Hanger Inc (HNGR) 2013 Q1 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger, Inc. First Quarter 2013 Results Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Russell Allen. Sir, you may begin your conference.

Thank you, Brandy. Good morning and welcome everyone to Hanger's discussion of our first quarter 2013 results. Before we start our discussion, I would like to review with you our declaration of forward-looking statements.

During this call, Management may make forward-looking statements concerning the Company's results of operations. The United States Private Securities Litigation Act--Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements related to future results of operations during this call reflect the views of Management. However, various risks, uncertainties, and contingencies could cause actual results to--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, 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 a result--whether as a result of new information, future events, or otherwise.

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

Thanks, Russell, and welcome to our first quarter call. We've had a pretty solid--a very solid start to 2013 with our first quarter results. We produced revenue growth of 7.1% and a 12% increase in adjusted earnings per diluted share in what is seasonally our slowest quarter. We also achieved a significant milestone this quarter by reaching sales of $1 billion for the trailing four quarters. This is an excellent achievement driven by the talented men and women at Hanger that work tirelessly to further our vision to enhance human physical capabilities.

Sales in our patient care segment increased almost 10% with same center sales up 1.7% in a quarter that had a very high same center sales growth comparison in 2012. In addition to the high comp, a number of our regions dealt with several storms that impacted operations. Sales in our products and services segment were down 3% driven by a combination of the success of our O&P acquisitions in 2012, the continued pressure on our customers due to the ongoing RAC audits, as well as similar weather related issues faced in our own O&P business. Since this is the first call that we are talking about these two newly created business segments, I will provide a little more color on the thinking and expected positive impact a little later on the call.

Overall, our 2012 acquisitions contributed significantly to our growth. And also, our rehabilitative solutions business, ACP, continued to improve with another quarter of increased year-over-year revenues.

With regards to earnings, by continuing to exercise cost discipline in our newly announced realignment, our Q1 earnings growth was consistent with our full year guidance. In fact, with the underlying strength of our first quarter results and our view of the remainder of the year, we have reaffirmed our guidance for 2013, despite the impact of sequestration, which we had earlier calculated at approximately $0.05 of earnings.

Before I make comments on some of our business initiatives and operations, let me ask George McHenry, our Executive Vice President and Chief Financial Officer, to review our Q1 financials in more detail.

Thank you, Vinit, and good morning, everyone. As Vinit mentioned, we are very pleased with our Q1 results, which serve as a great start to the year with 7.1% consolidated growth in sales and good leverage in our EPS growth at 12%.

My specific comments are as follows. Our adjusted diluted EPS of $0.28 represents [12%] growth over the prior year and is a penny better than our internal estimates. So we view this as a penny beat, whereas First Call is currently at $0.25 because it does not appear that all the analysts have yet changed their model to reflect the seasonality of our earnings caused by the new WIP labor and overhead rate calculation, so keep that in mind.

Our adjusted operating margin was down 10 basis points compared to 2012. Last year in the first quarter we were actually down 20 basis points in the first quarter and we finished up the year exceeding our margin improvement goal for the full year, so we're off to a good start relatively speaking in that area.

At patient care services, total sales increased a healthy 9.5% while comp sales of 1.7% was below our annual guidance of 3% to 5%. But we're happy with that result when you consider the strong quarter we were up against last year with the 7.1% increase and the bad weather in many parts of the country that Vinit talked about a second ago.

Our products and services segment reported a 3% decline. Rehabilitative solutions delivered the second quarter in a row of year-over-year growth. Vinit will give you some more color on distribution in a minute.

Our materials rate of 29% was 1.6% lower than last year, due principally to the impact of our efforts to further concentrate our purchasing power and the impact of the 2012 O&P acquisitions, which have a lower material cost than the consolidated percentage. Our tax rate for the quarter was 36.5%. It included one out-of-period R&D credit realized in the quarter. Our core tax rate was 37.2%, which is slightly better than our expectations.

