Hanger Inc (HNGR) 2015 Q4 法說會逐字稿

Welcome to the Hanger Inc. 2015 to 2016 Results and Business Update conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Seth Frank, Vice President of Treasury and Investor Relations.

Thank you, Mr. Frank, you may begin.

My name is Seth Frank, Vice President of Treasury and Investor Relations of Hanger. Today, some of the information we will discuss on this call are forward looking statements in the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause Hanger's actual results to be materially different than those discussed today. Those risks include among others, matters we have identified in the forward looking statements provided in our earnings release and in our filings with the Securities and Exchange Commission.

Hanger disclaims any obligation to update forward looking statements discussed on this call.

And now, I'd like to introduce Hanger's President and Chief Executive Officer, Vinit Asar.

Thank you, Seth. Good morning, everyone and thank you for joining our call. Today, we're going to provide perspective on the results in our 10-K filing and press release covering the 2016 and 2015 time period. We're also pleased to provide you a business update and some perspective on 2017.

I will provide the opening comment, and then our CFO, Tom Kiraly, will get into the numbers in more detail.

It's been several years since we've had an earnings call, given our focus on getting our financials current. I believe we've made significant progress and this 10-K filing is a major milestone and in line with the company's commitment to ensure Hanger becomes current in its filing and relists on a national securities exchange as soon as practical.

As I look into the future, I believe we have strengthened the foundation to support anticipated future growth. In the past, challenges we have faced have resulted in a Hanger that will be much better able to adapt to the continuing needs of our stakeholders.

We've also worked diligently to maintain Hanger's leadership position in our industry. The healthcare services industry is undergoing fundamental and accelerating change, and we're excited to be a part of this future, positioning the company to deliver great outcomes, efficient, quality patient care and enabling Hanger to thrive in a healthcare market driven increasingly by value.

To achieve these goals, we've invested in talent. In particular, our management team has changed significantly. Tom Kiraly is now our Chief Financial Officer. Gabrielle Adams is now our Chief Accounting Officer. Sam Liang joined as President of our Hanger Clinic Business, and Scott Ranson joined as our Chief Information Officer.

In addition, over the last few years, we have brought on new board members with fresh perspectives that will continue to strengthen our focus on governance and shareholder interest. Over the last three years, we invested heavily in infrastructure to strengthen our internal controls, financial reporting and information systems.

We've also engaged third party firms to assist us with our significant accounting and legal requirements during this time. While we anticipate third party fees will normalize in the coming years, we do expect to continue to invest in strengthening our infrastructure, as it relates to internal controls and information systems to ensure that we maximize our market opportunities.

Now, let's turn to where we have been, where we are now and our plans looking ahead. As many of you are aware, Hanger was built through an acquisition-driven strategy of combining independent O&P service providers going all the way back to the mid-1980s.

Prior to 2015, the company's back office activities operated in a decentralized environment. As independent O&P businesses were acquired, they operated and provided clinical care under the direction of Hanger, but many back office functions continued to be performed onsite at the acquired location.

This did not enable us to leverage best practices, nor did it fully allow us to benefit from our considerable national scale and footprint. Our decentralized revenue cycle management function was simply inadequate to respond to the changes impacting the O&P industry.

These changes are driven by the payer community and have accelerated over time, particularly since the adoption of the Affordable Care Act.

Appropriate reimbursement is more challenging than ever. These difficulties were in large part driven by increased claim denials and payer audits. At Hanger Clinic, these adversities were exacerbated by our ongoing implementation of an EHR system.

Due to these issues, our trends in disallowed sales gradually increased from a level of 2.9% in 2010 to 7.5% in 2014. These trends further compounded the burdens on the company, caused by the delayed financial filings and restatement efforts through this period.

During the years leading up to 2015, our products and services segment continued to perform well, showing measured growth in revenue and profitability. To remediate the issues we were facing, we focused on strengthening our infrastructure and capitalizing on the value brought by our new leadership within the company.

In addition to strengthening our financial reporting processes and improving our internal control environment, we also focused on several key operating initiatives. Within our patient care segment, we focused on two areas, revenue cycle management and patient outcomes.

