Hanger Inc (HNGR) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Hanger Second Quarter 2021 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Seth Frank, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you. Welcome to Hanger's Second Quarter 2021 Earnings Conference Call. With us today are Vinit Asar, Hanger's President and Chief Executive Officer; and Thomas Kiraly, Executive Vice President and Chief Financial Officer.

Some of the information discussed today will include 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 materially differ from those we discuss today. Those risks include, among others, matters we have identified in the forward-looking statements portion of our latest earnings release and in our filings with the SEC. Hanger disclaims any obligation to update forward-looking information discussed on this call.

And now let's hand the call over to Vinit.

Thank you, Seth. Good morning, and thank you for joining Hanger's second quarter 2021 earnings call. As anticipated, Hanger's second quarter results reflected a significant recovery compared to 2020. We saw a broad year-over-year rebound due to the severe demand drop experienced at the height of the COVID pandemic last year. Looking at the quarter, our Patient Care segment was at 96% of pre-pandemic levels. As such, the second half of the year is of critical importance in our ability to achieve our financial goals for the year. The current issues that are impacting the rate of further recovery in the near term, such as the stall in vaccination rates and the COVID variants are ultimately transitory. That said, irrespective of the actual pace of the end of the pandemic, we believe Hanger is by far the best positioned O&P company to lead and benefit from restored growth.

Reviewing our consolidated second quarter results. Net revenue totaled $280.8 million, which reflected growth of 20.3% compared to the same period of 2020. Adjusted EBITDA was $31 million compared to $36.5 million last year. You will recall that we took aggressive but temporary cost reduction measures in the second quarter of 2020 that reduced our second quarter personnel and other expenses by $35 million.

Looking at our 2 business segments. In Patient Care, we saw significant year-over-year growth and a return of the historical seasonal pattern of sequential improvement that we had compared to the first quarter. For Q2, Patient Care segment net revenue grew 20.9%, while same clinic growth was 18.2%. When we look at trends within the segment, as a reminder, our orthotics business had experienced a significantly greater downturn than prosthetics during the early part of the pandemic. As a result, we are seeing a more pronounced year-over-year growth in orthotics than prosthetics when comparing to 2020.

Orthotics revenues rebounded 40.4%. Customer orthotic devices, such as ankle foot orthosis, spinal, cranial and other categories posted strong growth as surgeries and elective procedures picked back up. In addition, our newly established National Cranial CARE Network is helping drive growth in custom orthotics. Off-the-shelf devices as well as shoes and inserts experienced recovery but at a rate less than custom orthotics. This is generally positive for our segment margins.

Excluding the impact of acquisitions, prosthetic revenue growth was 4.3%. Microprocessor-based prosthetic volumes, in general, grew relatively modestly. These devices tend to be utilized by otherwise healthy and younger individuals who continued coming in to see us even during the height of the pandemic. This contrasts to prosthetic categories typically utilized by lower mobility, older patients, many with chronic illnesses. The growth in this older less mobile population aligns with what we saw in our practice last year, as these patients were profoundly impacted by care access limitations at the height of the pandemic.

A key metric for Hanger as a leading healthcare provider is patient satisfaction. And as you know, we view our Net Promoter Score as a key indicator. I am pleased to share with you, that despite the challenges of the ramp in patient volumes that are occurring, Hanger Clinic NPS remains solid at 86.

From an operational perspective, we are facing, as are many companies, what we anticipate are temporary challenges due to the economic recovery and macroeconomic environment. Specifically, hourly or non-exempt labor remains at high demand. Certain of our staff positions, such as distribution center workers, fabrication technicians and front-office administrators are most impacted. Widely reported inflationary signals and capacity constraints have also created some near-term challenges. These factors are naturally creating additional demands on clinic staff and our associates in the distribution and fabrication areas. Even through this, I am encouraged and heartened by the execution and commitment to our patients and our organizational values by our associates.

The current environment asks for extra effort, pitching in and maintaining a professional attitude after a long and difficult 18 months. We are fortunate to have built an environment with a DNA that embodies our corporate values and a durable service-oriented culture.

