Hanger Inc (HNGR) 2012 Q4 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger, Inc. fourth-quarter year end 2012 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 will now turn the call over to your host, Russell Allen. Mr. Allen, you may begin your conference.

Thank you, Lisa, and good morning, everyone. Welcome to Hanger's discussion of our fourth-quarter 2012 results. Before we discuss our results, I will review with you our declaration of forward-looking statements.

During this call, management will make forward-looking statements concerning the Company's results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements relating to future results of operations 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 or implied in these statements. This includes but is not limited to the Company's ability to enter into or derive benefits from managed care contracts and 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, further events or otherwise.

I will now turn the call over to our Chief Executive Officer, Vinit Asar.

Thanks, Russell, and welcome, again, everyone, to our fourth-quarter earnings call.

We are pleased with our fourth-quarter results as we finished the year strong across all of our businesses. Consolidated sales for the quarter were up almost 10%, resulting in the largest sales and profits for quarter in our Company's history. This was driven by a combination of organic and acquisition-related growth.

Sales in our Patient Care segment were up over 10% with same center sales accounting for 4.7% of the growth and the remainder coming from our ongoing O&P acquisition program.

As we announced previously, 2012 marked one of the highest years of O&P acquisitions for the Company with $60 million in annualized sales acquired during the year, much of that occurring during the fourth quarter.

Sales in our Distribution segment were up over 5% in the quarter, reflecting continued momentum in this competitive market.

Sales from our Therapeutic Solutions segment were up $1 million versus last year's fourth quarter, reflecting a return to year-to-year growth in our ACP business after many quarters of pressure related to the impact of reduced SNF reimbursement. This strong sales growth and continued focus on leveraging our cost helped us deliver a quarterly adjusted diluted earnings per share of $0.58. This is a 16% increase from the prior-year quarter.

I will now turn the call over to George McHenry, our Executive Vice President and CFO, to take you through the detailed financial results and our outlook for 2013.

Thank you, Vinit, and good morning, everyone. Q4 in summary was the best quarter in Hanger's history. As Vinit mentioned, diluted EPS was $0.62; that's an all-time high. Important takeaways for the quarter as follows.

Adjusted diluted EPS of $0.58 represents a 16% growth over the prior year and beat consensus estimates by $0.02. In adjusted EPS we are singling out some one-time tax benefits. Our tax director, Louis Messier, has really done a great job of attaining credits that we are due and in managing our complex tax structure and really bringing down our effective tax rate.

Our adjusted operating margin increased by 40 basis points in Q4, which was at the top end of our guidance.

At Patient Care services, I am sure you will all remember that we had a tough calendar in Q3, and I mentioned at the time that it hurt Q3 but would benefit Q4, which you can all see it did with 4.7% same center sales increase, which was towards the top end of our range for guidance.

Our Distribution segment reported a 5.1% increase. Therapeutic Services reported a 6.2% sales increase, including the first sales growth at ACP since the first half of 2011. Our COM rate of 28.7% was 0.2% lower than last year. Results of our annual physical inventory resulted in a $500,000 increase in expense, and that is compared to a $2.3 million benefit that we reported last year in our book to fiscal.

However, a number of other factors helped offset the impact of that swing in the inventory adjustment. First of all, we got a 2.4% rate increase that we received from CMS in 2012 which resulted in on average about a 1% benefit from a standpoint of rate that lowers our COM rate, benefits from a project we started in Q2 aimed at reducing as to use and material cost and a favorable change in our sales mix. Our tax rate for the quarter was 29.6% including the tax benefits realized in the quarter. Our core tax rate was 37.4% excluding the one-time benefits I mentioned previously.

Moving onto the year, adjusted diluted EPS of $1.81 represents 13.8% growth over $1.59 in the prior year. Our adjusted operating margin increased by 50 basis points, exceeding our goal for the year.

Consolidated sales increased by 7.3% for the year. Comp sales in our core Patient Care segment increased by 4%, square in the middle of the range of guidance.

Our Distribution segment reported a 6.8% increase. Therapeutic services sales increased by $1 million in the quarter and improved to a slight decrease for the year and performed as expected when we discussed this last quarter.

