Hanger, Inc.
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Greetings and welcome to Hanger’s First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. Today, we will have prepared remarks followed by Q&A period. Instructions for questions and answers will be provided after the formal presentation. It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations. Thank you. You may begin your conference.

[Seth Frank:]

Good morning, thank you, welcome to Hanger’s first quarter 2020 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.

[Vinit Asar:]

Thanks Seth. Good morning everyone and thank you all for joining us. Let me start by acknowledging what we have unfortunately, come to understand that life for all of us has been upended in different ways by the global pandemic, and things are and will remain different for a while. For most people, there has been real pain, real loss, and a sense of uncertainty unlike anything we've experienced in our lifetimes. On behalf of Hanger, our hearts go out to all who have been impacted. As part of today's call, we want to help you understand the actions we have taken in response to the pandemic, our current view and how we will navigate through it, and what we hope will be a better future ahead for all of us. We do believe it is important to first ground you with our first quarter results, which were impacted by COVID-19 and then set the stage for the remainder of the year. We entered 2020 on a strong footing. We returned to growth in 2019, reinitiated a successful acquisition program, and began to see promising stabilization in our therapeutic solutions business. Indeed the year was off to a great start. We had a successful Hanger live event in Nashville in early February as we shared on our Q4 earnings call. We saw the benefits of the multi-year investments in Hanger’s core differentiators beginning to synergize and accelerate our position in the O&P industry. Unfortunately, during the last two weeks of March, typically the busiest time of the quarter when we are delivering devices to patients we began to see a rapid uptick in cancellations of patient appointments. This was driven by the litany of social distancing measures implemented around the country to slow the spread of COVID-19 as shelter-in-place and related restrictions became more widespread. As a result, our first quarter revenue and earnings were adversely impacted. Hanger’s first quarter net revenue of $233.7 million decreased $2.7 million, or 1.1% from the first quarter of last year, while adjusted EBITDA declined by 6.6 million in the first quarter, compared to the same period of 2019.

[Thomas Kiraly:]

Good morning. As was the case for many companies, our plans and business trends were interrupted in late March, and events led us to quickly redirect our attention to a wholly different set of objectives than the ones that we had intended for 2020. In the first quarter, Hanger reported 5.3 million in adjusted EBITDA, 233.7 million of revenue, which reflected decreases from the 11.9 million on adjusted EBITDA and 236.4 million in revenue we reported for the same period last year. Our results for the quarter would have been markedly different where it not for two key items

[Operator:]

Yes, thank you. And the first question comes from Larry Solow with CJS Securities.

[Larry Solow:]

Good morning, guys. Good to hear your voice and I hope you and your families are hanging in there doing relatively well. Perhaps a couple of questions, obviously, it's, you know, unprecedented times and you guys are clearly reacting, doing the best you can and preserving cash and cost cuts, can you speak to, you know, a lot of the reasons why we like Hanger, the differentiation, you know, of it, and a lot of programs that you've, you know, had ongoing that have, you know, obviously helped for the long term. How does a lot of this stuff, this process get impacted in the short-run? And, and that question also goes along the line with the supply chain improvements that you guys are putting through now. Did some of that stuff also get slowed or impacted.

[Vinit Asar:]

Thanks, Larry. Thanks for the question. Appreciate it, and also hope you all are safe up there in the Northeast. So, in terms of the programs that we've put in place here over the last few years, you know, we, I think as Tom alluded to, we were feeling terrific about the impact of those programs as we began the year, you know, early January, late December, January, early February, because we could just sense the momentum that our business had. And you know, a lot of those programs combined the use of doing patient evaluation clinics, social media campaigns, outreach to patient to patients to bring them into our clinics. And clearly that has slowed down because, you know, as I've mentioned in my comments, we're using a little more of the telehealth platforms, etc, to screen patients earlier. Some of the patient evaluation clinics that we had planned, you know, for this year, where we would bring in groups of patients together and show them the technology and show them different aspects of orthotic and prosthetic care are all on hold because of social distancing measures. So, a lot of those programs are certainly on hold, but we are, you know, using social media and outreaches to patients, you know, during the year. So, we'll see how that proceeds, but certainly it is a different sort of approach to patient outreach than we had planned. Tom you want to talk about the supply chain?

