Hanger Inc (HNGR) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger second quarter 2012 results.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Thomas Hofmeister, Chief Accounting Officer. You may begin your conference.

Good morning, and thank you for joining us for our discussion of our second quarter 2012 results. Before we get started, I want to review with you our declaration on forward-looking statements.

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 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 benefits from managed-care contracts, the demands for the Company's products and services, and other factors identified on 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. Now, I will turn over the call to our Chief Executive Officer, Vinit Asar.

Thank you, Tom, and good morning, everyone. Welcome again to Hanger's second quarter earnings call. Overall, we are pleased with the results for the quarter on many fronts.

Consolidated sales grew 7.2% over the second quarter of last year. Our continued efforts on leverage and cost management yielded a nice improvement in our EBITDA percent. Both of these factors resulted in a diluted earnings per share of $0.50, or 11.1% over the second quarter of last year.

Our operating cash flow for the quarter was $25.7 million. Later in the call, I will provide a little more color on the factors driving these results, but first, I would like to recognize our people. It's thanks to the extraordinary efforts put forth by all our employees every day in the clinics, in the offices, and out in the field, that allow us to build on our vision to enhance human physical capability.

For now, let me turn it over to George McHenry, our CFO, to review our detailed financial results and balance sheet.

Thank you, Vinit, and good morning, everyone. Q2 was another excellent quarter. Comparable store sales in our core patient care business were in the higher end of guidance, and we showed leverage in our margins. The important takeaways are as follows.

As Vinit mentioned, our adjusted EPS of $0.50 represented 11.1% growth over the prior year and exceeded consensus estimates. Adjusted EBITDA leverage increased by 30 basis points in Q2, which was in the middle of our range of guidance. In particular, we had excellent leverage from our labor cost by controlling the growth in our headcount.

We are on track to achieve our leverage goals for 2012. Consolidated sales increased by 7.2% for the quarter. Comp sales in our patient care segment increased by 4.6%, which I mentioned was towards the upper end of our expected range. Our WIP remains strong at the end of the quarter.

Our distribution segment reported a 7.2% increase, due in part to a new warehouse that we added in the Midwest, and the efforts of Ken Wilson, who has done an excellent job since he joined us over one year ago.

Therapeutic services contributed a $300,000 increase. ACP revenues continued to recover to levels approaching last year's actual, due to an increase in the number of net new contracts they have sold throughout the quarter.

Our com rate of 29% was 0.2% below last year due to a slight change in our product mix, but in line with our expectations. Our effective tax rate improved by 50 basis points from 38.6% in 2011 to 38.1% this year, due to improvement in our blended state rate.

Moving on to results for the year diluted EPS of $0.72 represents 14.3% growth over the prior year. Our adjusted EBITDA leverage increased by 10 basis points in the first six months, which is slightly below our goal for the year, but given the performance in Q2, we expect to reach our stated goal for the year.

Consolidated sales increased by 8% for the first six months. Comp sales in our core patient care segment increased by 5.7%.

Our distribution segment reported an impressive 9.4% increase in the first half for the reasons I just discussed a minute ago. Therapeutic services sales decreased $600,000 year to-date. As discussed previously, we do not expect to grow in the ACP piece of that business until Q4. Our com rate at 29.2% was 0.1% higher than last year, and in line with our internal forecast.

Depreciation and amortization increased by $1.7 million compared to 2011, principally due to a combination of the impact of acquisitions and a slightly higher rate of expenditures on capital additions.

Moving on to the balance sheet and cash flow, our AR balance was $142.5 million at June 30. DSOs were 54 days, which is 3 days higher than Q1. Invoicing is generally seasonally higher in Q2, which naturally leads to an increase in DSOs. Also contributing to the increase in DSOs is the impact of Medicare RAC audits on our Medicare receivables, and about a $2 million increase in our Medicaid receivables, principally due to receipts we have not yet received from Illinois, which we expect to collect in Q4 after they enter their new fiscal year.

On the RAC audits, I want to point out that we have been very successful in appealing them overall, which is a testament to the excellent process and our practices, but it does slow down our collections while we appeal.

You know, this isn't just about process, it's also about people. For example, I was forwarded an e-mail last night from Lenora, the office manager of our Wichita, Kansas practice, who was proudly reporting that she had just been notified the funds for all 20 of her outstanding RAC audits were being returned after appeal. Way to go, Lenora.

Inventory increased to $124.8 million. Inventory turns were 3.7 times, which is consistent with prior periods. As I mentioned previously, our sales backlog was strong at quarter end.

CapEx was $10.7 million for the quarter and $15.9 million year to-date. These amounts are slightly higher than last year due principally to some progress payments we made to NextGen in June.