Our COM rate was 29.2%. That's 0.1% higher than last year due principally to mix changes in our sales. D&A increased by $3.7 million compared to 2011, principally due to a combination of the impact of acquisitions, the slightly higher rate of expenditures on capital additions and ACP sales, which is a leasing model.

Our tax rate for the year was 35.1%. After you remove one-time tax benefits such as R&D credits for the release of reserves on our Maryland State NOLs that are now being realized and improved effective tax rate at ACP, our core rate for the year, as I mentioned before, was 37.4%. And we expect that you can use a 37.5% rate going forward in 2013.

Moving on to the balance sheet, our AR balance was $165.7 million at December 31. DSOs were 58 days compared to 54 at the end of last year. Our DSOs typically increase by 3 to 4 days in Q4 due to the December sales increase, and then decrease by roughly an equal number of days in Q1 of the following year. However, when you look at the trend in 2012, our DSOs were about four days higher than they were on average in the prior year. Our federal and state receivables have been -- they have been slower payers in general. We have talked about that in the past. Some states stopped paying because they ran out of money, but when they went into their new budget year they started paying. An example would be Illinois.

RAC audits have slowed down our collections, but we have been very successful in collecting those and appeals.

So, overall, our bad debts have not changed on the P&L and we do not expect our bad debt experience to change materially going forward. Remember, most of our work is approved in advance and, thus, should be collectible.

Inventory increased to $129.9 million. Inventory turns were 4.2 times, which represents a slight improvement compared to 4.1 times a year ago. Our CapEx was $7.4 million for the quarter. That's $1 million higher than last year and $32.3 million year-to-date; that's $3.6 million higher than the prior year. The increase is principally due to the cost of software related to our new practice management system.

Cash flow provided from operating activities for the quarter was $22.3 million, a $2.4 million decrease compared to $24.7 million in 2011. For the year, cash flow provided from operating activities stands at $81.3 million. That's almost a $20 million increase over 2011. This is a great result compared to our -- especially when you compare it to our $16.8 million increase in EBITDA, so it's over 115% conversion rate.

Liquidity remains strong. The Company currently has total liquidity of $118.7 million comprised of $19.2 million in cash and $99.5 million in availability on our revolver. Total leverage for our bank calculation improved to 2.8 times, well below our covenant of 4 times and a slight improvement over Q3 despite the significant number of O&P acquisitions that were closed during the quarter.

Moving onto guidance, the Company expects 2003 -- 2013 revenues of between $1.06 billion and $1.08 billion, resulting from 3% to 5% same center sales growth in Patient Care and 3% to 5% growth in distribution as well as Therapeutic Solutions.

The Company anticipates adjusted diluted earnings per share of between $2.02 and $2.09 for 2013 excluding approximately $0.05 for training costs related to the implementation of its new practice management system which we will begin rolling out in the second half of this year. That represents between 11.6% and 15.5% growth over adjusted EPS of $1.81 in 2012.

We expect to continue to improve adjusted operating margins at a rate of between 30 and 50 basis points by continuing to leverage our fixed cost model. The Company anticipates generating cash flow from operations of between $80 million to $100 million in 2013 and investing a total of between $40 million and $50 million in capital additions.

During 2013, the Company will continue its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues. We expect about $7 million of that to impact 2013, since those deals generally close more in the second half than the first half.

Our guidance on EPS does not include the potential impact of sequestration, which could be a gross impact of $0.04 to $0.05 if it occurs starting on April 1. Obviously, that impact would be on Q2 through Q4. We believe we can pull levers to mitigate that issue and that the real exposure to us would be roughly $0.01 a quarter, or $0.03 in 2013. But we have -- as I mentioned, that is not included in our guidance.

That concludes my remarks and I'm going to turn the call back over to our CEO, Vinit Asar.

Thanks, George. I would like to finish up my remarks by reflecting back on a very successful year at Hanger and also projecting forward on what we anticipate being another strong year in 2013.

I'm very proud of how our team performed in 2012, delivering over 7% at the top line and 14% EPS growth for our shareholders. This was a combination of organic growth and market share gains in a complex healthcare environment coupled with a very strategic acquisition program aimed at strengthening our long-term position in the O&P space.