Turning to the Products & Services segment. We also saw a return to growth as independent O&P providers saw patient volumes improve. Segment revenue growth was 17.2% year-over-year. Hanger's O&P distribution business grew by 25.4% and is at approximately 89% of pre-pandemic levels. We remain focused on the transition to our new state-of-the-art distribution facility in Alpharetta, Georgia. Tom will take you through the margins in patient care as well as products and services.

While our reported adjusted EBITDA declined due to normalized levels of personnel expenses in 2021, we continue to do a solid job managing G&A expense growth given current revenue levels. Operationally, we continue to build on Hanger's key differentiators and are increasingly focused on maximize our assets to accelerate and sustain growth.

During the second quarter, we held our national meeting for clinic leadership. There was a lot of excitement and energy as this was the first time our regional leaders gathered in person in 1.5 years. The focus was on our vision for Hanger over the next several years. We have begun to look at increasing discipline and consistency across our network to drive alignment and tighter integration within the broader healthcare system. This is becoming an imperative in a risk-based healthcare environment, and we believe Hanger is appropriately positioned as the leading partner for Q&P services on a national scale. Hanger's commitment to putting the patient first, backed by our substantial investments in clinical research and a focus on excellence continues to support and advance our reputation among medical professionals and payers nationally. We have a solid clinical systems platform, patient connectivity and an integrated revenue cycle process, all of which enable payer compliance and documentation requirements while ensuring low friction access to vital O&P services. Focusing on centers of excellence and establishing regional specialty hubs present longer-term opportunities to enhance productivity while optimizing patient outcomes.

With regards to acquisitions, I am pleased with our initial progress since the pandemic related pause we took in 2020 after the landmark acquisition of Scheck & Siress. We have acquired 6 independent O&P providers in 2021 through the end of June, bringing our total nationwide clinic count to 835. These new clinic locations span the southwest part of the country, California, the Southeast and the mid-Atlantic areas. We welcome these associates and patients to Hanger.

Looking ahead to the remainder of 2021, we continue to be optimistic in our ability to add to our network through selective acquisitions that will strengthen Hanger's growth strategy. It is important to note that several team members that have come to us via acquisitions have taken on significant management positions across Hanger in regional and national roles. It is an indication of the strength of the teams we are bringing in Hanger, combined with the myriad of career opportunities available to them as they join us.

In conclusion, we achieved solid results this quarter and are in a good position for the year-to-date. As Tom will discuss, our outlook for the remainder of the year is predicated on a continued improvement of the business environment. Despite these immediate term challenges, when you combine the strength of our experienced senior leadership team, our financial condition and the benefits of our portfolio gaining better understanding and recognition broadly, we continue to be optimistic about Hanger's growth prospects as the pandemic ends.

Thank you for your interest in us. I will now turn the call over so we can get more details on the financials. Tom?

Thanks, Vinit. As Vinit discussed, we're pleased with Hanger's financial performance during the second quarter and are encouraged to see that business volumes have returned to levels close to those achieved prior to the pandemic.

Net revenue for the quarter was $280.8 million. And due to the effects of COVID-19 in the second quarter of last year, our results reflected $47.4 million in revenue growth.

The company's adjusted EBITDA during the quarter was $31 million. In reviewing our adjusted EBITDA, as you may recall, in response to the pandemic, last year, we undertook a number of temporary cost reduction measures, which resulted in approximately $35 million in operating cost savings during that period. As a result, the company's adjusted EBITDA during the recently completed quarter of $31 million does reflect the decrease from the $36.5 million we reported last year at this time.

When reviewing our performance by business segment, Patient Care reported $236.8 million in revenue, which reflected a $40.9 million increase over the same period last year, primarily due to the adverse effects, which the pandemic had on our prior year patient volumes. Our same clinic revenue growth was 18.2% during the quarter. Patient Care produced $44.8 million in adjusted EBITDA, which reflected a margin of 18.9%. Due primarily to the temporary cost reduction measures we implemented in the second quarter of 2020, this segment's adjusted EBITDA reflected only slight improvement when compared to the $44.2 million we reported for that prior period. Same clinic net revenue for this segment during the quarter was approximately 96% of the pre-pandemic or pre-COVID level we reported in the second quarter of 2019.