Cash flow provided by operating activities for the quarter was $25.7 million, a $3.4 million improvement compared to $22.3 million last year. For the year, cash flow provided by operating activities stands at $27 million, which is a $16.4 million improvement over 2011. The improvement relates principally to increased profitability, as well as a reduction in working capital requirements.

Our liquidity as a company totals $141.1 million, comprised of $41.6 million in cash and $99.5 million availability on our revolver. Total leverage per our bank calculation improved to 2.88 times, which is well below our covenant of 4.5 times and an improvement over Q1.

We reaffirmed our guidance for 2012 with one change. In response to our excellent performance in Q1 and Q2, we are narrowing the range of EPS guidance to $1.75 to $1.79. That concludes my comments, and now I'm going to turn the call back over to Vinit Asar, our CEO.

Thanks, George. Let me now take a few minutes to provide some color on the business conditions and results from an operational and strategic perspective. Our patient care segment, which many of you know is our largest business segment at Hanger, continued to demonstrate successful and profitable growth.

In that segment, our overall revenues of $207.8 million reflect an increase of $14.8 million, or 7.6% over the same quarter prior-year, while our same-store sales increased $8.8 million or 4.6%. We believe this, combined with our cash collections performance, is a good result in the current economic environment.

On the commercial front, the Linkia book of business revenues increased by 5.9% over the same quarter of the prior year. We continue to be pleased with the efforts of the Linkia team as they work to increase Linkia's share of the O&P spend in existing large national and regional contracts.

We also continue to explore ways to expand local and mid-size regional contracts, and provide analytical tools to help their customers improve access and coverage for O&P services.

We are also pleased with the rebranding efforts in our clinics around the country. As you are all aware, we recently unveiled our new brand and shortened the name of our company from Hanger Orthopedic Group, Inc. to Hanger, and also rebranded Hanger Prosthetics and Orthotics to Hanger Clinic.

We believe strongly that a consistent, high-quality brand promise delivered to our patients across the spectrum of our more than 700 clinics nationwide will raise the bar further on customer satisfaction.

Our distribution segment also had a good quarter, generating revenues of $27.4 million, which is a 7.2% increase in revenues from Q2 2011. We are very pleased with these results as our SPS management team continues to drive increased revenues with new and existing customers, as well as the team's relentless focus on managing costs appropriately.

Our investment in a new Midwest warehouse continues to contribute nicely to the overall growth of the business. During the quarter, SPS, in partnership with Hanger Clinic, continued to drive our company-wide materials initiative, and is demonstrating good success as we roll this out. This initiative essentially provides a purchasing framework that helps us evaluate products that we buy from our manufacturing partners, taking into consideration clinical efficacy, as well as value and economic benefit.

Our therapeutic solutions segment generated revenues of $16.4 million, or a 2% growth over the same quarter of the prior year, which is slightly ahead of our internal forecast. As we have reported in the past few earnings calls, we expect the ACP business to show steady year-over-year growth started in Q4 of this year.

Over the last few months, we are beginning to see a consistent net add of new customers at ACP that we expect will contribute to the planned growth of this successful recurring-revenue business.

Also, within the therapeutic solutions segment, our Innovative Neurotronics business continues to monitor the six month follow-up of our patients from the INSTRIDE trial. As a reminder, we announced the completion of enrollment in the INSTRIDE trial in May, and we expect to complete six month follow-up on these patients by year-end.

During the last few months, we have also been dialoguing with experts on reimbursement and clinical trials of a similar nature, and believe that we will want to have the data published in a peer-reviewed journal prior to CMS submission in 2013. We will make this final decision over the next few months as we continue to evaluate and discern the most effective route with the experts.

During this past quarter, we also internally announced some operational changes as part of a plan to solidify synergies between some of our units. In early July, we began the process of merging the management teams of our Innovative Neurotronics and SPS businesses into one cohesive unit.

As you may be aware, both units generally sell about 60% of their product lines to our Hanger Clinic business, and the majority of their remaining sales to the independent O&P businesses or care settings outside of Hanger. Given this common customer base, it made a lot of sense to make this change.

This move will provide the SPS business with technical development capabilities, especially in the product fabrication arena of our National Labs. As a reminder, our National Labs are the central fabrication units for our Hanger Clinic business.

The Innovative Neurotronics business, as a result of this move, will also have more direct access to a national distribution and customer service competency that SPS excels at, especially in the event that WalkAide does get final CMS approval for a stroke indication.

On the legislative front, as the market leader in O&P, we have a responsibility to our patients and the clinicians in the industry to be vocal as appropriate. As in past years, we will continue to work with industry associations and patient advocacy groups to ensure that we are well represented and our voice heard appropriately within the federal and state governments.

