards, but we continue to work with them. We made an acquisition during the first quarter and we've got a healthy pipeline, so we're going to continue to work all the angles with those guys.

Okay. Thanks a lot, guys.

Thank you, Bryan.

David MacDonald; SunTrust Robinson Humphrey

Hey, good morning guys. Can you do me a favor and just walk me through, just run me through the walk-in timeline again? After the six months, Tom, you mentioned you analyzed the data. My understanding was it is six months of follow-up, but could be unblended early. Is that the right way to think about it before you submit it to CMS?

Well, as we reported earlier, we did accomplish a significant reduction in the overall number of patients that had to be in the trial and that brought us down to 496, so we're going to have to complete going through 496. That's going to take about six months. We'll evaluate, assemble the data, see what it looks like. We don't anticipate it going un-blinded.

As we look to the future, we believe it may be prudent and we are looking at this. If you remember from earlier discussions, we considered this at one time and that is having some of our principle investigators write peer-reviewed articles, because it really builds the credibility around the study.

And so, if that occurs and if we can get those published, and then we would submit to CMS. So, that variable, we have not pulled the trigger on that, but certainly the investigators know very well exactly how the study is unfolding. So some of those guys and gals have expressed an interest in becoming a participant in a peer-reviewed article or articles.

But, Tom, I mean, just to kind of drill down on it, after the original six months, is six months of follow-up the correct timeframe?

Oh, after we complete the trials? That's probably reasonable, Dave. The trial should be complete, if you look at April 26th, they should be completed around the end of October, because it takes -- they're six-month trials and then probably a period of evaluation.

And I'd say it's pretty reasonable in terms of getting everything out there within another six months or so and then, of course, we can't control CMS and so we're going to have to do the best we can to convince them to try to make a prompt decision, but their timetable will be their timetable.

Okay and then, George, can you give us any more color on ACP in terms of bookings? You said they grew in the first quarter and also in April. Can you put any numbers around that or give us a sense of how many, on a monthly basis, they're starting to add? Anything around that would be helpful.

Well, they grew about 30 in April. I don't have the number in front of me for first quarter, but it's probably in the 20% to 25% range per month.

Okay. And that number, when it was bottoming, George, were they adding kind of 15 to 20 is the number that I have in my head, is that correct?

Yes, that's about right.

Okay. Thanks, guys.

Thank you, Dave.

(Operator Instructions) Mike Petusky, Noble Financial Group

Good morning. In terms of the price of -- I mean, I'm assuming most of the same-store comp was volume. I didn't catch it if you broke this out, but was it about 1.0% pricing and the remainder volume? Or can you talk about that?

Yes, that's about right. Then there's obviously a little bit of mix that gets in that volume. As we mentioned, the sales of our higher-performing products that sell at higher price points helped us accomplish that, but a little less than 1.0% on price and volume is the predominant character on the other side of the equation.

Okay, alright, great. And is it possible, either in rough terms or specifically, to quantify the revenue breakdown between ACP and IN in the therapeutic?

Well, I mean, most of the therapeutic solutions is ACP. As you're only seeing the WalkAide sales that are being made overseas, essentially, in that segment. The rest of the WalkAide sales are in distribution, sales, and then they're in the sales of the clinics, so you can assume that most of those sales are coming from ACP.

Was it like 95/5 or 90/10, something like that?

It's in that kind of ballpark, yes.

Alright and then, just a last question. George, if you were quantifying kind of onetime items that negatively impacted Q1, I mean, could you remind me? It was a couple million dollars. Can you just quantify between the -- you've mentioned a few things, bad debt expenses and things. Can you just quantify maybe kind of one-off items in aggregate?

In aggregate, that was -- I mentioned about $3.0 million in changes in the other costs. There really wasn't anything in the other line items in expenses and about $2.5 million of that $3.0 million was one-timers, either from a standpoint of the comparison in Q1. You had a benefit in the prior year, not this year. I mentioned those and we also had things like bad debt that was higher in Q1, but when you see Q2, Q3, and Q4, it should be pretty much inline year-over-year. So, yes, about $2.5 million of that $3.0 million was one-timers.

Okay, alright, great. And just one other question around Linkia. Tom, the language around Linkia for the last, I don't know, couple two or three years is about the same. Hey, we're negotiating with the groups. We're trying. We're trying to break through. But it doesn't sound like anything material has occurred in terms of new customers. Can you just talk about that?

Well, the negotiations occur on two fronts. One, we have been picking up some new clients out there and we don't always get the exclusive contract that we would like. In some cases we have to settle for preferred, which means we don't get their entire book of business. So, we are negotiating to try and accomplish some price increases, which we have been getting.

Linkia has done outstanding job on a customer-by-customer basis of getting some price increases. They picked up additional business from the people that we were servicing on a preferred basis. And so we're moving up to pick up a bigger piece of their book of business and they are negotiating and have been successful in picking up some smaller, I'll call them small regionals, that we put into the book of business.

So, yes, you're right. The terminology has stayed the same over the past few quarters, but they are very active and that's how we're getting that 6.0% increase in the overall book of business.

How many customers do you have, approximately, in Linkia?

If we were to total them all up, about 15, including some of the small ones. Now, they're not all the big ones, but they're probably -- now, if we look at total contracts, it's over 2,000. I mean, we've got contracts and Linkia sort of manages the contract estate, but when we talk about who's in the Linkia play it's probably more like about 15 companies of good size.

Alright, very good. Hey, great quarter, guys.

Thank you.

Larry Solow, CJS Securities

Hey, good morning, guys. Just quickly just on the 7.0% same-store sales growth, which is pretty remarkable considering it's usually a seasonally slow quarter. If I just adjust that, I think last year, if I just look back in my notes, you called out like 1,000 lost business days or something due to weather in Q1 '11 versus Q1 '10. Can I basically assume that this year you probably were at least back to Q1 '10, if not better, considering the pretty good weather we've had.

We had very good weather and there were very few days lost.

Right. Okay.

(Multiple speakers) the first quarter.

Okay. Because I think you called that out at like a $4.0 million, so essentially, if I deduct that it's still 4.5% same-store sales growth, which is obviously still pretty good. You guys sometimes provide regional outlooks or you break it down to, I think, 15 or whatever. Any color on that and also changes or trends during the quarter?

If there's something that's significant that occurs within one of the regions, we will call it out. For example, a few quarters ago we had some issues with Arizona. We're working our way through those now and that's improving, but we normally don't comment, because it's a bit of an ebb and a flow.

Right.

Regions behave in different ways. Certainly New York is not like California and so we might see somebody improve. As I said, Arizona is coming back up now. A few quarters ago they went down. You might see one of the other ones going down or going up. But to go through all of our markets and talk about those would take a significant amount of time and we probably won't gain that much from it, unless there's a significant event and then we will call that out for you.

Okay, I have just one quick follow-up. The -- hold on. Actually, that question was already asked. I'm all set. Thanks.

Thank you.

Thank you, Larry.

And there are no further questions at this time. Mr. Kirk, I turn the call back over to you.

Alright. Well, thank you all for taking the time to join us. We look forward to talking to you at the end of the second quarter and we will be keeping the focus on monitoring all the activities going on in healthcare to find those opportunities that I mentioned before. So, thanks again and have a good day. Thank you.

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