Hanger Inc (HNGR) 2012 Q3 法說會逐字稿

My name is Felicia and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hanger, Inc. third quarter 2012 earning results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). I would now like to turn the conference over to Mr. Tom Hofmeister, CAO and Director of IR. Please go ahead, sir.

Good morning, everyone, and welcome to our discussion of our third quarter results. Before we get started with our discussion, I would like 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 US Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements relating 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 and 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 over to our President and Chief Executive Officer, Vinit Asar.

Thank you, Tom, and good morning to you all. Welcome again to Hanger's third quarter earnings call. Let me begin by saying that our hearts and prayers go out to all those affected by Hurricane Sandy. Over the last few days, the true impact of this storm is being revealed in pictures and also in words. On our end we're keeping a close watch on the safety and well being of our employees and our patients, some of whom we know have been directly impacted. Now, moving on to our results.

Overall, we're pleased with the results for the quarter. Our consolidated sales grew 3.5% over the third quarter of last year, which was the period in 2011 that we had our highest comp. The sales growth combined with a deliberate focus on cost control resulted in a diluted earnings per share of $0.50, or 11% growth.

Our cash flow from operations for the quarter was strong at $32 million. Through the nine months, we've improved cash flow from operations by $24 million and free cash flow by $21 million. We've also had a busy year so far on the acquisitions front as mentioned in our press release and 8-K filed earlier this week, and our pipeline for future potential acquisitions remains healthy.

Early in the third quarter, a few of our regions experienced Hurricane Isaac that made its way up from the Gulf Coast, up the Northeast corridor, and caused some disruptions to our local operations. Throughout this event, our employees made every effort to ensure that our patients had access to the quality care they're used to getting from Hanger, despite personal difficulties, in some cases, to do so. For now, I want to recognize all our 4,600 plus employees at Hanger for the hard work and dedication to our patients and customers that they put in day in, and day out. This dedication and the results generated by our employees has also been recognized very recently by Forbes magazine by putting us on the list of their top 100 best small companies in the US. During this call we'll provide more details on our results, and more. But for now let me turn it over to George McHenry, our CFO, to review our detailed financial results and balance sheets.

Thank you, Vinit, and good morning, everyone. Q3, as Vinit mentioned, was an excellent quarter for the Company. Diluted EPS increased 11% on a sales increase of 3.5%, so we did a great job of leveraging our sales. Comparable store sales in our core patient care business is right in the sweet spot of our guidance at 3.9% through nine months, and we had our highest ever backlog coming out of Q3 going into Q4, which is a very positive sign. Finally as we noted in a separate press release, we've exceeded our internal plan on O&P acquisitions and we'll have our best year in over 10 years.

The important takeaways, first in the quarter are as follows. Adjusted EPS of $0.50 represents 11% growth over the prior year and met consensus estimates. Adjusted operating leverage increased by 120 basis points in Q3 which exceeded our expectations.

We had excellent leverage from our G&A expenses, as well as labor cost. We're on track to meet, or exceed, our margin improvement goals for 2012. Patient care reported a 1% comp to our sales increase for the quarter, principally due to the calendar in September. We lost a business day in the month ended on a Saturday/Sunday, as opposed to Thursday/Friday last year which is almost like losing another day. So demand was there, we just couldn't get all the work out the door. As a result we had $8 million more in WIP at the end of Q3, than we did at the end of Q2. Calendar issues like this highlighted by the Company gives annual guidance on sales growth.

Our distribution segment reported a 3.5% increase. Remember last quarter I mentioned that the Midwest warehouse would anniversary this quarter. Their growth is in line with our internal expectations.

Therapeutic service sales were essentially flat in Q3. We expect this segment to grow year-over-year in Q4. Our COM rate of 30% was a half point higher than last year due to a slight change in product mix.

Our effective tax rate for the quarter was 37.2% which is slightly lower than the estimate for the year which is calculating at 37.7%.

Moving on to the year. Adjusted diluted EPS for the year of $1.23 represents 11% growth over the prior year. Adjusted operating leverage improved by 40 basis points, meeting our goal for the year.

We expect the full year to come in between an increase of 40 to 50 basis points at the top end of our goal. Consolidated sales increased by 6.4% for the first nine months. Comp sales in our core patient care segment increased by 3.9%. Our distribution segment reported a 7.3% increase through nine months.

Therapeutic services sales decreased $1.1 million year-to-date. As discussed in my comments in the quarter, we do expect to see further improvement in Q4. Our COM rate of 29.5% was .3 higher than last year due principally to mix changes in our sales.

D&A increased by $2.6 million, compared to 2011 principally due to a combination of the impact of acquisitions, a slightly higher rate of expenditures on capital additions, and ACP sales.

Moving on to the balance sheet and the cash flow. Our accounts receivable was $144.1 million at September 30th. DSOs were 54 days, the same as they were at the end of Q2. Inventory increased to $126.9 million. Inventory turns were 3.6 times which is reasonably consistent when compared to a year ago, which was 3.8 times, especially when you take into consideration the growth in our WIP.

