Hanger, Inc.
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Greetings and welcome to Hanger's Second Quarter 2020 Earnings Call. Today, all participants will be in a listen-only mode. Today, we will have prepared remarks, followed by a question-and-answer session. 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. Sir, you may proceed.

[Seth Frank:]

Good morning. Thank you. Welcome to Hanger's second 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. We hope those of you listening today are staying safe and in good health, especially during these times. Today, I will review our second quarter results and give you an update on our efforts to manage the business during COVID-19. Tom will then review the numbers in detail and we will take questions. If you ask me to describe the second quarter of 2020 in one word, I would have to say remarkable. At the beginning of April, shelter in place orders, rising infection rates, and uncertainty about the future we're peaking, managing our business was made all the more challenging by fragmented civic responses to the pandemic varying by state and in some cases by county. As we discussed during our last call, we had Hanger took early and decisive action to expeditiously build an operational and financial plan, which would allow us to successfully navigate this global challenge. We executed on specific actions that maximize our opportunity to emerge on the other side of all of this on a strong footing to resume the momentum that we saw in the early days of 2020. Our approach to managing through the pandemic and the year ahead was and remains grounded in three imperatives; first, ensuring the safety, and welfare of our patients and employees; second, delivering on our purpose of empowering human potential together by ensuring uninterrupted access to essential O&P services. Part of this effort has included proactive communications with our referring physicians and patients to ensure they know that the Hanger team is accessible and open in person or via video consultation providing safe, high-quality O&P care; and third, ensuring that Hanger has adequate liquidity to endure a multi-quarter potentially prolonged downturn in patient volumes. I am pleased to say that we are in a stronger liquidity position today than at the beginning of the year. It is difficult to express the profound appreciation and gratitude I have, where Hanger's approximately 49,000 employees. There are many examples across the organization of people stepping up and going above and beyond in their efforts to support our mission. The proof is how our patients view us. Since the onset of COVID-19, Hanger clinics patient experience net promoter score has increased from 84.3 to 84.9. In this environment, it is a phenomenal achievement.

[Thomas Kiraly:]

Good morning. Due to the early planning and implementation of cost reduction and liquidity enhancement measures in late March as a result show, Hanger was able to successfully generate cash flow and build its available capital during the second quarter. If reviewing our results for the quarter, it is critical that they not be viewed in isolation, but rather as an integral part of our focus on establishing the financial resources necessary to endure the adversity of a prolonged pandemic. Primarily due to the adverse effects of COVID-19 on our business volumes, Hanger produced $233.4 million in revenue during the second quarter, which reflected a $47.7 million or 17% decrease as compared with the same period last year. However, due to cost-reduction measures, the company was able to offset a meaningful portion of this revenue decrease and achieved an adjusted EBITDA of $36.5 million. This reflected a moderate decrease of $860,000 or 2.3% as compared with the second quarter of 2019. These results do not include the favorable benefit of $20.5 million in provider grants we received in connection with the CARES Act. The decrease in revenue was primarily driven by a $35.3 million decline in our Patient Care segment, which experienced an 18.7% reduction in same clinic revenue. As Vinit shared although patient appointment volumes were down by an average of 33% during the quarter due to higher relative price prosthetic devices declining at a lesser rate, the degree of the effect that patient appointment declines had on revenue was moderated by an increase in our prosthetic mix. We believe this favorable mix shift was due in part to the somewhat more acute nature of the injuries, conditions, and impediments to mobility that lead to the need for Hanger's prosthetic services. This may have contributed to a greater proportion of prosthetic patients choosing to seek essential care in our clinics despite the pandemic. Net revenue in this segment also benefited from favorable collection trends, due to an exceptional performance by our revenue cycle management team disallowances and patient non-payment fell to 3.3% of gross charges in the quarter which compared favorably to the 5.4% we reported in the second quarter of last year.

[Operator:]

Today's first question comes from Larry Solow with CJS Securities. Please proceed.

[Larry Solow:]

Hi, good morning guys. Thanks for taking my question. So obviously, a very – quarter that certainly had lots of challenges. I mean you guys commendable on the job you did on your cost-cutting and actually kept the EBITDA almost flat despite the significant volume declines. Could you maybe just discuss – you discussed trends and all and obviously the mix was much greater than we expected. I'm trying to figure out with such a much better performance on the bottom line. Can you maybe discuss what you've learned from this experience and more importantly what this bodes for 2021 and beyond? I know you know – I know on the last call you thought you lost about a year in terms of just growth on the income statement. So maybe you can kind of discuss that as well? Thanks.

[Vinit Asar:]

Great. Thanks, Larry. In terms of what we've learned through all of this, first of all, you know, I can't help but emphasize how much impact the collective efforts of our employees had on the business. I mean we basically laid out what we needed to do for the quarter and our focus was on a couple of things, as I mentioned, the focus was on employee and patient safety, on building liquidity and with all the efforts we put in, the sacrifices from our employees. That collective effort came shining through and I think it's a result, it's a reflection of our purpose, of our values, et cetera. So it's clear the company can rally when the need is there. The other piece is as Tom mentioned on the prosthetic mix for the prosthetic mix to jump to almost 61% for the quarter kind of tells us a couple of things about the nature of our prosthetic services, especially if you compare them to off-the-shelf orthotics in particular. There is no question. Our patients, our prosthetic users clearly need this service despite the shutdowns in the shelter in place, et cetera, was clear is that, number one, they needed to come in and number two, we were able to figure out ways to provide the service, whether it was in our office, whether it was in the parking lot if we had to make a visit to their front-yard to service them. It was clear the need was essential. So a number of operational learnings across the businesses. Our Therapeutic Solutions business also did a lot of nice remote work and webinars et cetera, as did our Patient Care business. And then with regards to 2021, our view hasn't changed. I think if we look at 2021, we really view it as if we skipped 2020. So what we were expecting to do in 2020, we expect to do in 2021. The only caveat being the continuing length of the duration of this pandemic if the effects filter into the first part of 2021, it could affect the operations for that period. But in general, we believe all the strategies, the investments we put in place are primed and ready for growth at the conclusion of the effects of this pandemic.