This top-line growth, combined with continued diligence around operating costs and cash management resulted in another year of significant operating margin expansion and over $80 million of cash from operations. These results funded our investment and acquisition strategy while maintaining a solid balance sheet.

Our 4% same center sales growth in Patient Care and almost 7% growth in Distribution sales for the full year 2012 is a direct reflection of the increased patient and customer demand driven by the superior value and service we deliver to our patients and customers day in and day out. We have continued to invest in new technologies as well as the recruitment and retention of our clinicians and support staff, all in an effort to drive further increases in patient and customer demand.

A few examples of this include the introduction of improved vacuum solutions used to hold prosthetics in place more securely at Hanger Clinic, and also virtual-reality Therapeutic Solutions provided by ACP; our investments in world-class training of clinicians and the introduction of a new flight of talented clinicians to Hanger to our residency program. Also, our investments in our pilot businesses began to bear fruit in the latter part of the year and we will incorporate them into our mainstream business processes going forward.

Our launch of a preferred vendor program aimed at optimizing our product portfolio as we strengthened our partnership with key suppliers. We also completed the WalkAide clinical trial as planned.

Switching gears to 2013, as George laid out, we anticipate another year of high-single-digit sales growth, double-digit EPS growth and significant upgrade in cash flow, allowing us to deliver strong returns for our shareholders while making important investments in the business to ensure our continued success.

As with most healthcare companies, we face a variety of uncertainties as the country deals with its financial difficulties. Whether it's sequestration, fiscal cliff negotiations, Medicare and Medicaid reimbursement or the implications of the Affordable Care Act, one thing that is certain is that those companies that can adapt and continue delivering a true value proposition to customers will be the most likely to succeed. We believe that we are well equipped to succeed in this environment and continue to invest and focus in areas to strengthen our position even further.

Some of our priorities for 2013 include a continued investment and focus in the already announced new clinic management system that will improve our patient experience, clinical effectiveness and billing and collections efficiency; the focus on lowering complexity and cost, while ensuring clinical efficacy by optimizing our product portfolio and leveraging relationships with key strategic suppliers; investing in sales and business development talent across the Company to ensure continued revenue and market share gains; also, continued strategic O&P acquisition focused on market penetration, clinical capabilities and leadership; and submission of the WalkAide trial results to CMS for reimbursement decision.

As I conclude, I would like to thank all our employees dedicated to improving the lives of our patients, providing valuable solutions for our customers and driving shareholder value. It is their hard work, passion and dedication that enable us to continue to drive profitable growth and shareholder value as we look forward to a strong 2013.

Thank you, and we can now open up the call for questions. Operator?

(Operator instructions) David MacDonald, SunTrust.

Just a handful of questions -- Vinit, first, just on the WalkAide, is it safe to assume that -- it sounds like you have completed what you need to complete, that you guys are now working on getting some of this data peer reviewed, get it published and then you submit the data to CMS for decisions. Is that how we should think about this?

Yes, that's correct.

Okay. George, just a couple of numbers questions -- I was wondering if you could give us the bad debt in the quarter and for the year and where that was relative to 2011 and then if you could just provide a little detail on the same center sales, if you have the numbers, how much was volume, how much was pure price, how much was mix?

First of all, same center sales was roughly 1% price, and the rest was volume and mix.

Okay.

And in terms of bad debt, for the year, we were at 2.2%. We were -- and then we were -- that was compared to 2.3% in the prior year. For the quarter, we were at the same rate that we were for the year, 2.2%. So that's what we've averaged throughout 2012.

One other thing I would like to add on that I meant to say during my comments was the DSOs -- we think the headwind that we got hit with in terms of some slowing in state and federal paying history is largely behind us and we are going to be managing to keep that number at 54 days during 2013. So we think that 58 will come down in the first quarter and we are going to be doing everything we can to keep it at that level in 2013.