Moving on to the balance sheet and the cash flow. First off, AR. Our AR balance was $156.8 million at March 31. DSOs were 56 days, which is two days better than Q4 and five days higher than a year ago. RAC audit related receivables more than doubled in Q1 to $8 million, which we believe we will collect 95% of based on our past experience. The RAC audits alone added four days to our DSOs compared to a year ago and two days compared to Q4, so we would have improved by four days in Q1, compared to Q4, if it had not been for the RAC audits alone.

Bad debt expense was 2.4%, which falls within the range of our expectations and historic results. Inventory was $132.5 million at the end of the quarter. Inventory turns were 4.1 times, which represents an improvement when compared to 3.8 times a year ago. CapEx was $5.4 million for the quarter. That's $100,000 higher than last year, so very comparable to last year's results. Cash flow provided by operating activities for the quarter was $1.7 million. That's a $400,000 improvement compared to $1.3 million in 2012.

First of all, positive cash flow in the first quarter when we had to pay our incentive compensation plans and our final 2012 tax estimates is an excellent result for us. When you consider the impact on top of that of the $4 million increase in the RAC audit receivables and the impact on working capital, we're very pleased with that result and it's a good start for the year.

Moving on to liquidity, the Company currently has total liquidity of $114.5 million. Total leverage per our bank calculation remained constant at 2.8 times, which is well below our covenant of 4.0 times. Guidance - as detailed in the press release, we have reaffirmed our guidance for 2013.

That concludes my comments and now I want to turn the call back over to our CEO, Vinit Asar.

Thanks, George. Let me first provide a little more color on the topic of our segment change. As we think about Hanger's opportunities for long term growth, we expect our patient care segment to continue to be the primary engine for that growth in the immediate future. The O&P industry has attractive growth dynamics based on the demographics of an aging population, increased incidents of chronic diseases like diabetes due to obesity and other health risk factors. Our proven ability to produce consistent same store growth of 3% to 5% in an industry growing at approximately 2% demonstrates the strength of the business model and supports our long term ability for growth in this $4.3 billion market.

The payer environment is also evolving and we are seeing more and more interest by payers in narrowing provider networks for some product offerings, such as healthcare exchange plans. As some of you know, our network management business, Linkia, has that very offering in the O&P space and to that end, we have now moved Linkia into the patient care segment to better align our resources. Switching over to the products and services segment, this segment is focused on services that we provide to the caregivers serving people in need of O&P and rehabilitative products and services. Our SPS distribution business, Surefit, ACP, and [Inn, Inc.] all fit very well into this definition. We are already benefiting from an enhanced focus on growth and increased efficiencies as a result of bringing these operations together.

For example, ACP and Innovative Neurotronics have a great deal of experience working with the FDA, experience that SBS increasingly needs now that it operates our fabrication facilities. Conversely, SBS is a distribution expert, which is vital to successful operations for both ACP and Innovative Neurotronics. Inn, Inc. is also proving to be a great source for manufacturing, operations, and R&D leadership that we believe will make a significant difference in our Surefit and fabrication operations.

On the growth front for this segment, we will continue to build on and explore new channels, products, and services using all our assets from ACP, Inn, Inc., and SBS businesses. We are very encouraged to see what we have already begun to capture some of the realignments potential for greater operating efficiency by consolidating some of these elements in our products and services segment, such as sales forces, warehouses, and back office systems.

A very appropriate way to look at our two segments is that our patient care segment serves the patient community while the products and services segment services the caregiver community. We believe this realignment will enable us to make more effective use of the Company's many strengths, while supporting the long term profitable growth and development of our businesses. It further supports our confidence that we are well positioned to achieve our growth objectives for the remainder of 2013 and in the years ahead.

Now switching gears to some of our other ongoing initiatives, our development efforts on Janus, the new clinic management system that we have referred to in previous calls, continue to proceed well. We are on track to complete our pilots and begin the full rollout of the system this summer.