[Larry Solow:]

Great. And then just a follow-up on that. Obviously you guys are much bigger than your peers. So I'm just curious of through these challenging times, some of these more mom and pop type O&P facilities. Are they able to maintain operations and are there cases where you guys maybe for stars potentially taking market share? And then secondarily, maybe there becomes more acquisition opportunities as we look out? Thanks.

[Vinit Asar:]

Sure. Yes. We have a lot of respect for the independent providers even the smaller and mid-sized regional players and what we've seen is in pockets of the country, a lot of them were not able to stay open or at full strength, and in those cases, a lot of their referral sources did actually end up sending Hanger those patients. So there is a likelihood that we picked up some market share at least on a temporary basis while these smaller independent O&P players had scaled down their operations or their offerings. Now a lot of them also were able to take advantage of the PPP loans, which as you know we did not take advantage of or qualify for that matter. So they did also strengthen their balance sheet to an extent. So temporarily we likely picked up market share. The key here is the next three, six months as operations begin to open up for these smaller players, how they're able to build up their pipeline and how much of that market share, we're able to retain. I think that's the bigger question and we're obviously monitoring that and in all over that.

[Larry Solow:]

Got it. Okay, great. Thanks, I appreciate the color, Vinit.

[Vinit Asar:]

Thanks Larry.

[Operator:]

The next question comes from Brian Tanquilut with Jefferies. Please proceed.

[Brian Tanquilut:]

Hey, good morning guys. And a good job in this past quarter. I guess Vinit my first question for you, as I think about the volume recovery, right. So you've done a good job, 40% down to just down 24% in June. How are you thinking about the remaining opportunity or remaining a runway for the bounce back? Right, is this something that has to be more macro-driven or is there anything more proactive that you guys could do, whether it's the sales effort push or just bringing people back more and opening more hours to recapture that especially as we see broadly speaking when we look at hospitals and other areas of health care that I've seen recoveries in the 80% to 110% of pre-COVID levels in terms of medical activity. So explain your thoughts on the pace of recovery that you see?

[Vinit Asar:]

Sure. And honestly, it's a, it's a bit of both. So first of all, we will be dependent, a little bit on the macro environment, if the reopening of different states do slow down, then that's going to affect the volume. But from a proactive perspective, I think the team has done just a wonderful job – wonderful job on making sure that we're proactively reaching out to our referral sources letting them know that our operations are open where available, we're also proactively reaching out the patients to let them know. We also have information on our website and letting our patients know the safety protocols we have in place at each of our clinics in a pretty detailed – in a pretty detailed fashion. So it's a bit of both. We do expect the volumes to be suppressed for sure for the rest of the year but, as Tom pointed out, it's going to be difficult for us to put a stake in the ground and say it's going to be x percent for the remainder of the year. Coming into the third quarter, the patient volumes appear to be, appointment volumes appear to have stabilized at about 24% below last year and we haven't seen an uptick neither have we seen a regression in the last few weeks.

[Brian Tanquilut:]

Got it. And then I guess to you Tom as I think about your comments on the progression of earnings without giving guidance obviously, right. So, is it safe to say as you ramped up re-rent expenses presumably for most of this quarter, we're going to gain back that $35 million of expenses that you guys pull back on the wage side? And if the volume stay currently in this down 24% range, let's just stay for most of the quarter that sequentially, we should see EBITDA go down with the hope of recovery in Q4 and then basically back to the pre-COVID 2020 outlook, once you get to 2021. Is that the right way to frame that?

[Thomas Kiraly:]

Yes, I think you articulated it fairly well. I think the caution point is, it's very difficult to get a grasp on how the fourth quarter will play. We're going to be restoring the final third of the wages at the end of the quarter – at the end of the third quarter. And so that's going to put additional cost into our operations in the fourth quarter. So a little bit of what happens in the fourth quarter is going to be dependent on whether we stay at around that 20% to 24% volume decline or not.

[Brian Tanquilut:]

Got it. And then, yes, go ahead. And then I guess Vinit my last question on ACP, obviously, the sniff industry is struggling right now with COVID and it could be something that's probably more lasting. How are you thinking about that business as the end market struggles and probably struggles further?

[Vinit Asar:]

Yes, we're watching it closely, as you know, and we've made some significant enhancements to the offerings to the sniffs, you know that's going to be dependent now how the sniffs get through this environment. They certainly have received government funds and we're seeing a little bit of the impact of that. The offerings that ACP, the Therapeutic Solutions business has put out there actually allows for more remote support, group therapy, et cetera. So we're watching it closely not sure we can predict what's going to happen within the sniffs. But I'm really pleased with the team in terms of the different offerings they've come out with and the some of the things they're planning on here for the next couple of quarters, which kind of should help the sniffs to navigate the environment better than the prior years.

[Brian Tanquilut:]

I got it. Thanks, guys.

[Vinit Asar:]

Thanks, Brian.

[Operator:]

And there are no further questions in the queue. So this ends the question-and-answer session and the end of the conference. The conference is now concluded. So thank you for attending today's presentation and you may now disconnect.