We created a new revenue cycle management function in order to centrally manage our billing and collection processes throughout our patient care segment. We also revamped and significantly improved the implementation of our EHR system.

In 2016, we launched a company-wide initiative to improve our claims documentation and instill a much deeper discipline into our claims submission processes. This initiative, combined with our improved approach and restart of our EHR rollout has resulted in significant improvements in our revenue disallowance rates in 2016 and '17, which we will touch on later during this call.

However, the additional time and attention we spent in the training and implementation of the program was also a key factor that contributed to the decrease in revenues in 2016. We think of this as a necessary step to help ensure our success going forward.

In addition to the revenue cycle management and EHR implementation efforts, we also focused on establishing clinical practice guidelines and clinical outcomes within our patient care segment.

In 2016, we brought on board Dr. Jim Campbell, our Chief Clinical Officer, who has led the effort on clinical practice guidelines and begun the process of analyzing our expansive data to develop studies and programs around clinical outcomes.

Recently, we announced the results of our landmark study in lower limb amputees, known as the Mobility Analysis of Amputees or MAAT 1. The largest of its kind to date, this study measured the correlation of mobility to quality of life and patient satisfaction for people living with limb loss, with findings demonstrating a significant direct correlation.

This is one of a series of studies that we are working on that we believe will help us tremendously in our relationships with referral sources, as well as our conversations with payers. We are proud of these important research findings and believe they further demonstrate our leadership in evidence based outcomes.

During 2016, within the products and services segment, the therapeutic services we provide to skilled nursing facilities began to experience a downturn. This was driven by both the reimbursement pressures that our clients were experiencing, as well as a reduction in their patient census.

As we've entered 2018, to address these trends, we are evaluating and adjusting our therapeutic services offerings, as well as our targeted markets for these services.

During 2016 and '17 we completed a restatement of 2014 and prior year financials, while also making significant progress with our financial statements for 2015 and '16. I'm very appreciative of our finance and accounting team, under the leadership of Tom Kiraly and Gabrielle Adams, for their completion of these difficult tasks.

While further work still needs to be done to remediate our material weaknesses, I believe that we have made significant progress in the last couple of years. And our management team and board continue to place strong focus on the completion of the remediation work.

Our revenues for 2015 and 2016 were $1.067 billion and $1.042 billion respectively. In 2016, given the focus we put on our claims documentation improvement initiative and the resulting slowdown in our sales cycle, we saw our same clinic revenues within the patients care segment show a decline of 3.1% prior the favorable effect of disallowances.

We considered this 2016 decline an investment that will benefit us going forward. With regards to 2017, we have not yet completed the preparation of our financial statements for the year, and any information we provide on 2017 is preliminary and unaudited.

On a preliminary basis, we believe that our net revenues for the company in 2017 will be approximately $1.04 billion, which is generally consistent with our 2016 net revenues.

On a preliminary basis, we believe that the factors which contributed to our revenues in 2017 include the positive effect of our 2016 claims documentation improvement initiative, as a result of which, we saw significant improvements in our disallowed sales and bad debts during 2017, and also the return of same clinic revenue growth in 2017.

In 2017, we also expect to see a decline in net revenues within the products and services segment, the primary driver of which was an expected decrease of approximately $15 million in net revenue, resulting from the headwinds in the skilled nursing facility customers of our therapeutic services business.

In response to this, as I alluded to earlier, we have begun to diversify our efforts to include other target markets such as continuing care retirement communities, assisted living and home health settings.

Let me now switch gears and spend a few minutes on our plans for the future, in the context of where we believe that healthcare and O&P are headed.

During the last two years, while the industry has gone through substantial increases in payer reimbursement denials, the general drivers for growth in the industry have not changed.

We believe that the combination of the aging population, the prevalence of diabetes, vascular disease, injuries from trauma, along with continued development of orthotic and prosthetic solutions in post-acute clinic settings will contribute to future growth in the O&P industry.

The last few years have been difficult on the industry, particularly on the independent O&P businesses that did not take steps to strengthen their processes regarding clinical and billing documentation to payers. Some of these businesses have faced adverse headwinds as a result. Others have navigated through this as we have.

