Hanger, Inc.
Q3 2020 Earnings Call Transcript

Published: 8 Nov 2020

[Operator:]

Greetings, and welcome to Hanger's Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. . As a reminder, this conference is being recorded. Today, we will have prepared remarks, followed by a 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. Sir, you may begin your conference.

[Seth Frank:]

Good morning. Thank you. Welcome to Hanger's third 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 and thank you all for joining us Hanger's third quarter 2020 earnings conference call. During the third quarter, our patient volumes demonstrated a continued recovery and combined with our cash preservation measures, contributed to a favorable earnings and cash flow performance despite the continuing pandemic. In response to this positive trend, along with our strengthened liquidity position, and in order to enter 2021 with momentum, we restored employee salaries and welcomed back furloughed employees as of October. I want to express my appreciation to Hanger's employees for the high quality of patient and customer care provided during these times and also for enabling us to achieve the strong financial and operational position we are in today. The better volume trends during Q3 resulted in a further narrowing of year-over-year revenue declines. We acknowledge that while the ultimate length of the pandemic is not fully known, especially given the current resurgence of infections, we are well positioned to meet the return of normalized volume, and pick up where we left off on organic and acquired growth strategies. Net revenue for the third quarter totaled $256.6 million, a decrease of 8% or $23 million compared to the same period of 2019. Total adjusted EBITDA in the quarter was $27.9 million, which reflects a decrease of $4.8 million. Tom will provide more details, but even as we had partially restored salaries during the third quarter, our efforts on cost containment and capital preservation continued to insulate the company from the impact of lower year-on-year revenue. In the patient care segment, third quarter appointment volume declined 16% compared to 33% in the second quarter, a meaningful improvement. Same clinic net revenue on a day-adjusted basis declined 10.3%, a marked improvement from the 18.7% decline reported in the second quarter.

[Thomas Kiraly:]

Thanks, Vinit. As the results demonstrate, during the third quarter, Hanger continued to perform well despite the adverse business conditions caused by the COVID-19 pandemic. As discussed in our August investor call, our primary objectives during the current year have included the accumulation of capital in order to position Hanger for the effects of a prolonged pandemic as well as a focus on preserving our personnel and clinical capacity so that we can resume our growth and expansion in 2021. We believe we achieved those objectives in the past quarter. During this most recent period, Hanger produced 256.6 million in revenue, which reflected a 23 million or 8.2% decrease as compared to the same period last year. Adjusted EBITDA was 27.9 million as compared to 32.6 million. We benefited from approximately 16 million in temporary labor and operating cost reductions during the quarter. With this performance for the year-to-date, Hanger stands at 723.8 million in revenue and 69.7 million in adjusted EBITDA, which reflects a 9.2% decline in revenue and a 14.9% decrease in adjusted EBITDA as compared with the first nine months of 2019. Our year-to-date results have benefited from a total of approximately 51 million in temporary cost reductions. In the third quarter, the decline in revenue was primarily driven by an $18.3 million decrease in our patient care segment. Since our peak decline of approximately 40% in April, patient appointment volumes in this segment have gradually improved each month to a decline of 13% in September and an average decline of 16% for the full third quarter. As Vinit shared, improved orthotics volumes were the key service area that contributed to the sequential increases in revenue from the second quarter. Nevertheless, prosthetics continues to constitute an increasing portion of our revenue mix. During the third quarter, prosthetics accounted for 55.5% of our revenue in 2020 as compared with 54.8% at the same time last year.

[Operator:]

Thank you. We will now begin the question-and-answer session. . And the first question will be from Brian Tanquilut with Jefferies. Please go ahead.

[Brian Tanquilut:]

Hi. Good morning, guys. Congrats on the good quarter. I guess, Tom, I'll start with the comments you just made towards the end of your prepared remarks. As we think about the sequential trend, right. So am I right in thinking that your employees are back to full salary and full hours, so we should see an uptick sequentially in expenses and then essentially flattening revenue just because of your cautiousness in COVID? And then kind of like build from that as we think about 2021, sounds like using the Q4 exit run rate as the baseline for growing '21, is that the right way to think about that?

[Thomas Kiraly:]

Yes. I think a number of the elements that you shared are on point, but just to clarify a bit. So yes, on the expense side, we do think an increase in cost structure of 11 million to 14 million. On the revenue side, it's just very difficult to predict. We are concerned about the increase in infections and the fact that that may cause the recovery to stay pretty much flat with where Q3 was, which would mean that Q4 would not at all be comparable to last year's Q4. When you go to next year, it's – at this point, we're somewhat more positive in our view. We do think we're seeing a big search here in the winter from COVID, and it could have an additional effect on the business in the near term. But we'd like to believe that the company is in a good position to benefit as we go into 2021, and the country moves more to a recovery from this virus.