[Thomas Kiraly:]

Yeah, Larry, from the standpoint of a supply chain, we did pause, you know, the supply chain systems and financial systems project that involved the warehouse management system, as well as the underlying financial systems. Where we were though in construction of our new distribution facility in Alpharetta was we're well underway in Q1 and already, you know, committed in Q2. So, when you look at the 30 million to 35 million of capital expenditures, there's approximately 8 million in that number that really relates to the build out of that facility. So, the company's actual underlying capital expenditures, you know, more of the routine capital expenditures have been cut into the low 20s. So, we're proceeding with that. We won't be able to operate it in the same efficient way as we will ultimately with that new system, but we are at a point where we feel that that part of this will go in. We are also going to benefit this year from an earlier savings, you know, from the freight. It's not going to be all of the savings because again, we don't have a system, but some of the pricing and some of the practices we've had on consignment are starting to pay back earlier than we anticipated. So, some savings are coming into the numbers, all by it, they will, you know, probably be consumed by these overall COVID variances, but we'll see some of that. Some of the other savings, those associated with the system probably will be pushed out at least for a year given that we’ve paused the underlying technology. So, I'll pause there and see if there's any follow on question.

[Vinit Asar:]

Hey, Larry, one thing I would add is, you know, during this period, what we are seeing is because of the network of clinics that we have, we are seeing some inbound calls from referral sources that in the past you know, we may not have had business with, but because some of the smaller O&P providers may not be able to deliver the care, we are seeing in-bound calls from hospitals and referral sources during this period because we do have operations either fully open or open by appointment only, and we're letting everybody know that we are available for care.

[Larry Solow:]

Thank you.

[Operator:]

Thank you. And the next question comes from Brian Tanquilut with Jefferies.

[Brian Tanquilut:]

Hey, good morning, guys. Hope everyone's okay through all this. I guess, Vinit, my first question is for you. So where do you stand today? Obviously, there's a lot of disruption in the business, but as we think about 2021, you know, if you think about COVID potentially or likely normalize over the course of this year, how do you view the earnings power in the business for 2021 versus where you're sitting, let's just say sometime in February when you did the Hanger Live event here in Nashville?

[Vinit Asar:]

Yes, great question, Brian. And, you know, it's almost like we've kind of lost a year, I think is how we're thinking about it, you know, because if you think about it, we are putting a lot of our investments in 2020 on hold, you know, and we're focusing on liquidity and employee safety and patient – you know the continuity of care this year. So, it's almost like we'll pick up assuming there is no resurgence in the pandemic, assuming there's no second or third wave that's – you know that substantially affects the country later this year or early next year, which again, is a big assumption. Then, it's like we almost skipped 2020 and we begin our growth plans in 2021 as if we were back in early 2020, if that makes sense.

[Brian Tanquilut:]

No, that does. I guess that's the other point, right, I mean, it sounded like you guys were tracking pretty well, in January and February and I know we've had a lot of discussions in the past about reigniting growth in the business or accelerating growth, if you don't mind walking us through what you saw pre-COVID in terms of, you know, the trends and the growth rates that you were seeing in the different product lines, orthotics versus prosthetics?

[Thomas Kiraly:]

Sure, Brian. So, first of all, I think if you go back to the comments about WIP and you were to go back into, you know, a number in terms of the unbilled, you'd find a pretty healthy same-clinic growth rate, you know, for the first quarter, you know, certainly well within the target range that we had thought was an attractive one for the year. Suddenly, when you look at the actual decline that occurred, the 3.2%, we had a very modest decline in prosthetics, only about 0.6%. And so, when you consider the fact that we probably had about 500 devices that did not get delivered in the quarter because of the cancellation of patient appointments, prosthetics were growing in a pretty robust fashion. So, it was really confirming for us that all of the things that Vinit described, all of the things that our people were doing, were really working in a pretty profound way. You know, our goal will be, as Vinit described, as we emerge from this, to get back to business as quickly as we can to resume what we really see as an indication that Hanger has positioned itself successfully as it wanted to in terms of the medicine that it provides.

[Brian Tanquilut:]

That makes a lot of sense. I guess Tom just to that point, if we think about, you know, a lot of the states are allowing the reopening of businesses, probably within the next few weeks, how are you thinking about the seasonality factor, I mean, because you've gotten WIP sitting there, you’ve got 500 devices that presumably you will be installing sometime in the second quarter, but obviously, you’re backlog is delayed a little bit with patients not coming in the door. So – you know so Q2, you see a drop, and then you see an acceleration in Q3? Or how are you thinking about the seasonality factor for the cadence of, you know, without numbers, obviously, the pickup in business over the course of this year?