We are taking the necessary steps and making the appropriate investments to capitalize on the triple aim of healthcare, and that is better care through patient satisfaction, better health through outcomes, and better value by providing care more efficiently, by focusing on the triple aim, and we believe we are well positioned to succeed in this era of healthcare reform and to differentiate ourselves.

At Hanger, we believe that the investments we have made in our claims documentation improvement initiative and the revenue cycle management functions, combined with our ongoing implementation of our EHR system, have positioned us well to effectively realize steady revenue and cash flow.

We expect that our stable base of revenue in our patient care segment, combined with an effective supply chain, clinician productivity and the optimization of our locations will serve to establish an efficient and scalable business model that will enable us to foster a profitable same clinic growth.

In addition, we have begun to combine our clinical outcomes efforts with our sales and marketing teams, to ensure that we are demonstrating to patients, referral sources and payers the value that we bring.

In summary, there is no question that our company has gone through an extraordinary amount of change and reorganization over the past several years, and has borne a significant financial burden to effect these changes.

During the course of this journey, while we have made some course corrections and found it necessary to make substantial investments to better position Hanger for the long term, the fundamental thesis for our growth within O&P has not changed.

As we look to the future, I believe that we have strengthened the foundation to support anticipated future growth, and that the challenges we have faced have resulted in a Hanger that will be much better able to adapt to the continuing needs of our patients and changes in our industry.

Now, let me turn the call over to Tom Kiraly, our CFO to provide more details on the numbers.

Tom?

Thanks, Vinit. When reviewing Hanger's financial results over the past several years, we believe it's helpful to separate the key elements of our financial statements into two categories, those that relate to our underlying operating results and those that relate to costs and consequential effects of the restatement.

The cost of the financial restatements and the related effects are most directly reflected in the substantial third party professional fees, the increased interest expenses and the impairment of intangible assets that we've incurred.

I'll spend the first portion of my comments on the company's underlying financial trends excluding these items, and then finish up by speaking to them. There are four key elements within Hanger's revenue that we think are helpful to understanding our trends from 2015 through 2017.

These are our rate of same clinic revenue growth, our achievement of reductions in disallowed revenue, the discontinuance of our CARES line of business and the changing trends in our products and services segment.

First, from a same clinic revenue growth perspective, excluding the favorable effect of improvements in disallowances, we grew by 3.1% in 2015, declined by 3.1% in 2016, and on a preliminary and unaudited basis, grew modestly by just under 1% in 2017.

It's important to note that we appear to have finished 2017 with a fourth quarter same clinic growth rate of approximately 2%, which we believe reflects a resumption of our underlying growth.

What is key about these trends is that the 2016 and early 2017 results were affected by the company's focus on reducing disallowed revenue through improved clinic-level documentation and revenue cycle management discipline.

While the implementation of this initiative hindered our 2016 growth rate, these new processes have provided clear benefits to the company's disallowance rates. Since a peak of $82 million in disallowed revenue in 2014, the company has reduced that to $49 million by 2016, and then by potentially another $10 million in 2017 on a preliminary and unaudited basis.

On a preliminary basis, during 2017, we've additionally benefited through an improvement of approximately $4 million in bad debt expense. These savings have been achieved through an incremental investment of approximately $12 million in revenue cycle management and through the hard work of our clinical and office administrative staff.

The third key element of our revenue trends after you consider same clinic growth and improvements in disallowance trends, relates to our exit from our unprofitable CARES line of business in 2015.

Unlike our Dosteon business, which we classified in discontinued operations commencing in 2014, the nature of our CARES business did not qualify for that accounting treatment. We had $15 million in revenue from CARES in 2014, $6 million in 2015 and no revenue in 2016.

The fourth key area within our revenue trends relates to changes in our products and services segment's growth from 2015 through 2017. This segment demonstrated good growth in both 2015 and 2016. In 2016, it grew by $10 million year over year.

And approximately $4 million of that growth related to a temporary increase in the sales of therapeutic equipment to skilled nursing facility customers in connection with the termination of our services to them.