[Brian Tanquilut:]

And I guess a follow-up to that, Tom, in past quarters that we've talked about this, you guys felt confident that 2021 would look a lot like what your pre-COVID 2020 outlook would have been, right. So do you still believe that that's the case?

[Vinit Asar:]

Yes. Hi, Brian. This is Vinit.

[Brian Tanquilut:]

Hi, Vinit.

[Vinit Asar:]

Yes, we do. Hi, Brian. We do believe that's the case because if you think back when we began 2020, we had all the pieces in place. We had the strategy set. We had the people set. We were feeling pretty positive about the momentum coming into 2020 and then COVID hit. So as this pandemic subsides, we think we’ll pretty much pick up where we left off in terms of that growth trajectory, because all those pieces are in place and we're just stronger today from a liquidity perspective. So it helps out.

[Brian Tanquilut:]

Just to that point on the liquidity perspective, right, so it sounds like you're back into considering acquisitions. So if you don't mind just walking us through how you're thinking about deal flow, data pacing and also like what characteristics or what types of assets are you interested in at this point?

[Vinit Asar:]

Sure. So, we certainly have been engaged in a fair amount of discussions with potential sellers of these smaller O&P businesses, both local businesses as well as the regional businesses, and the criteria we look at really is a combination of things. It's the geography of where these businesses are located. We look at things like what is their compliance to billing and regulations. We look at the size. We also look at the quality of the team. For the most part, we know who these clinicians are. We know, in general, the reputation of the team. So we look at the quality and we look at the cultural fit, how will these businesses fit in with Hanger and the desire to join Hanger? And then the way we look at success factors, Brian, for us, a transaction is successful when we know that we've retained all the clinicians, they're productive. We've had a smooth integration. The new team that's coming in wants to take on and take advantage of the processes and the extensive resources we have so that they can focus on patient care. So during the first year, it's about making sure the transition has gone well. The integration has gone well. The systems have been integrated. And then we pick up on the growth trajectory, which was the reason we would have acquired these businesses.

[Brian Tanquilut:]

That makes a lot of sense. And then as I think about the O&P industry, it seems like you guys have seen some recovery. How do you think things stand in terms of you gaining market share? And then investors have been focused on some of the data points we're hearing out of the manufacturers. So, I guess if I may ask, how do you think the industry's numbers or maybe some of the manufacturers numbers spike to yours or why wouldn't they? Is it a sign of market share gains? And just any kind of differentiation that Hanger has at this point?

[Vinit Asar:]

Sure. Yes. I think it's two different pieces. So when a manufacturer reports their numbers, it's a medical device business that they're reporting on. So they could be losing market share or gaining market share against their competitors in the manufacturing industry. When we report our numbers, this is about the healthcare services industry and the provision of care that we're providing. From where we sit, during the last six to nine months in this pandemic period, we know we probably picked up some market share in places where smaller O&P providers were either unable to provide care or provide care to the level that was normal for them. So referral sources that reached out to us to provide the care in their absence. So it's kind of an apples and oranges if a manufacturer reports results, I would be cautious in trying to correlate the two things because we're in the service provision, and the manufacturers are probably losing share or gaining share against their competitors.

[Brian Tanquilut:]

Got you. And then the last question for me, Tom, just thinking about the prosthetics volume or prosthetic same-store comment on Q3. Any color you can share with us in terms of what the volumes look like? Is that apple one-to-one, essentially flat same-store decline compared to the second quarter or is there – any color you could share with us on the makeup of your prosthetics business?

[Thomas Kiraly:]

Sure, Brian. I think that's a good question. When you look – I think you recall back in May, when we had completed the first quarter and shared the results of the first quarter, second quarter did benefit from some additional volume that fell over from the first quarter. Now even with that, second quarter underlying prosthetic volume was down about 13%. But if you look at the mix of that volume in the second quarter, it was more of a higher acuity cases, the ones that patients that were more trauma-focused that would qualify for higher-end devices. When you look at what occurred from Q2 to Q3, we saw volumes actually pick up. And so we were only down 8% in volumes in Q3 on prosthetics as compared to 13% in Q2, and the mix of devices was more normal. It included a much bigger vascular component. And our theory is that we saw more vascular patients in Q3 as those patients became more comfortable coming and seeing their provider in the COVID environment.