Okay. On the acquisition front, you have obviously been very active, and some of the deals you have picked up, you have certainly added some people that I think are pretty well thought of in the industry. Are you seeing any increased interest from, really, two areas -- one, just the changes in the environment and it getting more difficult to be kind of a mom-and-pop, and also just some eyebrow-raising in terms of some of the deals that you have been able to complete and some of the folks you have been able to bring on board?

I think the interest does continue in terms of wanting to join Hanger from all sides as an O&P business, including the mom-and-pops. And you're right; it is getting a little trickier to be an independent mom-and-pop dealing with some of the regulatory issues, some of the issues with the RAC audits. So that interest is continuing.

We are being selective in terms of who we speak with because we're looking for quality leadership, we are looking for quality practices around the country. Our pipeline certainly was very active leading up to the close of 2012 because of the capital gains tax issues as well, so some of that stuff would be one time. We don't expect a bolus of acquisitions.

But the pipeline certainly remains strong. The interest is there in Hanger for independents to join us. But like I said, we are being selective not only in the quality of the businesses, but also looking at what geographies we want to strengthen our positions. And those options can be acquisitions, or just startups on our own.

Okay, thanks, guys.

Dana Hambley.

Just to follow up on the acquisitions, Vinit, you did about $60 million in annualized revenue in 2012. You're talking about doing $20 million this year, and you mentioned some of the tax advantages of doing it in 2012. Is it unreasonable to think you could do $60 million again this year?

I think that would be very tricky to get up to the $60 million -- I'm not -- I doubt we'd hit the $60 million number because in the fourth quarter, the deals we did were sizable deals, and there's not many sizable independent clinicians out there, practices out there, that are necessarily those that we would look at in 2013.

Would we exceed the $20 million? Yes, there's a small possibility we would exceed it, but I would be surprised -- I would be shocked if we went up to $60 million level.

Okay, thanks. And on the Janus rollout, I know we've gone over this in the past, but could you just give some of the high level, what you think as you roll this out, the significant benefits that are going to be, and where would we see that manifest in either the balance sheet or the income statement?

Well, we believe that it's going to be manifested in a number of areas. First, you should keep in mind that we are going to be rolling this out over about a 2.5-year period. Even at 30 a month, which is a pretty heady number, it will take us 2.5 years to get this out to our entire system, so the benefits will be spread out over a period of time.

We think, first and foremost, it's going to make us more efficient. It's going to give our practitioners more chair time with their patients, so we'll be able to continue to control our headcount. It will give us a much better view of our capacity within our practices. It's going to eliminate paper. There are some savings that will just be from paper.

And also, in conjunction with this, we're going to go into more of a central collections model. And that, we believe, is going to allow us to take some heads out of the system over time, because, today, we bill and we post in every location and we interbranch post, and all that will be turned into a more automated process. I would say those are the principal benefits that you should see. And it should allow us to continue to be able to leverage our operations over the next several years.

Okay, that's great. And then last question for me -- on the guidance for Therapeutic Solutions for 2013, is 3% to 5%. We saw 6% growth in the fourth quarter. Why do you think the 6% isn't sustainable through 2013 at this point?

It could be. We are being cautious because of the issues still faced by the rehab industry. As you know, the Part B side of the rehab industry is under pressure in 2013, and so we are being cautious on our projections. We are going to see how the first and second quarter go as o some of the -- I think it's the MPPR adjustments take place, which I believe is in the April-May time frame.

Right.

And we will see how that plays out.

Okay, great, thank you.

Larry Solow, CJS.

Some of my questions have been answered, but just confirm on the 3% to 5% same-store sales growth. So we are not assuming sequestration? Is there, I guess, a modest price increase incorporated into that number?

Sure, Larry, there is. As I mentioned before, in 2012 we had about a 1% price benefit. In 2013, if you ignore sequestration for the moment, our CMS price increase is about 80 basis points. So that is going to bring down our aspirations in terms of what we think we can obtain from a price standpoint to somewhere between 75 basis points and 100 basis points, so a little less than what you saw in 2012.

Okay, and just to follow up on the electronic management systems and the Janus, is -- $0.05 or so training cost this year -- can I suppose as we go onto 2014, you will have some additional one-time costs in there before -- as you incorporate the system?