The subsequent effect in 2017 of the corresponding decrease in equipment sales, coupled with the effects of therapeutic customer terminations, led to what we currently estimate was an approximately $15 million decrease from therapeutic services in revenues in 2017.

If we take these revenue trends and provide you with a preview of 2017, on a preliminary basis, the effect of the increases in revenue resulting from the $10 million in disallowed sales improvement and same clinic growth have been offset by revenue declines in our products and services segment, resulting in 2017 revenues that we anticipate will generally be in the same ranges of those in 2016.

In reviewing our operating expense trends, our cost of materials as a percentage of net revenue has remained relatively stable. It's trended at or just under 32% of net revenue from 2014 through 2016.

Within our patient car segment, our personnel costs on the other hand, did reflect an increase on a percentage of adjusted gross revenue basis from 2014 to 2016. Within this segment, personnel costs grew from 33.2% of adjusted gross revenue in 2014, to 35.5% of adjusted gross revenue in 2016.

This was primarily due to our focus on expanding patient and claims administration functions within our clinics and the decrease in revenue we experienced in 2016. Additionally, although the products and services segment reflected relatively stable personnel costs during this period, given the pending decrease in 2017 revenue, we were staffed too strongly in that business as we exited 2016.

In response to the trends in each of these two businesses, we initiated a reduction in force in December of 2016 that resulted in approximately 6 million in savings during $2017, primarily benefiting the patient care segment.

A final operating expense category that's important to highlight is our growth in general and administrative expenses. G&A expenses grew from $86 million in 2014 to $112 million in 2015, and then declined slightly to $107 million in 2016.

Growth in 2015 over 2014 related primarily to the investments we've made in our accounting and technology functions and the decline from 2015 to 2016 relates primarily to reductions in bonus expense.

To help orient you to the effects of these revenue and expense trends, and perhaps give you a general sense of our preliminary earnings trends for 2017, in 2014 and 2015, Hanger produced adjusted EBITDA of $115 and $117 million respectively. In 2016, due primarily to decreased patient care revenues, adjusted EBITDA declined to $108 million.

While our preliminary revenue for 2017 is estimated to have been relatively consistent with that of 2016, from an earnings perspective, we benefited from the $6 million in workforce reduction and from the strong favorable flow-through through our disallowances, bad debt expense improvements and same clinic growth in 2017, as contrasted with a more measured adverse earnings effect related to the $15 million in decline in our revenue from our therapeutic services.

We believe these factors have positioned our earnings to rebound in 2017 to levels more indicative of the 2015 and 2014 levels. We plan to provide you more information on 2017 results once we've completed our financial statement preparation and audit of this recent year.

Now, I'll turn to third party fees, interest expense and impairment of intangibles. In connection with our financial statements and internal controls remediation and our efforts to regain current filing status with the Securities and Exchange Commission, the company has incurred fees for accounting and legal professionals well in excess of our historic levels.

These amounted to $37 million in 2016 and an estimated $30 million in 2017. We believe we will spend approximately $13 million in 2018.

Due to the past financial statements issues we encountered, we've also had to seek the accommodation of our lenders on a number of occasions, and are currently incurring interest costs well above those for companies with similar cash flow and credit characteristics.

In 2016, we incurred $45 million in interest expense and estimate that amount to have been approximately $58 million in 2017.

With the filing of our 2016 financial statements, we believe we are now in a position to undertake a refinancing, that will provide for both a reduction in the rate of interest and which we currently anticipate will facilitate the repayment of our $143 million in Term A indebtedness that's maturing in June.

During both 2015 and 2016, we incurred substantial impairments of our intangible assets, primarily our goodwill. In the aggregate, these amounted to $472 million or 61% of our goodwill and intangible assets. It's important to note, for those of you who may not be familiar with these types of assets, that these charges do not reflect a current or future cash outlay.

The primary cause for these impairments related to the increased risk and discount rates for our businesses, which resulted from the company's financial statement issues and from the delisting from the New York Stock Exchange in the first quarter of 2016, and secondarily, from a decrease in our products and services segment's earnings trends.