As a result, we're currently not utilizing our clinic capacities at the same level as we were prior to the pandemic, and our margins are reflecting this operating environment. Patient Care's adjusted EBITDA margin is running approximately 160 basis points lower than the second quarter of 2019. And this difference primarily relates to the fact that, we have not yet fully recovered to pre-COVID patient volume levels.

Our Product & Services segment is reflecting similar business trends. Revenue of $44 million for the second quarter reflected a $6.5 million increase over those reported last year at this time, primarily due to the adverse effects of the initial months of the pandemic. Within this segment, distribution services grew by 25.4% over the second quarter of 2020, and revenues were at 89% of the level reported in the second quarter of 2019. This is primarily due to the continuing effects of COVID-19 on the business environment, but it's also a reflection of the exit from unprofitable podiatry distribution arrangements as we discussed throughout last year as well as the effects of lost revenue due to our acquisition of independent O&P providers who had previously purchased componentry through our SPS business.

Our therapeutic solutions business, which operates through the monthly equipment and related therapy protocols it provides to skilled nursing facilities, was less directly affected by COVID-19 in the second quarter of 2020 and reflected relatively stable revenue of $10.8 million in the current year quarter.

Now I'll spend some time walking you through the company's cash flow from operations. In analyzing Hanger's cash flows, it's important to recall that during 2020, we undertook a number of initiatives to build liquidity in light of the risks we faced due to the pandemic. These included the temporary operating cost reductions I mentioned earlier as well as a number of actions that reduced our net working capital to lower than normal levels in the prior year. As we left 2020, when excluding cash, taxes receivable and the current portion of debt, Hanger's net working capital had been temporarily reduced by $59.7 million. During 2021, as business volumes return, we will naturally be deploying a portion of our cash flow in the restoration of more normal working capital levels.

With that said, for the year-to-date, our operating cash flow trends have been similar to those for the first 6 months of 2019, the best comparable pre-COVID period. During 2021, we've consumed approximately $35 million in net working capital through June 30th, primarily due to the payment of annual incentives in the first quarter, due to reductions in our payables levels, and due to an increase in inventory balances. This is in line with the same period of 2019 if you adjust for our build in inventories and return of payables to more normal levels. Our operating cash flow for the second quarter was $33.1 million, which reflects an increase of $3.8 million or 13% as compared to the second quarter of 2019.

A key favorable factor in our financial performance, working capital and cash flows continues to relate to the decreases in disallowed revenue and days sales outstanding, which the company has achieved in 2021. During the quarter, disallowed revenue in patient nonpayment were 3.4% of gross charges, which was well below the pre-COVID level of 5.4% reported in the second quarter of 2019. Days sales outstanding decreased to 40 days, which reflects an improvement of 5 days as compared to June of 2020 and 7 days when comparing to June of 2019. These trends are encouraging, and again, reflect the exceptional documentation and billing work of our field personnel and the collection activity spearheaded by our revenue cycle management team.

During the quarter, we expended $16 million in cash for the acquisition of O&P clinics and $7.3 million for capital expenditures. We currently estimate that we will utilize approximately $30 million to $35 million for capital expenditures during 2021. As of June 30th, we had $171.1 million in total liquidity, which reflected an increase of $6 million from the first quarter of this year. From a leverage perspective, Hanger had $438 million of net indebtedness as of June 30th. This reflected a leverage level of just under 4x on a trailing 12-month adjusted EBITDA basis when taking acquisitions into account. Our underlying net leverage is closer to a mid-3x level if we adjust for the effects of COVID-19 on the second half earnings for 2020.

Now I'll turn my commentary towards our overall outlook for 2021. While we are pleased with Hanger's performance during the first 6 months of 2021, it's important to recognize that our original outlook for the second half assumed a clear end to COVID’s effects on the business environment by the end of June. As such, we're not in a position to view our favorable first 6 months’ performance as indicative of a change in our anticipated full year outlook. Based on this, we are reaffirming our original guidance for 2021, which foresees that Hanger will produce net revenues in the range of $1.145 billion to $1.175 billion and adjusted EBITDA of $130 million to $135 million. This includes the benefit of approximately $36 million in net revenue from the annualized effect of acquisitions completed in 2020 or closed in the first half of this year. This outlook also assumes a continued sequential improvement in the third and fourth quarters of the orthotics and prosthetics business environment related to the continued cessation of the effects of COVID-19 on patient volumes.