We will be calling out the training cost, because they won't recur after we get the thing rolled out. In 2013, the mix is a little different because we will be designing the programs and then starting to implement them in the second half. And then what you will be seeing in 2014 and 2015 will just be the cost of the people that we are putting out in the field to train our practitioners and our administrative staff on how the system works.

Okay, just lastly, last quarter you mentioned you had a nice backup of -- your WIP grew quarter to quarter. I suppose most of that or some of that was wound down this quarter. Is there any color you can give on that?

Well, it's more of a normal number in Q4 going into Q1. Our WIP is -- it was a little higher in Q3 because of that calendar. But it -- generally, when you don't have something like that happen, the WIP generally runs pretty level.

Great, thanks.

(Operator instructions) Mike Petusky, Noble Financial.

Good morning, guys, and really a great job and just a great quarter and year. George, did you mention -- and forgive me if you did, and I just missed it -- did you mention any impact from Hurricane Sandy, or can you speak about that if you didn't?

Well, we didn't see any dramatic impact from that. It was centered in an area where we don't have a tremendous presence, and none of our practices were directly affected, but obviously our patients were. And we had a lot of effort going on there to help them personally. But it didn't have -- it had some impact on that market, but not overall in the Company.

Sometimes if these things happen early in the quarter, we do get a chance to bring the patients in during the quarter, so the timing did help us out a bit on this.

Okay, great. Could you talk about just how 2013 should play out in terms of WalkAide? I'm talking about publication, peer-reviewed articles, when you think -- which quarter you are likely to submit data, etc., when you might expect a decision after that? Could you talk about how you see the next 12 to 18 months playing out in terms of WalkAide?

Sure. As we had mentioned earlier, we are analyzing data now and looking to prepare for a peer-reviewed submission, and we hope to get that done sometime in the summer time frame. As soon as that happens, we would submit our data to CMS. Generally, that could take 6 to 9 months after the submission. But these days, it's anyone's guess how long that would take, and also what the outcome could be, given the economic environment we are in. So we're pretty guarded about the whole WalkAide opportunity in total, but that is generally the time frame. Does that help you? Does that answer your question?

It does. I do have one follow-up. Do you have the number of patients that ultimately went through the trial?

Yes, it was 496 patients, is the data that we have a follow up on, six-month follow-up on.

Okay, all right, terrific. I guess last question, in terms of -- and again, forgive me if you mentioned this and I missed it. But in terms of your outlook for Linkia going forward, could you just talk about what you expect there, and also just outlook in terms of negotiations the payers, and also any key renewals that could be coming up?

Sure. We continue to be really pleased with what the Linkia team has done back in 2012 in terms of the growth in revenue that they contributed to Hanger Clinic in the Patient Care segment business. We do see that continuing for sure in 2013. There are some negotiations going on in terms of expanding some of our business with some of the payers and also adding a few more.

So we see that success from the Linkia continuing in 2013.

Terrific, great job, guys, thanks.

Larry Solow, CJS.

Just a quick follow-up -- did you actually give the Linkia growth for the quarter and the year in 2012? I don't know if I caught that -- the contributions?

The Linkia growth for the quarter was 7.7%. I don't have the year number handy --

Okay, that's fine.

But for the quarter, it was -- obviously, it was accretive to our numbers at clinic. So they continue to help us.

Okay. Just a more global type question -- I hear you guys have been sort of in this pretty good comfort, 3% to 5% same-store sales growth range, mostly volume, a little price, over the last few years. Do you get a sense that the industry is keeping up with you? Are you outpacing the industry? Any color on that?

Sure. We believe we are outpacing the industry. Our estimates for the industry -- it's a $4 billion industry, a $4.3 billion industry, a $4.3 billion market, and we believe that's growing possibly at about 2%, plus or minus. So we think we are outpacing the industry on a same-store basis right now.

Great, that's helpful, thanks.

That concludes our Q&A session for today. Sir, do you have any closing remarks?

I just want to say thanks for dialing in today. Just to recap, we had a good quarter, we had a good 2012 and we believe we are well prepared as we get into 2013. So thanks very much.

Thank you for participating in today's conference. You may now disconnect.