Turning briefly to the cash flow statement, we believe it's important that you focus on several key elements when reviewing these statements. First, it's helpful to bear in mind that, as I discussed earlier, the company is expending a significant amount of cash relating to the payment of third party professional firms in connection with the resolution of its financial statement issues.

The timing of these payments differ from the periods of their expense, and we incurred $26 million in payments in 2015, $48 million in 2016, $38 million in 2017. Secondly, when reviewing operating cash flow for 2016, the company benefited from improved collections, which contributed to an $18 million increase in operating cash flow. And we also received a $35 million tax refund in 2016.

These favorable cash flow items were mitigated to a certain extent by increased employee bonus payments, which we made in the first quarter of 2016, that are related to the company's 2015 performance. And that was a contributing factor to the $12 million consumption in accrued compensation and related costs, which you see on the cash flow statement.

Finally, I'll close by stating that we're pleased to be emerging from this difficult period. Since the second quarter of 2017, we've now issued audited financial statements relating to five annual periods, extending from 2012 through 2016, and have provided interim quarterly information relating to those years.

The costs and time necessary to prepare those financial statements, as well as our current financial statements for 2017, have been significantly expanded due to the extensive testing and documentation procedures required under our current internal control environment.

Nevertheless, we're pleased to be catching up and are committed to achieving current filing status with the SEC during 2018.

With that, I'm going to turn the call back over to Michelle to have her open it up for any questions that our analysts may have.

(Operator Instructions)

Larry Solow, with CJS Securities.

Good morning, and welcome back. Your last few calls in '13 and '14, just generally speaking, the industry experienced some tightening. And historically, same store sales growth had been sort of 3 to 5%.

And then -- you know, there was the (inaudible) [audit], higher deductibles, slow reimbursement, a lot more of the payment being put into the patient's hands. Obviously there's a lot of noise going on with you guys and the increased documentation and whatnot clearly had an impact on '16 and nice to see some rebound in '17.

Where do you think that -- I don't know if you have much industry data, but where do you think we should settle out on -- you know, on same store volumes?

And then maybe if you could touch on pricing trends as well?

Yes, morning, Larry, good to talk to you as well again. This is Vinit. Look, in terms of the overall industry, I think that tightening that we saw in 2013 and perhaps [early] '14, as you put it, you know, that continued in 2015, '16.

I don't think the demands on the O&P industry or on clinicians is going to ease off. And so that's why we made the course corrections that we did at Hanger, with regards to our documentation and the payers and the audits, et cetera.

So, you know, as Tom indicated, and I indicated in our opening comments, you know, we feel very good that we've put in some good infrastructure and some good processes for our [claims] and our documentation.

Some of the independent O&P providers have done that and some haven't done it. So, you know, we'll see some more ups and downs, depending on where you are in the industry and what investment the O&P providers have actually put in.

Yes, then, Larry, a little bit more specific to your questions about industry growth, you know, our best way of thinking about it is that we would see about a 1.1% overall sort of a price factor in 2018. And that's based on the CMS reimbursement rate growth for the [demi post fee] schedule, you know, in 2018, as a reference point.

And then we add to that, population growth, which is -- at an age adjusted basis, just over 1%. So, you would see about a 2% market growth. Now, if you said well, what's a more conservative number, you know, because of an increased patient responsibility from consumer driven healthcare, you might say well, the low end'll be 1.5. So, 1.5 to 2% market growth--

Yes, and that sort of references to that 2% exit rate that we appear to have had at the end of 2017.

Okay, and that would -- that would sort of include average 1%-ish price, I assume -- CPI increase, is that correct?

Exactly.

Got it. And then historically obviously, you guys are -- you know -- acquisitions have been a big part of your strategy, fair to say as you get the house in order, the acquisitions spigot will be turned on again? I assume there are lots of opportunities out there?

Look, I think first of all, in the near term and the immediate term, you know, our focus will be to stay focused on getting our financials current. You know, that remains our top priority.

What's been interesting over the last couple of years that we haven't done acquisitions given this focus, you know, we've actually relearned this whole area of organic growth.