On the materials front, we are very pleased with the progress we are making on our preferred vendor program. We have made excellent progress with the key strategic suppliers that have partnered with us to provide us a combination of clinically effective products and a good value proposition. We will continue to develop this program further as we are seeing the early successes work extremely well in our clinics.

On the acquisitions front, we are pleased with the pipeline of candidates and comfortable with our goal to acquire $20 million of annualized revenues this year.

With regards to other issues in the environment, the RAC audits continue to impact the O&P industry. While they certainly affect Hanger directly, as you heard from George, our investments in clinical training, documentation, and compliance programs, are helping us greatly. Our success rate on appeals in these audits appear to be far greater than the rest of the industry and we believe that this is a direct reflection of the investments we have made in the appropriate resources, tools, and training.

With regards to the environment in skilled nursing, which is services by our rehabilitative solutions business, the industry is still under tremendous pressure now driven by the sequestration cuts and some of the changes in the Med Part B fee screen. Despite this pressure, we have been able to adjust our offerings and maintain a strong value proposition with our customers. The environment will continue to ensure that we remain vigilant in this space.

Overall, on the growth front, we continue to invest in our clinical, marketing, and business development programs to enhance our value proposition to our patients, our payers, and our referral sources across all of our businesses.

In summary, we believe that the business fundamentals remain strong. We are pleased with our earnings results this quarter and our reaffirmed guidance. Our balance sheet remains strong and with the projected $80 million to $100 million in operating cash flow this year, we have the financial flexibility to conduct our operations and continue to invest for growth. All of these factors, despite headwinds like sequestration, reinforce our commitment to deliver quality care for our patients, profitable growth, and shareholder value.

This concludes our prepared remarks. And Operator, please, can you open the call for the Q&A segment?

(Operator Instructions) Your first question comes from the line of Larry Solow.

Good morning, guys. I realize you don't guide quarterly. But fair to say this quarter was maybe slightly in line or slightly better than your internal expectations? How do you look at that?

Good morning, Larry. This is George. Yes. We looked at what we expected internally after the changes from that change in our calculation for the WIP labor and overhead. We expect it to be a couple pennies better than last year. Last year, we stated it was $0.25. We expect it to be at $0.27. So we view this as a penny better than we expected.

Okay. And sales were a little light, but I realize there are very difficult comps. So is that sort of in line on sales for you pretty much, give or take?

Yes.

Okay.

Q1 is always kind of challenging quarter for us from a sales perspective just because the ducks aren't all flying. So 1.7%, especially with the comp we were up against and the weather that we ran into in some parts of the country, was really a very good result.

Excellent. Could you just maybe just give us a little brief detail, a little color, on where you're going to--where some of these cost savings are coming? And is it driven by--the realignment of the segment I imagine is helping it somewhat, but is it just realization of more cost cutting you guys have been doing for the last several years?

Yes, it certainly is--it's a combination of those factors, Larry. Good morning. It's Vinit.

Hi.

It's a combination of these factors. Certainly, as we heard about the sequestration impact, et cetera, we had already begun to tighten some of our belts on some discretionary spending, but the realignment certainly helps. We did eek out a little bit of savings from the realignments of the segments as well. So those, I would say, are the two factors. And we'll continue to be vigilant on our spend for the remainder of the year. And that's basically in a nutshell where we come up with the savings.

Okay. How does the implementation of Janus and the new electronic management system--probably not going to drive savings right off the bat. But I assume that it's going to improve operating efficiencies and all. And to that, inevitably do you see that as being margin accretive as you look out in '14 and beyond?

Larry, we certainly think that Janus is going to improve our operations. It will give our practitioners more chair time with their patients. There'll be less paper for them to deal with. There's obviously some savings from that just in paper. But it will take less time to enter sales transactions. They'll--we'll have a better feel for what is going on from a scheduling standpoint because the system is patient centric, not center centric.

Right.

And our practitioners do move around from center to center. So we think it's--it will evolve. We're going to start to roll out in the second half. We're kind of in an advanced pilot stage right now and are happy with what we're seeing. But we certainly think this will be something that will help us over time continue to be able to deliver improvement in our margins.