Overall, we feel we are well positioned as a company as we move forward through the existing economic conditions, as well as the potential uncertainty caused by the combination of the election year and the future of the Affordable Care Act.

During the last couple of years, we have invested time and money into understanding the value of the O&P market, including adjacent care settings. While historically, our estimates for the size of the core O&P market amounted to about $2.6 billion, today we believe that our addressable market is closer to $4 billion, or a $4 billion number.

This is a market that provides O&P services to patients in many more care settings than ever before. In addition to the traditional O&P clinics, we are acutely aware of O&P care delivered in doctor's offices, orthopedic surgeon clinics, hospitals and skilled nursing facilities, only to name a few.

These are settings that we have always acknowledged and looked to for growth, but now we believe we have done our homework and quantified the opportunity.

Our acquisition pipeline, as well as our startup activities, have taken all these settings into consideration as potential opportunities. Speaking of our acquisition pipeline, we continue to remain confident in our ability to attract and strategically acquire O&P businesses.

So, in conclusion, we are pleased with our quarter 2 results. We have a lot of exciting initiatives underway for the long term, and we continue to focus on delivering our commitments to our patients, our customers, and our shareholders in the near term.

We recognize that the uncertainty in the economic and healthcare environment could be an impediment to growth, but we are confident that the talented men and women who work at Hanger have the right approach, strategy and customer-oriented mindset to navigate all of it successfully.

We will also continue to supplement these efforts with the appropriate investments in our infrastructure and growth initiatives as needed in the coming years. Thank you all, and that concludes our opening remarks.

Operator, you can open the queue for questions at this time.

(Operator Instructions) Your first question comes from the line of David MacDonald from SunTrust. Your line is open.

Good morning, guys. Had a couple quick questions. First, on the WalkAide, can you give us a sense, if you guys do decide to publish this in a peer-reviewed journal, is that about a three-month process, six-month process? Can you give us any color on roughly how long you think that would take to turn around?

Sure, David. Generally it should be -- you're in the exact ballpark. It's a three- to six-month process. It's going to depend on what journals we decide on, but that's probably a good measure, probably closer to a six-month ballpark.

Okay, and then when you guys look at -- when I just look at the first half, really two areas. One, the same-center sales, especially with a pretty easy 4Q comp, are you guys fairly comfortable that you'll be towards the high end of that range?

And then also, on your acquisitions, if I look at the fact that they've historically been skewed towards 2Q, and you've already got $13 million done through July, does that $20 million number also look very attainable? Maybe a little bit low?

Thanks, David. Okay, let me address the WalkAide INSTRIDE -- well, I guess I already did address the INSTRIDE piece. Let me address the question on the pipeline and what we expect for the remainder of the year.

As we closed out Q2, our work in progress looked pretty strong, so we feel pretty comfortable with our estimates for the remainder of the year Q3 and Q4. The WIP didn't taper off, so it looks good.

In terms of the acquisition pipeline, the pipeline is strong, and chances that we'll exceed the $20 million target are good, but until a deal is closed, we don't want to say that we will exceed it. But we should -- we have a pretty good shot at exceeding that $20 million number for this year.

Okay, and then, just on the acquisitions, are there -- I know the larger properties have been a little bit tougher to come by, but are there any, say, $10 million plus ones floating around out there that you guys are working on, and any update there?

Generally, we can't really comment on what exactly we're working on, for all the obvious reasons, but we're always in dialogue with all the different sizes of companies. In this current economic environment, some of the folks do come forward and say -- Hey, look, it's time, we could probably partner with you guys at this time. Small and large. So we generally wouldn't comment on who we're working with.

Okay, and guys, just last question. I was wondering if you could give us an update on the practice management and billing system, just where we are, how that's progressing and then just the timing of some of the training and how we think about that?

Well, David, that's moving along fine. We still expect to be in pilot in October, early October. And we will conclude that pilot next year in June or July, and start rolling the system out, which is right in line with the schedule that we've had for some time.

The training will be happening -- right now, we're developing all the training programs, and we have the training leader on board. He's been working real hard.

The training itself will be happening over the roughly three-year period that it will take to roll the entire system out, so you'll see that cost. That will be in the area of $1 million to $1.5 million a year, just the training piece, each year, for starting in 2013.

Okay, thanks very much, guys.

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

Good morning. It sounds like things are pretty much on target with what you guys saw. Anything, any change, subtly or anecdotally that you're seeing out there in the field as the economy sort of languishes? Are you seeing any delays in maintenance or customers trying to defer things?

Hi, Larry. Look, I think the trend is going to continue that we've seen in the first and second quarters. What we are seeing is things that I think George alluded to. There is an increase in RAC audits, (multiple speakers) cases will probably take longer.