[Thomas Kiraly:]

Yes. So, I think, Vinit alluded to it, you know, we've been modeling a number of models, and we're – the model we're currently following does foresee more of an extended effect of the virus. We've set up our plans and our liquidity really for a one-year period, you know, for – so assuming COVID effects us primarily Q2 to a lesser extent Q3 and to even a lesser extent Q4. And when you look at that, I think that overrides – that's going to override the natural seasonality that the business had, you know, where Q2 is obviously going to be the most difficult quarter with patient appointments down 40% in April, but our – you know our plans are and our belief is that we should start to see that subside as some of the patients return to more of a normal view and resume their normal trust, you know, that they can conduct their lives. We'd like to believe that our business volumes improve after that.

[Brian Tanquilut:]

Yes, got it. And then, I really appreciate the extensive discussion you've put in the 10-Q on COVID and liquidity, but as we think about the bad debt reserves, reserves adjustment that you put in the quarter, I mean, do you think that will be a lasting adjustment that's more structural than not? Or is that a temporary thing that we should re-adjust at some point?

[Thomas Kiraly:]

Well, I think what – I think when it came on, we had a number of customers, we had customer receivables in the distribution business from Q1 and Q4. We responded in the distribution business with major changes in Q1 to how we're staffing and how we're operating our credit policies, primarily in response to COVID. Vinit will probably speak in a moment to how we think about our customers in distribution because we're certainly sensitive and want to help them through this without putting the company in financial risk. But we'd like to believe that the Q1 number is a bit of a high point and that through both the reduced volume that we have in that business, as well as the improved procedures, well, there could be some further risk of bad debt expense that won't be as extensive as you saw in Q1. Vinit?

[Vinit Asar:]

Yes, Brian. I’ll just add a little bit, you know, our distribution business, you know, we’ve a lot of confidence in that business. The leadership is terrific and the way they're approaching their customers, it's a balance. The priority for the distribution business is to make sure we protect the AR that we have, the accounts receivable that we have, but the balance also is, you know, they're looking for those customers that have a strong – you know have strong business and have longevity. So, we're trying to be flexible with some customers as well that we know will make it through this and will be long lasting customers for us as well. So, that's the balance the team is putting in, but a big focus on, you know, making sure that the AR is protected.

[Brian Tanquilut:]

Got you. And then, I guess my last question is, Vinit, you’re at the company back through the last recession, how are you thinking about the – you know just the of the business across your different service lines?

[Vinit Asar:]

Sure, yes. I think I joined at the tail-end of that last recession, and, you know, in one way, this is a very different sort of – you know sort of period that the company will go through or the country will go through as well. But back in the 2007, 2008, 2009 period, even before I joined, as the country was going through a recession, it appeared that – you know that the business is somewhat recession proof in the sense that people do need their care and they will come in. The difference now though, is that there are more patients, more customers that have these high deductible plans that have more out of pocket payments today than in 2008, 2009 periods. So, that's the one thing we're watching for. So, it may not be an apples-to-apples comparison, but in terms of managing through a recession, you know, our services and products will still be in demand.

[Brian Tanquilut:]

Got it. Alright, thank you, guys.

[Operator:]

Thank you.

[Vinit Asar:]

Thank you, Brian.

[Thomas Kiraly:]

Great. Thanks, Brian.

[Operator:]

And as that does conclude the question and answer session, I would like to turn the call back over to Vinit Asar for any closing comments.

[Vinit Asar:]

Great, thanks. You know, as you can all see, you know, we're focused on two things as the country navigates this pandemic. You know, first as we mentioned the safety and continuity of care for employees and patients. And second, you know, we're focused on ensuring we have the adequate liquidity to get us through the downturn of the business as a result of COVID-19. And finally, as you’ve heard, even on this call, you know, we believe we have the right strategy in place, we have the right people in place, we have the right business model for when – you know when this does settle, you know, we'll pick up where we left off in terms of the growth trajectory we believe is ahead of us. So, I'll close by saying the same thing I say to all our employees on the calls during this time, you know, I say be safe, be kind and be strong. So, thank you all.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.