Hanger, Inc.

Q2 2021 Earnings Conference Call

8/5/2021

spk00: Good morning and welcome to the Hanger Second Quarter 2021 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. 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.
spk01: Seth Frank Good morning. Thank you. Welcome to Hanger's second quarter 2021 earnings conference call. With us today are Vinod Asar, Hanger's President and Chief Executive Officer, and Thomas Corrales, 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 discussed 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 Vinny.
spk02: 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 two business segments, inpatient 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 orthoses, 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 customer orthotics. Off-the-shelf devices, as well as shoes and inserts, experienced recovery, but at a rate less than customer products. 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 and 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 a year and a half. 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 ONP 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 Shekin Cyrus. We've acquired six 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 into 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, Bennett.
spk04: As Bennett 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 a 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 and 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 returned, 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 six 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 day sales outstanding, which the company has achieved in 2021. During the quarter, disallowed revenue and 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. Day sales outstanding decreased to 40 days, which reflects an improvement of five days as compared to June of 2020 and seven 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 activities 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 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 four times on a trailing 12 months adjusted EBITDA basis when taking acquisitions into account. Our underlying net leverage is closer to a mid three times 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 six months of 2021, it's important to recognize that our original outlook for the second half assumed a clearer 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 six 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.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question today comes from Brian Tinkleit with Jefferies.
spk03: Hey, good morning, guys. It's Jack Flevin on for Brian. Congrats on a really strong quarter. I guess the first one, I appreciate the commentary on why you're maintaining a 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 an early 3Q in terms of patients' willingness to get into centers for, you know, or the flow of volumes in 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?
spk02: Sure, Jack. Thanks. So first off, let me address the closing out second quarter patient volumes, et cetera. Yeah, 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 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, you know, our employees, in terms of COVID vaccination rates, you know, we haven't disclosed that information. So, you know, 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 rates.
spk03: Okay, got it. I appreciate that. And then I guess, you know, looking forward, you know, it 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, you know, 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, you know, 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.
spk02: Sure. Let me touch on the, you know, 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. You know, our As we've said throughout the last year or so, is our focus is on same clinic revenue growth within patient care, organic growth within the products and 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, you know, in post-pandemic, focus on organic growth. We've got some terrific initiatives. We've got some terrific leadership we put in place over the last year, as we've announced, and very encouraged with, you know, some of the areas of focus on, you know, 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.
spk04: Yeah, 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, you know, completing our investment in the new distribution facility. in Alpharetta, Georgia, which came online, you know, really as last year closed and has been serving the company here in the first half. And, you know, 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 Bennett touched on, I think we're seeing less of the benefit of that at this point simply because of some of the labor, you know, and staffing that we're trying to attain to really put those facilities to full use. From a standpoint of growth, I'll just add to what Bennett said. It's too early for us to be, you know, 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 and think as we leave 2021 and get into 2022, you know, we're going to be even better positioned from an overall size and network capacity standpoint.
spk03: 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?
spk04: You know, when you look at it, those came in real late in the quarter. They're not really that large, you know, from a standpoint of revenue contribution this year and certainly earnings contribution because of the integration expense. So, you know, it's probably premature for me to start giving you 20, 22 cents, you know, 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.
spk03: Got it. Awesome. Thanks, guys, and congrats again. Thanks, Jack.
spk00: Our next question comes from Larry Solo with CJS Securities.
spk05: Hi. Good morning, guys. Just a quick follow-up on the unchanged guidance and the cadence. It sort of feels like the first half, I know you guys don't guide to the quarters, but it does feel like, I guess, from the initial guidance in terms of percentage of the diva die, that perhaps we're a little bit ahead of the curve in the first half, but COVID is... obviously greatly diminished, but there's some resurgence and whatnot. So maybe not completely in the spot we'd like to be. So perhaps the year itself is a little bit more, not quite as back and loaded as you thought. Is that a fair way to characterize it? And then in terms of the cadence, times like Q4, you're going to get most of the growth. But should the normal cadence between Q3 and Q4 be higher? relatively normal versus pre-COVID?
spk04: Yeah, Larry, first of all, I think that's correct. I think we'd be in a much stronger position if we'd seen a full reduction of COVID's effect on the business environment 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, you know, the third quarter has always been relatively similar to the second quarter, maybe even a little bit lower, you know, around 25%, you know, or call it, you know, of the year, you know. And I don't think, you know, reasonably speaking, that we'd be much different this year, probably more of a sideways slide from Q2 to Q3 as we've seen in past years. So clearly the fourth quarter, you know, will be significant in contrast to past years from a, you know, from a revenue perspective and then certainly from an EBITDA perspective.
spk05: I know, you know, way too early to God on 22, but it doesn't seem like, you know, your confidence in 22 being a normal year and being a good growth year has changed at all or reamed in the last few months. Is that fair to say?
spk04: That's absolutely fair to say. You know, we feel pretty bullish about the business as we look at next year and would like to believe these distracting surges, you know, will probably continue. There'll be other variants, but less and less we would like to believe affect on the daily lives of people. And so we're viewing 2022 as pretty much being a full normal year at this point.
spk05: And lots of companies, especially in other industries and service industries, facing difficulties with retaining labor, labor wages, and also some on the supply side as well, of course. And 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 those.
spk02: Yeah, look, with regards to labour, the areas that we're a little bit under pressure are the non-exempt labour. You know, as I'd mentioned in my prepared remarks, we're feeling it in our fabrication facilities, we're feeling it in the front office administrators, you know, in both those areas. And, you know, we've put on some incentive plans to bring in, recruit heavily in those areas. So, you know, we're hoping that, you know, 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 labour that we've been having a tough time bringing in on the non-exempt side.
spk05: Gotcha. And then just lastly for Tom, you mentioned the pretty remarkable improvement in disallowance rate from 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 in the two-year. So, you know, the dynamic there, I suppose some COVID benefit, but, you know, do you see some of this as being sustainable as you look out?
spk04: Yeah, 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 period's as being indicative of the future. But, you know, I'd like to say that at this point, internally, we're much more optimistic that we're in the mid-fours, you know, from a standpoint of where patient nonpayment and disallowance would be, as opposed to the low fives we were in pre-COVID periods.
spk05: Got it. Great. Thanks, Tom. Appreciate it. Thanks, guys, for the call.
spk00: If you have any further questions, please press star then 1 to join our queue. 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.
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