We understand our strengths better. Our investments in clinical outcomes and our sales and marketing efforts have demonstrated the same clinic growth. So, our default strategy, once everything settles, will be certainly to look at acquisitions, but equally importantly, also our organic growth.

But again, I want to reiterate our immediate term focus will be on getting our financials current and getting relisted.

Got it. And then just lastly, you obviously had [a lot of cost] cutting in '16 on labor, of course third party costs remain -- you know, have come down a little bit but remain clearly above historical levels. What gives you confidence that these third party costs will sort of either go to 0 or maybe you'll need to sort of [in technology, you guys] still continue to make investments in infrastructure?

But just trying to figure out you know, do you feel like your cost structure is basically in line? Or do you still feel like you'll need to add more costs -- you know, relative to the revenue growth? Thanks.

Yes, thanks, Larry. Look, a lot of our comfort comes from the nature of what we're incurring those costs for. And so, when we look at -- you know, from a standpoint of our auditors, increased expense, it's really due to the nature of what they've had to do, in terms of additional procedures in connection with our audits, which as we emerge, should dissipate.

And then secondarily, some of the other professionals that have supported us, it's really been the redundancy of doing multiple periods at the same time. You know, it's been a very burdensome process to try to be catching up and doing that -- you know, the five annual periods in less than a year, as we talked about.

So, when we go looking at the activities, we get a lot of comfort that the existing underlying structure of the company is more than capable of handling -- you know, its duties on a go-forward basis, but without this additional assistance.

(Operator Instructions)

Brian Tanquilut with Jefferies.

Hey, good morning, guys, welcome back. Vinit, first question for you, if you don't mind me asking, so as I think about -- again broader landscape, right, I mean what are the drivers you think that could drive a reacceleration of growth, whether it's technology -- you alluded to that in your prepared remarks, new technologies?

And also, how should we be thinking about share gains for Hanger, given the challenges that the industry has faced over the last few years?

Thanks, Brian, appreciate the question. Look, for us, you know, given some of the investments we've made and some of the progress we've made, the way that -- the way we're thinking about the future, in terms of whether it's market share growth and also our presence in the market -- certainly technology's going to be one of them, and you know -- and the investments we've made in our claims initiative, et cetera, that's going to help matters for sure.

But then we also invested in patient clinical outcomes, sales and marketing. And we believe that will help us significantly in our conversations with our peers and our referral sources. And we've already begun some of those conversations.

And you know, and we -- when we -- when we look around, we do -- we will have one of the largest databases of patient data as well, that -- you know, that we can actually look and see what outcomes can be generated once we focus on our clinical practice guidelines, which we've already started doing.

Those are the sorts of things we believe that will help us, in terms of market share and same clinic growth in the -- in the immediate term.

And Vinit, is there anything on the actual O&P technology that has evolved or changed or emerged in the last three years?

Not really. I think you know -- in general, the last big change in technology was the microprocessor [and the] (inaudible) microprocessor [fee]. They've made incremental advances. And at this point, the conversations we're having with our manufacturing partners is -- you know, we do need to see outcomes data as they -- you know, bring out new technologies going forward.

And then, Tom, as I [think] about you know, your discussion on payer dynamics and also --you know, high deductible health plans, how should we be thinking about -- you know, where do you think that stabilization point happens, [where fairer] dynamics and high deductibles will no longer be a headwind, and it's more of a -- you know, [the high notes], I mean it's just baked into the model at this point, you know, at that point?

Yes, I'd like to believe that -- you know, when you look at the mix, you know, of high deductible plans with employers, it's certainly a plan that -- you know, virtually all employers have adopted and really over the last couple of years, I think there's been a -- sort of the advent of stabilization, where people are realizing you know, that they've got this sort of stark choice between the two types of plans.

So, in short, I think we're getting there, in terms of consumer driven healthcare and the effects of consumer driven healthcare at this point.

And then last question from me, as I think about payer mix, Medicare versus commercial, if you don't mind reminding us what that mix looks like for you guys and what the payment differential is between commercial and Medicare, you know, even in qualitative terms.