From a quarterly timing perspective, we believe that due to the continuing effects of the COVID-19 virus on business conditions and the $16 million in temporary cost reduction items that benefited us in the third quarter of last year, that the majority of our revenue and earnings growth will occur in the fourth quarter.

With that, I'll turn the call back over to the operator to open it up for any questions that you may have.

(Operator Instructions) Our first question today comes from Brian Tanquilut with Jefferies.

This is Jack Slevin on for Brian. Congrats on a really strong quarter. I guess the first one, I appreciate the commentary on why you're maintaining the guidance. I think Delta Variant is on everyone's mind right now. Just wanted to see kind of any color you can get on what you saw exiting 2Q and perhaps in early 3Q in terms of patients' willingness to get into centers for -- or the flow of volumes and as a result of the Delta Variant being out there? Are you seeing any patient hesitancy? And then secondly, can you give us any color on what vaccination rates are like in your staff as well as in your broader patient base?

Sure, Jack. Thanks. So first off, let me address the closing out second quarter patient volumes, et cetera. Yes, I think you may know that in our business, it's kind of early to try and project how third quarter is looking this early in the quarter, because a lot of our traffic comes in the latter part of the quarter. So it's a little bit early to project that. Having said that, we haven't seen any significant or material degradation in the traffic since that point. But again, just a reminder, most of our traffic comes in in the latter part of the quarter. With regards to our patients and our employees in terms of COVID vaccination rates, we haven't disclosed that information. So we are encouraging, or strongly encouraging our employees to make sure that they do get vaccinated within our clinics. We have some pretty stringent protocols in terms of what happens when a patient does come in in terms of mask wearing with or without the vaccination. So that's kind of where we are with the vaccination rate.

Okay. Got it. I appreciate that. And then I guess, looking forward, looks really strong numbers on the top line, I think, and encouraging to see some of the M&A coming through. As we look forward, perhaps out to 2022 or beyond, how should we be thinking about the buckets that you all can put your focus in to accelerate growth, whether it be top line initiatives, more M&A or organic growth acceleration, or kind of savings opportunities? And appreciate some of the commentary on supply chain initiatives, any update there would be great, in terms of what you're doing on the cost side to drive earnings longer term?

Sure. Let me touch on the -- our focus on growth, post-pandemic. And I think that's how we should look at it post-pandemic growth. Our focus is really on both organic and inorganic growth. Our -- as we've said throughout the last year or so, is our focus is on same clinic revenue growth with in Patient Care, organic growth within the Products & Services segment, and we'll supplement it with selective acquisitions within O&P. And our pipeline right now on the inorganic side is very strong. We don't expect that to slow down anytime soon. So in post-pandemic, focus on organic growth. We've got some terrific initiatives. We've got some perfect leadership we put in place over the last year, as we've announced, and very encouraged with some of the areas of focus on the growth initiatives with regards to focusing on hospital systems, focusing on centers of excellence. And equally importantly, our recruiting efforts, bringing in residents and the increased investments we've made in bringing in the right clinicians. So that's how we look at our growth opportunities, organic, supplemented by selective acquisitions. And then Tom, if you want to touch on the supply chain and cost side of things.

Yes. I mean, I think as we talked about in prior calls, we've been forging ahead on the supply chain front despite COVID, and that has involved completing our investment in the new distribution facility in Alpharetta, Georgia, which came online really as the last year closed and has been serving the company here in the first half. And given its automation and the nature of that facility, that's one of the key contributors to the supply chain savings, which we've talked about in past calls. So that has been going well.

In the second area of supply chain investment, we have been investing in our fabrication -- central fabrication facilities. There, as Vinit touched on, I think we're seeing less of the benefit of that at this point simply because of some of the labor and staffing that we're trying to attain to really put those facilities to full use. From a standpoint growth, I'll just add to what Vinit said, it's too early for us to be sharing what we think on a market share basis. But what we've seen in terms of our organic growth during last year and this year as compared to the industry as well as the augmentation we've done through M&A, we think that's driven our market share up a little bit. And so we're pleased with that. I think as we leave 2021 and get into 2022, we're going to be even better positioned from an overall size and network capacity standpoint.