CapEx was $8.9 million for the quarter which is $2.4 million higher than last year, and for nine months we were at $24.9 million year-to-date which is $3.1 million higher than last year.

The principle reason for the increases in our CapEx is our investment in systems, principally the new Hanger Clinic billing system, which we refer to as Janice. Our cash flow provided by operating activities for the quarter was $32 million, a $7.5 million improvement compared to $24.5 million last year.

For the year, cash flow provided by operating activities stands at $59 million, that's a $23.9 million improvement over last year. The improvement relates principally to increased profitability, as well as our improved management and working capital. Liquidly for the Company stands at a total of $155.1 million compromised of $55.6 million in cash, and $99.5 million in availability on our revolver.

Total leverage per our bank calculation improved to 2.82 times, well below our covenant of 4.5 times and an improvement over Q2. In terms of guidance, we're reaffirming our guidance for 2012 and we expect to meet or exceed all elements of our annual guidance. That concludes my comments and now I'm going to turn the call back over to Vinit Asar, our CEO.

Thanks, George. Let me take just a few minutes to provide some color on the business conditions and results from an operational and strategic prospective. Our patient care segment continued to demonstrate successful and profitable growth in the $4.3 billion O&P market that we participate in. In that segment, our overall revenues of $200.3 million reflect an increase of $7.7 million or 4.4% over the same quarter prior year, and also about $38.4 million, which is almost 7% on a year-to-date basis.

Our same store sales have increased $21.2 million, or 3.9% on a year-to-date basis, and $1.9 million, or 1% for the third quarter.

As mentioned earlier, knowing we were up against our highest 2011 comp and a calendar issue in the highest month of the quarter, we had adequately planned to control our overall expenses across the board. We believe that the attention to cost control, combined with our sales increased performance, is another quarter of strong results on the bottom line, and in line with EPS expectations.

On the commercial front, the Linkia business has now increased by 5.7% year-to-date over the prior year. We continue to be pleased with the efforts of the Linkia team as they work to increase their share of the O&P spend in existing large national and regional accounts.

Our distribution segment generated revenues of $27.4 million which is a 3.5% increase in revenues from Q3 2011. We are very pleased with these results as our SPS management team continues to drive increased revenues with new and existing customers.

During the quarter, SPS continued to successfully drive a materials management initiative, which was forged by Hanger Clinic with our manufacturing partners. This initiative, which we alluded to briefly in our last call, provides a framework that allows our Hanger clinic business to determine the appropriate clinical solutions and products for our patients, among the many options available in the marketplace.

SPS then uses this agreed upon framework from Hanger clinic and works with their manufacturing partners to get the best value and economic benefit on those purchases. As this program takes hold, the SPS team is also looking into a similar program for their independent O&P customers that have the potential to benefit based on their volume of purchases. This is one of the many ways that SPS is looking into enhancing their value proposition to the independent O&P customers as well.

Our therapeutic solutions segment generated revenues of $15.6 million in the quarter, which for the full segment is essentially flat over the same quarter of the prior year. As a reminder, this is a combination of our Linkia business' external revenues and our ACP business. Specific to the ACP business, over the last few months we continue to see a consistent net add of new customers at ACP that we expect will contribute to the planned growth in the successful reoccurring revenue business that calls on skilled nursing facilities. 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 we mentioned in our last call.

On the legislative front, as the market leader in O&P, we have a responsibility to our patients and our 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.

Of particular note and interest is a recent report from the OIG that was published as a result of the work that our industry association has been doing with them. The report, which is available in public domain, brings to light that CMS has paid providers for custom O&P services without required license or certifications. As you read through this report, the OIG has urged CMS to write regulations that will now only allow it to reimburse appropriately licensed and certified clinicians for custom O&P services. This is very good for the O&P industry, and Hanger, as a whole.

AOPA, our industry association, is to be commended for the efforts that went behind these results. Overall, we feel that Hanger continues to go from strength to strength. While we remain alert about the economic and political environment, we believe we are very well positioned to successfully navigate the coming months and years. The growth drivers for our business include the aging demographics and diabetes in the US, coupled with advancing technologies and techniques that can provide mobility solutions to our patients better than ever before.

In conclusion, we are pleased with our Q3 results. We have a lot of great opportunities and initiatives on our radar screen for the short and 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'll 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.

Thank you, Vinit. Operator, can you now open the line for questions?

(Operator Instructions). And your first question comes from the line of Larry Solow with CJS Securities.

Sounds like most of the shortfall was maybe in analyst estimates, but in terms of the sales shortfall, but it seems like you guys anticipated some of the slowdown and is it mostly timing related? Any way to quantify if Isaac actually had an impact on sales?