Okay. Anything on--any update, anything on WalkAide, potential publication? Has the filing occurred with the CMS? Just remind me where we stand there.

Sure. Yes, we're on track to do our filing later this year with CMS. So no real major updates. As we have a (inaudible) to an update, we'll certainly update all of you.

Okay. So it still has not been filed yet, but it's still some time--I think you were talking sort of toward the middle of this year. Is that correct? At least--.

--That's correct.

Okay.

Later in the summer likely. Late summer most likely.

Okay, great. Thanks so much. I appreciate it.

Thank you.

(Operator Instructions) Your next question comes from the line of Mike Petusky.

Hey, guys. Good quarter. Did you guys give the Linkia comp for the quarter versus the period last year?

We did not. And let me see if I have that. Actually, I don't have that at my fingertips, Mike. I can give you that offline.

Okay.

They did add to our comp for the quarter.

Okay, that's fine. George, in terms of the kind of modeling tax rate for the rest of the year, I mean, 37.5%, something like that make sense?

Yes. I believe when we talked about guidance at the end of Q4, we said our core rate we expected to be 37.4%. So to use 37.5%, that's certainly safe. 37.2% is probably--that we saw in Q1 is probably a little aggressive, so I'd stay right in the 37.4%, 37.5% range.

Okay. All right. Great. And then, I guess, Vinit, can you talk about how--and I know sometimes you just--these things are tough to predict, but in terms of how you would expect M&A to roll in this year. I mean, do you think it's more likely kind of back end loaded in terms of the timing of the majority of the $20 million?

Mike, hi. Yes, that's exactly the way to look at it. If you looked back over the last four or five years of our M&A activity, it's very rare that we have actually closed deals in the first quarter, so to speak. Typically, the first half is much lighter than the second half is how we look at it. And the way we see our pipeline now, that's pretty much how it will likely play out for this year as well.

And then, I guess in terms of the rollout of Janus, is that kind of going region by region, or are there certain specific facilities that you guys have targeted in each region? How is that going to work in the--I guess what I'm really trying to get after, is there any--what's the risk this becomes a distraction, or--could you just speak to that?

Yes, great question, Mike. Certainly, this has the risk of becoming a distraction if it's not planned well. And the team's done a real nice job of going through the pilots at this point and they've started plotting out large group practices that will get rolled out first that make sense. So we've picked out different groups across the country that are more ready than others, which will get rolled out first. And as we learn more, we'll continue to adapt that. We're also investing a fair amount in training and change management type pieces to ensure that the impact on the individuals in these clinics is minimal and they can continue to provide the quality patient care that our patients are used to. So it's a fairly far reaching approach on picking which regions and which cities will go first, again, based on the competencies and the readiness of the groups across the country.

And the--and you expect the rollout to last, what, a couple years?

Well, yes, two to three years, likely closer to three years.

All right. And then, last question, and I'm sorry, this is going to be a repeat. I was temporarily distracted and I really do want to know. So the timetable for WalkAide, you're looking for a peer reviewed article at some point over the next three to six months, is that right or did I--I'm sorry, I got distracted. I heard the question, and then--I'm sorry. Can you just kind of give me a quick update on WalkAide, the timetable for filing and also for publication.

Yes, sure, Larry--Mike. No need to apologize. Yes, it's--our plan is--right now we're in the process of getting it peer reviewed, so once we finalize that, finalize the publication, we'll submit. And we're hoping to be in that position to submit and get that peer review published later this summer most likely.

Okay. So then, filed before the end of the year?

Yes.

All right. Great. Great start to the year, guys. Thanks.

Thanks, Mike.

And there are no further questions at this time.

Okay. Well, thanks, Operator. And I appreciate everyone taking the time to join us on this call. Again, just to reiterate, we're pleased with the first quarter and we have reaffirmed guidance and we'll talk to you next quarter. Thanks very much.

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