[Brian Tanquilut:]

Got you. All right. Thanks, guys.

[Vinit Asar:]

Thanks, Brian.

[Operator:]

And our next question will be from Larry Solow with CJS Securities. Please go ahead.

[Larry Solow:]

Great. Thanks. Good morning. Just a couple of follow ups to Brian's questions. I guess first question is just on the – I know your plan is to – you plan to bring back all the – unwind all the furloughs and bring back all the costs. Any hesitation to that being – clearly revenues are – and volumes are not going to get back to pre-pandemic levels probably for at least another two, three quarters I think at best and perhaps probably longer than that. So is there any hesitation for that or is there an ability to be nimble on that and maybe perhaps unwind a little bit again, if need be?

[Vinit Asar:]

Yes. Thanks, Larry, for that question. Really no hesitation in the actions that we've taken so far. Clearly, we're watching to see what happens as a result of this most current resurgence in infections. If you think back, a large part of our volumes were affected in the April, May timeframe – March, April, May timeframe, primarily because of the shelter in place orders and the shutdowns. That affected our volumes more than the fact that there are infections in place. So we're watching that. As long as there's no large shelter in places or shutdowns, we believe this is the right thing to do, bring back our people also because there has been a large part of our clinicians that have been working tremendous hours and the work that has to go in to treat these patients. And after every patient, we have to clean the clinic and then clean the patient room, bring in the next patient. So just a lot of stress, a lot of workload. And so bringing back some of these furloughed employees and restoring the salaries does help the morale. It certainly helps the well-being of our people as well, so they can take care of that next patient. So in summary, I guess, as long as there's no large shelter in place type issues that we experienced in April and May, we believe this is the right thing to do. But we've demonstrated that we can be nimble as needed.

[Larry Solow:]

Right. And it does sound like – certainly, results have been at least from the onside of the pandemic better than feared and clearly demonstrated a resilience certainly on the prosthetic side. And it sounds like – and inevitably, I guess a little bit of a shift more on the orthotic side, even shows that there's even some of these patients will inevitably get back into clinic if need be. How about just switching gears real fast on the – you discussed on the distribution side. How about just on the therapeutic side, pressure on hospitals and whatnot? I know it's a small piece of your business, but it's still somewhat of a material piece. And it also drives a little bit of a cash outflow to a pretty good cash inflow story. So any updates on that piece of the business and how that's been through the pandemic?

[Vinit Asar:]

Sure. We're actually pretty pleased with the therapeutic solutions part of our business despite the difficult environment, the skilled nursing facilities they're in. Our team has really enhanced the value proposition. They've been hosting webinars for their customers, enhance some of the product offerings. So we feel that they've been pretty stable compared to what the skilled nursing facilities have been seeing. We know there's a drop in census, maybe of a temporary nature, for the next quarter or two, but I think the therapeutic solutions business has been more stable than perhaps the rest of the industry from a volume perspective.

[Thomas Kiraly:]

Yes. And Larry, let me just add a little bit of context too. If you look at the revenue decline on that business, it actually was certainly affected by COVID, but it was only down about 6.6%, which was modest. It's literally down about 800,000 in revenue against the prior year quarter. From a cash flow standpoint, just to clarify, it actually is a positive free cash flow and positive EBITDA to the business. So it's not a cash flow drain. And in fact, we've been very pleased with the management team at that business this year in the way that they've handled the pandemic and managed their earnings.

[Larry Solow:]

Got you. And then just last question on the acquisitions that you've touched on. Do you see – without getting specific as the pandemic has evolved, have you seen an increasing amount of opportunities when there are other sellers out there more willing, less willing to sell as time has progressed?

[Vinit Asar:]

Yes. Certainly, there are sellers out there. And I would say the pipeline is pretty robust, but we're also being very disciplined and discriminating on the types of businesses that we're bringing in and speaking to. There are some very good businesses out there that we've been speaking to, we're very encouraged by. And on the flipside, there are some businesses that need to strengthen their documentation and things like that. So the pipeline is full, and we're in a pretty good position to be able to determine which are the assets – which are the teams that we want to bring in versus not.

[Larry Solow:]

Got it. Great. Thanks. I appreciate the color.

[Vinit Asar:]

Thanks, Larry.

[Operator:]

. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today’s call. Thank you for joining Hanger’s third quarter 2020 earnings conference call. You may now disconnect.