Larry, when you look at the additional WIP we had going into the fourth quarter, $8 million of WIP is close to another 3% of comp sales at the clinic, so we would have been right in the middle of our guidance for the year if we had been able to get that out the door. We had pretty strong WIP coming out of second quarter, so it's not as if without that we would have been in trouble going into Q4. It was really the big reason of the calendar.

Okay. Are you seeing any underlying changes, whether it be positive, negative, regional, geographical, anything out there or is business humming along at a pretty steady state?

We're seeing good, consistent demand. There's really been no drop off in the demand. If we were going into the fourth quarter and we had these results and our WIP was down, I would be concerned, but our WIP is up and healthy. We knew that we were going to be a little challenged because of the calendar in the third quarter, so we concentrated on moving discretionary spend out of the quarter where we could and managing our costs, so that's just the way you run your business.

Just lastly on the acquisition announcement. Obviously, I realize it's a cumulative number, but it looks like it did accelerate recently. Can we expect the usual, little dilution or maybe flatness early on as you get these guys under your belt into your systems and then accretion going forward?

Yes. Normally it takes us 3-5 months to get them integrated and make whatever changes were identified during the due diligence process we planned to make. They don't make a huge contribution from an EBITDA standpoint generally in the first three, four months.

Great. Thanks so much.

(Operator Instructions). Your next question comes from the line of Mike Petusky with Noble Financial Group.

My first question is, when we look at the 1% same facility, you guys mentioned the business day, you mentioned the quarter ending on a weekend, and you also seem to mention a third quarter hurricane, if I heard that correctly. Is there any way to essentially quantify the impact from those three things, either in aggregate or kind of itemized? Can you guys talk about that a little bit?

Hi, Mike. First of all, the hurricane didn't really have a huge impact. It happened in the beginning of the quarter. I think Vinit was trying to thank our employees for working so hard and taking care of our patients through that.

Okay.

The other two items all happened right at the end of the quarter. I think I just did quantify the impact of that. Our WIP is up by $8 million which would be 2% to 3% more comp for patient care.

Okay, all right, great. And then I guess in a related question. I know you guys have a lot of facilities on the East Coast throughout the Northeast. How much disruption have you guys seen here in the last few days from the Hurricane Sandy? Can you talk about closures and the sorts? Can you just update on that?

Sure, Mike. This past week, we're still getting some of the information as we speak, but the first day after the Hurricane came through, we had closed about 30 of our clinics in the Northeast. On the second day, we had opened ten of those 30 on the second day, and as of this morning, we think we only have about six clinics that still remained closed without electricity and access. Right now we're down to about six clinics that are closed.

Alright. And when you have a situation like that, especially when it occurs early in the quarter, is it reasonable to think that if a person had an appointment that had to be postponed that you do get that back certainly within the quarter? I guess essentially what I'm asking is, is there any real impact from this in the quarter as we look forward?

I think that remains to be seen. I don't think there should be a lot, but I think that remains to be seen because as you know, as you look at the news channels, et cetera, we're trying to determine the impact not just on the facility, but also as you rightly pointed out, the patients also have to have the means to come into our clinic so that remains to be seen. But right now we think it's too early in the quarter to say there's a definite impact.

Okay. All right, great. Then, could I ask about your efforts, where they stand in terms of cross-selling O&P into some of these alternate sites? Whether it's nursing homes or assisted living or anywhere else? Have you guys had either anecdotal stuff you can share or quantifiable data that you can share on that effort?

Sure. Some of the anecdotal is that I was just at a conference down in Tampa where we met with a few of the skilled nursing facilities' CEOs and management teams, and there is interest in partnering on that. Right now there's a lot more dialogue going on because even within the [snips], they are still making sure that they stabilize their own environment. We're seeing some success in pockets in Phoenix and in Florida where we had done some initial pilots. We're seeing some success certainly in those two areas, but probably still too early to quantify. The effort still continues and we plan on focusing on that in 2013.

All right, last one, and I'll let somebody else have a shot. In terms of Linkia, I know you said 5.7% up year-to-date, I guess that's for the nine months. Do you have what that result was for the quarter, by any chance?

For the quarter, the Linkia number was probably 5%. 4.9% or 5%, I think, was the number. Is that right? Tom's nodding.

Yes.

Can I use 4.9% is that the right, exact number, or approximately 5%?

We can follow up with you after the call. Unless, Tom, do you have that schedule?

I mean, if you're saying approximately 5% is a good number.

Yes, 5% for the quarter and 5.7% year-to-date would be a good number.

That's it.

All right. I guess, okay, that's it. Thanks.

Thank you.

Thank you.

And at this time, there are no further questions. I would like to turn the conference back to Mr. Asar for any closing remarks.

Thank you all for joining the call. We appreciate your time on this call and as we go into the fourth quarter, I just want to reiterate we did have a strong WIP coming out of the third quarter and we expect to close the year right in the middle of our guidance on both revenues and earnings per share. So thanks, very much.

Thank you. This concludes today's Hanger third quarter 2012 results earnings conference call. You may now disconnect.