Our patient base is, when they need treatment, when they need a fitting, they are going to come in, and we're not seeing much of that. As we go into the summer months, I think some of this will continue, the trend will continue. So I can't see anything significantly deviating from what's happening.

Yes, Larry, I'd add, even though there has been a lot of press about what's going on in Europe and that concerns people and has had some effect here, we still see an environment that's better than last year, overall. I think that's the key takeaway.

Okay, and the other operating expenses had a pretty nice year-over-year jump. Anything in there that you could speak over? Was that just accrual of incentive comp?

The principal piece of that was accrual of incentive comp. If you'll recall, last year in the first half, we didn't really hit our sales goals, especially in Q1, so we had a much smaller incentive compensation accrual. We pretty much hit all our guidance for all the different plans this year, and consequently, the accrual was higher.

Now, we made some of that up in the second half last year, so the accrual was a little lumpy last year. It ought to be a little less lumpy this year.

Got it. Okay, great, thanks.

(Operator Instructions) Your next question comes from the line of Brian Tanquilut from Jefferies. Your line is open.

Hey, good morning, guys. Congratulations. First question I wanted to ask you, I know at the end of June, you guys talked about -- you guys press released a contract win at ACP.

Just wanted to see if you can give more color on that arrangement with Hallmark, because it sounds like it was a contract renewal, but if you can just give us a background and help us size that opportunity.

Sure, absolutely, Brian. This was a customer of ACP's that had actually left ACP many years ago, Hallmark, out on the West Coast. And over the last couple years, they have decided that they could be even more successful if they brought ACP back, is basically how this played out. So we engaged in dialogue with them late last year and, per the release, we signed a contract with them a few months ago.

This is a contract rehab business that we got into I think 120 or 130 buildings right away, and there's a total opportunity of about 200 buildings. So we basically have the opportunity to continue to work with them, partner with them, to provide our modality programs that I know they appreciate very much.

And, Vinit, that starts in Q3, I'm guessing?

Yes, we signed sometime in June, so it would start -- we got some of it in part of June.

Okay, got it, and then I noticed that you increased the size of your view on the addressable market. And I'm just wondering, is -- as we think about acquisitions, and I know the last time you and I spoke, you were talking about expanding longer-term into other areas, such as rehab. How does that blend in with the expanded view on the addressable market, just from a pure acquisition perspective, or from trying to do things organically, as well?

Sure. The expanded market really relates to the O&P, orthotics and prosthetics market in different care settings, and while we've always looked at these settings in the past as well, we didn't really get an opportunity to quantify it.

As you know, this market isn't covered by a lot of people on the research side, and so we invested in it. So it's more the O&P settings -- the O&P offerings in these different care settings.

So, does that mean -- sorry, go ahead.

I was just going to answer the second part of your question. In terms of some of the other opportunities, we're in the process of kind of creating or continuing to create this category of integrated rehab solutions.

Now, the focus is always going to be on the core O&P business, but we want to have the opportunity to provide more care to our patients, and if that means partnering perhaps with other caregivers, we will. And this is a longer-term play, whether it's rehab, et cetera. We will, keeping into consideration that some of these folks are also our referral sources.

Got it. Okay, thank you guys.

You're welcome.

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

Good morning, guys, and I echo the great quarter comment. In terms of the same-facility revenue, can you break that out between pricing and volumes, please?

Sure. The pricing piece was 1%, and the remainder was volume.

All right. And as some of these skilled nursing facilities have reported results in the last few days, as well as even the first quarter results, it looks like these guys have found a way to largely mitigate, at least materially mitigate, the 11.1% skilled nursing cut in their Medicare business. I was just wondering, are you -- and also, they are getting almost a 2% pricing increase starting October 1.

I mean, are you guys sensing kind of a sense of relief and -- in terms of your ACP business, in terms of your customers? Just a sense that -- hey, maybe the worst is over for the time being and we can focus on making some level of investment and renewals and new signings and all the rest of it.

Mike, thanks for the question. You're right, the 1.8% increase is certainly not as dramatic an event as last year at this time, and we are sensing -- and I spend a fair amount of time with some of our ACP customers myself, and we are sensing a little bit of relief. But I wouldn't say we are totally out of the woods, because a lot of them are still trying to figure out how this will land in the longer term.

So, inasmuch as there is a little bit of relief, we are not sensing total relief. So we are still on our feet, trying to make sure that we are in constant dialogue with our ACP customers to figure out what their needs are, to figure out how we can maintain and grow the business.

So I'd say short answer to your question is, a little bit of relief, but not out of the woods.

We have no more questions. I turn the call back to Mr. Asar.

Great. Well, hey, I appreciate everyone dialing into the call. Again, we're pleased with the quarter results, and we look forward to talking to you at the next earnings call, in Q3. Thanks very much.

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