Yes, you know, so if you look at our 2016 financials, about 31% -- you know, of our business came from Medicare, and about 15% came from Medicaid. Now, I should point out that within the Medicare and Medicaid numbers, there's about 8% of that that is Medicare Advantage or Medicaid Advantage. So, it depends on how you count that part of the book.

But generally, that base of business is coming in with this reference point at the CMS reimbursement rate. Separately, we have about 39% -- you know, of the book that comes from the true commercial rates, which are usually referenced to Medicare, but may be at a -- at a -- at a slight discount to the Medicare rates.

Got it. Last question from me -- sorry, tax reform, do you see -- do you expect any benefit from tax reform in 2018? Thanks.

We ultimately do expect to benefit from tax reform, but in 2018, as I referenced, you know, we're paying about $58 million in interest expense as we enter the year. You know, we've got to undertake the refinancing, but yes, a certain portion of our interest, [that'll be limited] from an [induction] standpoint.

But certainly, as the company addresses its capital structure and merges in future years, we're hopeful that we should benefit from tax reform.

(Operator Instructions)

Dana Hambly with Stephens Inc.

Thanks for taking the questions, good morning and congratulations. A few questions from me -- then on the EHR, it sounds like we're very early innings in -- you know, utilizing that and presenting the data to the payers. I think you got it rolled out to two thirds of your clinics, could you just tell me where we -- you know, where you are with -- you know, kind of meshing this with the sales force?

And have there been incremental costs with the EHR rollout that will roll off as that becomes fully implemented?

Yes, hi, Dana. You know, we -- as you said we've implemented -- you know, EHR in two thirds of the clinics, and to really take advantage of the EHR, you know, we would need to be in -- take full advantage of EHR, we would need to be in all of our clinics. But we have started seeing trends.

We started extrapolating some data from the clinics we're in. On one hand, it's also helping us with the claims improvement initiative, but -- and it's also helping us with some of the clinical data that we've already mentioned, especially the MAAT study. So, we'll continue that -- you know, that extrapolation of the data.

We have begun the conversation with our sales force. In a few weeks here, we have our national meeting, we'll share more with our sales force as well as our clinicians about some of these clinical outcomes data. And you know, I think we've mentioned in our filing that we expect of -- it to be fully rolled out in all of our clinics with our EHR system by the first or second quarter of 2019.

So, you know, that's where we are. Tom, you want to touch a little bit on the cost side of it?

Yes, Dana, there is an increase in the company's cost structure, due to some of the costs of implementation, you know, in the field of the EHR, although I would -- I would sort of guide you to realize that even as we complete that, as we exit 2018 and go into 2019, you know, we've got the aspiration to roll other systems out.

And so, there'll be some period of time where the company will be in the process of experiencing implementation costs within its P&L.

Okay, all right. That's helpful. And then, Tom, on the G&A expense, you know, the jump up from I think $86 to $110 came down a little bit in 2016, is that kind of $110 million, does that seem like a good run rate at this point?

It does--

Okay.

-- you know, we really addressed a number of deficiencies, you know, from 2014 to 2015, and feel that we've got a good structure at this point.

Okay. And then on your capital expenditures -- have been running closer to $30 million, came down closer to $20 million in 2016, is there an anomaly in 2016? Should we think about that ticking back up?

There really isn't an anomaly, but I do think that if you're closer to the $30 to $35 range, going forward that that's probably a more reasonable range.

Thank you.

There are no further questions at this time. I would like to turn the call back over to Mr. Asar for any closing remarks.

Well, thank you all for joining. I just want to close by saying that -- you know, our focus in the immediate term is on getting current with our financial filings and getting relisted.

Our thesis for our growth in O&P has not changed, as I mentioned, you know, it has to do with the increase -- the prevalence of diabetes and trauma, and also the increase in vascular disease, as well as the orthotics and prosthetic solutions. So overall, you know, we feel we're well positioned for the -- for the future.

And we appreciate everyone's patience through the last few years as we worked through some difficult stuff, but I'm convinced Hanger is in a stronger place to deal with where healthcare is going.

So, thank you all very much, appreciate your time today.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.