Great. And I appreciate that. And then Tom, quick one just for modeling purposes for you to close it out for me. On the deals that were announced in the quarter, any color you can give on timing just so we can model out Q1, Q2 contributions from M&A next year?

When you look at it, those came in real late in the quarter. They're not really that large from a standpoint of revenue contribution this year and, certainly, earnings contribution because of the integration expense. So it's probably premature for me to start giving you 2022 sense on what those will do. But we'll certainly, as we close out the year, be giving more guidance in terms of how to think about the M&A plus the organic for that year.

Our next question comes from Larry Solow with CJS Securities.

Just a quick follow-up on the unchanged guidance and the cadence. It sort of feels like first half -- I know you guys don't guide to the quarters, but it does feel like, I guess, from your initial guidance in terms of percentages of the EBITDA, that perhaps we're a little bit ahead of the curve in the first half, but COVID has obviously greatly diminished, but there's some resurgence and whatnot. So maybe not completely in a spot we'd like to be. So perhaps the year itself is a little bit more, not quite as back-end loaded as you thought. Is that a fair way to characterize it? And then in terms of the cadence, it sounds like Q4, you're going to get most of the growth. But should the normal cadence between Q3 and Q4 be relatively normal versus pre-COVID?

Yes. Larry, first of all, I think that's correct. I think we'd be in a much stronger position if we've seen a full reduction of COVID’s effect on the business environment through the -- by the close of the second half, and certainly the outperformance in the first half would have really helped the company from a standpoint of its future expectations. When you look at the cadence, I think if you look historically, the third quarter has always been relatively similar to the second quarter, maybe even a little bit lower, around 25%, or call it, of the year. And I don't think, reasonably speaking, that we'd be much different this year. And probably more of a sideway slide from Q2 to Q3 as we've seen in past years. So clearly, the fourth quarter will be significant in contrast to past years from a revenue perspective and then certainly from an EBITDA perspective.

I know, way too early to guide on '22, but it doesn't seem like your confidence in '22 being a normal year and being a good growth year has changed at all or waned in the last few months. Is that fair to say?

That's absolutely fair to say. We feel pretty bullish about the business as we look at next year and would like to believe these distracting surges, will -- they'll probably continue. There'll be other variants, but less and less, we would like to believe, effect on the daily lives of people. And so we're viewing 2022 as pretty much being a full normal year at this point.

Okay. And lots of companies, especially in other industries and service industries, facing difficulties with retaining labor, labor wages and also somewhat on the supply side as well, of course. So I'm just curious if you guys are facing any of those challenges, and it does seem like from your margins, you've been able to offset most of that.

Yes. Look, with regards to labor, the areas that we're a little bit under pressure are the non-exempt labor. As I've mentioned in my prepared remarks, we're feeling it in our fabrication facilities. We're feeling it in the front-office administrators, in both those areas. And we've put on some incentive plans to bring in, recruit heavily in those areas. So we're hoping that also, what will help us is some of the eliminations of the supplemental unemployment benefits that are out there. We're hoping that will help us here in the second half, bring in some of that labor that we've been having a tough time bringing in on the non-exempt side.

Got you. And then just lastly for Tom. You mentioned a pretty remarkable improvement in disallowance rate in 3%, 4% from 5%, 7% pre-COVID; and DSOs down to 40 from, I think you said, 45 last year to 47, if you look back on the 2 year. So the dynamic there, I suppose some COVID benefit, but do you see some of this as being sustainable as you look out?

Yes. Each quarter that goes by, we're feeling more and more comfortable that we've got enough of a trend that we should see some improvement that would be more permanent in nature. I do feel, because of the benefits of COVID and some of the special initiatives that we put into place, that we’re achieving a peak level of success. So I wouldn't necessarily be saying that you should look at the current periods as being indicative of the future. But I'd like to say that at this point, internally, we're much more optimistic that we're in the mid-4s from a standpoint of where patient non-payment and disallowance would be as opposed to the low-5s, where we were in pre-COVID periods.

(Operator Instructions) As I'm showing no further questions, this will conclude our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.